The Legal Distinction Between Debt And Equity: Judicial Trends And Doctrinal Clarity In India
- IJLLR Journal
- 1 minute ago
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Anantha Kashyap BR, OP Jindal Global Law School
ABSTRACT
The distinction between debt and equity has long occupied a central position in corporate finance law. In India, the complexity of this distinction arises from statutory frameworks, judicial pronouncements, and regulatory instruments that often overlap or contradict each other. Debt instruments confer fixed obligations, while equity represents residual claims, yet hybrid instruments blur this binary. Compulsorily Convertible Debentures (CCDs), Optionally Convertible Debentures (OCDs), and Convertible Notes (CNs) have intensified doctrinal ambiguity by combining features of both categories. Courts and regulators in India, including the Supreme Court and the Securities and Exchange Board of India (SEBI), have grappled with these issues. For instance, the Supreme Court in Narendra Kumar Maheshwari v. Union of India [1989] AIR SC 2138 declared that CCDs did not postulate repayment of principal, thereby classifying them as equity. In contrast, rulings of the Authority for Advance Rulings and the Income Tax Appellate Tribunal have often treated CCDs as debt until conversion. Similarly, the recent judgment in IFCI Limited v. Sutanu Sinha (2023) reinforced the “repayment of principal” test, confirming that CCDs constitute equity for insolvency purposes. This paper critically evaluates judicial and regulatory treatment of borderline instruments in India, analysing whether existing frameworks provide clarity or perpetuate confusion. It investigates implications of such distinctions on capital structuring, taxation, insolvency proceedings, and foreign investment compliance under FEMA and RBI directions. By drawing upon statutory analysis, case law, structured finance literature, and global comparative approaches, research seeks to determine whether India requires doctrinal clarity through legislative safe harbour provisions or whether property-law-based methodology would better serve market needs. The findings underscore the urgent necessity for harmonization across corporate, insolvency, and securities laws to restore investor confidence and ensure efficient capital formation in Indian financial markets.
Keywords: Debt, Equity, Compulsorily Convertible Debentures, Insolvency Regulatory Framework
