Compulsorily Convertible Debentures (CCDs) are hybrid financial instruments that combine the characteristics of debt and equity. These instruments are issued as debt securities but come with a mandatory provision to convert into equity shares after a predetermined period or upon meeting specified conditions. The Companies Act, 2013, along with related rules, governs their issuance and management. CCDs have gained popularity as a strategic funding mechanism for businesses, especially startups and private companies seeking equity-based funding.

Key Provisions under the Companies Act, 2013

1. Definition and Nature
   CCDs are categorized as debentures under Section 2(30) of the Companies Act, 2013, acknowledging a debt obligation. Unlike traditional debentures, CCDs compulsorily convert into equity shares, diluting the company’s equity but providing long-term benefits to investors.
2. Authority to Issue CCDs

• The company’s Articles of Association (AoA) must authorize CCD issuance.
• Approval is required from the Board of Directors and shareholders through a special resolution, as per Sections 62(1)(c) and 71 of the Companies Act.

1. Modes of Issuance
   CCDs can be issued via:

• Private Placement
• Preferential Allotment
• Public Issue

Compliance with Sections 42 and 62(1)(c) and the relevant rules under the Companies Act is mandatory for private placement or preferential allotment.

4. Private Placement Process

• A private placement offer letter in Form PAS-4 must be issued.
• Allotment must occur within 60 days of receiving application money, failing which the amount must be refunded with interest.

4. Terms of Conversion
   The terms, including the conversion ratio and timing, must be clearly defined at the time of issuance. Compliance with Section 62 is essential during the conversion process.
5. Valuation
   Proper valuation of CCDs and the resultant equity shares is crucial to determine fair market value. For companies with foreign investment, compliance with FEMA and RBI regulations is necessary.
6. Debenture Redemption Reserve (DRR)
   CCDs are exempt from creating a DRR if wholly convertible into equity, as per Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014.
7. Filing Requirements

• Form MGT-14*: Filed with the RoC for special resolution approval.
• Form PAS-3*: Filed post-allotment of CCDs.

4. Other Compliance

• Maintenance of a debenture register as per Section 88.
• Issuance of debenture certificates within six months of allotment.
  Benefits of CCDs
• Flexibility: Combines features of debt and equity.
• Tax Efficiency: Interest payments are tax-deductible until conversion.
• Investor Appeal: Offers debt security with potential equity returns.

Conclusion

Issuing CCDs under the Companies Act, 2013, offers a strategic mechanism to raise funds while balancing debt and equity. However, meticulous compliance with legal provisions, valuation norms, and filing requirements is essential to avoid penalties and ensure smooth operations. CCDs are a preferred instrument for businesses aiming to attract investments while preserving cash flow stability.

FAQs

1. What are Compulsorily Convertible Debentures (CCDs)?
   CCDs are financial instruments issued as debt but must be converted into equity shares after a specified period or upon meeting certain conditions.
2. Do CCDs require shareholder approval?
   Yes, issuing CCDs requires approval from the Board of Directors and shareholders via a special resolution in a general meeting.
3. Are CCDs taxable before conversion?
   Yes, the interest paid on CCDs is tax-deductible until they are converted into equity shares.