Tribunal Rules Mere Issuance of Conversion Notice Does Not Constitute Conversion; Expired ISIN and Non-Compliance Confirm Debentures as Financial Debt
In a significant ruling dated October 9, 2026, the National Company Law Tribunal (NCLT), New Delhi Bench, has admitted a Corporate Insolvency Resolution Process (CIRP) petition filed by Beacon Trusteeship Limited, the debenture trustee acting on behalf of Asset Reconstruction Company (India) Ltd., against Vatika IT Parks Private Limited for default on payment of Optionally Convertible Debentures (OCDs) amounting to over Rs. 233 crore.
The case revolved around whether the optionally convertible debentures issued by the Corporate Debtor had converted into Compulsorily Convertible Debentures (CCDs) or equity shares, thereby extinguishing the financial debt and precluding insolvency proceedings. The Corporate Debtor argued that notices issued for conversion of OCDs into equity shares were effective, and thus no financial debt existed.
However, the Tribunal rejected this contention, emphasizing that the mere issuance of conversion notices does not amount to actual conversion. The conversion process requires strict compliance with statutory and procedural formalities, including the existence of an active International Securities Identification Number (ISIN), allotment of converted securities, crediting them in the demat account of debenture holders, and proper filings with the Registrar of Companies (ROC).
In this matter, the ISIN assigned to the OCDs had expired on July 2, 2024, and the Corporate Debtor failed to renew or reactivate it in time. The Tribunal observed that the Corporate Debtor, as the issuer, bore the responsibility for initiating ISIN renewal, and any failure to do so could not be attributed to the debenture holders. Due to the absence of an active ISIN and incomplete procedural compliance, the OCDs retained their character as debt instruments and did not convert into equity shares.
Further, the Tribunal noted that the Debenture Trust Deed provided the Debenture Holder with a put option to exit by redeeming the OCDs after 60 months. The Debenture Trustee exercised this right on January 7, 2025, by issuing a put option notice demanding redemption within seven days. The Corporate Debtor failed to redeem the debentures despite this valid notice, constituting an event of default under the Debenture Trust Deed.
The Tribunal relied on Section 5(8)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC), which defines amounts raised through debentures as financial debt. It also referred to the Debenture Trust Deed clause that non-redemption upon put option exercise is a default event. Since both debt and default were established, the Tribunal admitted the Section 7 petition under the IBC for initiating CIRP against the Corporate Debtor.
Ms. Megha Agrawal was appointed as the Interim Resolution Professional (IRP) to take charge of the Corporate Debtor's management, and a moratorium was declared, prohibiting suits, asset transfers, and recovery actions against the Corporate Debtor during the insolvency process.
This ruling reiterates the legal position that conversion of debentures into equity requires complete adherence to statutory requirements and proper procedural formalities, and mere issuance of conversion notices is insufficient to extinguish financial debt. The decision also clarifies that a validly exercised put option triggering default entitles the financial creditor to initiate insolvency proceedings under the IBC.
Bottom Line:
Insolvency and Bankruptcy Code, 2016, Section 7 petition by debenture trustee - Mere issuance of notice for conversion of Optionally Convertible Debentures into CCDs/equity does not amount to conversion - Active ISIN and compliance with mandatory statutory and depository requirements are essential for valid conversion - In absence of such conversion, OCDs retain character of debentures and constitute financial debt - Non-redemption upon exercise of put option amounts to default - Petition rightly admitted.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Section 5(8)(c), Section 7, Section 14; Companies Act, 2013 Section 29; Companies (Prospectus and Allotment of Securities) Rules, 2014 Rule 9B
