Instruments Entirely Equity explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Company law knows shares and debentures. Ind AS 32 knows only whether a contract leaves a residual interest — and Schedule III follows Ind AS 32.
The definitional gap
Section 2(84) of the Act defines a share as a share in the share capital of a company, including stock; section 2(30) defines a debenture to include debenture stock, bonds or any other instrument evidencing a debt.
Ind AS 32 defines an equity instrument as any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
The consequence is stated directly: the accounting definition is principle based as compared to the legal definition, such that any contract that evidences residual interest in an entity's net assets is termed equity irrespective of whether it is legally recognised as a share.
Both directions follow from the same definition, and both appear in Schedule III presentation.
All instruments — including convertible preference shares and convertible debentures — that meet the Ind AS 32 definition of equity in their entirety, and have no component of liability, should be considered as having the nature of equity. These are termed instruments entirely equity in nature, and they get their own line on the face of the balance sheet:
(a) Equity Share Capital
(b) Instruments entirely equity in nature
(c) Other Equity
The illustrative Statement of Changes in Equity then reconciles each instrument separately — compulsorily convertible preference shares, compulsorily convertible debentures, and any other such instrument — each with its own five-line reconciliation for both periods.
But the classification is not automatic. Whether an instrument qualifies in its entirety for classification as equity depends on the terms and conditions associated with it, evaluated based on the criteria in para 16 of Ind AS 32. The illustration assumes CCPS and CCDs qualify; companies should assess terms and conditions specific to their instruments.
Compound financial instruments
Those with both equity and liability components shall be split in accordance with Ind AS 32:
- the equity component is presented under Other Equity in the Statement of Changes in Equity; and
- the liability component is presented as a separate line item under Borrowings.
So a single instrument appears in two places on the balance sheet, in two different sections.
The mutatis mutandis rule
Notes 9 and 10 of the General Instructions provide that the disclosure and presentation requirements applicable to the relevant class of equity or liability shall apply mutatis mutandis to instruments, including their components, classified under the relevant heads.
| Component | Disclosures | Example given |
|---|---|---|
| Equity component of a compound instrument | Those applicable to Equity Share Capital under Note 6(D)(I), to the extent applicable | Terms of any securities convertible into equity shares, with the earliest date of conversion, in descending order starting from the farthest date |
| Liability component | All disclosures applicable to Borrowings, to the extent applicable | Rate of interest; particulars of redemption or conversion, stated in descending order of maturity or conversion |
| Instruments entirely liability in nature | All disclosures applicable to Borrowings | — |
Where the premium goes
Premium received on compulsorily convertible preference shares which are entirely equity in nature shall be classified and presented as a part of Other Equity under Securities Premium — separated from the instrument line itself, and treated exactly as a share premium would be.
And the authorised capital disclosure under clause (a) of Note 6(D)(I) is provided for instruments entirely equity in nature as well as for compound instruments that have an equity component, to the extent applicable.
Common mistakes
- Classifying CCPS or CCDs as equity by instrument type without testing para 16.
- Presenting a compound instrument wholly within borrowings or wholly within equity.
- Omitting the borrowings-style disclosures for the liability component.
- Showing CCPS premium alongside the instrument rather than in securities premium.