Convertible debentures cannot be issued at a discount if:

The correct answer is Option 2: They are to be immediately converted

Convertible debentures are debentures that can be converted into equity shares of the company at a future date.

When convertible debentures are to be immediately converted, issuing them at a discount would essentially mean issuing equity shares at a discount. This is because:

→ Immediate conversion = Direct equity issue in substance (not in form)

→ Issue of equity shares at discount is prohibited under the Companies Act (except in specific cases like sweat equity shares)

→ Therefore, to prevent circumventing this legal restriction, convertible debentures cannot be issued at discount if they are to be immediately converted

However, when convertible debentures are not immediately converted, they remain as debentures (debt instruments) for a certain period. In this case:

→ The discount represents the cost of borrowing/interest component

→ This is acceptable as they function as genuine debt instruments before conversion

→ The discount can be treated as a finance cost over the period until conversion

This rule ensures that companies cannot bypass the restriction on issuing shares at discount by using convertible debentures as an indirect route for immediate equity issuance.