Solution

To determine whether the financial instrument will be classified as equity or not, we need to consider the relevant accounting standards. According to IAS 32 Financial Instruments: Presentation, an equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. A financial instrument will be classified as equity if it meets the following criteria:

1. It includes no contractual obligation to deliver cash or other financial assets or to exchange financial assets or liabilities with another party under conditions that are potentially unfavorable to the entity.
2. Any residual interest in the assets of the entity is divided among the instrument's holders in proportion to the number of instruments held.
3. There is no contractual obligation to pay dividends.

Now let's apply these criteria to the convertible preference shares of VT Limited held by NKT Limited:

1. There is no contractual obligation to deliver cash or other financial assets or to exchange financial assets or liabilities with another party under conditions that are potentially unfavorable to the entity. This criterion is met because the conversion ratio only determines the number of equity shares that NKT Limited will receive upon conversion, and there is no other obligation associated with the convertible preference shares.
2. Any residual interest in the assets of the entity is divided among the instrument's holders in proportion to the number of instruments held. This criterion is also met because upon conversion, NKT Limited will receive a proportionate share of the equity in VT Limited.
3. There is no contractual obligation to pay dividends. This criterion is not relevant in this case because the question does not provide information about dividend payments.

Based on the above analysis, the convertible preference shares of VT Limited held by NKT Limited meet the criteria for classification as equity.