Solution

The nature of the financial instrument held by NG Limited in AG Limited is a convertible preference share. This is because the instrument can be converted into equity shares of AG Limited at a fair value determined at the time of conversion, subject to certain conditions.

The conversion ratio of the convertible preference shares is variable, but within a narrow range. Specifically, the conversion ratio is such that NG Limited's stake in AG Limited upon conversion should not go below 15% or above 40%. This means that the number of equity shares that NG Limited will receive upon conversion will be adjusted to ensure that its stake in AG Limited falls within this range.

The feature of the instrument that requires the conversion ratio to be adjusted to maintain NG Limited's stake within a narrow range is a typical feature of convertible securities. This feature is designed to provide some protection to the convertible security holder against dilution of their stake, while also giving them some upside potential if the value of the underlying equity shares increases.

It is important to note that the specific classification of the instrument as either equity or financial liability will depend on the specific terms and conditions of the instrument. However, based on the information provided, it is likely that the instrument will be classified as equity since it meets the definition of an equity instrument under IAS 32 Financial Instruments: Presentation.

In summary, the financial instrument held by NG Limited in AG Limited is a convertible preference share with a variable conversion ratio that is designed to maintain NG Limited's stake in AG Limited within a narrow range.