• [Comment 1]  - Specific behaviors of the GRUB bootloader when encountering "Linux 16" versus "Linux EFI" directives.
• linux16 - Directive in GRUB boot loader to load the Linux Kernel image. It is documented in the GNU GRUB documentation - linux16
• The linux16 command forces GRUB load Linux Kernel image by using legacy 16-bit real-mode boot protocol.
• GRUB hands control to the kernel while the CPU is still in 16-bit Real Mode.
• This allows the kernel's real-mode setup code to perform early hardware initialization using BIOS services (e.g., querying video modes, memory map)"
• The Linux Kernel switches itself into 32-bit protected mode.
• initrd16 loads the initramfs and is paired with linux16
• linuxefi - downstream GRUB2 bootloader directives specific to RHEL 7 for UEFI systems. Documented in RHEL 7 System Administrator Guide
• Directive specific to RHEL 7. These directives are deprecated in RHEL 8 upwards which use standard GRUB directives linux, initrd instead and these work uniformly across BIOS or UEFI systems.
• linuxefi and initrdefi directives use UEFI boot services to load the Linux Kernel image and initramfs respectively.
• Based on the boot mode of the system
• These GRUB configuration files are created using scripts in /etc/grub.d/ - primary script which generates the kernel image, initramfs boot loader commands is /etc/grub.d/10_linux.
• RHEL 7.9 VM in BIOS Mode - GRUB reads the file /boot/grub2/grub.cfg which has the directives {linux16, initrd16}

[root@localhost ~]# cat /boot/grub2/grub.cfg | egrep "linux16|initrd16"                        
        linux16 /vmlinuz-3.10.0-1160.el7.x86_64 root=UUID=b635e330-0173-4866-9e5e-693086760507 
ro crashkernel=auto rhgb quiet LANG=en_US.UTF-8                                                
        initrd16 /initramfs-3.10.0-1160.el7.x86_64.img                                         
        linux16 /vmlinuz-0-rescue-bb246b817b814a44b5e960404fdc7ae3 root=UUID=b635e330-0173-4866
-9e5e-693086760507 ro crashkernel=auto rhgb quiet                                              
        initrd16 /initramfs-0-rescue-bb246b817b814a44b5e960404fdc7ae3.img                      

• RHEL 7.9 VM in UEFI Mode - GRUB reads the file /boot/efi/EFI/redhat/grub.cfg which has the directives {linux16, initrd16}

[root@localhost ~]# cat /boot/efi/EFI/redhat/grub.cfg | egrep "linuxefi|initrdefi"
        linuxefi /vmlinuz-3.10.0-1160.el7.x86_64 root=/dev/mapper/rhel-root ro crashkernel=auto rd.lvm.lv=rhel/root rd.lvm.lv=rhel/swap rhgb quiet 
        initrdefi /initramfs-3.10.0-1160.el7.x86_64.img
        linuxefi /vmlinuz-0-rescue-6e4e30972e924630b169d78059b932d2 root=/dev/mapper/rhel-root ro crashkernel=auto rd.lvm.lv=rhel/root rd.lvm.lv=rhel/swap rhgb quiet 
        initrdefi /initramfs-0-rescue-6e4e30972e924630b169d78059b932d2.img

• Code snippet from /etc/grub.d/10_linux for RHEL9 and RHEL7. The root device UUID passed to the kernel (e.g., root=UUID=...) is dynamically queried and formatted by helper routines in /usr/share/grub/grub-mkconfig_lib using grub-probe .
• Code snippet from /etc/grub.d/10_linux in RHEL9

  if [ -d /sys/firmware/efi ]; then
      bootefi_device="`${grub_probe} --target=device /boot/efi/`"
      prepare_grub_to_access_device_with_variable boot ${bootefi_device}
  else
      boot_device="`${grub_probe} --target=device /boot/`"
      prepare_grub_to_access_device_with_variable boot ${boot_device}
  fi

• Code snippet from /etc/grub.d/10_linux in RHEL7

  if [ -d /sys/firmware/efi ]; then
    sed "s/^/$submenu_indentation/" << EOF
        ${linuxefi} ${rel_dirname}/${basename} root=${linux_root_device_thisversion} ro ${args}
EOF
  else
    sed "s/^/$submenu_indentation/" << EOF
        linux${sixteenbit} ${rel_dirname}/${basename} root=${linux_root_device_thisversion} ro ${args}
EOF
  fi

[Comment 2] Confirming that the virtual machine Linux file format is fully compatible with the new directive
Based on the analysis done for the previous  comment, we can safely conclude that this problem is very specific to RHEL 7 only. Further, the problem occurs when following conditions are met
Source VM must be in UEFI boot mode
In the /etc/fstab, the /boot and /boot/efi partitions must be identified by the corresponding /dev/sd* files instead of the UUIDs (default) generated during FS creation.
The second condition forces virt-v2v conversion to configure GRUB. 
As the  grub configuration executes in context of libguestfs appliance (BIOS mode), it is generated with linux16, initrd16 whereas the VM is configured to boot in UEFI.
The VM powers up with UEFI firmware, but the linux16 directive switches the CPU into 16-bit real mode and look for BIOS services (/boot/grub2/i386-pc) which are absent.

[Comment 3] Regarding the potential modification of file system table entries and disk device naming conventions, Richard Jones insisted that any statements regarding potential disk access problems must be accompanied by a detailed explanation of the "why" and "what" behind those risks
The kernel device discovery (names /dev/sd*) is non-deterministic as it is based on order of driver initialization at the boot time. The order variation is due to asynchronous driver probe, kernel update or VM configuration changes.
By "hard-coding" the device names inside /etc/fstab, there could be a possibility of an unintended device being mounted onto an incorrect mount point, thus causing the system to fail or corrupt.
UUIDs (written into FS) are more reliable - where order of initialization would not matter making it more deterministic.
The proposed solution
Convert the references to /dev/sd* files to corresponding FS UUIDs [Implemented  and tested]
Following change applicable only if OS is RHEL 7 and Boot mode is UEFI
Replace {linux16, initrd16} with {linuxefi, initrdefi}  [Work in progress to change from using sed to using APIs]

Thanks
Srihari