CCDs

Compulsorily Convertible Debentures (CCDs) are debt instruments that mandatorily convert into equity shares of the issuer on or before a stated date or trigger event. They are governed by Section 71 of the Companies Act 2013 and Rule 18 of the Companies (Share Capital and Debentures) Rules 2014.

Why CCDs exist in the Indian VC stack:

• FEMA classification: Under the Foreign Exchange Management (Non-debt Instruments) Rules 2019, CCDs are deemed equity if the conversion price is fixed upfront. This means FDI can flow into CCDs without RBI approval under the automatic route (subject to sector caps and pricing guidelines).
• Interim coupon: Unlike CCPS, CCDs can pay a tax-deductible interest coupon to the holder until conversion — useful for investors who want yield during the holding period.
• Conversion price visibility: Often used in bridge rounds or convertible top-ups where the next round's price will set the conversion price (with a cap and discount).

Key compliance:

• Allotment: File PAS-3 (return of allotment) with the ROC within 30 days.
• FCGPR: For non-resident allotment, file Form FC-GPR with the RBI within 30 days through the AD bank.
• Conversion: At conversion, allot equity shares via fresh PAS-3 and (for non-resident holders) report via FCGPR or FCTRS as relevant.
• Maximum tenor: 10 years for CCDs issued to non-residents (FEMA NDI Rules); the conversion must happen within this period.
• Debenture Trustee: required only for public issues and certain private placements above prescribed thresholds.

Pricing guidelines:

For non-resident investors, the conversion price must comply with FEMA pricing guidelines — at issue, the floor price is the fair value certified by a SEBI-registered Merchant Banker or Chartered Accountant.

Pitfalls: Treating CCDs as straight debt for accounting (Ind AS 32 forces equity classification when conversion is fixed); forgetting to convert by the long-stop date — overhang turns into a regulatory and disclosure mess.