CCPS
Compulsorily Convertible Pref. Shares
The dominant Indian VC instrument. Preference shares that must convert to equity by a fixed date — providing downside protection plus equity upside.
Compulsorily Convertible Preference Shares (CCPS) are preference shares that must convert into equity on or before a specified date or trigger (typically the earlier of an IPO, a strategic sale, or a long-stop date 10–20 years out).
They are the default instrument for Indian VC investments because they offer the best of both worlds: preference economics until conversion (liquidation preference, anti-dilution, board rights, veto rights) plus equity upside on conversion. Under FEMA they are classified as equity capital if the conversion ratio is fixed upfront, so FDI flows through the automatic route into CCPS without RBI approval (subject to sector caps and pricing).
Key economic terms baked into CCPS:
- Conversion ratio: typically 1:1 at the conversion price, adjusted for stock splits, bonus issues, and anti-dilution events.
- Liquidation preference: usually 1x non-participating for Series A in India — investor takes back the higher of their CCPS purchase price or as-converted share.
- Dividend: typically a low 0.001% nominal dividend — present only to satisfy the Companies Act requirement that preference shares carry a preferential right to dividend (Section 47(2)).
- Anti-dilution: broad-based weighted-average is market standard. See Anti-Dilution Protection.
- Voting: CCPS holders vote on resolutions directly affecting their rights and, after a 2-year dividend default, on all resolutions (Section 47(2) proviso).
Legal framework:
- Section 55 of the Companies Act 2013 governs preference shares.
- Rule 9 of the Companies (Share Capital and Debentures) Rules 2014 prescribes terms for issue.
- Maximum redemption tenor for redeemable preference shares is 20 years; for CCPS the conversion must happen within 20 years.
- Allotment: file PAS-3 within 30 days; for non-resident allotment also file FC-GPR.
Common pitfall: founders accept aggressive participating liquidation preferences without modelling the exit waterfall. At sub-2x exits, founders walk away with little. Always model multiple exit scenarios in Cap Table before signing.
Hybrid debt instruments that must convert to equity by a fixed date. Treated as equity under FEMA; popular for FDI-route investments into Indian startups.
Investor right that adjusts conversion price when a company issues shares at a lower price in a later round. Indian VCs typically take broad-based weighted-average.
Investor right to receive proceeds before equity holders on a liquidation event. Indian VC standard is 1x non-participating.
Category of shares with distinct rights — equity vs preference; voting vs non-voting; ordinary vs Class A/B/DVR. Governed by Section 43 and the AoA.
Return of allotment of shares (equity, preference, CCDs, sweat equity) filed with ROC under Section 39(4). Due within 15 days of allotment.