The issuance of Compulsorily Convertible Preference Shares (CCPS) is highly relevant for capital structuring in a private limited company. CCPS are a popular hybrid instrument used to raise equity funding while delaying immediate valuation and dilution.
Issuance of Compulsorily Convertible Preference Shares (CCPS)
CCPS are a type of hybrid security—they function as debt by paying a fixed dividend (like interest) but are legally mandated to convert into equity (shares) at a predetermined point in the future. They are widely used by startups and growing private limited companies to attract investment.
I. Statutory Basis and Key Characteristics
| Characteristic | Governing Provision | Requirement |
| Authorization | Section 55 (Preference Shares) | The issue must be explicitly authorized by the company’s Articles of Association (AoA). |
| Nature of Conversion | Section 55(1) | The conversion is mandatory (Compulsory) within a specified period. |
| Tenure | Section 55(2) | The redemption (or conversion) period must not exceed 20 years from the date of issue. |
| Issue Method | Section 62 (Preferential Allotment) | CCPS are typically issued through a Private Placement under Section 42/Rule 13, requiring a Special Resolution from shareholders. |
| Use of Proceeds | Section 62(4) | The company must utilize the money raised only for the purpose stated in the explanatory statement. |
II. The Mandatory Conversion & Pricing Requirement
The most critical aspect of CCPS is the certainty of its future conversion:
Definite Conversion Terms: The terms must be fixed upfront at the time of issue. A CCPS cannot be issued with an uncertain conversion price or ratio. The conversion must be certain to maintain its legal status.
Pricing Compliance: As CCPS issuance is treated as a preferential allotment, the pricing must comply with the rules:
Valuation Report: The issue price (including the final equity conversion price/formula) must be determined based on a Valuation Report obtained from a Registered Valuer.
Conversion Formula: The Explanatory Statement must clearly disclose the price or the definite formula by which the shares will convert into equity. (e.g., “The shares will convert at a price equal to 80% of the Fair Market Value at the time of conversion, subject to a minimum floor price of ₹X,” where the formula is fixed at the time of issue).
III. Compliance Procedure and Forms
The procedure for issuing CCPS largely mirrors that of a preferential allotment (Section 42):
| Step | Action Required | Statutory Form/Document |
| 1. Preparation | Appoint a Registered Valuer and determine the conversion price/formula. | Valuation Report |
| 2. Board Approval | Board passes a resolution approving the issue price and calls a General Meeting. | Board Resolution |
| 3. Member Approval | Shareholders pass a Special Resolution for the preferential allotment of CCPS. | Form MGT-14 (Filed within 30 days of the resolution) |
| 4. Offer and Receipt | Send the Offer Letter to identified investors and receive the subscription money. | Form PAS-4 (Private Placement Offer Letter) |
| 5. Allotment | Board passes a resolution allotting the CCPS to the investors. | Form PAS-3 (Return of Allotment, filed within 30 days) |
| 6. Record Keeping | Maintain a record of all private placement offers. | Form PAS-5 (Record of Private Placement) |
Strategic Use of CCPS
Strategic Note: Deferred Dilution and Valuation Certainty
"CCPS are strategically valuable as they allow the company to raise capital based on a current valuation while granting the investor the benefit of a conversion price that reflects future growth. Crucially, since CCPS pays a dividend, it provides a stable return to the investor, classifying the investment as 'safer' than pure equity during the early stages. This makes CCPS a powerful tool for structuring deals that satisfy both the founder's desire to limit immediate dilution and the investor's need for a guaranteed exit strategy."