CCPS Explained — Why Indian Investors Don't Take Equity Shares
Quick Summary
Almost every institutional investor in India invests through Compulsorily Convertible Preference Shares (CCPS) rather than equity shares — for tax, downside protection, and FEMA reasons. This article explains how CCPS work under the Companies Act, 2013, why your cap table must distinguish Current vs. Fully Diluted ownership, and how Founding Legals automates the conversion math.
The Legal Breakdown / Why It Matters
CCPS (Compulsorily Convertible Preference Shares): A class of preference shares, governed by Section 55 of the Companies Act, 2013, that must convert into equity shares within a specified period (maximum 20 years under Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014).
CCPS are the dominant institutional investment instrument in India because they offer:
- Liquidation Preference: In a downside scenario, CCPS holders are paid out before equity shareholders, under the priority waterfall set in the AOA.
- Anti-Dilution Protection: If a future round is at a lower valuation ("down round"), the conversion ratio adjusts to protect the investor.
- FEMA Compliance: Under FEMA 20(R), CCPS qualify as "equity instruments" for FDI purposes — unlike Optionally Convertible Preference Shares (OCPS), which are treated as External Commercial Borrowings (ECB).
- No Voting at Equity Threshold: Until conversion, CCPS typically carry voting rights only on matters affecting their class.
CCPS Key Terms — A Founder's Glossary
| Term | What It Means |
|---|---|
| Face Value | Nominal value per CCPS (usually ₹10 or ₹100) |
| Issue Price | Face Value + Premium (the actual price investor pays) |
| Conversion Ratio | How many equity shares each CCPS converts into (1:1 is most common, but adjusts on down rounds) |
| Conversion Trigger | Event that forces conversion — typically IPO, exit, or expiry of tenure |
| Liquidation Preference | Multiple (1×, 1.5×, 2×) of issue price paid before equity in a liquidation/exit |
| Participation Rights | "Participating" CCPS get preference plus share in remaining proceeds; "Non-participating" get only one |
| Anti-Dilution | Broad-Based Weighted Average (founder-friendly) vs. Full Ratchet (investor-friendly) |
Current vs. Fully Diluted Ownership
This is where founders get blindsided. Your Current Ownership percentage is calculated only on issued equity shares. Your Fully Diluted Ownership assumes all CCPS, ESOPs, warrants, and convertible notes have converted into equity.
| View | What It Shows | When It Matters |
|---|---|---|
| Current Ownership | Only issued equity shares | Voting at general meetings |
| Fully Diluted Ownership | All convertible instruments converted | Future exits, valuations, control |
How to Do It on Founding Legals
- Step 1: Go to Cap Table → Issue New Shares → Select Class → CCPS. Enter the issue price, face value, conversion ratio, and conversion deadline.
- Step 2: Configure investor protections via the CCPS Term Builder: Liquidation Preference, Participation, Anti-Dilution, and Conversion Triggers.
- Step 3: Toggle the "Fully Diluted View" on your cap table. Founding Legals shows two columns side-by-side: Current Ownership % vs. Fully Diluted Ownership %.
- Step 4: Run the "Down Round Simulator". Enter a hypothetical lower future valuation. The platform recalculates the new CCPS conversion ratio and dilution impact.
- Step 5: Auto-generate the SSA and SHA with CCPS-specific clauses, and file Form PAS-3 with the linked valuation report under Rule 11UA.
Under Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014, CCPS must convert into equity within 20 years from the date of issue. If your termsheet specifies a longer or open-ended conversion window, the share issue is invalid. For FDI-funded CCPS, FEMA 20(R) further restricts conversion price formulas — your CCPS must convert at a price determined upfront or by an internationally accepted pricing methodology.
Always push for Broad-Based Weighted Average anti-dilution rather than Full Ratchet. In a down round, Full Ratchet can wipe out 30–40% of founder equity overnight. Broad-Based dilutes proportionally and is the Indian VC market standard.