What are Compulsorily Convertible Preference Shares (CCPS)? (2024)

FAQs

What are Compulsorily Convertible Preference Shares (CCPS)? ›

Compulsorily Convertible Preference Shares (CCPS) are a type of preference shares issued by a company with a mandatory conversion feature. These shares are a hybrid financial instrument that combines elements of both preference shares and convertible debentures.

CCPS, or Compulsorily Convertible Preference Shares, are a key element of startup financing. These shares carry certain terms—if an early investor has CCPS, he can have more rights than other investors who come in later at a higher valuation.

Compulsorily Convertible Preference Shares (“CCPS”) is a form of hybrid financial instruments, which are initially preference shares that, under the provisions of a mutually agreed-upon time period, convert into equity shares of the company. CCPS gives the holders precedence over equity shareholders in two ways.

Convertible preferred shares are fixed-income securities. The investor can choose to trade this type of share for a certain number of shares of the company's common stock, either after a predetermined length of time or on a specific date.

Compulsory Convertible Preference Shares (CCPS) in India are a type of hybrid security that combines features of both debt and equity. It is the most favorable means for investors and most commonly used in the early stage of any start-up.

Convertible preferred stocks are a special class of stocks issued by the company, giving the investor the right to convert its preferred stock holding into fixed shares of company common stock after the predetermined period.

In case of listed companies, inform the STOCK EXCHANGE with which shares of the company are listed atleast 2 days before the Board meeting. Convene and hold a Board Meeting for passing the resolution for conversion of compulsorily convertible preference shares into equity shares of the company.

The CCPS helps the start-up Companies founders to control their stake at the funding stage of new investors without an infusion of new funds. CCPS are also anti-dilution securities and founders can manage their equity stake to keep control of the Company by holding a substantial stake in the Company.

Yes, it is possible. The procedure shall be the same as the one prescribed under Sections 68, 69, and 70 of the Companies Act 2013 and relevant rules.

SCC 440] (“Narendra Kumar Case”), wherein it was held that any instrument which is compulsorily convertible into shares is regarded as an “equity” and not a loan or debt. The said order was also upheld by National Company Law Appellate Tribunal (“NCLAT”), vide its order dated June 5, 2023.

Can compulsorily convertible preference shares be redeemed? ›

Compulsorily convertible Preference Shares are those shares, which once the shares are converted, there is no obligation on the part of the company to redeem them since they are no longer preference shares.

Ease of conversion: The different types of bonds and debentures which are convertible, allow their owners the chance to convert them fast and without any hassle. This allows them to better adapt to market conditions and in turn effectively earn more in interest payment.

CCPS has precedence over common equity shareholders in two ways – before paying any dividends to equity shareholders, CCPS holders receive dividends, and if the company goes bankrupt and has to sell its assets, CCPS holders will receive a return on their capital on a priority basis when compared to the other ...

The benefits of convertible preferred stock include flexibility, potential for capital appreciation, dividend payments, and priority in liquidation. However, convertible preferred stock also has several drawbacks, such as dilution of ownership, lower dividend rates, higher costs, and risk of conversion.

For companies, CCPS is a financial tool that serves as a bridge between debt and equity financing. It allows them to secure capital while maintaining control.

Preference shares that can be easily converted into equity shares are known as convertible preference shares. Non-Convertible preference shares are those shares that cannot be converted into equity shares.