CCPS and CCDs: the instruments behind most Indian rounds

What are CCPS?

CCPS stands for compulsorily convertible preference shares. They are a class of shares issued to investors that carry special rights, such as a liquidation preference and anti-dilution protection, and that must convert into ordinary shares on a fixed date or event. 'Compulsorily' means the holder cannot ask for the money back: conversion is certain.

Investors like them because the special rights protect their money before conversion, and founders accept them because the investor's claim turns into ordinary equity later. In an Indian venture round, a startup usually issues CCPS to the investor under a subscription agreement and shareholders' agreement. A series name such as 'Series A CCPS' is common.

What are CCDs?

CCDs are compulsorily convertible debentures. A debenture is a debt certificate: the investor lends money and receives interest. But a compulsorily convertible one must turn into shares at a fixed time, so the debt is never repaid in cash.

The interest on a CCD can be paid in cash or added to the amount that converts. CCDs are often used when the investor or company wants the cash flow or tax treatment of debt for a while, or when the price of the shares cannot be fixed at the start. They are also used for flexible structures where the conversion ratio depends on later performance, though that needs care under foreign exchange rules.

Why do Indian startups use CCPS and CCDs instead of ordinary shares?

Ordinary shares do not carry special rights. If an investor puts in ₹50 crore for plain equity, it ranks the same as the founders in a sale. With preference shares, the investor gets a liquidation preference, a fixed dividend (often a nominal one per cent) and protection terms. Investors in venture funds almost always insist on this.

Foreign exchange law gives another reason. Under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, fully, compulsorily and mandatorily convertible instruments count as equity for foreign investment purposes. This means a foreign investor can hold CCPS or CCDs and be treated as an equity investor, subject to sector limits and pricing rules. Preference shares that are not fully convertible are treated as debt, which brings different limits.

Some early rounds, especially angel rounds, do use ordinary equity shares, because they are simple and cheap to document. Investors in larger rounds usually want the protection of preference shares, and founders accept this in exchange for a better price or a larger cheque.

The tension is between simplicity and protection. A plain equity round is quick but gives the investor no shield in a bad outcome, so such investors tend to demand a lower price. A CCPS round costs more in legal fees but can support a higher valuation.

How does conversion work?

The terms say when the instrument converts and at what ratio. It may convert at an IPO, on a date such as the twentieth year, or earlier if the investor chooses. The standard conversion ratio is one to one: one CCPS becomes one ordinary share, adjusted for splits, bonus shares and anti-dilution protection.

Under the Companies Act, 2013, preference shares may be issued for a maximum of twenty years, though the Act sets a shorter limit for companies in infrastructure projects at up to thirty years. CCPS, because they convert, do not have to be redeemed. The conversion formula must be fixed at the time of issue, or at least be a clear formula, because of the FEMA pricing rules covered below.

What are the FEMA rules for foreign investors?

For an unlisted Indian company, shares issued to a non-resident must be priced at or above fair value, determined by an internationally accepted pricing method and certified by a chartered accountant or a SEBI-registered merchant banker or a cost accountant, as the rules permit. This fair value acts as a floor for the issue price. When the investor buys from a resident seller, a related floor applies in the other direction.

The price or the formula for conversion must be decided at the start, and the instrument must be fully, compulsorily and mandatorily convertible, with no option to ask for repayment. The company must report the issue to the RBI through the authorised dealer bank, using the forms and timelines set out in the rules. Reporting forms have changed over the years, so a professional should confirm the current process.

What is the tax treatment?

Tax treatment can be complicated. Dividends on preference shares are usually small. Interest on CCDs may be deductible for the company within limits, and taxable for the investor. Until 2024, money a private company raised above its fair market value could be taxed in its hands as income, a rule known as the angel tax. The July 2024 Budget abolished it for all investors, from assessment year 2025-26.

Because tax rules are amended frequently, founders should get advice for each round. The investor's holding period for tax purposes may also run from the date of allotment of the CCPS, which matters for capital gains at exit.

What is the difference between CCPS and CCD for the founder?

For a founder, CCPS and CCDs differ in three ways. First, CCPS appear in equity on the balance sheet, while CCDs are shown as a liability until conversion, which can affect loan agreements. Second, CCDs carry interest, which may or may not be paid in cash, while CCPS carry a dividend, which a company can pay only from profits. Third, in a winding up, a debenture holder ranks as a creditor ahead of shareholders, while a CCPS holder ranks as a shareholder.

In practice, most venture capital rounds use CCPS for the main equity money, and CCDs for bridge money, structured deals and cases where tax planning calls for it.

What are the dividend and voting terms?

Preference shares usually carry a small fixed dividend, often one per cent a year or less, which is paid only if the company has profits to distribute. Many are cumulative, which means that unpaid dividends add up. Because the dividend is small, it is not the main reason to hold CCPS. The rights are.

Voting follows the agreement. Under the Companies Act, 2013, preference shareholders can vote on matters that directly affect their class, and on all matters if the dividend has not been paid for a long time. The shareholders' agreement normally gives them votes on an as-converted basis and consent rights over key decisions. A lawyer should check that the articles of association match the agreement.

What should you check in your deal?

Check the conversion trigger and ratio. Check that the instrument meets the FEMA conditions if any investor is foreign. Check the dividend rate and whether it is cumulative. Check the rights attached: preference, anti-dilution, veto and information rights. Check the long stop date by which conversion must happen.

These instruments sit between company law, foreign exchange law and tax law, and all three change. This guide is general information. Please check with a lawyer or chartered accountant before issuing or buying any of them.

Recent examples on StopDown

• Jar secures Rs 29 crore from existing investor 18 September 2026
• Zenalyst raises ₹3 crore in pre-seed funding round 19 August 2026
• Delhi HC restrains Unity SFB from raising authorized capital amid dispute 28 July 2026
• Gabit raises ₹36.2 crore in pre-series A funding 22 May 2026

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