CCPS conversion before an IPO: how preference shares become equity

Compulsorily convertible preference shares (CCPS) are shares that rank ahead of ordinary shares for certain rights and must turn into ordinary equity shares at a set point or event. Conversion is the moment when each CCPS becomes a given number of equity shares and the special preference rights fall away.

Almost every funded Indian startup carries CCPS, because they let investors hold special rights such as a liquidation preference while the company is private. A listed company's public investors buy only ordinary shares, so those special rights need to disappear before the listing.

Regulation 5(2) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 generally bars a company from making an IPO while convertible securities or other rights to receive equity remain outstanding. The usual exception covers fully paid convertible securities that are converted on or before the filing of the red herring prospectus (RHP). Stock options under a compliant employee scheme are also allowed to remain.

In practice, the conversion is done after the draft is filed and before the RHP. Advisers suggest planning it early, since it needs board and shareholder approvals, valuations in some cases and updated filings.

Reports say that in 2025 SEBI also extended the exception to convertible securities that convert before the RHP and are offered for sale in the IPO. Check the current text of the regulation for the final wording.

The ratio is written in the share subscription and shareholders' agreement. Often it starts at one equity share per CCPS. It may be adjusted if the company has done bonus issues, splits or later rounds at lower prices that trigger anti-dilution protection for earlier investors.

Companies also do a share split or a bonus issue just before listing to bring the price per share to a convenient level. Conversion then happens at the ratio that applies after those adjustments. The DRHP lists each series of CCPS, their terms and the number of equity shares each will become.

Before conversion, a cap table shows ordinary shares and several series of CCPS. After conversion, it shows only equity shares, and the numbers of shares and the percentages shift. Investors who held CCPS now show up as ordinary shareholders, and their share is calculated on a fully diluted basis.

A company with many series of preferred shares and anti-dilution adjustments may end up with a larger share count than the simple one-to-one calculation suggests. The DRHP's capital structure section shows the shares before and after the issue.

Promoters hold ordinary shares, so when the CCPS of outside investors convert and the share count grows, the promoters' percentage drops. This is often the point at which a founder's stake becomes smaller than the public figure from the last round implied.

The offer document classifies each shareholder as a promoter, promoter group or public. A founder who stays above or below certain levels may be called a promoter for the IPO, with consequences for lock-ins and for the minimum promoter contribution.

Pre-IPO shareholders who are not promoters are generally locked in for six months from the date of allotment in the IPO under Regulation 17 of the ICDR Regulations, as of November 2026. Promoters' minimum contribution has a longer lock-in, typically 18 months, with the rest of their holding locked for six months. Specific categories, such as venture capital funds, were treated differently in earlier versions of the rules, so check the offer document.

Shares held for a year before the issue are generally eligible to be offered for sale by investors. For converted CCPS, the holding period is, according to law firm summaries, counted from when the CCPS were held, but each offer document states which shares are eligible.

Conversion is not only mechanical. Investors usually negotiate terms in the shareholders' agreement that apply at an IPO: automatic conversion on a qualified IPO, minimum price or valuation conditions for the IPO to count as qualified, and adjustments if the IPO price is below an earlier round. Founders try to avoid any term that gives a late investor extra shares at listing.

Many agreements provide that if the IPO happens at or above a certain price, CCPS convert at the base ratio, and if below it, the ratio improves for the investor. This is called a ratchet. It is rare in the lead investors' documents of well-known startups but still appears in some structures.

Other rights, such as board seats and veto rights, normally fall away at listing or are replaced by the rights allowed to listed companies. The DRHP's section on the history of the share capital and the summary of shareholder agreements shows what applies.

The DRHP lists the history of the company's share capital in a table, with each allotment of equity and preference shares, the date, the price and the number of shares. It also lists each series of CCPS with its terms, and gives the shareholding before and after conversion.

Reading these tables shows how many shares each fund will hold and at what effective price they entered. This is where analysts compare the IPO price with the last private round to see whether early investors are exiting above or below their entry price.

Conversion also has a tax and filing side. The company files the changes with the Registrar of Companies, updates its register of members and makes the demat credits. Startups do this with the help of company secretaries and lawyers, and it is one reason the pre-IPO months are busy. Get professional advice on tax for any specific holder.

Companies also tell employees about the change, because ESOP holders may see their option counts adjusted after a bonus issue or split that happens alongside conversion.

Look for stories saying a company has converted its preference shares or restructured its capital ahead of a filing. They signal that an IPO is being prepared. Check the share count after conversion, any bonus issue or split, and whether the stake of the founders has fallen. This guide is general information, not legal or investment advice.