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What is CCPS?

CCPS are Compulsorily Convertible Preference Shares. Compulsorily Convertible Preference Shares (CCPS) are a type of preference shares issued by a company that are mandatorily convertible into equity shares at a predetermined time or upon the occurrence of certain events, such as a specified date, a milestone, or a trigger event.

While startups aren’t specifically restricted from issuing CCPS, they must adhere to the regulatory framework governing the issuance of securities as stipulated by the Companies Act, 2013, and the rules.

 Terms and Conditions of CCPS?

The terms and conditions of CCPS, including the conversion ratio, conversion price, dividend rate, voting rights, and other rights and privileges attached to the shares, must be clearly specified in the offering documents and agreements.

The terms and conditions of Compulsorily Convertible Preference Shares (CCPS) can vary depending on the specific agreement between the issuing company and the investors. However, here are some common terms and conditions typically associated with CCPS:

1. Conversion mechanism: CCPS are mandatorily convertible into equity shares at a predetermined time or upon the occurrence of specified events, such as a specified date, a milestone, or a trigger event.
2. Conversion price: The conversion price is the price at which CCPS are converted into equity shares. It may be fixed at the time of issuance or determined based on a formula specified in the agreement. The conversion price is typically calculated to ensure that investors receive a predetermined number of equity shares for each CCPS held.
3. Conversion ratio: The conversion ratio specifies the number of equity shares that each CCPS can be converted into. It is calculated based on the conversion price and is used to determine the number of equity shares issued to investors upon conversion of their CCPS.
4. Conversion period: The conversion period is the period during which CCPS can be converted into equity shares. It may be specified in the agreement and typically begins after a certain period from the date of issuance or upon the occurrence of specified events.
5. Dividend rate: CCPS may carry a dividend rate, which represents the rate at which dividends are paid to CCPS holders. The dividend rate may be fixed or variable and may be cumulative or non-cumulative.
6. Voting rights: CCPS may or may not carry voting rights. If voting rights are attached to CCPS, investors may have the right to vote on certain matters affecting the company, such as changes to the company’s capital structure, mergers, acquisitions, or other significant corporate actions.
7. Redemption provisions: CCPS may include provisions for redemption, allowing the issuing company to redeem the shares at a predetermined price or upon the occurrence of specified events. Redemption provisions may be subject to regulatory restrictions and may require approval from regulatory authorities.
8. Liquidation preference: CCPS holders will have a liquidation preference, entitling them to receive a preferential amount of proceeds in the event of the company’s liquidation or winding-up before other shareholders.
9. Transferability: The transferability of CCPS may be restricted, requiring approval from the issuing company or other shareholders before transferring the shares to third parties.

These are some of the key terms and conditions associated with CCPS. It’s essential for both the issuing company and investors to carefully review and negotiate the terms of the CCPS agreement to ensure clarity and alignment of interests. Additionally, companies issuing CCPS must comply with applicable regulatory requirements and seek legal and financial advice to ensure compliance and proper structuring of the transaction.

Is a valuation required to issue CCPS?

Yes, valuation is mandatory. Startups must determine a fair valuation for their CCPS issuance from a registered valuer to justify the issue price of the securities.

Restriction on the use of funds?

Startups must use the funds raised through the issuance of CCPS for the stated purposes outlined in the offer documents. Misuse or misappropriation of funds can lead to regulatory scrutiny and legal consequences.

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Team Businezexcellence