04 Feb 2022

What is CCPS?

  • Compulsorily Convertible Preference Shares (CCPS) or Compulsorily Convertible Debentures (CCDs) are units that compulsorily convert into fairness stocks of the issuing agency at the jointly pre-determined situations at the time of issuance of the units. CCPS also are taken into consideration as capital units, and funding carried out in CCPS may be made beneath the FDI route.
  • According to the Reserve Bank of India (RBI), the compulsorily convertible choice stocks or CCPS have to be dealt with fairness stocks. Indian organizations can begin economic commitments primarily based totally on the publicity of a joint mission via CCPS. The current provisions of Overseas Direct Investments visualize putting in place or obtaining a joint mission overseas with the aid of using subscribing or contributing to the fairness capital of the mission.

 

Technical Terms

    1. Floor: A price floor is the lowest amount at which a good or service may be sold and still function within the traditional supply and demand model. Prices below the price floor do not result in an appropriate increase in demand.

    2. Cap: Market Capitalization (Market Cap) is the most recent market value of a company’s outstanding shares. The Market Cap is equal to the current share price multiplied by the number of shares outstanding.  The investing community often uses market capitalization value to rank companies and compare their relative sizes in a particular industry or sector. To determine a company’s market cap, simply take its current market share price and multiply the figure by the total number of shares outstanding.

    3. Discount:  A discount specifies a percentage reduction in the convertible note's conversion rate compared to the next eligible priced round. This effectively allows an investor to turn the principal sum of their loan (plus any unpaid interest) into stock at a lower price than the purchase price charged by other buyers in that round. “Lower the time to the next round, lower the % discount.” (The reason being that the happening of a next round is an indication of lowered risk for the existing investor).

 

For Startups

  • The CCPS also assists start-up company founders in maintaining control of their stake during the funding stage of new investors without requiring new funds. The founders will manage their equity without adding any additional funds because CCPS are anti-dilution securities.
  • Since the CCPS are also anti-dilution securities so the founders can manage their equity stake to lead the company by holding a substantial stake in the company.
  • The CCPS also assists startup company founders in maintaining control of their stake during the funding stage of new investors without requiring new funds. The founders will manage their equity without adding any additional funds because CCPS are anti-dilution securities.

 

For Investors

  • Investors that receive Compulsory Convertible Preference Shares, or CCPS, have an option of tying the conversion date to the company's results. This means the investor may decide to convert CCPS to equity only after the business achieves the expected growth. If these targets are not met, investors will be able to raise their stake in the company. There can be a ratio associated with the transfer of CCPS to equity shares at times. When advisors or promoters demand more shares, such conversion ratios are common. In the Shareholder Agreement, the conversion ratio is usually decided upon (SHA).

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