{"id":21607,"date":"2020-12-11T14:36:55","date_gmt":"2020-12-11T09:06:55","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=21607"},"modified":"2024-07-02T15:16:32","modified_gmt":"2024-07-02T09:46:32","slug":"compulsorily-convertible-preference-shares","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/compulsorily-convertible-preference-shares\/","title":{"rendered":"An Complete Overview on Compulsorily Convertible Preference Shares"},"content":{"rendered":"\n<p class=\"has-drop-cap\">CCPS is\nalso known as Compulsory Convertible Preference Shares which is a well-recognized\ninvestment instrument preferred by Private Equity investor. CCPS is referring\nto as an anti-dilution or hybrid instrument. NBFC can issue CCPS without\navailing permission from Reserve Bank if the conversion remains well below the\ntwenty-six percent. Henceforth, it is safe to say that RBI&#8217;s permission is not\nrequired in the event when there is no noticeable increment in\nshareholding.&nbsp; <\/p>\n\n\n\n<p>However, during the conversion of preference shares to equity, <a href=\"https:\/\/corpbiz.io\/nbfc-registration\"><strong>NBFC<\/strong><\/a> must obtain permission for Reserve Bank. NBFC can issue Compulsory Convertible Preference for a max timeline of twenty years. There will be no tax obligation on Compulsory Convertible Preference Shares, whether it is issued at face value or par. <\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/compulsorily-convertible-preference-shares\/#What_do_you_mean_by_Compulsorily_Convertible_Preference_Shares\" >What do you mean by Compulsorily Convertible Preference Shares?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/compulsorily-convertible-preference-shares\/#What_is_the_Concept_of_Anti_Dilution_in_CCPS_Issued_by_NBFC\" >What is the Concept of Anti Dilution in CCPS Issued by NBFC?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/compulsorily-convertible-preference-shares\/#How_Private_Equity_Investors_get_benefitted_from_Compulsorily_Convertible_Preference_Shares\" >How Private Equity Investors get\nbenefitted from Compulsorily Convertible Preference Shares?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/compulsorily-convertible-preference-shares\/#How_Start-ups_can_avail_benefits_from_CCPS\" >How\nStart-ups can avail benefits from CCPS?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/compulsorily-convertible-preference-shares\/#Discounted_Cash_Flow_under_CCPS\" >Discounted Cash Flow under CCPS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/corpbiz.io\/learning\/compulsorily-convertible-preference-shares\/#Regulatory_Framework_Related_to_CCPS\" >Regulatory Framework Related to CCPS<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/corpbiz.io\/learning\/compulsorily-convertible-preference-shares\/#Regulations_Imposed_by_Reserve_Bank_of_India\" >Regulations Imposed by Reserve Bank of\nIndia<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/corpbiz.io\/learning\/compulsorily-convertible-preference-shares\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_do_you_mean_by_Compulsorily_Convertible_Preference_Shares\"><\/span>What do you mean by Compulsorily Convertible Preference Shares? <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Compulsorily\nConvertible Preference Shares, aka CCPS instruments that mandatorily changed\ninto equity shares of the issuing organization on the predetermined condition\nat the time of releasing of the instruments. <\/p>\n\n\n\n<p>Compulsory\nConvertible Preference Shares typically posses lower interest rate as compare\nto NCDs. CCPS are also deemed as capital instruments &amp; investment done\nCompulsorily Convertible Preference Shares under the FDI route, <\/p>\n\n\n\n<p>As per\nRBI, the CCPS ought to be treated at par with equity shares. Indian\norganization can agree to financial commitments depends on the exposure to a\njoint venture via CCPS. The current provision related to FDI (foreign direct investment)\ncontributing to the equity capital of the venture to acquire a joint venture.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_Concept_of_Anti_Dilution_in_CCPS_Issued_by_NBFC\"><\/span>What is the Concept of Anti Dilution in CCPS Issued by NBFC?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The\ncompany\u2019s promoters avail several benefits from CCPS by maintaining equity\nshares intake during the release of equity share to new investors. The promoter\ncan easily convert the Compulsory Convertible Preference Shares availed in the\nevent of lower valuation of shares when new investor introduces the funds at a\nhigher valuation. Subsequently, the promoter can escalate its stake in the\nabsence of the fund described above.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_Private_Equity_Investors_get_benefitted_from_Compulsorily_Convertible_Preference_Shares\"><\/span>How Private Equity Investors get\nbenefitted from Compulsorily Convertible Preference Shares?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>CCPS offers several benefits for private equity investors. During the conversion\ntime, the investor can link the performance of the company. This essentially\nindicates that the share shall get converted only in the situation when the\nNBFC accomplish the target growth. In case the target is not laid out, the\ncompany has every right to crank up its stake. <\/p>\n\n\n\n<p>According to norms of the capital market regulator, any acquisition of\nfifteen percent or more (in case listed organization) opens up the possibility of\noffers. Likewise, a PE\nfirm can drive direct equity of @14.9% and remain in the form of securities,\nwhich might transform into equity within eighteen months. In this ways, the\ncompanies have a chance to exist the one year lock-in period for private equity\ninvestment.&nbsp;&nbsp; <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_Start-ups_can_avail_benefits_from_CCPS\"><\/span>How\nStart-ups can avail benefits from CCPS?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The CCPS,\naka Compulsory Convertible Preference Shares, also render aid to the owner of\nstartup firms in curbing their stake at the stage of funding of new investors\nin the absence of infusion new funds. As CCPS are also referring to as\nanti-dilution securities, the company&#8217;s owners can handle their equity by\nintroducing additional funds. This also helps the owner to handle their equity\nshare to manage the organization by holding a good amount of stake in the\ncompany. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Discounted_Cash_Flow_under_CCPS\"><\/span>Discounted Cash Flow under CCPS<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The\nCompulsory Convertible Preference Shares helps in averting the valuation gap\nthat exists between investor and founder. According to the theoretical\nviewpoint, several methods are used to bring at par the equity share value.\nFurthermore, the most preferred method for calculation of the valuation gap is\nthe relative valuation. Another method that is used for the purpose is known as\nDiscounted Cash Flow (DCF).&nbsp; The said\nmethod seeks multiple assumptions, including forecasting data of five years for\nvaluation.&nbsp; Henceforth, an easy method to\navert a valuation discussion is if there is any distinction.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Regulatory_Framework_Related_to_CCPS\"><\/span>Regulatory Framework Related to CCPS<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The issuance of CCPS securities is not a straightforward business decision for NBFCs.&nbsp; It plays a pivotal role in curbing the promoter&#8217;s equity stake. A slightest of disparity can impact the holding structure of the founders. Moreover, the Compulsory Convertible Preference share issued by NBFC entails compliances of 4 major laws, which are as follows:-<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter is-resized\"><img decoding=\"async\" src=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/12\/Regulatory-Framework-Related-to-CCPS.png\" alt=\"Regulatory Framework Related to CCPS\" class=\"wp-image-21608\" width=\"434\" height=\"434\" srcset=\"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/12\/Regulatory-Framework-Related-to-CCPS.png 1000w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/12\/Regulatory-Framework-Related-to-CCPS-150x150.png 150w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/12\/Regulatory-Framework-Related-to-CCPS-300x300.png 300w, https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2020\/12\/Regulatory-Framework-Related-to-CCPS-768x768.png 768w\" sizes=\"(max-width: 434px) 100vw, 434px\" \/><\/figure><\/div>\n\n\n<h3 class=\"wp-block-heading\">Companies Act, 2013<\/h3>\n\n\n\n<p>The\nfollowing bylaws regulate the issuance of Compulsory Convertible Preference\nShares: <\/p>\n\n\n\n<ul>\n<li>Section 42, Companies Act, 2013&nbsp;<\/li>\n\n\n\n<li>Section 62, Companies Act, 2013&nbsp;<\/li>\n\n\n\n<li>Section 55, Companies Act, 2013&nbsp;<\/li>\n\n\n\n<li>Companies (Prospectus and Allotment of Securities)\nRules, 2014<\/li>\n\n\n\n<li>(Share Capital and Debentures) Rules, 2014.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">FEMA Regulatory Framework<\/h3>\n\n\n\n<p>Compulsory Convertible Preference Shares are also being recognized as equity instruments; subsequently, even overseas investors can subscribe under the <strong>FDI policy<\/strong> under the automatic route in the view of pricing guidelines as well as the sartorial cap. As per the above policy, the conversion stipulates shall be determined upfront during the issuance of said instruments. The price during conversion, under any circumstances, should not be lower than the fair value estimated during the issuance of such instruments.\u00a0 <\/p>\n\n\n\n<p>Keep in\nthe mind that Indian companies are not eligible to issue Non Convertible\nPreference shares (NCPS) under the foreign direct investment policy. The\nExternal Commercial Borrowing Regulations regulate it. Moreover, Indian\ncompanies have an option to issue CCPS subjecting to some limitations minimum\nlock-in period and also assured to returns to overseas investors. Henceforth,\none has to remain cautious while opting for the convertibility aspect of the\nPreference Shares. Post compliances issues of Compulsory Convertible Preference\nShares are as follow: <\/p>\n\n\n\n<ul>\n<li>Submitting advance reporting form \u2013 First Year\nCommission <\/li>\n\n\n\n<li>FCGPR &#8211; Foreign Currency-Gross Provisional Return<\/li>\n<\/ul>\n\n\n\n<p>The\ncompliance measures remain more or less the same during the issuance of equity\nshares. The filing of the FCGPR isn&#8217;t mandatory during the conversion, i.e.\nCCPS into equity shares. However, it is advisable to intimate the Reserve bank\nabout the information of conversion of CCPS into equity shares, so that Reserve\nBank would update its database related to the foreign equity policy. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Taxation Regulatory Framework<\/h3>\n\n\n\n<p><strong>The CCPS\nvaluation is done pursuant to section <\/strong><strong><em>56\n(2)(viib) of the Income Tax Act, 1961.<\/em><\/strong><\/p>\n\n\n\n<p>As\nper the said section, the unlisted entity receives the consideration regarding\nthe issuance of shares from any individual being a resident that surpasses the\nface value of such shares, the cumulative compensation availed for such shares\nwhich surpasses the fair market value of shares will be converted to income tax\nunder the head income generated from other sources. But, pricing, as mentioned\nabove limitation, is not applied to the shares issued to the non-resident\nindividual.&nbsp; <\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Stamp duty Aspect of CCPS<\/h3>\n\n\n\n<p>The\npayment related to the stamp duty is governed by the stamp duty act of the\nrespective states. It should be noted that no stamp duty applies to the Equity\nShare Certificate.&nbsp; <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Regulations_Imposed_by_Reserve_Bank_of_India\"><\/span>Regulations Imposed by Reserve Bank of\nIndia<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The offered\ndocument regarding the private placement ought to be issued within six months\nfrom the date of issuance of board resolution regarding the same. The offer\ndocument must enclose the name of the office along with their designation that\nreserves the right to issue the offer document. The offer document and board\nresolution must enclose all the detail about the purpose behind the procurement\nof the said resources.<\/p>\n\n\n\n<ul>\n<li>The offer document must be printed as \u201cFor Private Circulation Only.\u201d<\/li>\n\n\n\n<li>The general information like the registered office address, date of opening or closure of the issue etc. must get enclose in the offer document.&nbsp; <\/li>\n\n\n\n<li>The NBFC make sure to issue debenture for the inclusion of the funds in its balance sheet and not facilitate request regarding the resources of group entities or associates or parent companies. <\/li>\n\n\n\n<li>The private placement by all the Non-Banking financial companies will be limited to forty-nine investors, picked by the NBFC.<\/li>\n\n\n\n<li>The cost of subscription for a single investor shall be twenty lakh rupees and in multiple of ten lakh rupees afterwards.&nbsp;      <\/li>\n\n\n\n<li>There should be a minimum period gap of at six months between the subsequent private placements.<\/li>\n\n\n\n<li>An NBFC cannot extend credit while taking the security of its debentures into account.<\/li>\n\n\n\n<li>All other guidelines in pursuant to private investments remain unchangeable. <\/li>\n\n\n\n<li>The provision of the said direction shall supersede in case of contradiction. <\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The NBFCs should make sure that at any instance, the debenture issued, including NCDs, are secured.&nbsp;Henceforth, during the issuance period, the security cover is inadequate or not formed the issue proceeds will be routed to secure escrow account until the formation of security. The several statuary compliances accountable for the creation of CCPS are mentioned in this blog. However, in the current scenarios, Compulsory Convertible Preference Shares are playing a crucial role as far as the strategic decision-making of the company and investor is concerned.&nbsp; <\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/name-change-affidavit-in-india\/\">How to get easily a Name Change Affidavit in India?\n<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>CCPS is also known as Compulsory Convertible Preference Shares which is a well-recognized investment instrument preferred by Private Equity investor. CCPS is referring to as an anti-dilution or hybrid instrument. NBFC can issue CCPS without availing permission from Reserve Bank if the conversion remains well below the twenty-six percent. Henceforth, it is safe to say [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":21611,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[120],"tags":[1304],"acf":{"service_id":"321"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.","postViews":16739,"readingTime":6,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/21607"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=21607"}],"version-history":[{"count":17,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/21607\/revisions"}],"predecessor-version":[{"id":65074,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/21607\/revisions\/65074"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/21611"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=21607"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=21607"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=21607"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}