CCPS in India — Issue Rules, FEMA, Conversion & Tax

Is CCPS the right instrument for your round?

CCPS fits if:

• You are raising a venture round and the investor wants downside protection — liquidation preference, anti-dilution — that plain equity cannot give.
• A foreign investor or fund is putting money in. CCPS count as equity instruments under the FEMA Non-Debt Instruments Rules, so automatic-route sectors need no government approval.
• You want to defer voting dilution. CCPS typically carry no general voting rights — investor control comes from reserved-matter rights in the shareholders' agreement.
• You need cash without a repayment schedule. Unlike debentures or a loan, CCPS never mature into a cash payment — they convert into equity.
• The round needs a valuation cap or discount for early investors without fixing a full valuation today.

Consider alternatives if:

• The investor wants voting rights from day one — that is a plain equity issue, simpler and cheaper.
• What you need is debt: fixed tenure, interest, security. Paper it as a non-convertible debenture or loan.
• You want a US-style SAFE. A SAFE is not on the list of instruments a foreign investor can hold in an Indian company — use CCPS/CCDs with a price or formula fixed upfront, or (for DPIIT-recognised startups) a convertible note of at least ₹25 lakh per investor in a single tranche, convertible or repayable within 10 years.
• You want optionally convertible preference shares (OCPS) with foreign money in the mix — OCPS are treated as debt under the NDI Rules.

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CCPS vs equity vs debt vs CCD — which instrument is yours?

Equity shares are the simplest ownership: votes and a share of everything from day one — and last in line on a winding-up. Use equity when the valuation is final and the investor should own and vote today. The cost is immediate, permanent dilution of the founders' voting percentage.

Debt (non-convertible debentures or loans) is money with a clock. Interest accrues, principal must be repaid on maturity, and the lender can take security. It suits companies with predictable cash flows — not pre-revenue startups.

CCD (compulsorily convertible debentures) are CCPS's closest cousin: debt until conversion, carrying a coupon (often 8–12%), converting into equity mandatorily — and an equity instrument under FEMA too. Use CCDs for bridge rounds or where the investor wants a running return; use CCPS where the economics should sit still until conversion (typical dividend: 0.001% per annum).

CCPS sits between. No votes by default, no repayment, a small preferential dividend, a liquidation preference protecting the downside, and mandatory conversion into equity within 20 years — the choice when the investor wants protection without a loan, and the founder wants money without immediate voting dilution or a repayment date.

The decision rule: if the money must be repaid, it is debt — say so and paper it as debt. If the investor should own and vote today, issue equity. If the investor wants debt-like protection that ends in ownership, choose CCPS (quiet, nominal dividend) or CCD (coupon-bearing). The side-by-side table in the GEO layer above sets the mechanics out in full.

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How the conversion actually works

Everything about conversion must be fixed — or fixed by an agreed formula — when the CCPS are issued. The law does not allow you to decide the conversion terms later.

The conversion ratio

Conversion ratio = Issue price of the CCPS ÷ Conversion price. Pay ₹100 per CCPS with a ₹100 conversion price: 1:1. If the conversion price adjusts to ₹50, the ratio becomes 1:2. Most Indian rounds start at 1:1 and move only through the adjustment clauses below.

Fixed vs variable conversion

Fixed: the ratio is a number — 1:1, most commonly — adjusted only for bonus issues, splits and consolidations. Variable (formula-based): the conversion price links to a future event — the classic seed structure converts at a 20% discount to the Series A price, subject to a valuation cap. This is how Indian rounds replicate SAFE-style economics inside an instrument the law recognises.

Anti-dilution — the two flavours

Anti-dilution reduces the conversion price if the company later raises at a lower valuation, increasing the equity shares each CCPS converts into. Broad-based weighted average (the Indian market standard) adjusts partially, weighing the down-round price against the money raised. Full ratchet resets the conversion price entirely to the down-round price, however small the round — founders should resist it unless the investor's bargaining power leaves no choice. Standard carve-outs: ESOP exercises, bonus issues, splits, conversions of other convertible securities.

Timing triggers — when conversion happens

Voluntary: the holder may convert at any time at the prevailing ratio. Automatic on a Qualified IPO: the SHA defines the qualifying offer, on which all CCPS convert so the company lists with one class of equity. Automatic at maturity: conversion must happen within 20 years of issue. Event-based: on a sale or merger, the holder typically chooses between the liquidation preference and converting to equity — whichever pays more.

The analogy that makes it stick

Think of CCPS like buying foreign currency at a rate locked today for a trip years away. You pay rupees now; the voucher converts into dollars later at the agreed rate, whatever the market does in between. Anti-dilution is the dealer promising that if the rupee strengthens before your trip, your voucher gets topped up. The rate is fixed when you buy; it only ever adjusts in your favour.

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The Section 55 / Rule 9 legal framework

CCPS are preference shares: Section 55 of the Companies Act, 2013 governs, with procedure in Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014 — mandatory whether the investor is a Mumbai angel or a Singapore fund.

No irredeemable preference shares

Section 55(1) prohibits irredeemable preference shares outright. Every preference share must end — by redemption or conversion — inside its permitted tenure. A term sheet promising CCPS with no conversion timeline is a non-compliant instrument.

The three preconditions for issue

Under Section 55(2) read with Rule 9(1): (1) the articles must authorise preference shares — most startup articles do not, and are amended as part of the round; (2) a special resolution in a general meeting; (3) no subsisting default in redemption of earlier preference shares or in dividend payments due on any preference shares.

The 20-year ceiling — and the infrastructure exception

Preference shares must be redeemed or converted within 20 years of issue. Infrastructure companies (Schedule VI) may go up to 30 years, subject to redeeming at least 10% of the shares every year from the 21st year, proportionately, at the holders' option. For venture CCPS, the SHA must carry a mandatory-conversion backstop within 20 years of allotment.

What the resolution and explanatory statement must contain

Rule 9(2) requires the resolution to state: (a) priority for dividend and capital repayment vis-à-vis equity; (b) participation in surplus funds; (c) participation in surplus assets and profits on winding-up after the entire capital is repaid; (d) cumulative or non-cumulative dividend; (e) conversion terms into equity; (f) voting rights; (g) redemption terms. The Section 102 explanatory statement must set out the material facts: size of the issue, number of shares and nominal value, nature of the shares, objectives, manner of issue, price, the basis of the price, and the terms of issue including the dividend rate.

Redemption mechanics (for completeness)

CCPS are structured to convert, not redeem — but the redemption rules are the legal backstop. Redemption must be out of profits available for dividend (transferring the nominal amount to the Capital Redemption Reserve) or out of fresh-issue proceeds. Any redemption premium must be provided for out of profits before redemption. Only fully paid preference shares can be redeemed.

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FEMA pricing and reporting for foreign investors

Where any investor is a person resident outside India, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and the FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 apply alongside the Companies Act.

CCPS count as equity — and that is the whole point

The NDI Rules recognise a closed list of equity instruments: equity shares, share warrants, and preference shares or debentures that are fully, compulsorily and mandatorily convertible. CCPS qualify. CCDs qualify. Optionally convertible preference shares do not — they are debt. A US-style SAFE is not on the list at all; a foreign investor's SAFE template must be restructured into CCPS, CCDs or (for DPIIT-recognised startups) convertible notes before the money moves. In automatic-route sectors — most startup activity — no prior government approval is needed.

The pricing floor

CCPS issued to a foreign investor cannot be priced below fair value, determined on an arm's-length basis under an internationally accepted methodology and certified by a SEBI-registered merchant banker or a chartered accountant. The price or conversion formula is fixed upfront, and the conversion price cannot be below the fair value at issue.

The two clocks: 60 days to allot, 30 days to report

Allot within 60 days of receipt — otherwise the money must be refunded within 15 days after the 60 days end. Report in FC-GPR within 30 days of allotment on RBI's FIRMS portal, with the FIRC, valuation certificate, board resolution and PAS-3 acknowledgement. On-time filing carries no fee; delays go through the late-submission facility with compounding exposure under FEMA. Annual FLA: while the company holds foreign investment, the Foreign Liabilities and Assets return goes to RBI each year.

Downstream investment

Where the Indian recipient invests downstream into another Indian company, the downstream investment must itself comply with the NDI Rules — sectoral caps, pricing, and Form DI on FIRMS within 30 days. The rules look through the structure.

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Advantages of CCPS

Downside protection for the investor

The liquidation preference — typically 1x, non-participating — puts the CCPS holder first in line on a sale or winding-up. On a disappointing exit the investor recovers its money; on a successful one it converts and shares the upside as equity.

Founders keep control of the cap table

CCPS do not vote in general meetings as a matter of course. Investor governance comes from reserved-matter rights in the shareholders' agreement — vetoes on defined decisions — not from a voting percentage that dilutes founders on day one.

No repayment date, ever

A loan has a maturity; CCPS do not. There is no year in which the company must find cash to repay the investor, because the instrument's destiny is conversion, not redemption.

Negligible ongoing cash cost

Startup CCPS typically carry a dividend of 0.001% per annum — a token satisfying the "preference" without draining cash — usually non-cumulative, so unpaid amounts do not pile up.

Foreign investors already speak this language

Global venture funds understand preference shares with liquidation preferences, anti-dilution and conversion mechanics — it is their home-turf term sheet. Papering the round as CCPS shortens diligence and legal negotiation.

Everyone ends up as equity — a clean cap table

Every CCPS converts into ordinary equity: at the IPO, at a sale, or at the 20-year backstop. No quasi-debt lingers on the balance sheet, no redemption overhang for the next round's investors to price in.

Flexible economics without re-papering

Valuation caps, conversion discounts, anti-dilution formulae, cumulative or non-cumulative dividends, participating or non-participating preferences — all of it can be built into the CCPS terms at issue.

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The tax treatment — what actually gets taxed

The dividend — taxed in the investor's hands. Since 1 April 2020, dividends are taxed in the shareholder's hands, with the company withholding tax under Section 194 (10% for residents; treaty rates for non-residents). At 0.001% per annum the amount is usually negligible — but the mechanism still applies.

The conversion — tax-neutral. Converting CCPS into equity is not a transfer under Section 2(47), so no capital gains are computed. The Mumbai ITAT held this in *Periar Trading Co. (P) Ltd. v. ITO* (2018), relying on the CBDT's circular of 12 May 1964. Section 55(2)(b)(v)(e) carries the original CCPS cost to the equity shares. Tax is deferred, not forgiven.

The exit — capital gains on the equity shares. When the investor later sells the converted equity shares, gains are computed normally: sale price minus the carried-over cost, with the holding-period rules for unlisted shares.

The redemption question — deemed dividend risk. Where redemption occurs, the receipt can face deemed-dividend scrutiny under Section 2(22). The Mumbai ITAT has held on specific facts that redemption of preference shares at par was not a deemed dividend under Section 2(22)(d) where there was no reduction of share capital in substance — but redemption at a premium, or out of accumulated profits, is examined far more closely. [NEEDS VERIFICATION — the precise clause of Section 2(22) applicable to a given redemption structure should be confirmed on the facts of each case.]

Angel tax — abolished. Section 56(2)(viib) was made inapplicable from 1 April 2025 (AY 2025-26) by the Finance (No. 2) Act, 2024, confirmed by the Minister of State for Finance in a Rajya Sabha answer on 2 December 2025.

Stamp duty. Duty applies on the issue of the CCPS and is borne by the company — the rate on the issue of securities is 0.005% of the issue price under the amended Indian Stamp Act schedule. [NEEDS VERIFICATION — confirm the current Schedule I rate at the time of issue.]

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Documents required for a CCPS issue

Corporate authorisations: articles checked for preference-share authorisation (amended by special resolution if silent); board resolution approving the issue, the valuation, the PAS-4 offer letter and convening the EGM; two special resolutions — Section 42 (private placement) and Section 55 / Rule 9 (preference issue) with the Rule 9(2) particulars; EGM notice with the Section 102 explanatory statement.

Term sheet and definitive agreements: signed term sheet (valuation, liquidation preference, dividend rate, conversion ratio/formula, anti-dilution, reserved matters, founder vesting and lock-in, 20-year backstop); SSA and SHA carrying the conversion mechanics in full.

Valuation: fair valuation certificate from a SEBI-registered merchant banker or a chartered accountant — the FEMA pricing floor and the Section 102 price basis in one document; board's recorded acceptance.

FEMA file (foreign investors): FIRC evidencing inward remittance through banking channels; investor KYC and beneficial-ownership declaration (land-border-country screening); valuation certificate (ideally not older than 90 days at FC-GPR filing).

Registers and filings: PAS-3 within 30 days of allotment; MGT-14 within 30 days of the resolutions; SH-1 share certificates within 2 months of allotment (Section 56); updated register of members (Section 88); separate bank account records for application money (Section 42).

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CCPS issue process — step by step

Step 1 — Negotiate and sign the term sheet

Fix the commercial terms first: valuation, investment amount, liquidation preference (1x non-participating is the market default), dividend rate, conversion ratio and formula, anti-dilution type, qualified-IPO definition, reserved matters, founder vesting and lock-in, and the 20-year conversion backstop.

Step 2 — Commission the valuation

Engage a SEBI-registered merchant banker or chartered accountant early — the EGM cannot properly approve a price that does not exist yet. The report does triple duty: Section 102 price basis, FEMA pricing floor, and the tax file's defence of the issue price.

Step 3 — Check and fix the articles

If the articles are silent on preference shares — as most startup articles are — amend them by special resolution before the issue resolution. An issue under unauthorised articles is defective at the root.

Step 4 — Board meeting

The board approves the issue, records acceptance of the valuation, approves the draft PAS-4 offer letter, and convenes the EGM with the full Section 102 explanatory statement.

Step 5 — General meeting: the two special resolutions

Shareholders pass (i) the Section 42 private placement resolution and (ii) the Section 55 / Rule 9 preference-issue resolution with all seven Rule 9(2) particulars. File MGT-14 within 30 days. The 21-day clear EGM notice can be shortened with 95% consent.

Step 6 — Receive money, allot within the clocks

Application money comes through banking channels into the separate Section 42 bank account. The board allots the CCPS — within 60 days of receipt of funds where FEMA applies (refund within 15 days if missed), and within the Section 42 sixty-day window in any case. SH-1 certificates follow within 2 months.

Step 7 — File PAS-3 within 30 days

File the return of allotment with the ROC within 30 days of allotment, with the valuation report and resolutions attached as required. Update the register of members.

Step 8 — File FC-GPR within 30 days (foreign investors)

Report on RBI's FIRMS portal within 30 days of allotment, with the FIRC, valuation certificate, allotment resolution and PAS-3 acknowledgement. Calendar the annual FLA return from here.

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How long does it take?

| Stage | Typical time | |---|---| | Term-sheet negotiation | 2–4 weeks | | Valuation engagement and report | 1–2 weeks | | Articles check / amendment | 1–2 weeks (can run parallel) | | Board meeting to EGM (notice) | 21 days clear notice (shorter with 95% consent) | | Money in, board allotment | 1–2 weeks | | PAS-3 filing | Within 30 days of allotment (statutory) | | FC-GPR filing | Within 30 days of allotment (statutory) | | Share certificates (SH-1) | Within 2 months of allotment (statutory) | | Total, straightforward round | 8–12 weeks |

The valuation and the term-sheet negotiation are the critical path. Everything downstream is mechanical once those two are settled.

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How ComplyKart helps in this entire process

Structuring advice. We work through the term sheet with you and your counsel — liquidation preference, conversion formula, anti-dilution flavour, dividend rate, the 20-year backstop — checking each against Section 55, Rule 9 and the FEMA equity-instrument list before it becomes a commitment.

Valuation coordination. We scope the merchant-banker or CA engagement so one report covers the Section 102 price basis and the FEMA pricing floor, and review the certificate for the arm's-length methodology the authorised dealer bank will look for.

Articles, resolutions and filings. We check the articles for preference-share authorisation and amend them where needed; draft the board resolution, PAS-4 offer letter, EGM notice with the full explanatory statement, and both special resolutions; and we file MGT-14 and PAS-3 within their 30-day windows and issue the SH-1 certificates.

FEMA reporting. Where foreign investors participate, we assemble the FC-GPR file and file it on FIRMS within 30 days of allotment, track the 60-day allotment clock from receipt of funds, and set up the annual FLA calendar. Downstream investments get their Form DI filings.

Post-issue registers. We update the register of members, maintain the conversion-term records the next round's due diligence will ask for, and diary the conversion triggers.

What we will not do: we will not negotiate the valuation with your investor — the price is a commercial term between you; we validate its compliance, not its number. We will not arrange investors or introduce funds. We will not paper a SAFE for a foreign investor and call it compliant. We will not backdate a valuation certificate, and we will not file an FC-GPR at a price below the certified fair value. And we will not structure optionally convertible preference shares for a foreign round and present them as equity — under the NDI Rules they are debt, and we will tell you so before you sign.

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What happens after the issue

In the first 30 days: PAS-3 goes to the ROC; MGT-14 covers the special resolutions; FC-GPR goes on FIRMS where a foreign investor participated. The register of members is updated and the cap table reflects the new CCPS class with its full conversion terms.

In the first 2 months: SH-1 share certificates are issued. The SHA and SSA are executed in final form if they were drafts at closing.

In the first 6 months: the enlarged share capital flows into the Board's report and MGT-7. The FLA calendar is running. Any downstream investment from the round's proceeds gets its Form DI filing within 30 days.

At conversion: the board records the conversion, files PAS-3 for the resulting equity allotment, updates the register of members, and issues equity certificates. No capital gains arise on conversion itself; the cost carries over.

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The recurring compliance you are signing up for

• Event-based: PAS-3 within 30 days of the CCPS allotment and again on every conversion into equity; MGT-14 within 30 days of the issue resolutions; FC-GPR within 30 days of allotment to foreign investors; Form DI within 30 days of any downstream investment.
• Annual: the CCPS class and terms are disclosed in the Board's report and financial statements; the enlarged capital flows into MGT-7; the FLA return goes to RBI each year while foreign investment is held.
• Ongoing: the SHA's reserved-matter and information rights run for the life of the investment. Diary the 20-year conversion backstop even though commercial conversion will almost certainly come first.

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Common mistakes and how to avoid them

Articles silent on preference shares. Check the articles before the board meeting, not after the EGM — an issue under unauthorised articles needs ratification, which no investor's counsel enjoys explaining.

Missing the 20-year clock. Section 55 requires conversion or redemption within 20 years — write the backstop into the SHA and the resolution; "at the next round" is not a backstop.

Valuation after the resolution. The EGM approves a price; the price must exist before the EGM. Commission the valuer with the term sheet.

Blowing the 60-day allotment clock. FEMA gives 60 days from receipt of funds to allot, then requires a refund within 15 days. Sequence the remittance after the resolutions where possible.

Late FC-GPR. The 30-day clock starts at allotment. Assemble the FIRC and valuation certificate before allotment so the filing is a same-week job.

Pricing below fair value for foreign investors. The NDI pricing floor is not negotiable and the authorised dealer bank checks the certificate.

Treating OCPS or SAFEs as FEMA-clean. Optionally convertible preference shares are debt under the NDI Rules; US SAFEs are not on the recognised list at all. Restructure before the wire, not after.

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Sources

This page is built on the Companies Act, 2013 (Sections 42, 55, 56, 88, 102, 117); the Companies (Share Capital and Debentures) Rules, 2014 (Rule 9); the FEMA (Non-Debt Instruments) Rules, 2019 and the FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019; the Income-tax Act, 1961 (Sections 2(22), 2(47), 55(2)(b)(v)(e), 194) and the Finance (No. 2) Act, 2024 (angel-tax abolition); the ITAT Mumbai ruling in *Periar Trading Co. (P) Ltd. v. ITO* (2018) and the CBDT Circular dated 12 May 1964; and practitioner analysis from Mondaq, EquityList, Legal Suvidha, CAClubIndia, TaxGuru and the LetsVenture standard CCPS term sheet. Where a claim could not be verified against a primary source, it is marked [NEEDS VERIFICATION].

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