CCPS (Compulsorily Convertible Preference Shares)
The standard equity instrument in Indian VC rounds. Preference shares issued to investors that must convert to ordinary equity at a fixed date or trigger — not debt. Carries liquidation preference and anti-dilution.
CCPS (Compulsorily Convertible Preference Shares) is the most common equity instrument in Indian startup venture capital rounds. It is a class of preference shares that must convert to ordinary equity shares on a specified trigger — most commonly an IPO, acquisition, or a contractually defined date — rather than being redeemed for cash. Because conversion is compulsory, CCPS is classified as equity (not debt) for accounting and regulatory purposes.
Who it applies to
- Startups raising from domestic or foreign VC funds, PE investors, or angel syndicates from Series A onwards
- Founders negotiating the structure of a funding round and the terms attached to investor equity
- Cap table management — CCPS appears as a separate share class until conversion
Pre-seed and seed rounds may use ordinary equity shares, convertible notes, or SAFEs instead. From Series A, CCPS is the near-universal structure for Indian VC rounds.
What you get
A CCPS instrument typically carries:
| Feature | Typical structure |
|---|---|
| Liquidation preference | 1x non-participating (investor recovers investment before ordinary shareholders in a low-value exit) |
| Anti-dilution | Weighted average (conversion ratio adjusts if future round is priced lower) |
| Voting rights | On an as-converted basis (treated as if already converted to equity) |
| Dividend preference | Cumulative or non-cumulative; rarely enforced in practice |
| Conversion trigger | IPO, acquisition, or fixed date |
For the startup, CCPS carries no interest obligation and no cash redemption requirement. The company's obligation is to convert shares at the trigger event, not to return capital.
What most founders miss
CCPS is equity, not soft debt. Some founders treat the liquidation preference as a "first loss protection" that makes CCPS behave like a loan. It does not — if the company has no exit value, the investor gets nothing. CCPS holders take equity risk; the preference only determines the order of distribution in a partial-value scenario, not a guaranteed return.
Liquidation preference matters in M&A, not IPO. At IPO, all CCPS must convert to ordinary equity — the preference disappears. Liquidation preference is relevant only in a trade sale or winding-up where the exit value is below what investors put in. In a successful exit, 1x non-participating preference is economically irrelevant.
Anti-dilution is triggered by round price, not percentage dilution. A founder who raises a down round will see earlier CCPS holders' conversion ratios adjust upward — they receive more equity shares at conversion to compensate for the lower price. Model this before agreeing to anti-dilution terms; a down round with broad-based weighted average anti-dilution is manageable, but full ratchet anti-dilution can be severely dilutive to founders.
CCPS valuation must be defensible. Under Rule 11UA, shares issued to investors must be priced at no less than FMV. The CCPS conversion ratio must also be commercially reasonable — a nominal face-value conversion that delivers an outsized equity position at conversion may attract tax scrutiny on the difference as income.
See also
- Section 79 — loss carryforward rules affected by CCPS secondary transfers
- Rule 11UA — FMV computation that applies to CCPS issuances and sets the pricing floor
- AIF (Alternative Investment Fund) — the vehicle that typically subscribes to CCPS in a funding round
- Angel Tax — abolished from 1 April 2024; previously applied to premium on preference share issuances above FMV
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