CCPS vs Equity Shares in Funding: Conversion, Voting rights, Risks

When an investor sends you a term sheet saying they want CCPS, most founders nod along. The instrument sounds technical, the lawyer approves it, and the round closes. The problems surface two years later, at the next fundraise, at a secondary transaction, or the moment dividends go unpaid for 24 months and the investor’s limited voting rights suddenly expand to full voting rights on every resolution. Compulsorily Convertible Preference Shares (CCPS) and plain equity shares are both ownership instruments under the Companies Act, 2013, but they carry fundamentally different rights, risks, and tax outcomes for founders and investors at every stage of the funding journey.

What CCPS and equity shares are under the Companies Act, 2013

Under Section 43 of the Companies Act, 2013, an Indian company limited by shares can issue two classes of share capital: equity shares and preference shares. CCPS sits inside the preference share class but has an equity destination.

Equity shares are the base ownership instrument. Every equity shareholder has the right to vote on every resolution placed before the company, and voting power on a poll is proportional to the paid-up equity share capital held (Section 47(1), Companies Act 2013). Equity shareholders participate in dividends and in the residual value of the company after all creditors and preference shareholders are paid. There is no cap on upside. There is also no floor on downside.

CCPS are preference shares that must, by their terms, convert into equity shares at a defined future point or on the occurrence of a specified trigger event. Until that conversion, the CCPS holder is a preference shareholder with limited voting rights, dividend priority, and a liquidation preference over ordinary equity shareholders. After conversion, those preference-layer protections fall away and the investor holds plain equity alongside the founders. The mandatory nature of conversion is what separates CCPS from optionally convertible preference shares (OCPS), which are classified as debt instruments under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and fall under the External Commercial Borrowing framework for foreign investors. CCPS, because conversion is compulsory, is treated as an equity instrument for Foreign Direct Investment (FDI) purposes.

Under Section 55 of the Companies Act, preference shares must be redeemed or converted within 20 years of issuance. In practice, most startup CCPS term sheets set conversion triggers at 5 to 10 years, tied to a qualifying IPO, an acquisition, or a qualifying financing round.

Master comparison table

Parameter	Equity shares	CCPS (pre-conversion)
Voting rights	Full — all resolutions	Limited — only resolutions directly affecting their class
Dividend priority	After CCPS holders	Before equity shareholders
Liquidation priority	Residual — after all creditors and preference holders	Senior to equity; after secured creditors
Capital gains on conversion	Not applicable	Tax-neutral under Section 47(xb), IT Act 1961
FDI classification	Equity instrument	Equity instrument (FEMA NDI Rules, 2019)
FEMA FC-GPR filing	Required within 30 days (foreign investor allotments)	Required within 30 days of allotment (foreign investor allotments)
Maximum tenure	No mandatory conversion	20 years (Section 55, Companies Act 2013)
Anti-dilution protection	Not applicable (unless separately contracted)	Standard — typically broad-based weighted average
Voting right trigger on dividend default	Not applicable	Full voting rights if dividend unpaid 2+ years (Section 47(2))

How CCPS conversion works: the mechanics a founder must understand

The conversion mechanism is the single most consequential thing a founder agrees to when accepting a CCPS term sheet, because the conversion ratio and the trigger events determine the investor’s ultimate equity percentage, the founder’s dilution at exit, and whether the investor’s preference rights are alive or dead at the time of any liquidity event.

Conversion triggers are defined in the Share Subscription Agreement (SSA) and mirrored in the Articles of Association (AoA). Common triggers in Indian startup deals include: a qualifying IPO, a qualifying acquisition (defined as a sale of more than a specified percentage of shares or assets), a subsequent funding round at or above a specified valuation, or a longstop date (the backstop date within the 20-year statutory limit). The trigger event determines when the investor stops being a preference shareholder and becomes an equity shareholder.

Conversion ratio specifies how many equity shares one CCPS converts into. A simple 1:1 ratio means each CCPS converts to one equity share. A formula-based ratio ties conversion to the company’s valuation at a future round, adjusted for anti-dilution mechanics. This is where founders miscalculate: on a flat cap table the 1:1 ratio looks neutral, but if anti-dilution provisions have adjusted the conversion ratio upward (due to a down round), the investor receives more equity shares per CCPS than originally anticipated, diluting founders beyond their model.

What happens on the cap table: At conversion, the CCPS disappear from the preference share register and the corresponding equity shares are created and added to the equity share register. Form PAS-3 must be filed with the Registrar of Companies (ROC) within 15 days of allotment of the converted equity shares. The company’s authorised share capital must accommodate the new equity shares at the time of conversion. Failure to pre-check this is a common oversight that delays conversion closes.

For foreign investors, a fresh Form FC-GPR must be filed within 30 days of the equity share allotment on conversion, because the original FC-GPR at CCPS allotment does not cover the conversion event. If the conversion ratio has changed due to anti-dilution adjustments, the fresh FC-GPR must reflect the adjusted number of equity shares allotted, and the Share Subscription Agreement must reflect the revised ratio before conversion is executed.

What voting rights do CCPS holders actually have?

This is the question founders get wrong most often, and it has a trap embedded in it that very few term sheet reviewers flag.

The baseline rule under Section 47(2) of the Companies Act 2013 is that CCPS holders (as preference shareholders) may only vote on resolutions that directly affect the rights attached to their preference shares. These include resolutions for winding up the company, resolutions for repayment or reduction of equity or preference share capital, and any resolution that proposes to alter their class rights. They cannot vote on routine business resolutions: appointment of directors, annual accounts, dividend declarations for equity shareholders, or major commercial decisions.

The voting rights equity shareholders hold by default (every resolution, proportional to paid-up equity share capital on a poll) are specifically denied to CCPS holders until conversion. This is the structural reason why investors in Indian startups are comfortable holding CCPS rather than equity during the growth phase: they get protective governance rights through the SHA (reserved matters, board seat, information rights) without sitting as voting equity shareholders in every general meeting.

The dividend-default trap under Section 47(2): If dividends on the CCPS remain unpaid for two consecutive years or more, the preference shareholders gain the right to vote on every resolution placed before the company, exactly as equity shareholders can. This provision is mandatory under the Companies Act, and while private companies may exclude Section 47 by express provision in their AoA (as permitted under the MCA notification G.S.R. 464(E) dated 05/06/2015), most startup AoAs do not include this exclusion.

In practice, CCPS dividend rates in startup rounds are typically nominal (0.001% per annum) specifically because investors are not interested in current income; they want capital appreciation on conversion. A nominal dividend rate that is declared but not paid (because the company has no distributable profits and has not declared dividends) does not automatically trigger the Section 47(2) voting right. The trigger is unpaid dividends over two years, and it is more relevant for CCPS with higher stated dividend rates or in situations where a company has declared a dividend but lacks distributable profits. Founders whose companies have declared any dividend obligation on CCPS without paying it should review their position under Section 47(2) urgently.

Post-conversion: On conversion to equity shares, the former CCPS holders become full equity shareholders with voting rights on all resolutions, proportional to their equity shareholding on a poll. The SHA-negotiated reserved matters and board seat remain in force by contract, separate from the statutory voting right.

Why investors choose CCPS over equity in Indian startup rounds

Understanding what the investor gets from CCPS that plain equity cannot give them is essential before accepting or negotiating the structure.

Liquidation preference is the primary reason. As a preference shareholder, the CCPS holder ranks above equity shareholders in a winding up, acquisition, or contractually defined deemed liquidation event. The two most common structures in Indian term sheets are:

• 1x non-participating: the investor receives back their invested capital (1x) on exit, or converts to equity, whichever gives the higher return. This is the founder-friendly standard.
• Participating preferred: the investor receives 1x back first, then participates in remaining proceeds as an equity shareholder (as if fully converted). This can significantly compress founder economics in a lower-than-expected exit.

The critical compliance requirement that most articles omit: for the liquidation preference clause in an SHA to be enforceable among equity shareholders of a private company, the AoA must contain the MCA notification G.S.R. 464(E) exemption from Sections 43 and 47 of the Companies Act 2013. Without the AoA exemption, a contractual liquidation preference that operates among equity shareholders (i.e., after CCPS has converted) could be challenged as inconsistent with the statutory capital structure. Any SHA-based liquidation preference clause must be mirrored in the AoA at the time the round is documented.

Anti-dilution protection is the second major reason. Standard CCPS terms include broad-based weighted-average anti-dilution provisions that adjust the conversion ratio upward if the company raises a subsequent round at a lower valuation per share (a down round). Equity shareholders have no statutory anti-dilution right; it must be separately contracted. CCPS structurally carries it as a standard negotiated feature.

Dividend priority gives CCPS holders the right to receive dividends before equity shareholders. In early-stage startups, dividends are rarely declared. But in a company that has reached profitability before a liquidity event, the dividend priority matters for the investor’s return calculation.

FEMA compliance advantage for foreign investors: CCPS is classified as an equity instrument under Rule 2(g) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, which means foreign investment via CCPS qualifies for the FDI automatic route (in sectors where FDI is permitted). Optionally convertible or non-convertible preference shares are classified as debt under these rules and must comply with External Commercial Borrowing guidelines, a significantly more restrictive regime. This is why virtually every foreign VC investment into an Indian startup is structured as CCPS. For a full view of the FEMA compliance obligations this triggers (FC-GPR, FLA, sectoral caps), the dedicated service page maps each filing requirement.

Tax treatment: CCPS conversion and what happens when you sell

At conversion, no capital gains tax is triggered. Section 47(xb) of the Income Tax Act, 1961 explicitly excludes any transfer by way of conversion of preference shares of a company into equity shares of that same company from the definition of “transfer” for capital gains purposes. This means the conversion event itself is not a taxable event, even if the market value of the resulting equity shares is significantly higher than the original CCPS cost. The Income Tax Act, 2025 replaced the 1961 Act with effect from 01/04/2026 (applicable to Tax Year 2026-27 onwards). Income earned up to 31/03/2026 continues to be governed by the 1961 Act and assessed under AY 2026-27. The equivalent exemption for CCPS conversion is preserved in the 2025 Act. For any conversion occurring from 01/04/2026 onwards, the section reference under the 2025 Act applies; for conversions before that date, the 1961 Act governs. Both regimes reach the same outcome: no capital gains at conversion.

Cost of acquisition carryover: The cost of acquisition of the equity shares received on conversion is deemed to be the cost paid for the original CCPS. This is governed by Section 49(2AE) of the Income Tax Act, 1961. An investor who subscribed to CCPS at ₹1,000 per share and holds those CCPS until they convert at a per-share equivalent value of ₹10,000 does not pay capital gains at conversion; the ₹1,000 original cost becomes the cost basis for the resulting equity shares.

Holding period carryover: Under Section 2(42A)(hf) of the Income Tax Act, 1961, the holding period of the preference shares is included in the holding period of the resulting equity shares. So if an investor held CCPS from January 2022 and the conversion occurs in March 2025, the equity shares are treated as held from January 2022 for capital gains classification purposes. If those equity shares are sold after more than 12 months from the original CCPS acquisition date, the gain is Long Term Capital Gain (LTCG) taxable at 12.5% above ₹1.25 lakh (post-Budget 2024 rates, effective FY 2024-25 onwards) rather than Short Term Capital Gain (STCG) rates.

Dividends on CCPS are taxable in the hands of the investor at their applicable income tax slab rate. There is no special rate. For domestic corporate investors holding CCPS in a startup, dividend income from CCPS is included in normal business income.

For the company at issuance: Section 56(2)(viib) of the Income Tax Act, 1961 (the angel tax provision) was abolished for all share issuances after 01/04/2025 under the Finance (No. 2) Act, 2024. CCPS issued at a premium above fair market value no longer triggers tax in the hands of the issuing company for shares issued from April 2025 onwards. This removes a significant friction from high-valuation CCPS issuances.

LTCG rate note for 2026: Following the Finance Act 2024, LTCG on equity shares and equity-oriented instruments is taxed at 12.5% (without indexation benefit) on gains exceeding ₹1.25 lakh per financial year, applicable from FY 2024-25. STCG is taxed at 20%.

FEMA compliance obligations when issuing CCPS to foreign investors

A startup issuing CCPS to a foreign investor must follow the FEMA compliance chain in sequence. Missing any step creates a compounding problem that surfaces in the next round’s due diligence.

The steps are:

1. Pricing and valuation: The conversion price must be determined upfront at issuance and cannot, at the time of conversion, be lower than the fair market value determined at issuance. The valuation must be certified by a SEBI-registered Category I Merchant Banker or a Chartered Accountant with a valid Certificate of Practice, using an internationally accepted methodology (DCF, NAV, or comparable companies approach), under Rule 21 of the NDI Rules, 2019. One practical risk founders miss: the valuation certificate must not be more than 90 days old on the date of allotment. If board meetings slip after the valuation is commissioned and the 90-day window expires, a fresh valuation is required before allotment. There is no extension mechanism.
2. FC-GPR filing at CCPS allotment: Within 30 days of CCPS allotment to a foreign investor, the company must file Form FC-GPR through the RBI FIRMS portal (Single Master Form). The 30-day clock runs from the date the board passes the allotment resolution, not from the date funds were received. The company must allot the CCPS within 60 days of receiving the foreign remittance. Late filing attracts a Late Submission Fee calculated as Rs.7,500 plus 0.025% of the amount involved per day of delay, capped at the total amount involved.
3. FC-GPR filing at conversion: A fresh Form FC-GPR must also be filed within 30 days of the allotment of equity shares issued upon conversion of CCPS. Conversion creates a new allotment of a different instrument class (equity shares in place of preference shares), and this triggers a fresh reporting obligation under FEMA. This is a point that routinely catches founders off guard. If the conversion ratio has been adjusted due to anti-dilution, the fresh FC-GPR must reflect the adjusted number of equity shares allotted, consistent with the terms documented in the original SSA.
4. Annual FLA return: The company must file an Annual Return on Foreign Liabilities and Assets (FLA) through the RBI’s FLAIR portal by 15 July each year (FY 2025-26 deadline: 15 July 2026). This return must reflect outstanding CCPS held by foreign investors during the holding period and equity shares post-conversion.
5. Sectoral cap compliance: CCPS held by foreign investors counts toward the sectoral FDI cap from the date of allotment, not from the date of conversion. Note: the FEMA NDI Rules were amended in May 2026 to permit up to 100% FDI in the insurance sector under the automatic route (FEMA NDI Second Amendment Rules, 2026, notified 02/05/2026), replacing the earlier 74% cap. Companies in any capped sector should verify current limits directly against the amended Schedule I to the NDI Rules before relying on older sources.

Anti-dilution mechanics and the down-round risk founders underestimate

Anti-dilution provisions in CCPS terms protect the investor’s economic position if the company raises at a lower valuation in a subsequent round. Understanding the mechanics is critical before signing.

Broad-based weighted average (BBWA) is the market standard in Indian VC rounds. Under BBWA, the conversion ratio adjusts upward based on a weighted average formula that takes into account the size and price of the down-round relative to the existing shares outstanding. The adjustment is partial: it does not fully compensate the investor for the full down-round impact, which is why it is considered founder-friendly relative to the alternative.

Full ratchet is the investor-friendly extreme: the conversion ratio adjusts so that the investor’s effective price per share equals the lower round price, regardless of how small the down round was. A full ratchet in a significant down round can result in extreme founder dilution and is rare in Indian markets for Series A and beyond, though it does appear in some angel and seed-stage deals.

Down-round arithmetic example: Suppose a Series A investor puts in ₹10 crores at ₹100 per share for CCPS, acquiring 10 lakh CCPS. The Series A implied ownership is 20%. The company then raises a Series B at ₹70 per share (a down round). Under a BBWA provision, the conversion ratio adjusts upward, and the investor’s 10 lakh CCPS converts into more than 10 lakh equity shares. If the adjusted conversion ratio gives the investor 12 lakh equity shares, the founder’s dilution is greater than the original cap table suggested. This is a live risk that founders who model only the pre-money and post-money ownership without running BBWA sensitivity analysis will not see.

The interaction between CCPS anti-dilution provisions and a founder CCPS issuance (where a founder issues CCPS to themselves to recover diluted equity) is particularly complex. If the founder’s CCPS issuance price is below the Series A issuance price, the BBWA formula may treat the founder’s issuance as a dilutive event and adjust the Series A investor’s conversion ratio. This scenario, which Treelife has seen in multiple pre-Series B cap table restructurings, requires a full fully-diluted cap table model before execution.

Common structuring mistakes that cost founders equity or control

Mistake 1: Not mirroring the liquidation preference in the AoA

The SHA liquidation preference clause is a contract. Its enforceability after CCPS has converted into equity (so both investor and founder hold equity shares) depends on whether the AoA includes the private company exemption from Sections 43 and 47 of the Companies Act 2013. Without the AoA exemption (MCA notification G.S.R. 464(E), 05/06/2015), a contractual liquidation preference operating among equity shareholders can be challenged as contrary to the statutory capital structure. The fix is one line in the AoA at the time the round is documented. Missing it creates an enforcement gap that an investor’s counsel will find during an exit or dispute.

Mistake 2: Treating CCPS conversion as automatic without checking the trigger

CCPS converts on a trigger event, not automatically on the passage of time (unless the SHA specifies a longstop date). Many founders believe CCPS auto-converts at the time of the next funding round or at the close of each round. If the SHA defines the conversion trigger as a “qualifying financing round” with a minimum size or price threshold, and the next round does not meet that threshold, the CCPS remains outstanding. The investor continues to hold preference shares (with their liquidation preference still live) rather than equity. Founders who model dilution on the assumption that CCPS has converted are working from a wrong cap table. Getting the trigger definition right at the term sheet negotiation stage is the most efficient fix.

Mistake 3: Ignoring the dividend-default voting risk

If the SHA specifies a non-nominal dividend rate on CCPS and the company does not pay dividends for two consecutive years, CCPS holders gain voting rights on all resolutions under Section 47(2) of the Companies Act 2013 (subject to the AoA exclusion for private companies). This converts a governance-limited preference shareholder into a full-voting equity-equivalent shareholder without any cap table change. Founders who have accepted CCPS terms with dividend rates above 0% should confirm their AoA contains the Section 47 exclusion.

Mistake 4: Failing to check authorised share capital before conversion

At the time of CCPS conversion, the company must have sufficient authorised equity share capital to accommodate the new equity shares being created. If the conversion ratio has been adjusted upward due to anti-dilution (resulting in more equity shares per CCPS than originally planned), the authorised capital may be insufficient. Form SH-7 (increase in authorised capital) must be filed and approved by the ROC before the conversion allotment board meeting. Missing this delays conversion by 4-8 weeks and creates a compliance gap.

Mistake 5: Pricing CCPS at below-FMV for foreign investors

For CCPS issued to foreign investors, the issue price must be at or above the fair market value determined by a qualified valuer at the time of issuance, under FEMA NDI Rules, 2019. A startup that issues CCPS at a nominal price (₹10 face value) to a foreign investor without a contemporaneous valuation report has a FEMA contravention that will surface in due diligence for the next round. The correct approach is to get a valuation before issuance, even if the round size is small.

Case study

Situation: A Series A B2B SaaS startup based in Bengaluru with one US-based VC fund holding ₹8 crores in CCPS (1x non-participating liquidation preference, conversion trigger defined as qualifying IPO only). Three co-founders held equity.

Challenge: The company received an acquisition offer at ₹30 crores. At that valuation, the VC’s 1x preference (₹8 crores) left ₹22 crores for founders, a reasonable outcome. However, the conversion trigger in the SHA was a qualifying IPO only. The acquisition route did not trigger conversion. The VC remained a preference shareholder and the liquidation preference applied, reducing the founding team’s effective take to ₹22 crores. The founders had modelled a ₹30 crore split assuming the VC would convert to equity pro-rata.

What Treelife did: Renegotiated the SHA to add an acquisition trigger at or above the pre-agreed minimum enterprise value, executed an AoA amendment to include the MCA private company exemption, and modelled the corrected waterfall.

Outcome: Revised structure enabled a clean acquisition close with the VC converting to equity, reducing transaction friction by four weeks and aligning founder and investor proceeds as originally intended.

FAQ’s on CCPS vs Equity Shares in Funding

Q: Is conversion of CCPS to equity shares taxable in India?
A: No. Under Section 47(xb) of the Income Tax Act, 1961, conversion of CCPS into equity shares of the same company is not treated as a transfer and does not attract capital gains tax at the time of conversion. The equivalent exemption is preserved under the Income Tax Act, 2025. Tax applies only when the resulting equity shares are eventually sold.

Q: What is the tax rate on equity shares received after CCPS conversion?
A: The cost of acquisition is the original CCPS cost. The holding period includes the CCPS holding period. If the total holding period exceeds 12 months from original CCPS acquisition, the sale of resulting equity shares is taxed as LTCG at 12.5% above ₹1.25 lakh (FY 2025-26 onwards, per Finance Act 2024). STCG at 20% applies if held under 12 months.

Q: How are advisory fees for CCPS structuring typically structured?
A: Treelife structures CCPS advisory engagements on a fixed-fee basis covering SHA review, AoA amendment, board and shareholder resolutions, MGT-14 filing, and coordination with the IBBI-registered valuer. Scope and fees vary by round complexity and foreign investor involvement.

Q: How long does a CCPS issuance take from term sheet to allotment?
A: For a domestic investor round, 3 to 6 weeks from board approval. For a foreign investor round, 4 to 8 weeks to accommodate the IBBI valuation, board meeting, EGM (with 21-day notice), PAS-3 filing, and FC-GPR filing.

Q: What documents are required for a CCPS issuance?
A: Board resolution approving terms, valuation report from an IBBI-registered valuer (for preferential allotments) or SEBI-registered Merchant Banker (for FDI rounds), EGM notice with explanatory statement, special resolution text, PAS-4 (offer letter), PAS-5 (record of allotment offers), PAS-3 (return of allotment filed within 15 days), updated Register of Members, share certificates, and amended AoA. For foreign investors: FC-GPR filed within 30 days of allotment through the FIRMS portal.

Q: What FEMA filings are required when issuing CCPS to a foreign investor?
A: Two FC-GPR filings are required, not one. The first is filed within 30 days of CCPS allotment, through the RBI FIRMS portal. The second is filed within 30 days of the allotment of equity shares issued upon conversion of the CCPS. Conversion is a new allotment event and triggers a fresh FC-GPR obligation. The Annual FLA return must reflect the outstanding CCPS position during the holding period and the equity position post-conversion. The valuation certificate used for the initial FC-GPR must not be more than 90 days old at the date of allotment.

Q: Do CCPS count toward the FDI sectoral cap?
A: Yes. CCPS held by foreign investors counts toward the FDI sectoral cap from the date of allotment, not from the date of conversion to equity. Companies in capped sectors must track this from the first CCPS allotment.

Q: What happens to the CCPS if the startup goes into voluntary liquidation before the conversion trigger?
A: If the conversion trigger has not occurred at the time liquidation commences, CCPS holders are preference shareholders and rank under Section 53 of the Insolvency and Bankruptcy Code, 2016 ahead of equity shareholders but below secured creditors. The founders receive their equity distribution only after the CCPS liquidation preference is paid out in full.

Q: Can an NRI founder receive CCPS in their own company?
A: NRI founders holding CCPS in an Indian company are subject to FEMA rules if they are persons resident outside India. The CCPS position must be documented under the FDI framework (FC-GPR, annual FLA). NRI founders who are classified as persons resident in India under FEMA (by virtue of meeting the 182-day test) are treated as resident investors and standard Companies Act procedures apply without FEMA filings.

Q: What is the difference between CCPS and CCD in a startup funding context?
A: Both are equity instruments under FEMA NDI Rules, 2019, and both must convert into equity. The key difference is tenure (CCPS maximum 20 years under Section 55, CCD maximum 10 years under RBI guidelines), tax treatment (CCD interest is deductible for the company under Section 36(1)(iii) of the IT Act; CCPS dividends are not deductible), and insolvency treatment (post the Supreme Court’s November 2023 ruling, CCD holders are financial creditors under the IBC until conversion; CCPS holders remain preference shareholders). CCPS is the dominant instrument for institutional VC rounds at Series A and beyond.

Q: Can a DPIIT-recognised startup issue CCPS instead of convertible notes at pre-seed?
A: Yes. CCPS can be issued at any stage, including pre-seed. Convertible notes are a DPIIT-specific instrument with a minimum investment of ₹25 lakhs per investor and a maximum tenure of 5 years. CCPS has no minimum investment threshold under company law, though FEMA pricing rules apply for foreign investors. For very early-stage rounds where valuation is uncertain, convertible notes offer simpler documentation; for rounds where investors want preference-layer protections from day one, CCPS is the cleaner instrument even at pre-seed.

Q: What happens if the CCPS holder wants to exit before the conversion trigger?
A: CCPS in a private company are not publicly traded. Transfer is subject to board approval, Right of First Refusal (ROFR), and lock-in provisions in the SHA. An investor seeking pre-trigger exit would need to find a buyer willing to acquire CCPS (with its preference-layer rights and future conversion obligation), which is possible but involves a secondary transfer process. The CCPS instruments and the underlying rights transfer to the buyer; no new allotment is made.

Q: If I issue CCPS to a foreign investor and the company’s valuation later drops, can I renegotiate the conversion price
A: Renegotiating the conversion price for a foreign investor requires care. FEMA NDI Rules require that the conversion price at conversion not be lower than the FMV determined at issuance. Any amendment to CCPS terms that affects the conversion price must be reviewed under FEMA to confirm it does not create an assured return for the foreign investor (which would reclassify the instrument as debt). Treelife recommends a FEMA-specific opinion before any CCPS amendment involving a non-resident.

Q: What is the voting rights position of CCPS holders at a company AGM?
A: CCPS holders may attend the AGM and vote on resolutions that directly affect their class rights. They cannot vote on ordinary business items, directors’ appointments, annual accounts approval, or equity dividend declarations. If dividends on the CCPS have remained unpaid for two consecutive years or more, and the AoA does not exclude Section 47 of the Companies Act 2013, CCPS holders gain full voting rights on all resolutions at the AGM, equivalent to equity shareholders (Section 47(2)).

Q: Should early-stage founders always insist on equity instead of CCPS?
A: The choice is not binary and is not always the founder’s to make. Foreign investors must use equity instruments under FEMA, and CCPS gives them structural protections (liquidation preference, anti-dilution) that make early-stage investing viable at uncertain valuations. Refusing CCPS outright is not a realistic position in most institutional rounds. The founder’s leverage is in negotiating the specific terms: non-participating vs participating preference, BBWA vs full-ratchet anti-dilution, the scope of reserved matters, the conversion trigger events, and the AoA exemption structure. Getting these right from the first CCPS issuance matters more than the instrument label.

Regulatory references

• Section 43, Companies Act, 2013 — share capital classes
• Section 47(1) and (2), Companies Act, 2013 — voting rights of equity and preference shareholders
• Section 55, Companies Act, 2013 — redemption and conversion of preference shares (maximum 20 years)
• Section 62(1)(c), Companies Act, 2013 — preferential allotment
• Section 68, Companies Act, 2013 — buyback of shares
• Rule 13, Companies (Share Capital and Debentures) Rules, 2014 — preferential allotment conditions
• Form PAS-3, Companies (Prospectus and Allotment of Securities) Rules, 2014 — return of allotment (15 days)
• Form MGT-14, Companies Act, 2013 — filing of special resolution (30 days)
• MCA Notification G.S.R. 464(E), dated 05/06/2015 — private company exemption from Sections 43 and 47
• Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 — Rule 2(g), equity instrument definition; CCPS classification; Rule 21, valuation requirements
• Foreign Exchange Management (Non-Debt Instruments) (Second Amendment) Rules, 2026, notified 02/05/2026 — insurance sector FDI cap revised to 100% under automatic route
• RBI Master Direction on Foreign Investment in India (updated January 2025) — FC-GPR procedural requirements
• FC-GPR (Form FC-GPR, Single Master Form) — RBI FIRMS portal; 30 days from allotment (both at CCPS issuance and at conversion to equity)
• Annual FLA Return — RBI FLAIR portal, by 15 July each year (FY 2025-26 deadline: 15 July 2026)
• Section 47(xb), Income Tax Act, 1961 — CCPS to equity conversion not treated as transfer (governs income up to 31/03/2026)
• Income Tax Act, 2025 (effective 01/04/2026, Tax Year 2026-27 onwards) — equivalent exemption preserved for CCPS conversion
• Section 2(42A)(hf), Income Tax Act, 1961 — holding period carryover for converted equity shares
• Section 49(2AE), Income Tax Act, 1961 — cost of acquisition of equity shares from CCPS conversion
• Section 112A, Income Tax Act, 1961 — LTCG rate on listed equity shares (12.5% above Rs.1.25 lakh, effective 23/07/2024)
• Section 111A, Income Tax Act, 1961 — STCG rate on listed equity shares (20%, effective 23/07/2024)
• Finance (No. 2) Act, 2024 — capital gains rate changes effective 23/07/2024; abolition of Section 56(2)(viib) angel tax for issuances from 01/04/2025
• Regulation 2(1)(k), SEBI (ICDR) Regulations, 2018 — CCPS as convertible security
• Regulation 162, SEBI (ICDR) Regulations, 2018 — conversion tenure for preferential issue (18 months)

External sources

• Ministry of Corporate Affairs
• Income Tax India
• Reserve Bank of India
• SEBI
• Startup India / DPIIT