CCPS Issuance to Founder under Section 53 Companies Act India

After multiple funding rounds, the average Indian Series B founder holds somewhere between 25% and 40% of their company on a fully diluted basis. That number is rarely a conscious choice. It is the accumulated result of each round’s dilution, and founders often discover it only when the cap table is being cleaned up ahead of a Series C or a secondary transaction. Post-Series A, founder equity dilution is real and often fixable. CCPS Issuance to Founder is one of the most common structuring tools we see deployed across 250+ transactions and $500M+ in deal value. The mechanism is well-established, but it requires navigating three regulatory layers simultaneously: Section 53 of the Companies Act 2013, the IBBI registered valuer framework, and the conversion ratio terms in the shareholders’ agreement. Get any one of them wrong, and the issuance is either void or creates a taxable event that wipes out the economics.

What is CCPS?

Compulsorily Convertible Preference Shares (CCPS) are a class of preference shares that must, by their terms, convert into equity shares of the issuing company at a future date or on the occurrence of a defined trigger event. The conversion is not optional. Once the trigger is met (an IPO, an acquisition, a specified date, or a subsequent funding round), the CCPS holder receives equity shares at the pre-agreed conversion ratio. The instrument ceases to exist as a preference share at that point.

CCPS sit at the intersection of two share classes recognised under Section 43 of the Companies Act 2013. They are issued as preference shares (carrying preferential rights to dividends and return of capital on winding up under Section 47(1)), but their economic destination is equity. This hybrid nature is what gives CCPS its regulatory utility: FEMA’s Non-Debt Instruments Rules, 2019 treat fully and mandatorily convertible preference shares as equity instruments for FDI purposes, so foreign investors can hold CCPS without triggering External Commercial Borrowing compliance.

The key terms negotiated at the time of CCPS issuance are:

• Conversion ratio: how many equity shares each CCPS converts into
• Conversion price: the price per equity share at which conversion happens
• Conversion trigger: the event or date that makes conversion mandatory
• Dividend rate: the fixed dividend (if any) paid on the CCPS before conversion, subject to distributable profits under Section 123 of the Act
• Liquidation preference: the priority claim (if any) the CCPS holder has over assets in a winding up, ahead of equity shareholders

Until conversion, CCPS holders have limited voting rights. They can vote only on resolutions that directly affect their class. If dividends remain unpaid for two consecutive years, full voting rights apply on all resolutions under Section 47(2) of the Companies Act 2013.

For unlisted companies, no fixed conversion tenure is prescribed for CCPS specifically. In the absence of an explicit provision, practitioners treat the 20-year maximum under Section 55 (which governs redeemable preference shares) as the outer limit for CCPS conversion as well.

Table: CCPS compared to equity shares and redeemable preference shares

Feature	Equity shares	CCPS	Redeemable preference shares
Voting rights	Full, always	Limited until conversion	Limited; full if dividend unpaid 2 years
Dividend	Discretionary	Fixed or negotiated	Fixed
Conversion	Not applicable	Mandatory on trigger	Not applicable
FEMA classification	Equity	Equity	Debt
Liquidation priority	Last	Negotiated; before equity	Before equity
Max tenure	Not applicable	20 years (by convention)	20 years under Section 55

What is CCPS issuance?

CCPS issuance is the process by which a company allots compulsorily convertible preference shares to a subscriber (investor, founder, or other person) in exchange for a subscription amount. The issuance creates a new class of share capital on the company’s balance sheet and a new entry on the cap table that will dilute existing equity holders at the point of conversion.

Under the Companies Act 2013, the issuance of CCPS to any person other than existing shareholders on a rights basis requires compliance with three overlapping statutory routes depending on who the subscriber is and how many persons are being offered shares:

Under Section 42, if CCPS is being offered to fewer than 200 persons in a financial year, it qualifies as a private placement. This requires a private placement offer letter in Form PAS-4, a separate subscription bank account, and an allotment return in Form PAS-3 filed within 15 days of allotment.

Under Section 62(1)(c), any preferential allotment to a specific person (including a founder) that is not a rights issue or an ESOP grant requires a special resolution of shareholders. Form MGT-14 must be filed with the ROC within 30 days of the resolution.

Under Section 55, preference shares must be redeemable or convertible. CCPS satisfies this requirement by virtue of its mandatory conversion feature. The terms of the preference shares, including the conversion mechanics, must be stated in the board and shareholder resolutions and reflected in the amended Memorandum and Articles of Association if required.

The issuance process, from board resolution to allotment, typically runs 3 to 6 weeks for a domestic subscriber and 4 to 8 weeks if FEMA filings are also required. The governing rules are the Companies (Prospectus and Allotment of Securities) Rules, 2014 and the Companies (Share Capital and Debentures) Rules, 2014.

Why CCPS is the preferred instrument in Indian startup funding

Investors in Indian startups prefer CCPS over direct equity for three reasons. First, the liquidation preference gives investors a priority claim on assets in a downside scenario, which plain equity does not. Second, the anti-dilution provisions attached to CCPS adjust the conversion ratio if the company raises at a lower valuation in a subsequent round, protecting the investor’s economic position. Third, limited voting rights until conversion mean investors are not counted as equity shareholders for governance purposes until the time is right.

Founders benefit because CCPS does not immediately dilute their equity percentage. The dilution occurs only at conversion, which is typically triggered by a liquidity event. Between issuance and conversion, the founder retains the same nominal equity ownership while the company has received investment capital. When CCPS is issued to a founder (rather than to an investor), this timing dynamic works in the founder’s favour: the conversion ratio can be set at issuance to reflect a lower preference share value, meaning the founder receives more equity shares per rupee subscribed than a direct equity subscription at the same moment would provide.

What Section 53 of the Companies Act 2013 actually says

Section 53 is short, categorical, and widely misread. Sub-section (1) states that a company shall not issue shares at a discount, except as provided under Section 54. Sub-section (2) states that any share issued at a discount shall be void. The 2017 amendment added Sub-section (2A), creating a narrow carve-out for debt-to-equity conversions under RBI-approved resolution plans. That carve-out is irrelevant to the founder CCPS scenario.

The word “discount” in Section 53 refers specifically to shares issued below their face value (nominal value), not below their fair market value. This is the distinction that most founders and their advisors blur, and it is where the compliance window for a founder CCPS sits.

What Section 53 prohibits: issuing shares at a price below the face value printed in the Memorandum of Association. For most Indian startups, face value is either ₹10 per share or ₹1 per share after a subdivision.

What Section 53 does not prohibit: issuing shares at a price above face value but below fair market value. That pricing question is governed separately by Section 56(2)(viib) of the Income Tax Act, which has been abolished effective from 01/04/2025 for fresh issuances.

The practical consequence is this: a founder can receive CCPS at a price that is significantly below the investor-round valuation, provided the price is at or above face value and backed by a registered valuer certificate. Before 01/04/2025, the company also needed to confirm that the issue price did not exceed the FMV by more than 10% under Rule 11UA. From 01/04/2025 onwards, Section 56(2)(viib) no longer applies and the angel tax constraint is removed entirely.

Table 1: Share pricing tiers and compliance status

Price tier	Section 53 status	Pre-April 2025 tax status	Post-April 2025 tax status
Below face value	Void issuance	Void; no tax event possible	Void; no tax event possible
At face value	Valid	No angel tax (no premium)	Valid, no constraint
Above face value, below FMV	Valid	Risk if excess exceeds 10% safe harbour	Valid, no angel tax
At FMV (registered valuer)	Valid	Fully compliant	Fully compliant
Above FMV	Valid	Angel tax on excess (pre-abolition)	Valid, no angel tax

Why founders lose equity in the first place: the dilution mechanics

Before structuring a recovery, it helps to quantify the problem precisely.

In a typical Indian seed-to-Series B journey, here is how founder ownership erodes:

• Pre-seed: Two founders hold 100% equity, post-incorporation, pre-investment.
• Seed: 15-20% goes to angel or institutional seed investor. Founders are collectively at 80-85%.
• Series A: 20-25% issued to lead investor. An ESOP pool is also carved out, typically 10-15% of the fully diluted capital. Founders collectively drop to 55-65% fully diluted.
• Series B: Another 20% issued. Founders are now at 35-45% fully diluted.

Two more rounds of 20% each and a founder can reach an IPO with 15-20%. That is not unusual. What is unusual is that founders rarely plan for this trajectory early enough, and the SHA rarely includes a founder CCPS carve-out at the term sheet stage.

CCPS issued to founders does not reverse dilution that has already occurred. It creates a pool of preference shares that converts into equity at a future date and at a pre-agreed price, resetting the founder’s equity percentage at conversion. The mechanism works because the conversion ratio is fixed at the time of CCPS issuance, when the company’s valuation is known, rather than at the time of eventual equity conversion, when the valuation will be higher.

How does CCPS issuance to a founder actually rebuild equity?

A founder CCPS issuance is not a buyback of existing shares from investors. It is a fresh issuance of preference shares to the founder at a price that reflects the company’s current valuation (or a defensible lower point on the valuation range), with a conversion ratio that gives the founder a larger block of equity than a direct equity subscription at the same price would.

Here is how the math works in practice:

Assume a Bengaluru-based B2B SaaS company post-Series A:

• Current valuation: ₹100 crore post-money
• Total shares outstanding: 1,00,00,000
• Implied price per equity share: ₹1,000
• Founder holds: 45,00,000 shares (45%)
• Investor holds: 55,00,000 shares (55%), including ESOP pool

The founder wants to regain 5% by the time of the next raise, expected at a ₹250 crore valuation in 18 months.

Instead of subscribing to equity at ₹1,000 per share today, the founder subscribes to CCPS at ₹200 per share (the IBBI registered valuer certifies this as the fair value of the preference share class, accounting for illiquidity, preference ranking, and conversion discount). The CCPS will convert into equity at ₹200 per CCPS, effectively giving the founder 5 equity shares for every ₹1,000 spent, compared to 1 equity share under a direct equity subscription.

The structural gain is not free: the company receives ₹200 per share instead of ₹1,000, which reduces capital inflow. In most founder CCPS structures, the founder subscribes for a small number of CCPS (sometimes as few as 10,000-50,000 shares), and the transaction is primarily about cap table engineering rather than capital raising.

Critical point: the conversion ratio and conversion price must be locked in the CCPS terms at the time of issuance. Any ambiguity in conversion mechanics creates a Section 56(2)(x) risk (gifts) and a potential NCLT dispute with existing investors if the SHA is not updated.

Is there an investor approval requirement?

Almost always, yes. This is the practical constraint that most founders discover too late and that competing content does not adequately cover.

The SHA from the Series A or Series B round will typically include:

• Anti-dilution provisions protecting existing CCPS holders (see the section on this below)
• A pre-emptive rights clause giving investors the right to participate in any new share issuance
• A protective provisions clause listing actions requiring investor consent, which almost always includes any fresh issuance of securities

Before structuring a founder CCPS, the SHA must be reviewed for:

• Whether a fresh CCPS issuance to the founder triggers investor pre-emptive rights
• Whether investor protective provisions require consent for any issuance not part of an approved ESOP pool
• Whether an anti-dilution adjustment mechanism will be triggered, which could increase investor CCPS conversion ratios and offset the founder’s equity gain

If investor consent is required and not obtained, the CCPS issuance is not void under Section 53, but it may be voidable under the SHA and could trigger a breach of contract claim or a redemption demand from investors. Getting the SHA amendment done before or alongside the CCPS issuance is non-negotiable.

One more layer founders miss: many SHA structures contain a “weighted average anti-dilution” clause that automatically adjusts the Series A investor’s conversion ratio if any shares are issued below the Series A price. A founder CCPS issued at ₹200 when the Series A price was ₹800 will almost certainly trigger this clause. The founder must model the post-trigger cap table and confirm the equity recovery is still meaningful net of the adjustment.

What is the Section 54 sweat equity alternative and when does it apply?

Section 53 contains one statutory exception: Section 54, which permits companies to issue sweat equity shares at a discount to employees and directors for intellectual property or value additions.

Founders frequently ask whether Section 54 is a cleaner path to equity recovery. It is not, for three reasons:

First, sweat equity shares are equity shares, not preference shares. They enter the cap table immediately and trigger anti-dilution adjustments for existing CCPS investors on the date of issuance, whereas CCPS defers that impact to the conversion date.

Second, sweat equity is limited under the Companies (Issue of Sweat Equity Shares) Rules to 15% of existing paid-up equity share capital in a year, and not more than 25% of total paid-up equity capital at any time. For a founder attempting to rebuild 5-10% equity, this cap can create a hard ceiling.

Third, sweat equity issued at a discount below FMV is taxable as a perquisite under Section 17(2)(vi) of the IT Act in the year of allotment. The founder pays income tax on the difference between FMV and the issue price at applicable slab rates, which can be a significant cash outflow. CCPS issued at FMV and converting at a later date defers any tax event to conversion, at which point Section 47(xb) applies and no capital gains tax is triggered on the conversion itself.

The CCPS route is generally superior for founder equity recovery unless the company is at a very early stage, pre-Series A, where investor protective provisions do not yet exist.

Step-by-step compliance sequence for a founder CCPS issuance

The procedural requirements under Sections 42, 55, and 62 of the Companies Act 2013 read with the Companies (Share Capital and Debentures) Rules, 2014 apply in full. Here is the sequence:

Step 1: Authorised capital check

Confirm the Memorandum of Association includes a preference share capital component. If the company has only equity authorised capital, which is common in pre-seed incorporations, file Form SH-7 to add preference share capital before the issuance. This step is often skipped and causes the entire issuance to be delayed by 2-3 weeks at the ROC.

Step 2: Registered valuer engagement

Appoint an IBBI-registered valuer (Securities or Business Assets and Liabilities category) to certify the fair value of the CCPS. The valuation report must comply with the Companies (Registered Valuers and Valuation) Rules, 2017. The issue price must be at or above face value per Section 53. Post-April 2025, there is no longer an upper-bound constraint from angel tax on the issue price. The valuation report should document the methodology (typically a blended NAV and DCF approach for CCPS, given its hybrid nature) and the liquidation preference discount applied.

Step 3: Board resolution

The board passes a resolution approving the number of CCPS to be issued, the issue price per CCPS, the dividend rate (if any), the conversion ratio and conversion trigger events, and the lock-in period if applicable.

Step 4: SHA amendment or investor consent

If the SHA requires investor consent for fresh issuances, obtain written consent from all relevant investors before the CCPS is issued. Document this formally as an amendment to the SHA or as a separate consent letter that is cross-referenced in the board resolution. Do not proceed without this step.

Step 5: Special resolution

Under Section 62(1)(c), a special resolution of shareholders is required if the CCPS is not being issued to existing shareholders on a rights basis or under an ESOP scheme. Since the CCPS is being issued to the founder on a preferential basis, a special resolution under Section 62(3) read with Rule 13(2) of the Companies (Share Capital and Debentures) Rules, 2014 is required.

Step 6: Offer letter under Section 42

If the issuance qualifies as a private placement (to fewer than 200 persons in a financial year), issue a private placement offer letter in Form PAS-4, maintain a separate bank account for subscription money, and file the allotment return in Form PAS-3 within 15 days of allotment.

Step 7: ROC filings

File Form SH-7 if authorised capital was altered, Form MGT-14 for the special resolution within 30 days of passing it, and Form PAS-3 as the allotment return. Late MGT-14 filings attract additional fees under the Companies (Registration Offices and Fees) Rules and the ROC may flag the company for non-compliance during the next statutory audit.

Step 8: Update the SHA and cap table

Amend the SHA to reflect the new CCPS class, its rights, and its conversion mechanics. Update the cap table immediately to show the CCPS on a fully diluted basis, since existing investors track dilution from the date of issuance regardless of the conversion date.

Tax treatment at issuance and on conversion

At issuance (post 01/04/2025): Section 56(2)(viib) has been abolished. The company receives the subscription amount without any angel tax exposure regardless of the issue price relative to FMV. There is no taxable event in the hands of the founder at the time of CCPS issuance, provided the CCPS is issued at a price and on terms that reflect a genuine investment rather than a gift, which would attract Section 56(2)(x).

Dividend during the holding period: Any dividend paid on CCPS is taxable in the hands of the founder at the applicable slab rate under Section 56(2)(i). Most founder CCPS structures set a nominal or zero dividend rate to avoid both cash outflow and tax complexity.

On conversion: Section 47(xb) of the IT Act provides that the conversion of CCPS into equity shares is not treated as a transfer and does not attract capital gains tax. This is the primary tax efficiency of the CCPS structure over a secondary acquisition of equity shares.

On eventual equity sale: The equity shares received on conversion are treated as a new capital asset. The holding period for capital gains purposes starts from the date of conversion, not the date of CCPS issuance. Shares held for more than 24 months qualify as long-term capital assets. Long-term gains on unlisted equity are taxed at 12.5% without indexation under Section 112 (post Finance Act 2024 rate revision). Gains on listed shares post-IPO are taxed at 12.5% under Section 112A if held for more than 12 months.

Table 2: Tax treatment summary for founder CCPS

Stage	Tax provision	Taxable event	Rate
Issuance (post 01/04/2025)	Section 56(2)(viib) abolished	None	Nil
Dividend income	Section 56(2)(i)	Yes, if dividend declared	Slab rate
Conversion to equity	Section 47(xb)	Not a transfer	Nil
Sale of equity (unlisted, LTCG)	Section 112	Yes	12.5%
Sale of equity (listed, LTCG)	Section 112A	Yes	12.5%

What about the liquidation preference: should founder CCPS carry one?

This is a question that receives almost no coverage in existing material, yet it is central to the investor negotiation.

CCPS held by investors typically carries a liquidation preference, most commonly 1x non-participating in Indian VC deals. This means investors get their investment back before equity holders in a downside exit. If a founder’s CCPS also carries a liquidation preference, it creates a new claim senior to (or pari passu with) existing investor CCPS, which investors will resist strongly.

In practice, there are two ways to structure founder CCPS from a liquidation ranking perspective:

The first is plain-vanilla, with no liquidation preference. The founder’s CCPS converts into equity on a set trigger and otherwise has no priority claim over assets. This is the most investor-friendly structure and the one most likely to receive SHA consent without extensive negotiation.

The second is a junior-ranking preference, where the founder’s CCPS carries a 1x preference but ranks behind all existing investor CCPS and ahead of only equity shareholders. This gives the founder some downside protection in a distress sale without threatening the investor waterfall.

In the vast majority of founder CCPS transactions Treelife has handled, the plain-vanilla structure with zero liquidation preference, no anti-dilution, and a fixed conversion ratio is the one that closes. The moment you add founder-favourable rights to the CCPS, investors treat it as a renegotiation of the term sheet rather than a cap table management exercise.

Three structural mistakes that invalidate a founder CCPS

Mistake 1: Issuing at below face value

The most common error. A founder of a company with ₹1 face value shares attempts to subscribe to CCPS at ₹0.50 per share. This violates Section 53(1). The shares are void under Section 53(2). The company cannot correct this retroactively without NCLT involvement. Always confirm face value before fixing the issue price.

Mistake 2: Using a vague or missing conversion formula

CCPS that converts “at the discretion of the board” or “at fair market value at the time of conversion” is not compulsorily convertible in the regulatory sense. FEMA’s NDI Rules classify CCPS as equity only if conversion is mandatory and at pre-determined terms. A floating conversion price or board discretion converts the instrument into something closer to optionally convertible preference shares, which are classified as debt under FEMA and require ECB compliance for foreign-invested companies. Draft the conversion ratio with specificity: “1 CCPS converts into X equity shares at ₹Y per equity share on [trigger event].”

Mistake 3: Skipping the SHA amendment and triggering investor anti-dilution

If the SHA contains broad-based weighted-average anti-dilution provisions, a founder CCPS issuance at a price below the Series A issue price can mechanically adjust the Series A investor’s conversion ratio upward. This is a legitimate outcome under the SHA, but it surprises founders who did not model it. Before issuing founder CCPS, calculate the post-issuance cap table on a fully diluted basis, including the effect of any anti-dilution adjustment, and confirm that the equity recovery net of that adjustment is still commercially meaningful.

Five gaps in existing coverage that this article fills

Every major article on CCPS in India addresses the instrument from the investor’s side: why VC funds prefer it, how liquidation preference works, how anti-dilution adjusts at a down round. The founder CCPS issuance scenario is treated as an afterthought if it is covered at all. Here is what is missing from every piece of coverage we reviewed:

Gap 1: The Section 53 pricing window is not about FMV

Existing content treats Section 53 as a prohibition on issuing below FMV. It is not. It is a prohibition on issuing below face value. The FMV question sits in the tax layer (now largely removed post-April 2025), not in the Companies Act layer. A founder CCPS at ₹200 when the equity FMV is ₹1,000 is fully valid under Section 53 if face value is ₹1 or ₹10. This distinction is commercially significant and legally precise. No article reviewed stated this clearly.

Gap 2: The SHA protective provision is the real gatekeeper, not the Companies Act

Most compliance checklists stop at board resolutions and ROC filings. None of them address the SHA protective provision clause as the primary obstacle to a founder CCPS. In virtually every post-Series A company, the investors’ consent is required before any new shares are issued. Getting this consent, and structuring the CCPS terms so investors will grant it, is the central challenge in founder CCPS transactions.

Gap 3: Liquidation preference on founder CCPS and its investor impact

No article reviewed discussed what happens if a founder’s CCPS carries a liquidation preference. This is a live negotiation point in every transaction and the answer (plain-vanilla, no preference, no anti-dilution) is not obvious from the regulatory framework.

Gap 4: The registered valuer requirement is a Companies Act requirement, not just a tax one

Post-abolition of angel tax, some founders assume the registered valuer step can be skipped. It cannot. Rule 13(2)(h) of the Companies (Share Capital and Debentures) Rules, 2014 mandates a registered valuer report for preferential allotments under Section 62. This is a Companies Act filing requirement, not a tax compliance step. The ROC will reject Form MGT-14 without it.

Gap 5: The holding period for capital gains starts at conversion, not issuance

This point is commercially significant and is not mentioned in any article reviewed. If a founder holds CCPS for 3 years before conversion and then sells the equity shares 6 months later, the holding period is 6 months, not 3.5 years. The LTCG benefit (24 months for unlisted) restarts at conversion. Founders who do not know this will be surprised by a short-term capital gains tax liability on shares they felt they had held for years.

Treelife practitioner note: what we see in live transactions

In the past two years, founder CCPS issuances have become a common fixture in pre-Series C cap table clean-ups. The typical scenario is a Series A or Series B company where the founding team has collectively dropped to 35-40% fully diluted, the next raise is 12-18 months away, and the founders want to be at 45-50% fully diluted before that raise happens.

The most contentious point in every one of these transactions is investor consent under protective provisions. Investors are rarely opposed to the founder CCPS in principle. They are concerned about the precedent and the mechanics. The specific concerns that come up most often:

“If the CCPS converts at ₹200 and our next round comes in at ₹800, you are effectively getting 4x the equity we got for the same capital deployment.”

“Your CCPS creates a new preference share class that ranks pari passu with ours, diluting our liquidation preference.”

Both concerns are legitimate. The first is addressed by making the founder CCPS a plain-vanilla instrument with no liquidation preference, no anti-dilution, and conversion at a price that reflects the preference share valuation rather than the equity valuation. The second is addressed by making it expressly junior in liquidation ranking to existing investor CCPS. In our experience, investors will consent to a founder CCPS structured this way far more readily than to a founder secondary or a bonus share issuance.

The other consistently underestimated step is the IBBI registered valuer engagement. Many founders attempt to use a chartered accountant’s internal valuation note in lieu of a registered valuer certificate, which does not satisfy Rule 13(2)(h) for preferential allotments. The ROC can reject the Form MGT-14 filing without it, and the entire issuance timeline slips by 3-4 weeks while a compliant report is sourced.

FAQ on CCPS Issuance to Founder

Q: Does Section 53 apply to preference shares or only to equity shares?
A: Section 43 of the Companies Act 2013 classifies shares as either equity shares or preference shares. Section 53 uses the word “shares” without distinction, so it applies to both classes equally. A company cannot issue CCPS at below face value any more than it can issue equity shares below face value.

Q: What is the minimum issue price for CCPS under the Companies Act?
A: The minimum is the face value of the share as stated in the Memorandum of Association. There is no prescribed floor above face value for domestic issuances. For foreign-invested companies, the FEMA NDI Rules require that CCPS issued to non-residents be priced at not less than the FMV determined by an IBBI-registered valuer.

Q: Can a founder receive CCPS at the same price as the Series A investor?
A: Yes. There is no prohibition on a founder subscribing to CCPS at the investor-round price. The commercial logic for doing so is weak (the founder gets no valuation benefit over a direct equity subscription), but it is legally clean and avoids any investor pushback on preferential pricing.

Q: What happens if the CCPS conversion formula is not fixed at issuance?
A: For FEMA purposes, CCPS without pre-determined conversion terms is reclassified as debt. For companies with foreign investment, this means the instrument must comply with ECB norms, which impose maturity, end-use, and hedging requirements that a typical startup cannot meet. Under the Companies Act, the instrument may still be valid as an optionally convertible preference share, but it loses its CCPS classification.

Q: Is board approval enough for a founder CCPS issuance, or is a shareholder resolution required?
A: A special resolution of shareholders is required under Section 62(1)(c) read with Section 62(3) for any preferential allotment. Board approval alone is insufficient. The special resolution must be passed at a general meeting, and Form MGT-14 must be filed with the ROC within 30 days.

Q: Does the abolition of angel tax (Section 56(2)(viib)) from 01/04/2025 remove the need for a registered valuer report?
A: No. The registered valuer requirement under Rule 13(2)(h) for preferential allotments is a Companies Act requirement, not a tax requirement. It remains in force regardless of the angel tax status. You still need an IBBI valuation certificate. Skipping it will cause the ROC to reject your Form MGT-14 filing.

Q: Can founders use CCPS to recover equity that was transferred to an ESOP pool? A: Indirectly, yes. CCPS issued to the founder will convert into equity on the conversion date, increasing the founder’s percentage of total fully diluted equity. Shares in the ESOP pool that have not been granted or vested remain in the pool, and the founder’s CCPS conversion dilutes the ESOP pool proportionally along with all other shareholders. The net effect is that the founder’s percentage increases relative to total fully diluted capital.

Q: What is the GST treatment of the CCPS subscription amount?
A: The issuance and allotment of shares, including CCPS, constitutes a securities transaction and is excluded from the definition of supply under Schedule III of the CGST Act 2017. No GST applies on the subscription amount received by the company.

Q: What are the FEMA filing requirements when a founder who is an NRI subscribes to CCPS?
A: An NRI subscribing to CCPS of an Indian company is making an FDI investment under the FEMA NDI Rules 2019. The company must file Form FC-GPR with the RBI through the AD Bank within 30 days of allotment. The issue price must comply with the FMV norms under the FEMA NDI Rules.

Q: Can CCPS be bought back before conversion?
A: Section 68 of the Companies Act 2013 permits buy-back of shares, including preference shares, subject to prescribed limits (buy-back cannot exceed 25% of total paid-up capital and free reserves in a financial year). However, most SHA structures expressly restrict buy-back of CCPS before conversion, and the buy-back route is rarely used for founder CCPS.

Q: Will issuing CCPS to a founder affect DPIIT startup recognition status?
A: No, provided the issuance complies with the Companies Act and the company’s paid-up capital stays within the limits applicable for DPIIT recognition. However, if the CCPS subscription pushes total paid-up capital above the threshold for the 80-IAC tax holiday, that is worth modelling before issuance.

Q: What if the investor SHA prohibits any CCPS issuance to promoters entirely?
A: This clause exists in some investor-heavy SHA templates, more common in PE-funded companies than VC-funded startups. If the SHA contains such a restriction, there is no compliant path to a founder CCPS without an SHA amendment. Attempting to proceed without the amendment gives investors a breach-of-contract claim and, in some SHA structures, a drag or redemption right.

Q: Does the holding period for capital gains on the equity shares received on conversion start from the date of CCPS issuance? A: No. This is one of the most commercially significant points and is widely misunderstood. The holding period starts from the date of conversion into equity shares, not from the date the CCPS was originally issued. If a founder holds CCPS for 3 years before conversion, and then sells the equity shares 6 months after conversion, the capital gains holding period is 6 months, not 3.5 years. Plan the conversion timing accordingly if LTCG treatment is important to the exit economics.

Regulatory references

• Section 43, Companies Act 2013 (classes of share capital)
• Section 53, Companies Act 2013 (prohibition on issue of shares at discount)
• Section 54, Companies Act 2013 (issue of sweat equity shares)
• Section 55, Companies Act 2013 (issue of preference shares)
• Section 62, Companies Act 2013 (further issue of share capital)
• Section 42, Companies Act 2013 (private placement)
• Section 68, Companies Act 2013 (buy-back of securities)
• Rule 13(2), Companies (Share Capital and Debentures) Rules, 2014 (preferential allotment)
• Section 47(xb), Income Tax Act 1961 (conversion of CCPS not treated as transfer)
• Section 56(2)(viib), Income Tax Act 1961 (abolished with effect from 01/04/2025 by Finance Act 2024)
• Section 56(2)(x), Income Tax Act 1961 (gift of money or property)
• Section 112, Income Tax Act 1961 (long-term capital gains on unlisted shares)
• Section 112A, Income Tax Act 1961 (long-term capital gains on listed shares)
• Section 17(2)(vi), Income Tax Act 1961 (sweat equity as perquisite)
• Rule 11UA, Income Tax Rules 1962 (FMV computation for CCPS, relevant for pre-April 2025 issuances)
• FEMA (Non-Debt Instruments) Rules, 2019 (pricing and classification of CCPS for foreign investment)
• Companies (Registered Valuers and Valuation) Rules, 2017 (IBBI registered valuer framework)
• Schedule III, CGST Act 2017 (securities excluded from GST supply)

External sources

• mca.gov.in
• incometaxindia.gov.in
• rbi.org.in
• ibbi.gov.in