CCPS: Does Issuing It Trigger a Valuation, and When?
Compulsorily Convertible Preference Shares are treated as a distinct instrument with its own rules, which suggests a valuation regime of its own. There is none. CCPS rides the same statutory trigger as plain equity, with one extra tool nobody else gets. This piece works from Section 62(1)(c) and Rule 13, and shows with a worked number why the choice that tool offers decides who carries the risk.
CCPS Is Equity by Compulsion
- It is a preference share that must convert into equity shares. It cannot stay a preference share forever and cannot be redeemed for cash instead.
- Investors like it because it behaves like debt on the way in — defined terms, sometimes a preference dividend — and like equity on the way out.
- Under FEMA it counts as an equity instrument, not debt, precisely because the conversion is mandatory. That is what lets a foreign investor use it without running into External Commercial Borrowing restrictions.
The Companies Act Never Mentions It
There is no dedicated CCPS section in the Companies Act, 2013. Section 43 says only that a company can have preference share capital. Section 55 governs redeemable preference shares and their 20-year cap. Neither was written with CCPS in mind.
Market practice treats the 20-year cap as applying to CCPS conversion by analogy, since the Act does not say otherwise and nobody wants to issue an effectively permanent instrument.
Issuing It Triggers the Same Valuation as Equity
Section 62(1)(c) covers equity shares and securities convertible into equity shares, and CCPS is squarely a convertible security. Rule 13(2)(g) of theCompanies (Share Capital and Debentures) Rules, 2014 requires a registered valuer's report before the price of any preferential-basis issue is fixed, and does not distinguish between equity and convertible preference shares.
There is no separate CCPS valuation regime. It rides the same trigger as a plain equity preferential allotment, the broader point covered in Preference Shares Are an SFA Valuer's Job. Redemption Isn't.
Rule 13(2)(h) Gives CCPS One Tool Plain Equity Does Not
It is specific to convertible securities, and offers a choice for pricing the equity shares that eventually come out of conversion.
- Upfront pricing, Rule 13(2)(h)(i). Price the resultant shares now, on a valuation report obtained when the CCPS is offered.
- Deferred pricing, Rule 13(2)(h)(ii). Price them later, on a valuation report dated no earlier than 60 days before the conversion entitlement date, with the board's pricing decision taken no earlier than 30 days before that date.
The choice must be made and disclosed at the time of the original offer. A company cannot leave it open. Plain equity has no equivalent, because there is no conversion event to defer anything to.
A Worked Number Shows Who Carries the Risk
An investor puts in ₹5 crore via CCPS. At issuance, the company is valued at ₹100 per share.
Upfront pricing. ₹5 crore ÷ ₹100 = 5,00,000 shares, fixed today. If the company grows to ₹250 per share by conversion, those shares are worth ₹12.5 crore. If it falls to ₹40, they are worth ₹2 crore. The investor is exposed to performance from day one, like a regular shareholder.
Deferred pricing. Nothing is fixed today except the formula: ₹5 crore ÷ fair value per share at conversion. At ₹250 the investor gets 2,00,000 shares, worth ₹5 crore. At ₹40 the investor gets 12,50,000 shares, again worth ₹5 crore. The rupee value at conversion is the same either way: what they put in.
Listed Companies Work Differently Entirely
All of the above governs unlisted, privately held companies issuing CCPS on a preferential basis. Listed companies price preferential issues under SEBI's ICDR Regulations, and Rule 13 does not apply to them at all.
- Frequently traded shares: no valuer. The floor price is the higher of the 90-trading-day or 10-trading-day volume-weighted average price.
- Infrequently traded shares: with no reliable market price to formula off, SEBI requires the floor to be set by an IBBI-registered valuer's report — the same professionals, and the same Section 247 definition, as the unlisted regime.
What This Means in Practice
Decide upfront versus deferred at the term sheet, not at the board meeting, because Rule 13(2)(h) requires the choice to be disclosed in the original offer and the instrument cannot be renegotiated into the other shape later. It is a risk allocation dressed as a timing question: upfront locks the investor's entry price and the founder's dilution; deferred protects the investor's capital and leaves the founder carrying the downside.
A registered valuer is involved on either path. The only thing the law leaves open is when.
And a CCPS round rarely leaves a cap table with one class of shares. Once several classes carry different rights, the question shifts from what the company is worth to how that worth splits between classes, covered in Startup Valuation Methods: Deal Heuristics vs. Fair Value Reporting.