Preference Shares — CCPS and NCRPS Structuring

Common questions

Points founders and investors most often raise before structuring a preference share round.

What is a CCPS and how does it differ from ordinary equity shares?

A compulsorily convertible preference share (CCPS) is a class of preference share that must convert into equity shares at a specified price on the occurrence of a trigger event or at the end of a specified period. Unlike ordinary equity shares, CCPS carries a liquidation preference and often anti-dilution protection, giving the investor a senior claim on assets before ordinary shareholders in a winding-up or liquidation event. The conversion ratio determines the investor's eventual equity stake.

When is an NCRPS the appropriate instrument?

A non-convertible redeemable preference share (NCRPS) is suited where the investor's objective is a structured debt-like return — a fixed coupon paid periodically and principal redemption at the end of the tenure — without equity participation. It is commonly used by NBFCs, family offices, and high-net-worth investors in closely held companies where the investor does not seek board representation or equity upside.

What approvals are required before preference shares can be issued?

The company's articles of association must authorise preference share issuance. Where they do not, an amendment by special resolution in a general meeting is required. The issuance itself requires a special resolution under section 55 of the Companies Act, 2013, specifying the terms including the dividend rate, redemption date (for NCRPS), and conversion terms (for CCPS). The return of allotment (PAS-3) must be filed with the Registrar of Companies within thirty days.

How is the CCPS conversion price typically set?

Conversion price is negotiated at the term-sheet stage. The most common approach in India is a standard conversion at a pre-agreed price based on the pre-money valuation of the round. Most investors also negotiate a weighted-average anti-dilution clause so that if the company raises a subsequent round at a lower valuation (a down round), the conversion price adjusts downward, protecting the investor's effective equity percentage.

Can a foreign investor hold CCPS or NCRPS in an Indian company?

Yes, subject to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, which govern foreign investment in Indian companies. CCPS is treated as equity investment under the FDI framework and is permitted under the automatic route in most sectors. NCRPS may be treated as a debt instrument for FDI classification purposes, which has different reporting and sectoral implications. The applicable FDI rules must be verified before the instrument is structured.

What happens to preference shares in a liquidation or winding-up?

Preference shareholders rank above ordinary equity shareholders in the distribution of a company's assets on winding-up, up to the paid-up capital and any arrears of dividend specified in the terms. They rank below secured creditors, unsecured creditors, and employees' claims. The precise liquidation preference — whether it is participating or non-participating, and whether it is capped — is a matter of commercial negotiation and is recorded in the shareholders' agreement and articles of association.