Compulsorily Convertible Preference Shares (CCPS)

Compulsorily Convertible Preference Shares (CCPS) are the dominant equity instrument used by venture capital and private equity investors in Indian startup deals. They sit at the intersection of debt-like protection and equity upside: holders enjoy preference rights while the company is solvent but are mandatorily converted into ordinary (equity) shares at a specified future date or upon a trigger such as an IPO or acquisition.

Why Indian VCs use CCPS: Unlike plain equity, CCPS can carry a liquidation preference — ensuring investors recover their capital before founders in a downside scenario. They can also carry anti-dilution protections, dividend rights, and veto rights on certain decisions. Critically, under the Foreign Exchange Management (Non-Debt Instruments) Rules, CCPS qualify as equity for foreign direct investment (FDI) purposes, making them compatible with automatic-route FDI — a key compliance advantage over instruments that might be classified as debt.

The conversion ratio and timing are fixed in the shareholders' agreement and share subscription agreement. Most CCPS convert at the next qualified financing round or after a set period (e.g., five to seven years). Upon conversion, all preference-linked protections fall away and the investor holds the same class of shares as the founders.

From the founder's perspective, CCPS lets the company raise capital at an agreed valuation while giving investors downside protection — a compromise that makes deals possible where plain equity would be too exposed and debt would be too rigid. Every standard Indian VC term sheet will reference CCPS; understanding its rights stack is essential before signing.