CCPS, whether an ‘Anti-Dilution Tool’ for the Promoters?

Dhrumil Shah – [2022] 138 taxmann.com 114 (Article)

Introduction:

Compulsory Convertible Preference Shares (CCPS) is one of the sources for raising funds for the corporate sector. It is an advance version of equity shares. CCPS is a type of preferred share/stock that gives holders the option to convert their preference shares into a fixed number of equity shares after a specified date. It is increasingly becoming a preferred investment instrument for high net worth and Private Equity (PE) investors, the reason being that it is not only helpful to investors to bridge the gap in mismatch in valuation expectation between investors and promoters but also assures the preference of investment amount at the time of liquidation event. The Investor often links time of conversion of CCPS into the company’s performance. In other words CCPS is an anti-dilution instrument or hybrid instrument or deemed equity instrument. Let us discuss in detail the characteristics or usage of CCPSs.

Anti Dilution – Tool for the Promoters:

CCPS is beneficial to the promoters of the company to keep their equity stake intact at the time when the Company issues equity shares to the new investors. The Promoters may convert their CCPS which was subscribed at the time of inception of the Company at par. When investor infuses the money at higher valuation thereby promoters can increase its stake by simply converting into equity shares without bringing money at higher valuation.

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