पाठशाला Pathshala · धन Dhan, Money · Lesson 11 · Build

CCPS: the instrument Indian VCs actually use

Almost every institutional round in India is paid for in compulsorily convertible preference shares. What the instrument is, why investors insist on it rather than equity shares, and the three terms inside it a founder should read twice.

Pathshala, The Founder Library · 11 October 2026 · 8 min read

Stone stairways descend in layers down the walls of a stepwell in Bandikui in black and white. — Photograph: Abhinav Sharma · Pexels

A founder signs a term sheet for equity and, six weeks later, allots something else: compulsorily convertible preference shares. Nobody hid anything. The CCPS is simply the form in which almost every institutional investor in India owns a company, and the reasons for it decide what the investor receives in the years when things go badly.

This lesson explains the instrument from the law upwards. What a CCPS is, why investors use it instead of the equity shares the founders hold, the rights it carries and how each one works, what the preference does at a sale (the figure draws it), the pricing and paperwork the law adds, and the handful of terms worth negotiating.

What a CCPS is, in one paragraph of law

A preference share is a share with two preferences over the equity shares: it is paid its dividend first, and it is repaid its capital first if the company is wound up. The Companies Act makes it a finite instrument. Section 55 forbids a company limited by shares from issuing preference shares that are irredeemable, and limits their life to twenty years from issue outside infrastructure projects. A compulsorily convertible preference share is one whose terms oblige it to become equity shares, on a ratio or formula fixed when it is issued, at the holder’s option or on a trigger such as a public offer, and in any case before that twenty-year limit. Until it converts it is a preference share; afterwards it is ordinary equity, indistinguishable from the founders’ own.

The issue is a private placement like any other: a special resolution of the shareholders, the offer letter, money from the investor’s own account into a separate bank account, allotment and the return of allotment, all under sections 42 and 62 of the Act, as practitioners describe it. The [fundraising process](/library/fundraising-process-six-weeks-not-six-months) lesson sets out the timetable.

Why Indian rounds use it instead of equity shares

The preference needs a class. An investor buying a minority stake in a company that may be sold cheaply wants its money back before the founders are paid. That is a preference, and the Companies Act’s preference share is the class built to carry one. Equity shares all rank together; a stake that must rank first has to be something else.

The price can be protected without issuing new shares. A CCPS converts at a ratio, usually one equity share for one CCPS on day one. If the company later raises money at a lower price, an anti-dilution clause adjusts that ratio so the investor receives more equity shares on conversion. Nothing is issued until conversion and no new allotment is needed to give effect to the protection. The [term sheet lesson](/library/term-sheet-clause-by-clause) draws what each form of anti-dilution costs the founders.

Foreign investors can hold it as equity. Under the Reserve Bank’s Master Direction on foreign investment, preference shares count as equity instruments only when they are fully and mandatorily convertible and fully paid. An optionally convertible or redeemable preference share issued to a non-resident is not an equity instrument for foreign exchange purposes and is treated as borrowing, with all the restrictions that carries. Since most Indian venture funds are either foreign or carry foreign money, the word compulsorily is not a choice. It is the condition on which the investment is allowed in.

The rights a CCPS carries

Dividend. The CCPS carries a fixed preferential dividend, and in venture rounds the rate is nominal, often a fraction of a per cent, because the investor is not buying income. Read whether it is cumulative. Section 47(2) gives preference shareholders a vote on every resolution if their dividend has gone unpaid for two years or more, and a dividend clause drafted carelessly can hand a single class a vote it was never meant to have.

A wall of old metal lockers closed with padlocks in sepia tones. — Each right in a CCPS is a separate lock. Read which ones the investor holds the key to before the agreement is signed. Photograph: David Underland · Pexels

Liquidation preference. On a winding up, a sale of the company or a sale of most of its assets, the holder is paid back its investment, or a multiple of it, before the equity shares receive anything. This is the term that matters most, and the figure below shows why.

Conversion. The ratio, the adjustments to it, the holder’s right to convert at any time and the events that force conversion, typically a qualified public offer. Read the adjustment clause as carefully as the price: it is where price protection lives.

Voting. By law a preference shareholder votes only on resolutions that directly affect the rights of its shares, on winding up and on repayment or reduction of capital. Investors therefore take voting rights by contract: the shareholders’ agreement and the articles give the CCPS holder votes as if converted, a board seat and a list of reserved matters on which the company needs its consent. Those rights are only as good as the articles that contain them, which is why a lawyer will insist they are copied in.

The preference, drawn

Take a company in Pune that issues ₹5 crore of CCPS converting into twenty per cent, a post-money of ₹25 crore. Two years later it is sold for ₹15 crore. As plain equity the investor would receive twenty per cent, ₹3 crore. With a 1x non-participating preference it takes its ₹5 crore back, a third of the sale, and everyone else shares ₹10 crore. With a 1x participating preference it takes its ₹5 crore and then twenty per cent of the remaining ₹10 crore, ₹7 crore in all. Same company, same stake, same sale; the founders’ side receives ₹12 crore, ₹10 crore or ₹8 crore depending on two words in the term sheet.

Move the sale price and the shape becomes clear. Below the conversion point, the investment divided by the stake (₹25 crore here), a non-participating preference shifts value from the founders to the investor; above it the investor converts, the preference disappears and everyone is paid pro rata. A participating preference never disappears: at a ₹100 crore sale it still takes ₹24 crore instead of ₹20 crore. That is why the non-participating version is normal and the participating one is a concession. Larger multiples are rarer still: Carta found that just 1.9 per cent of primary seed and Series A rounds on its platform in 2024 carried a preference above 1x. The preference is insurance for the investor against a disappointing sale, and a founder should price it as such: cheap if the company sells well, expensive if it does not.

The CCPS is equity on the way up and something closer to debt on the way down. Read its terms for the year the company is sold cheaply, because that is the only year they matter.

Pricing and paperwork

A CCPS needs two prices: the price at which it is issued and the price of the equity shares it becomes. For an unlisted company, rule 13(2)(g) of the share capital rules requires the price to rest on a registered valuer’s report, and gives the company a choice for the shares on conversion: fix their price upfront when the CCPS is offered, on a report given at that time, or fix it at a date no earlier than thirty days before the holder becomes entitled to convert, on a report no more than sixty days old. The company must choose when it makes the offer and disclose the choice.

Where the investor is outside India, the foreign exchange rules narrow that choice. The Master Direction requires the price or conversion formula to be determined upfront at the time of issue, and the price at conversion may not be lower than the fair value worked out when the CCPS was issued. In practice that means the conversion ratio, and every adjustment to it, is written into the terms on day one, and an anti-dilution adjustment can never push the conversion price below the fair value certified at issue. After allotment the company reports the foreign investment through its bank on the Reserve Bank’s timetable.

What to negotiate in the CCPS terms

A 1x non-participating preference, ranking with later rounds. Insist on non-participating; accept participation only with a cap, and only in exchange for something you value more. Ask that later series rank equally with this one rather than stacking ahead of it, so that each new round does not push the earlier investors, and through them the founders, further down the line.

A one-to-one ratio with broad-based weighted average adjustment. Full ratchet adjustment is rare and punishing. Broad-based weighted average is the normal form, and the definition of broad-based (whether it counts the option pool and all convertibles) is worth a sentence of negotiation.

A nominal, non-cumulative dividend, payable only if declared. The investor is not buying income, and a cumulative dividend left unpaid is both a liability and, after two years, a vote.

No redemption and no put. A CCPS converts; it is not repaid. Any clause that lets the holder demand its money back on a date or an event turns equity into debt in substance, and for a foreign holder is likely to break the foreign exchange rules on which the instrument depends.

Before you sign: the CCPS read-through

Ninety minutes, with the term sheet, the draft articles and this lesson open, before the term sheet is signed and again before the shareholders’ agreement is. Find the liquidation preference and write down, in rupees, what the founders’ side receives at a sale for half the post-money, at the post-money and at three times it; use the figure. Find the conversion ratio and every event that adjusts it, and check that each adjustment is described in the articles, not only in the agreement. Find the dividend and confirm the rate, that it is non-cumulative and that it is payable only if declared. Search the draft for redeem, repay, put and buy-back. Confirm that every right the investor relies on has been copied into the articles. Then keep a one-page summary of each series’ terms with the cap table, and update it the day each new round closes, because the second round’s terms are always negotiated against the first.

Nothing here is legal, tax or investment advice. The Companies Act provisions and the foreign exchange rules were checked on 11 October 2026; have the terms drafted and reviewed by a lawyer who has closed Indian venture rounds.