Founder explainer · 4 min read
CCPS vs CCD: the convertible instruments behind Indian VC rounds
Compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCDs) are the instruments most Indian venture rounds are built on. Both must turn into equity shares later, at an agreed ratio or formula. The difference is what they are until then: a CCPS is a share with preferential rights, while a CCD is a debenture, a form of debt that can carry interest.
By the StartupReader editorial desk · Updated 2026-10-28 · Worked examples are illustrative
CCPS vs CCD
- FEMA status of both, if fully convertible
- Equity
- CCD conversion window under deposit rules
- 10 years
- to report an issue to foreign investors
- 30 days
What CCPS are
A preference share ranks ahead of equity shares for dividends and for the return of capital if the company is wound up. A compulsorily convertible preference share must also convert into equity shares, on a set date or on events such as a later round, a sale or a listing, at a conversion ratio fixed when it is issued.
Dividend rights are set in the terms, but because startups rarely pay dividends they matter less than the other rights that come with the shares.
Why VCs favour CCPS
- A liquidation preference sits naturally on a preference share, so investors can be repaid first in a sale or wind-up.
- Anti-dilution protection can be delivered by adjusting the conversion ratio if a later round is priced lower.
- Under foreign-exchange rules, preference shares that are fully, compulsorily and mandatorily convertible count as equity, so foreign funds can invest through the FDI route.
- Governance rights are set by contract: company law gives preference shareholders a vote mainly on matters affecting their rights, so investors get board seats, vetoes and information rights through the shareholders' agreement and articles.
What CCDs are, and when they are used
A CCD is a debenture that must convert into shares. Until it converts it is a debenture, a form of debt, and the terms can provide for interest. Company-law rules on deposits exclude debentures that must convert into shares within ten years, so CCDs are drafted to convert within that window.
CCDs are common in bridge and unpriced rounds, where the conversion price is set by a formula tied to the next priced round, often with a discount. Unlike convertible notes, they need no DPIIT recognition or minimum ticket, and can convert into the next round's CCPS. Interest is generally deductible for the company and taxable for the investor, though interest paid to foreign group companies can face transfer pricing limits.
How conversion works
The terms set what triggers conversion and how many shares each instrument becomes. For foreign investors, FEMA requires the price or conversion formula to be fixed when the instrument is issued, and the conversion price cannot be lower than the fair value worked out at that time.
Illustrative example: an investor puts ₹1 crore into CCDs that convert at a 20% discount to the next round's price. The next round is priced at ₹200 a share, so the CCDs convert at ₹160 a share into 62,500 shares (₹1 crore ÷ ₹160). For a foreign investor, ₹160 would also have to be at least the fair value certified when the CCDs were issued.
Converting CCPS or CCDs into equity shares of the same company has generally not been treated as a taxable transfer under Indian income tax law; tax arises when the resulting shares are sold. Interest built into a conversion can be taxed separately.
Side by side
| CCPS | CCD | |
|---|---|---|
| Legal form | Preference share | Debenture (debt until conversion) |
| Return before conversion | Preferential dividend, if declared | Interest, if the terms provide it |
| Typical use | Priced rounds | Bridge or unpriced rounds |
| Votes before conversion | Limited by law; widened by contract | None as a shareholder |
| Payouts and company tax | Dividends come from taxed profits | Interest is generally deductible |
| FEMA treatment | Equity, if fully and compulsorily convertible | Equity, if fully and compulsorily convertible |
What founders should check
- The conversion triggers, and the final date by which conversion must happen.
- The conversion ratio or formula, and how anti-dilution adjustments change it.
- For CCDs, the interest rate and when it is paid, since interest is a cash cost.
- A valuation report for the issue and, for foreign investors, Form FC-GPR filed within 30 days of the issue.
- Company law, FEMA and tax rules on these instruments are amended from time to time, so check the current position on rbi.org.in and mca.gov.in, or with an adviser.
Questions founders ask
Why do Indian VCs use CCPS instead of equity shares?
CCPS let investors hold preferential rights, such as a liquidation preference and anti-dilution protection through the conversion ratio, while still counting as equity for foreign investment. Founders and employees usually hold plain equity shares.
Are CCDs debt or equity?
It depends on the lens. Under company law a CCD is a debenture until it converts. Under foreign-exchange rules, fully and compulsorily convertible debentures are equity instruments, so a foreign investor's CCDs count as FDI, not external commercial borrowing.
Can a CCD convert into CCPS?
Yes, if its terms provide for it. Bridge CCDs can be drafted to convert into the same class of preference shares issued in the next priced round, giving the bridge investor the same rights as the new investors.
What is the difference between a CCD and a convertible note?
Convertible notes can be issued only by DPIIT-recognised startups, a foreign investor must put in at least ₹25 lakh in a single tranche, and notes convert into equity shares or are repaid within ten years. CCDs have none of these limits but need a valuation report and more paperwork.
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Written by the StartupReader editorial desk with AI assistance, from standard definitions and the examples worked through above; updated 2026-10-28. Rules on tax and foreign investment change, so check the official sources or an adviser before acting. Spotted something wrong? Tell us.