Many founders view the conversion of Compulsorily Convertible Preference Shares (CCPS) into equity as a standard formality. In practice, this step can trigger significant legal, regulatory, and tax implications that directly impact control, dilution, valuation, and future exits.
Key Corporate Law Requirements
Upon conversion, the company must issue equity shares to CCPS holders strictly as per the agreed conversion formula, update the cap table, and file Form PAS-3 (Return of Allotment) within the prescribed timelines. The dilution impact should ideally be modelled and communicated at the structuring stage, not at the time of conversion
When Non-Resident Investors Hold CCPS:
Companies should revisit and reconfirm compliance under the FDI framework, including:
- Sectoral caps & entry routes
- Pricing guidelines
- FEMA reporting/filing requirements at conversion
- Downstream investment implications under the NDI Rules, 2019
Tax Perspective:
Conversion of CCPS into equity is generally tax-neutral under Section 47(xb) of the Income-tax Act, 1961. The original cost and holding period of CCPS get carried over to the resultant equity shares and will influence capital gains computation on exit.
Disclaimer:
This update is for general awareness only and does not constitute legal, regulatory, or tax advice. Specific transactions require a detailed, case-specific analysis