top of page

Unpacking Compulsorily Convertible Preference Shares: The Pros and Cons of Investing in CCPS

Overview

Compulsorily Convertible Preference Shares (CCPS) are a form of preference shares issued by a company that can be converted into equity shares at a predetermined time or event.


Unlike normal preference shares, which only pay a fixed dividend and do not have any voting rights, CCPS have the option to be converted into equity shares at a later date, making them a popular form of investment for venture capitalists, private equity firms, and angel investors.

In this blog, we will discuss what Compulsorily Convertible Preference Shares are, their features, advantages, disadvantages, and how they differ from other types of preference shares.



Features of Compulsorily Convertible Preference Shares

Compulsorily Convertible Preference Shares offer investors a unique investment opportunity that provides a combination of fixed returns and potential equity ownership in the company. Some features of CCPS are highlighted below:


1. Conversion Feature:

One of the most prominent features of CCPS is their mandatory conversion feature. This means that CCPS must be converted into equity shares at a predetermined time or event, such as when the company reaches a certain valuation or raises a specific amount of funding.


The conversion feature allows investors to benefit from both fixed returns and potential capital gains in the future if the company performs well.


2. Dividend Payments:

CCPS pay a fixed dividend rate to their holders, which is usually higher than the dividend paid to common shareholders. This makes them an attractive investment option for investors who are looking for steady income streams.


The dividend rate is typically fixed at the time of issuance and is paid out to CCPS holders before any dividends are paid to common shareholders.


3. Priority in Liquidation:

In the event of liquidation or sale, CCPS holders have priority over common shareholders when it comes to the distribution of the company's assets. This means that CCPS holders are more likely to receive their investment back than common shareholders.


However, it is important to note that CCPS holders may still rank behind secured creditors and bondholders in terms of priority in liquidation.


4. Voting Rights:

CCPS typically do not have voting rights, unlike common shares. The conversion of CCPS into equity shares usually takes away the voting rights of the preference shareholders.


This means that CCPS holders do not have any control over the company's management decisions, which may be a disadvantage for some investors.


5. Flexible Terms:

CCPS can have flexible terms and conditions depending on the issuer's requirements. For example, the conversion price of CCPS can be set at a discount to the current market price of the company's common shares.


Additionally, the conversion feature can be structured to occur at a specific time or event, such as at the time of the company's IPO.


5. Lower Risk:

CCPS offer lower risk than equity shares because they provide a fixed dividend rate and priority over common shareholders in the event of liquidation or sale.


This makes them an attractive investment option for investors who are looking for lower-risk investments that provide a steady income stream.


 

Advantages of Compulsorily Convertible Preference Shares


1. Fixed Income Stream:

CCPS offer a fixed dividend payment to their holders, which is usually higher than the dividend paid to common shareholders. This fixed income stream makes CCPS an attractive investment option for investors who are looking for steady income streams.


2. Potential Capital Appreciation:

CCPS also offer potential capital appreciation as they must be converted into equity shares at a predetermined time or event. If the company performs well, the value of the equity shares can increase, providing capital gains to CCPS holders.


3. Priority in Liquidation:

In the event of liquidation or sale, CCPS holders have priority over common shareholders when it comes to the distribution of the company's assets. This means that CCPS holders are more likely to receive their investment back than common shareholders.


4. Lower Risk:

CCPS offer lower risk than equity shares because they provide a fixed dividend rate and priority over common shareholders in the event of liquidation or sale. This makes them an attractive investment option for investors who are looking for lower-risk investments that provide a steady income stream.


5. Flexible Terms:

CCPS can have flexible terms and conditions depending on the issuer's requirements. For example, the conversion price of CCPS can be set at a discount to the current market price of the company's common shares. Additionally, the conversion feature can be structured to occur at a specific time or event, such as at the time of the company's IPO.


6. Attractive to Investors and Issuers:

CCPS are attractive to both investors and issuers. For investors, they provide a fixed income stream, potential capital appreciation, and lower risk compared to equity shares. For issuers, CCPS provide a way to raise capital without diluting existing shareholders' ownership and control over the company.


 

Disadvantages of Compulsorily Convertible Preference Shares


1. No Voting Rights:

CCPS holders do not have voting rights, unlike common shareholders. The conversion of CCPS into equity shares usually takes away the voting rights of the preference shareholders. This means that CCPS holders do not have any control over the company's management decisions, which may be a disadvantage for some investors.


2. Fixed Returns:

While the fixed dividend payment of CCPS is an advantage for investors who are looking for steady income streams, it can also be a disadvantage for investors who are seeking higher returns. The fixed dividend payment means that CCPS holders will not benefit from any increase in the company's profits or growth potential.


3. Mandatory Conversion:

The mandatory conversion feature of CCPS means that the investor must convert their shares into equity shares at a predetermined time or event, regardless of the market conditions or their own preferences. This lack of flexibility may be a disadvantage for some investors who would prefer to hold on to their preference shares.


4. Liquidity:

CCPS may have lower liquidity compared to common shares as they are a less well-known investment option. This means that it may be difficult for investors to sell their CCPS in the secondary market, especially if the company is not performing well.


5. Subordination to Other Creditors:

While CCPS holders have priority over common shareholders in the event of liquidation or sale, they may still rank behind secured creditors and bondholders. This means that CCPS holders may not receive their investment back in full in the event of liquidation or sale.


 

How do Compulsorily Convertible Preference Shares differ from other types of preference shares?


1. Optional vs. Mandatory Conversion: Unlike CCPS, other preference shares do not have a mandatory conversion feature and can only be converted into equity shares at the option of the preference shareholders.


2. Voting Rights: While CCPS usually do not have any voting rights, other preference shares may have voting rights, depending on their terms and conditions.


3. Dividend Rates: CCPS usually offer a higher dividend rate than other preference shares.


4. Risk: CCPS offer lower risk than equity shares, while other preference shares may offer higher risk depending on their terms and conditions.


Conclusion Compulsorily Convertible Preference Shares are a popular form of investment for venture capitalists, private equity firms, and angel investors. They offer lower risk than equity shares, high returns, and priority over common shareholders in case of liquidation.



19 views0 comments

Comments


bottom of page