Three instruments carry almost every startup round in India: plain equity, CCPS and CCD. Equity is simple and irreversible. CCPS – compulsorily convertible preference shares – is the venture default because investor protections live in it comfortably. CCD – compulsorily convertible debentures – is debt until it converts, with quirks that make it the right tool in specific situations. And for foreign money, FEMA quietly makes the choice for you: only compulsorily convertible instruments count as equity investment at all. This guide compares the three across law, tax, and negotiation reality.
The comparison
| Feature | Equity shares | CCPS | CCD |
|---|---|---|---|
| Legal nature | Share capital | Preference share capital (s.55, Companies Act) | Debenture (debt) until conversion |
| Votes | Full | Restricted (class matters + as agreed; deemed voting if dividend unpaid 2 years) | None until conversion |
| Investor protections | Only via SHA | Native home: liquidation preference, anti-dilution ride on the class | Contractual; coupon gives downside floor |
| Tenure limit | None | Max 20 years (s.55) | Convert within 10 years to stay deposit-exempt |
| Mandatory servicing | No | Dividend only if declared (usually 0.001%) | Coupon is payable interest – deductible for company, taxable for investor |
| FEMA status | Equity instrument | Equity instrument if fully & mandatorily convertible | Equity instrument if fully & mandatorily convertible |
| Stamp duty on issue | 0.005% | 0.005% | 0.005% as a marketable security (state practice varies) |
| Typical use | Founders, FFF, ESOP exercise | Every institutional round | Structured deals, foreign parent funding, interim capital |
Why VCs default to CCPS
Because the protections attach to the share class itself. A 1x non-participating liquidation preference means the CCPS holder takes back invested capital before equity holders see anything in a sale or winding-up – then converts and participates if conversion value is higher. Anti-dilution lives in the conversion ratio: a down round adjusts how many equity shares each CCPS becomes (broad-based weighted average in nearly all Indian deals). Conversion is compulsory at a defined trigger – IPO, exit, or long-stop date – and the conversion formula must be fixed at issuance. Tax is friendly: conversion is not a transfer (s.70 of the Income-tax Act 2025, old s.47(xb)), the holding period counts from the CCPS allotment, and the eventual sale of converted shares gets the 12.5% unlisted LTCG rate after 24 months total. The negotiation layer on top of CCPS – preferences, ratchets, vetoes – is covered stage-wise in the seed and Series A guides.
Where CCD wins
CCDs are debt until conversion, and that is exactly their use case. Foreign parent funding a subsidiary: a CCD is an FDI equity instrument (if compulsorily convertible) yet pays a deductible coupon in the meantime – a tax-efficient bridge between equity and the ECB rulebook, popular with holding-company structures. Structured domestic deals: the coupon provides a return floor while keeping upside. No DPIIT gate: unlike convertible notes, any private company can issue CCDs. The costs: interest attracts TDS and (beyond limits, for related parties) thin-cap style disallowances; the deposit-rules exemption requires conversion within 10 years; and a debenture trustee plus charge filings apply to secured issues. One boundary matters above all for foreign investors – an optionally convertible debenture is not FDI at all; it falls into the ECB regime with its own borrower caps and pricing, a fundamentally different animal.
Plain equity: when simple is right
Founders’ shares, family money, ESOP exercises, and small angel cheques where nobody wants preference mechanics – plain equity keeps the cap table legible and the paperwork light. Its weakness is the flip side: every protection must be written into the SHA as a contract right, which binds signatories rather than travelling with the shares, and offers no liquidation waterfall. Sophisticated angels who accept equity usually do so with a proper SHA and tag-along cover.
Issuance mechanics (all three)
Private placement discipline applies regardless of instrument: special resolution, valuation report, PAS-4 offer (≤200 persons/FY), separate bank account, allotment within 60 days, PAS-3 within 15 days before using the money, registers and certificates, 0.005% stamp duty. CCPS adds s.55 compliance (20-year cap, dividend rate stated); CCD adds s.71 debenture provisions and trustee/charge requirements when secured. Foreign subscribers add the pricing certificate and FC-GPR within 30 days – per instrument, per allotment. Deadline discipline lives on the FEMA deadline calculator.
Quick chooser
Priced institutional round → CCPS. Valuation-deferred early money for a DPIIT startup → convertible note (its own instrument, covered separately). Foreign parent capitalising a subsidiary with interim yield → CCD. Founders/family/ESOP → equity. Small SAFE-style cheques → iSAFE on CCPS rails. The five-question interactive version is the instrument chooser.
Structuring an issue?
My Cloud Accountant drafts and files the whole stack – resolutions, valuation, PAS forms, FEMA reporting – for equity, CCPS and CCD issues.
Talk to an expertFrequently Asked Questions
Is tax payable when CCPS or CCD converts to equity?
No – conversion of both CCPS and CCDs into equity is expressly not a “transfer” (s.70, Income-tax Act 2025; old s.47(x)/(xb)). Cost carries over and the holding period includes the instrument period, so a 2024 CCPS converting in 2027 and sold in 2028 is long-term throughout.
Can CCPS carry votes?
Preference shares vote on matters directly affecting their class and on any resolution if their dividend is unpaid for two years (s.47(2), Companies Act). In practice, investor voting power is engineered through the SHA and reserved matters rather than through preference-share votes.
What happens if a CCD is not converted within 10 years?
The deposit-rules exemption assumes conversion within 10 years of issue – drafting a longer tenor risks the instrument being treated as a deposit under the Companies (Acceptance of Deposits) Rules, with serious consequences. In FEMA terms, failure to convert a compulsorily convertible instrument as scheduled is a contravention requiring regularisation. Fix the long-stop date well inside 10 years.
Which instrument should an NRI investor use?
All three are open. On a repatriation basis, CCPS/CCD carry the full FEMA overlay (pricing, FC-GPR). On a non-repatriation basis (Schedule IV) the investment is treated as domestic capital – the cleanest route for NRI angel money, including convertible notes under Rule 18(4).
Last reviewed: July 2026. Companies Act 2013 (ss.42, 55, 62, 71), FEM (NDI) Rules 2019 as amended, Income-tax Act 2025.