How to Issue Compulsorily Convertible Debentures (CCDs): A Simple Guide
Contributed by: Pooja
Jain
Email id: pooja@simplybiz.in
Compulsorily Convertible Debentures (CCDs) are a popular instrument for raising funds, especially for startups and companies seeking flexible financing options. They are debt instruments that mandatorily convert into equity shares after a specified period or upon the occurrence of certain events.
Startups often face a tough choice between equity, which dilutes ownership, and debt, which comes with high-interest obligations that may be hard to manage in the early stages. To strike a balance, many turn to Compulsorily Convertible Debentures (CCDs), a hybrid instrument that starts as debt and converts into equity at a later date. CCDs are appealing to startups as they typically carry little to no interest, easing financial pressure, while investors prefer them for the liquidity preference they offer over equity until conversion, ensuring both security and potential returns.
Here’s a clear and concise walkthrough of the process for issuing CCDs:
Step-by-Step Process for Issuing CCDs:
- Draft the Term Sheet:
The term sheet is a document summarizing the key terms and conditions agreed upon between the company and the investors. It acts as the foundation for the CCD issuance.
2. Draft the CCD Agreement
A detailed agreement is prepared outlining the terms of the CCDs, including the conversion mechanism, rights, and obligations of both the company and investors.
3. Open a Separate Bank Account
A dedicated bank account must be opened to receive the investment amount. This ensures transparency and compliance with regulatory requirements.
4.Obtain a Valuation Report
A valuation report determines the fair value of the company, which is essential for setting the conversion price or formula.
Domestic Investors: Obtain the report from a Registered Valuer.
Foreign Investors: Obtain the report from a Chartered Accountant.
Note: The conversion price or formula can be fixed either at the time of issue or at the time of conversion, Thus, the valuation report can be obtained either at the time of issue if conversion price or formula is fixed at the time of issue or at the time of conversion, if the conversion price or formula is to be fixed at the time of conversion. In most cases, including our example, it is obtained during the issuance phase.
5. Convene a Board Meeting
A board meeting is called to approve the issuance of CCDs. Necessary resolutions are passed during this meeting.
6. Hold an Extraordinary General Meeting (EGM)
Shareholders’ approval is required for issuing CCDs. An EGM is held to obtain this approval.
7. File Form MGT-14
This form is filed with the Registrar of Companies (RoC) to register the special resolution passed in the EGM.
8. Circulate PAS-4 (Letter of Offer)
The company sends a letter of offer (Form PAS-4) to the investors, detailing the terms of the CCDs and other relevant information.
9. Convene a Board Meeting for Allotment
Once the investment amount is received, another board meeting is held to approve the allotment of CCDs.
10. File Form PAS-3
The company must file Form PAS-3 with the RoC to record the allotment of CCDs.
11. Issue CCD Certificates
Finally, the company issues CCD certificates to the investors as proof of their investment and stamp duty is paid on these certificates as per prevailing stamp duty rates.
Key Features of CCDs:
- Extended Conversion Period
CCDs can have a conversion period of up to 10 years, offering flexibility to the company and investors.
2. Fixed Conversion Price or Formula
The conversion price or formula may be determined and fixed at the time of issuance, providing clarity and reducing uncertainties.
3. Zero-Coupon Option
CCDs can be structured as zero-coupon instruments, meaning no mandatory interest payment during the tenure. This reduces the financial burden on the company.
Additional Compliance for Foreign Investors
If the investors include foreign entities, the following steps are mandatory:
- Create an Entity User on RBI FIRMS Portal
Register the company on the RBI’s FIRMS portal to comply with foreign exchange regulations.
2. Update the FIRMS Entity Master
Ensure that all company details are updated in the entity master section on the FIRMS portal.
3. Create a Business User on RBI FIRMS Portal
Appoint a business user to file foreign investment-related forms on the portal.
4. File Form FCGPR
File Form FCGPR (Foreign Currency-Gross Provisional Return) within 30 days of CCD allotment to report the foreign investment.
Conclusion
Issuing CCDs involves a well-structured process and regulatory compliance, particularly when foreign investors are involved. However, their flexibility in conversion terms and potential tax benefits make them a preferred choice for companies. By following the outlined steps and ensuring timely filings, companies can unlock the full potential of CCDs as a financing tool.
If you’re looking for advice on the right instrument for your company, then please get in touch with our SimplyTransact team of SimplyBiz for proper advisory and effective execution through digital workflow and dashboard for easy communication.
Please reach out to us at the mail ID SimplyTransact@simplybiz.in to know more.
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