A Complete Guide on Compulsory Convertible Preference Shares (CCPS) & Optionally Convertible Preference Shares (OCPS)

A Complete Guide on Compulsory Convertible Preference Shares (CCPS) & Optionally Convertible Preference Shares (OCPS) will help you understand the difference between the two options for stat-ups

What Is A Compulsory Convertible Preferred Share (CCPS)?

A Compulsory Convertible Preferred Share, i.e., CCPS, is a form of preferred share where the holders are able to convert their shares to ordinary shares after a set period. A CCPS is valuable if the startup investors what to see how the company grows before becoming share holders of the company m  It’s the preferred stock of the companies that use it for fundraising and business valuation purposes. It allows investors to take part of startup growth story with being direct share holders

Compulsorily Convertible Preference Shares (CCPS) come into picture during the funding stage of any growing start-up.

CCPS is covered under the following legal provision under the Companies Act 2013

Example

Let’s say you wanted to convert an existing preferred price to USD 100 with a conversion ratio of five.

The conversion is not worth your while if the stock price is below USD 20. The conversion is exciting with an increase in the equity shares.

That means if the common shares escalate to USD 25, the preference shareholders will get USD 125 for each USD 100 preferred share.

If you invest USD 500 in the investment fund and the fund has an average of USD 25 as a return on equity, you will earn a 25% return.

There is a drawback to owning stocks. When the investor becomes a stockholder, even though the investor is not completely responsible of the company operations, he will be

If the price drops to $15 after the conversion, then you’ll lose money, but if the price goes to $25 before the conversion, then you will make

So, in this case, they will own one preferred stock of USD 75 for each preferred stock, and they won’t get any dividends. You could invest in OCPS, where the investor receives an option to convert the preferred shares into shares or not.

How Does CCPS Work?

CCPS is covered under the following legal provision under the Companies Act 2013

Section 55 , 62(1)(c) and rule 13(1) of share capital & debentures rules 2014 , describe the procedure for issuance of CCPS

Preference shares are converted into equity shares at a future date as per the provisions of the company law

Alternatives to CCPS

CCPS is a great way to diversify your portfolio but can also be a pain in the neck. That’s why you should consider other options that offer similar benefits without headaches.

These are:

ComPlusory Convertibles (CPC) CPCs are a type of convertible security, which means they can convert into both stocks and bonds. This makes them very attractive to investors who want to diversify their portfolios.

1.    Optionally Convertible Performance Shares (OCP)

OCPs allow you to invest in companies that have a performance track record. However, unlike most mutual funds, you don’t need to own all of the company’s shares to benefit from its success.

1.    Hybrid Funds (HYB)

HYBs combine mutual funds’ features with those of exchange-traded funds (ETF). They’re like hybrid cars, combining a conventional car’s fuel efficiency with an electric vehicle’s speed.

What Are Optionally Convertible Performance Shares (OCPS)?

Optionally convertible performance shares (OCPs) are securities that can be converted into another security but have no fixed value. The conversion is optional, so you can decide whether to convert the OCP into a different type of investment.

You can buy OCPS from stock market exchanges, such as the NYSE. However, you should ensure you understand how these investments work before investing.

If the capital instruments are not issued by the Indian company within sixty days from the date of receipt of the consideration, the amount so received has to be refunded to the person concerned by outward remittance, through banking channels.

Valuation of Optionally Convertible Preference Shares Requires Some Different Methodologies Like Option Pricing Model, Etc.

An Optionally Convertible preference Share is a type of preferred stock that pays dividends based on the company’s profits. In order to determine the price of an option, you need to use some kind of valuation model.

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