Compulsory convertible preferred shares (CCPS) & equity shares

Compulsory convertible preferred shares (CCPS) & equity shares

Subject: Economy

Context:

IRDAI has rejected a proposal to convert a company’s holdings in compulsory convertible preferred shares (CCPS) into equity shares.

Details:

• In June 2022, Digit Insurance and Fairfax Financial Holdings applied to the IRDAI for approval to convert the company’s holdings in compulsory convertible preferred shares issued by Go Digit Infoworks into equity shares of Go Digit Infoworks.
• The conversion of the Digit CCPS would result in Digit (currently classified as an Indian promoter of Digit Insurance) becoming a subsidiary of the company, which is currently prohibited for Indian promoters.

 Compulsory convertible preferred shares (CCPS) 

• These are types of Preference Shares being issued by the Company
  • Preference shares (preferred stock) are company stock with dividends that are paid to shareholders before common stock dividends are paid out.
  • There are four types of preferred stock – cumulative (guaranteed), non-cumulative, participating and convertible.
• CCPS offer fixed income to the investors and compulsorily convert into Equity Shares of the issuing company after a predetermined period. The terms of conversion are also pre-decided at the time of issue.
• These offer investors the opportunity to participate in the growth of companies while mitigating the risk of lower valuation of companies that underachieve the targets.
•  Issuing CCPS further benefits the Company’s promoters to raise funds without diluting the ownership at the initial period.
• Following are the steps required to followed for the Conversion of Compulsory Convertible Preference Shares into Equity Shares:
  • Call Board Meeting of the Board of Directors of the Company
  • Hold the Board Meeting and pass Board Resolution f
  • E-forms Filing with the Registrar of the Companies-for intimation of redemption of preference shares which are converted into equity shares
  • Issue of Share Certificates-To all allottees within a period of 2 months from the date of allotment of Equity Shares
  • Maintenance of Statutory Registers
• It is crucial not only for the start-up founders but also for the investors to find the best way to become a part of the company so that not only both benefit out of it but also safeguard their interests.