Issuing Compulsorily Convertible Debentures (CCDs) is a strategic financial decision often used by companies to raise capital while offering future equity to investors. This financial instrument, unlike traditional debt, converts into equity shares after a specified period or upon the occurrence of certain events. While CCDs are commonly used by startups and growing businesses seeking venture capital, their issuance requires strict compliance with legal and regulatory guidelines. Companies must follow a detailed checklist to ensure they meet all procedural and statutory requirements before issuing CCDs.
Understanding Compulsorily Convertible Debentures (CCDs)
What are CCDs?
CCDs are hybrid financial instruments that begin as debt but are mandatorily converted into equity shares after a specified time or on the fulfillment of certain conditions. These instruments offer an effective way for companies to raise funds without immediate equity dilution, and they appeal to investors expecting ownership stakes in the future.
Purpose of Issuing CCDs
Companies often issue CCDs for various strategic reasons, such as:
- Attracting long-term investment from venture capitalists or private equity firms
- Deferring equity dilution while securing immediate capital
- Aligning investor interests with the company’s growth
- Meeting funding requirements without increasing debt burden permanently
Checklist for Issue of Compulsorily Convertible Debentures
1. Board Approval
The first and most critical step in issuing CCDs is securing approval from the company’s board of directors. This includes the following actions:
- Convening a board meeting to approve the proposal to issue CCDs
- Drafting a resolution specifying the terms of the CCDs
- Authorizing directors to take necessary actions for issuance
2. Preparation of Offer Terms
Once board approval is obtained, the company must prepare detailed terms for the CCDs. This includes:
- Conversion ratio and time frame for conversion
- Interest rate applicable until conversion
- Rights attached post-conversion (e.g., voting rights, dividends)
- Valuation basis for determining conversion
3. Shareholder Approval
If the CCDs involve conversion into equity shares that may lead to significant shareholding changes or preferential allotment, shareholder approval is typically required through an extraordinary general meeting (EGM). Steps include:
- Issuing a notice to shareholders detailing the CCD proposal
- Conducting the EGM to pass a special resolution
- Filing the special resolution with the Registrar of Companies (RoC)
4. Valuation Report
In case of private placement, the company must obtain a valuation report from a registered valuer to justify the pricing and conversion terms of the CCDs. This is particularly important for companies receiving foreign investment under FEMA regulations.
5. Drafting and Executing Agreements
Legal documentation is an essential part of the CCD issuance process. The company must draft agreements such as:
- Subscription Agreement outlining terms of investment
- Shareholders’ Agreement (if applicable)
- Debenture Trust Deed (if trustees are appointed)
6. Compliance with Companies Act, 2013
Under Indian company law, the issuance of CCDs must comply with the relevant provisions of the Companies Act, 2013, including:
- Section 62(1)(c) for conversion of debentures into shares
- Section 71 for issuing debentures
- Private placement rules under Section 42
Additionally, the company must maintain a complete record of the private placement offer in Form PAS-5 and file relevant returns with the RoC using Form PAS-3.
7. FEMA and RBI Compliance (for Foreign Investment)
If the CCDs are subscribed by non-resident investors, the issuance must be in compliance with FEMA regulations and RBI guidelines, including:
- Adherence to sectoral caps and entry routes for FDI
- Pricing guidelines for convertible instruments
- Filing Form FC-GPR post-conversion with the RBI
- Obtaining KYC from AD banks
8. ROC Filings and Documentation
After the CCDs are issued, necessary filings must be made with the Registrar of Companies. These include:
- Filing of board resolution and special resolution (Form MGT-14)
- Return of allotment (Form PAS-3)
- Updating the register of debenture holders
- Issuance of debenture certificates within 6 months
9. Appointment of Debenture Trustee (if applicable)
For public issue of CCDs or when the issue exceeds a certain threshold, the appointment of a Debenture Trustee is mandatory. The trustee ensures protection of debenture holders’ rights and oversees compliance with terms of the debenture trust deed.
10. Conversion Process and Allotment
When the term for conversion matures or the triggering event occurs, the following steps are taken to convert CCDs into equity shares:
- Board resolution approving the conversion and allotment of equity shares
- Issuance of share certificates or dematerialization through a depository
- Filing the allotment return with RoC in Form PAS-3
- Updating shareholding structure in company records
Best Practices for Issuing CCDs
Maintain Transparency
Ensure that all parties involved clearly understand the terms and implications of the CCDs. Transparent documentation helps build investor trust and prevents future disputes.
Keep Accurate Records
Maintain accurate records of all board meetings, shareholder approvals, filings, and communication with investors. Proper documentation is crucial for regulatory compliance and audits.
Engage Professional Advisors
Consult legal, tax, and financial advisors to navigate complex regulatory frameworks and to structure CCDs in a manner that aligns with long-term business goals.
Common Mistakes to Avoid
- Issuing CCDs without proper valuation or pricing guidelines
- Failing to comply with FEMA/RBI regulations for foreign investors
- Overlooking critical ROC filings or deadlines
- Using ambiguous conversion terms, leading to future disputes
Issuing Compulsorily Convertible Debentures is a sophisticated financing tool that can help companies grow while managing equity dilution strategically. However, the process is governed by multiple layers of regulations, and non-compliance can lead to penalties or legal complications. A comprehensive checklist serves as a valuable guide for businesses planning to issue CCDs, helping them remain compliant and investor-ready. By following a structured approach and involving professional advisors, companies can unlock the full potential of CCDs as a flexible and future-focused capital-raising option.