Compulsorily convertible preference shares (“CCPS”) and compulsorily convertible debentures (“CCDs”) are common instruments in venture capital and private equity investments. The valuation of these instruments is required for the pricing, the FEMA compliance, and the accounting.
The Valuation
The valuation of a CCPS or a CCD must determine the fair value of the instrument, considering the conversion terms, the dividend or interest, the conversion ratio, and the risk. The registered valuer must apply the methodology that is appropriate to the instrument, and it must explain the assumptions.
The Conversion Price
The conversion price must be fixed upfront in the offer document, based on the valuation report, and it cannot be deferred to the time of conversion. The conversion price is subject to the FEMA pricing guidelines, and the price must not be lower than the fair market value determined under the rules, unless the RBI’s approval is obtained.
The FEMA Interface
The issue of CCPS or CCDs to a non-resident is subject to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. The pricing must comply with the rules, and the instrument must be issued in accordance with the sectoral caps and the reporting requirements. The conversion must also comply with the FEMA, and the shares issued on conversion must be reported.
A technically sound CCPS or CCD valuation fixes the conversion price upfront, complies with the FEMA pricing guidelines, and is supported by a registered valuer’s report.
Call to Action
Anuj Desai & Associates advises companies and investors on the valuation of CCPS and CCDs—from the conversion price and the valuation report to the FEMA pricing and the reporting. If you are issuing convertible instruments, we can help you structure the valuation.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
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