Compulsory Convertible Debentures (CCDs) in India: A Founder’s Guide

Compulsory convertible debentures, or CCDs, are debt instruments that must convert into equity shares. They are not repayable in cash: conversion is mandatory, either on a fixed date or on a defined trigger such as the next funding round. That single feature is why they have become the standard instrument for structured investment into Indian private companies.

CCDs sit in an unusual position. Under the Companies Act they are debentures. Under India’s foreign exchange rules they are treated as equity. Understanding that split is the whole of the subject, because it determines who can invest, at what price, and what you must file. This guide covers the structure, the legal framework, how CCDs compare with the alternatives, and where founders get caught. It sits under our business valuation practice because the conversion price is a valuation question before it is a legal one.

What a CCD actually is

A CCD is a hybrid. The investor puts in money as debt, may earn interest during the holding period, and then receives equity shares instead of repayment. The company never returns the principal in cash.

The commercial appeal is symmetrical. The investor gets downside protection while the business proves itself, ranks ahead of equity until conversion, and may earn a coupon. The founder defers the dilution and, more importantly, defers fixing a valuation to a point where the company is easier to value. Neither side has to agree today what the business is worth.

The legal framework

Companies Act, 2013

CCDs are debentures under section 71, read with the Companies (Share Capital and Debentures) Rules, 2014. Two points matter most:

• Conversion must happen within 10 years of issue. There is no such thing as a perpetual CCD.
• Issuing them to a specific investor is a preferential allotment under section 62, which requires board approval, a special resolution of shareholders, and a valuation report supporting the price.

On the filing side: Form MGT-14 for the special resolution, and Form PAS-3 within 30 days of allotment. A further PAS-3 is required when the CCDs actually convert and shares are issued. Debentures also require an entry in the register of debenture holders.

FEMA, and why it is the more important half

Under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, “debentures” means fully, compulsorily and mandatorily convertible debentures, and those are classified as capital instruments, on par with equity shares.

The consequence is large. When a non-resident subscribes to CCDs of an Indian company, the money is foreign direct investment, not external commercial borrowing. FDI is comparatively straightforward: it is subject to sectoral caps and pricing rules but not to the maturity, end-use and all-in-cost restrictions that make ECB genuinely difficult. This is the single biggest reason CCDs dominate foreign-investor deals into India.

The trade-off is the pricing rule. Where a non-resident is involved, the conversion price, or a formula that determines it, must be fixed upfront at the time of issue, and the price at which the shares are eventually issued cannot be below the fair market value determined at that time. You cannot leave conversion economics open and settle them later, which is precisely what an optionally convertible instrument would allow. Partly convertible or optionally convertible debentures fall outside the capital-instrument definition and are treated as debt, which drags them into the ECB framework.

CCDs compared with the alternatives

In practice the choice is usually between a CCD and a convertible note. Notes are simpler and faster and suit the earliest rounds; India also has a specific convertible note regime available to recognised start-ups with its own minimum investment and tenure conditions. CCDs suit larger cheques, institutional investors, and any situation where a foreign investor wants the certainty of capital-instrument treatment. The iSAFE note is a third option that has become common at the pre-seed end.

How the conversion ratio actually works

A worked example. An investor puts ₹5 crore into a company through CCDs, with conversion at the next qualified round at a 20 percent discount to that round’s price, subject to a valuation cap of ₹60 crore pre-money.

• Eighteen months later the company raises a Series A at a ₹100 crore pre-money valuation, with a share price of ₹1,000.
• Discount route: 20 percent off ₹1,000 gives ₹800 a share, so ₹5 crore converts into 62,500 shares.
• Cap route: the ₹60 crore cap against the same share count implies roughly ₹600 a share, so ₹5 crore converts into about 83,333 shares.
• The investor takes whichever is more favourable, here the cap, giving them a materially larger holding than the new money at the same round.

Two things follow, and founders regularly miss both. First, the cap is doing far more work than the coupon; arguing over 2 percent of interest while conceding a low cap is the wrong negotiation. Second, the dilution lands on the founders, not on the incoming Series A investor, because conversion happens at or immediately before the round. Model the fully diluted cap table after conversion before you sign, not after. Our guide to pre-money vs post-money valuation covers the arithmetic that makes this bite, and where a foreign investor is involved the fixed-formula requirement above constrains how much of this can be left open.

Where founders get caught

• Treating a CCD as a loan they might repay. They cannot. Conversion is compulsory, and there is no version of the instrument where the company hands the money back and keeps the equity.
• Leaving the conversion formula vague with a foreign investor on the register. The formula must be fixed at issue. Fixing it later is a FEMA problem, not a drafting inconvenience.
• Missing the valuation report. A preferential allotment needs a valuation supporting the price. Issuing materially below fair value creates consequences for the recipient, and the report is what evidences the position either way.
• Ignoring the accounting. A CCD is not simply a liability. Under Ind AS the instrument is split into its liability and equity components, which affects reported leverage and therefore covenant headroom. If your lender tests debt-to-equity, find out how the CCD is classified before you issue it.
• Stacking CCDs across rounds without modelling the total. Three tranches on three different caps converting at once has produced more unpleasant cap-table surprises than any other instrument we see.
• Forgetting the 10-year wall. Rare, but a CCD that has not converted at year ten is a genuine problem with no clean answer.

Both the tax treatment of the coupon and the treatment on conversion need specific advice for your structure, and they are outside the scope of this article. The underlying statutory text is published by the Ministry of Corporate Affairs, and the FEMA rules by the Reserve Bank of India.

The bottom line on CCDs

Compulsory convertible debentures let an investor take equity-like exposure with debt-like protection, and let a founder defer both the dilution and the valuation argument. They are debentures under the Companies Act and capital instruments under FEMA, which is what makes them the default structure for foreign investment into Indian companies. The terms that decide the outcome are the conversion price and the cap, not the interest rate, and the dilution when they convert falls on the founders. Model the post-conversion cap table before you sign, not after.

Raising through CCDs and want the conversion economics and the post-conversion cap table modelled before you agree terms? KayOne Consulting supports founders through structuring and fundraising as part of fractional CFO engagements. See if we’re a fit