B Hari

April 24, 2024

Why CCPS is preferred over CCD by some investors .


Features of Compulsorily Convertible Preference Shares (CCPS)

  1. Hybrid Nature: CCPS are a blend of equity and debt, providing fixed dividends like preference shares and converting into equity shares under predetermined conditions.
  2. Anti-Dilution: These instruments safeguard investors from equity dilution when new shares are issued, which is particularly useful during funding rounds where the company valuation might increase.
  3. Preferential Rights: CCPS investors typically have priority in dividends and the distribution of assets in the event of liquidation, over common equity shareholders.
  4. Fixed Returns and Conversion Benefits: CCPS offer fixed returns until conversion, and investors can benefit from potential equity appreciation upon conversion. This combination of fixed income and growth potential makes CCPS attractive.
  5. Regulatory Compliance: The issuance of CCPS is well-regulated under various laws, including the Companies Act , ensuring investor protection.

Features of Compulsorily Convertible Debentures (CCD)

  1. Debt Instrument: CCDs are debt instruments mandatorily convertible into equity shares at the end of a specified period. They do not provide dividend benefits but might carry a higher interest rate compared to CCPS.
  2. Conversion Terms: The conversion terms are generally fixed at the time of issuance, which may result in conversion at a less favorable rate if the company’s stock performs well.
  3. Risk of Default: As a debt instrument, CCDs carry the risk of default. If the company underperforms, investors might end up converting their debt into equity of lesser value.
  4. Lack of Preferential Rights: Unlike CCPS, CCD holders generally do not have preferential rights in dividends or liquidation, putting them at a disadvantage during financial distress.

Why CCPS May Be Considered Better

  • Risk Mitigation: CCPS better mitigate risk by offering fixed dividends and conversion into equity, which can potentially increase in value. This is preferable in volatile markets where the stability of fixed returns combined with the opportunity for equity appreciation is valued.
  • Investor Protection: The preferential rights associated with CCPS, such as priority in dividends and liquidation, provide a layer of protection to investors, making it a safer option during economic downturns or company insolvency.
  • Regulatory Framework: The structured regulatory framework governing CCPS issuance promotes transparency and compliance, enhancing investor confidence in the company's governance.
  • Flexibility and Control: CCPS offer investors more control over their investment. They can benefit from the company’s growth due to the equity feature and still enjoy the fixed income from dividends until conversion.

In conclusion, while CCPS and CCD each have their merits, CCPS often stand out as a better option for investors seeking a mix of fixed income and growth potential, along with higher security and preferential rights in the company’s capital structure. This makes CCPS particularly attractive to investors who are cautious but also seek to benefit from the company’s potential upside.

Compiled using AI tools . Please ensure you validate this information with experts , before applying it for your transaction.

B Hari

Simplicity with substance
www.bhari.com