Compulsorily Convertible Debentures
Compulsory Convertible Debentures are the instruments which are recognised as debt initially till they are converted mandatorily in equity shares of the company. Any private limited company can issue CCD to any king of investors.
Who can issue CCD?
Any Private Limited company can issue CCD to foreign or Indian investors. There is not limitation like that of convertible notes where in only DIPP registered startups can issue convertible notes.
What is difference between Convertible Debentures and Convertible Notes?
CCD – Compulsorily Convertible Debentures | |
These are optionally convertible instruments which will or will not be converted at the choice of investor | These are mandatorily convertible instruments that should be mandatorily be converted in equity shares with 10 years |
Only DIPP registered start-ups can issue convertible notes | Any private limited company can issue CCD – convertible debentures |
The process to issue is very simple and can be issued in by just filing MGT 14 | The process is a bit tedious and takes around 20 days to complete the transaction |
This is more beneficial for investors as they have option to demand the money back | This is more beneficial for start-ups |
What are the steps / process / procedure to issue CCD to Indian Investors?
- Step 1 – Convene a board meeting for approval of issue of CCD to particular set of people. Get the valuation report from the registered valuer if the conversion price of CCD are predetermined.
- Step 2 – Decide on the terms of issue and prepare the CCD agreement with all the important terms
- Step 3 – Open a new bank account which will only be used for deposit of this subscription account
- Step 4 – Convene a extra ordinary general meeting of the shareholders for approval of offer and CCD agreement
- Step 5 – Issue the offer letter to the investors along with bank details.
- Step 6 – File the allotment form with MCA and issue the debenture certificates to the investors.
What are the steps / process / procedure to issue CCD to Foreign Investors?
- Step 1 – Convene a board meeting for approval of issue of CCD to particular set of people. Get the valuation report from the registered valuer if the conversion price of CCD are predetermined.
- Step 2 – Decide on the terms of issue and prepare the CCD agreement with all the important terms
- Step 3 – Open a new bank account which will only be used for deposit of this subscription account
- Step 4 – Convene a extra ordinary general meeting of the shareholders for approval of offer and CCD agreement
- Step 5 – Issue the offer letter to the investors along with bank details.
- Step 6 – File the allotment form with MCA and issue the debenture certificates to the investors.
- Step 7 – Get KYC and FIRC from bank.
- Step 8 – File FCGPRA with RBI.
Debentures as per the Companies Act 2013:
71. (1) A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption:
Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting.
(2) No company shall issue any debentures carrying any voting rights.
(3) Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed.
(4) Where debentures are issued by a company under this section, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures.
(5) No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed.
(6) A debenture trustee shall take steps to protect the interests of the debenture-holders and redress their grievances in accordance with such rules as may be prescribed.
(7) Any provision contained in a trust deed for securing the issue of debentures, or in any contract with the debenture-holders secured by a trust deed, shall be void in so far as it would have the effect of exempting a trustee thereof from, or indemnifying him against, any liability for breach of trust, where he fails to show the degree of care and due diligence required of him as a trustee, having regard to the provisions of the trust deed conferring on him any power, authority or discretion:
Provided that the liability of the debenture trustee shall be subject to such exemptions as may be agreed upon by a majority of debenture-holders holding not less than three-fourths in value of the total debentures at a meeting held for the purpose.
(8) A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue.
CCD Agreement – Download CCD agreement here
You can download free word template of CCD agreement here
FAQ - Frequently asked questions
Valuation is not required if you plan to convert the CCD at future valuation. But in case you have predetermined the conversion ratio then valuation report is required from a registered valuer.
Yes a separate bank account should be opened to receive the CCD proceeds.
The most important terms to be included in the agreement are:
- Conversion terms
- Tag along
- Drag along
There is no minimum interest to be given on CCD. Generally startups give 0.001% interest.