Legal Process for Fundraising: Issuing CCPS to Investors

Updated: July 15, 2026Published: July 15, 2026

Quick Answer

Issuing Compulsorily Convertible Preference Shares (CCPS) allows startups to raise funds while protecting investor downside and delaying valuation disputes. The process requires conducting a private placement under Section 42 of the Companies Act, passing a Special Resolution, and filing Forms MGT-14 and PAS-3 on the MCA portal.

Table of Contents

Key Takeaways

  • CCPS differs from ordinary equity; it guarantees preference in dividends and liquidation, eventually converting into equity shares.
  • Fundraising must strictly adhere to the Private Placement rules under Section 42 of the Companies Act, 2013.
  • Investment funds must be received in a separate, dedicated bank account before allotment.
  • Foreign Direct Investment (FDI) via CCPS mandates compliance with FEMA and filing Form FC-GPR on the RBI's FIRMS portal.

Introduction

When a high-growth startup raises capital from Venture Capitalists (VCs) or Angel Investors, they rarely issue standard equity shares. Investors demand a hybrid instrument that protects their capital if the company struggles, but allows them to capture the upside if the company succeeds. The instrument of choice in the Indian startup ecosystem is Compulsorily Convertible Preference Shares (CCPS). Unlike standard equity, CCPS grants investors preferential rights during liquidation and dividends, automatically converting into equity shares at a pre-agreed milestone or valuation. Issuing CCPS is a highly technical legal procedure; failing to comply with the Companies Act, 2013, can invalidate the funding round and attract massive regulatory penalties.

Applicable Laws & Sections

The issuance of CCPS is heavily regulated to prevent corporate fraud and money laundering.

  • Section 42 (Private Placement): Dictates the rules for issuing securities to a select group of persons (maximum 200) rather than the general public.
  • Section 62(1)(c) & Section 55: Governs the issuance of preference shares and the preferential allotment of shares, requiring the company to meet specific disclosure norms.
  • Foreign Exchange Management Act, 1999 (FEMA): If the VC or angel is a foreign entity, the pricing and reporting of the CCPS must comply with RBI regulations.

Step-by-Step Process for Issuing CCPS

A Private Limited Company cannot simply accept money and hand over shares. The process must follow a strict statutory sequence:

  1. Valuation Report: Obtain a valuation report from an IBBI-registered Registered Valuer to determine the fair market value of the shares.
  2. Board Approval: Convene a Board Meeting to approve the valuation, draft the Private Placement Offer Letter (Form PAS-4), and call an Extraordinary General Meeting (EGM).
  3. Shareholder Approval (Special Resolution): Convene the EGM and pass a Special Resolution (requiring 75% majority) authorizing the CCPS issuance.
  4. RoC Filing (Form MGT-14): File Form MGT-14 on the MCA V3 portal within 30 days of passing the Special Resolution to officially record the shareholder mandate.
  5. Circulate Offer Letter & Open Bank Account: Issue Form PAS-4 to the investors. The company must open a separate, dedicated bank account solely for receiving the subscription money.
  6. Allotment and Final Filing: Once the money hits the separate account, the Board must meet again to officially allot the CCPS within 60 days. Finally, the company must file a Return of Allotment in Form PAS-3 with the RoC within 15 days of allotment.

Practical Tips: Preserving Fundraising Evidence

Due diligence by subsequent investors will scrutinize every prior funding round. You must maintain impeccable records:

  • Executed Agreements: Keep stamped, signed copies of the Term Sheet, Share Subscription Agreement (SSA), and Shareholders' Agreement (SHA).
  • AoA Entrenchment: Ensure that the rights attached to the CCPS (liquidation preference, anti-dilution, conversion ratio) are strictly incorporated into an amended Articles of Association (AoA).
  • Filing Receipts: Maintain the SRN (Service Request Number) receipts and challans for Forms MGT-14 and PAS-3. Without PAS-3 approval, the company cannot legally utilize the raised funds.
  • Statutory Registers: Immediately update the Register of Members (Form MGT-1) to reflect the new CCPS holders.

When Should You Consult a Corporate Lawyer?

Issuing CCPS is not a DIY task. You must engage a specialized startup lawyer when:

  • Negotiating the SHA: VCs embed complex clauses like "Full Ratchet Anti-Dilution," "Drag-Along rights," and "Board Observer" rights. A lawyer must protect the founders' operational control and equity from severe dilution.
  • FDI Compliance: If receiving funds from a foreign VC, the transaction falls under FEMA. A lawyer and Company Secretary must manage the RBI pricing guidelines and successfully file Form FC-GPR on the RBI's FIRMS portal within 30 days of the CCPS allotment.
  • Cap Table Management: Differentiating the conversion ratios of CCPS from existing ESOP pools and equity shares requires precise legal and financial alignment.

Conclusion

Compulsorily Convertible Preference Shares (CCPS) provide the ultimate structural flexibility required by institutional investors, making them the standard currency of startup funding. However, the legal mechanics of issuing CCPS demand absolute adherence to the Private Placement rules under Section 42 and Section 62 of the Companies Act, 2013. By strictly following the sequence of Board and Shareholder Resolutions, isolating funds in a separate bank account, and promptly filing Forms MGT-14 and PAS-3, startups can seamlessly close their funding rounds while remaining in perfect standing with the Ministry of Corporate Affairs.

Frequently Asked Questions

Q: Can a Limited Liability Partnership (LLP) issue CCPS to investors?

A: No. An LLP does not have a share capital structure and therefore cannot issue CCPS, Equity Shares, or ESOPs. Startups must be incorporated as a Private Limited Company to issue CCPS.

Q: Can we use the investment money before filing Form PAS-3?

A: Absolutely not. Under the Companies Act, 2013, a company cannot utilize the funds raised through private placement until the Return of Allotment (Form PAS-3) has been successfully filed with the Registrar of Companies.

Q: What happens if we fail to allot the shares within 60 days of receiving the money?

A: If the CCPS are not allotted within 60 days of receiving the subscription money, the company is legally obligated to refund the entire amount within the next 15 days. Failure to do so attracts severe interest penalties and regulatory action.

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