The two kinds of share capital
Under Section 43 of the Companies Act, 2013, the share capital of a company limited by shares is of two kinds: equity share capital and preference share capital. Understanding the difference is essential to reading any Indian cap table.
Equity shares, also called common shares, are what founders and employees hold. They carry voting rights, a residual claim on the profits and assets of the company, and they sit last in the queue if the company is wound up or sold. Upside and risk both concentrate here.
Preference shares carry, as the name suggests, preferential rights: a preferential entitlement to dividend, and a preferential right to the return of capital ahead of equity holders on a winding up. Investors value this because it gives them downside protection while still allowing them to share in the upside on conversion.
It is worth noting that the exact bundle of rights attached to a preference share is set out in the company's articles of association and the shareholders' agreement, not left to a standard template. Two CCPS instruments issued in different rounds can therefore look similar on the cap table yet carry quite different economics and control terms, which is why reading the underlying documents matters as much as reading the share count.
Why Indian priced rounds use CCPS
When an Indian startup raises a priced round, the investment is almost always structured as compulsorily convertible preference shares, or CCPS. These are preference shares that must convert into equity shares at a future trigger, such as the next priced round, an initial public offering, or a fixed date, at a pre-agreed conversion ratio. Conversion is mandatory, not optional.
The dominant reason is foreign exchange regulation. Under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, only fully and mandatorily convertible instruments are treated as equity instruments eligible for foreign direct investment under the automatic route. Instruments that are optionally convertible or redeemable are treated as debt and fall under the external commercial borrowing framework, which is heavily restricted. Because most venture capital into India involves foreign money, CCPS is the clean, compliant way to bring it in.
What the preference rights actually contain
Sitting on top of the CCPS are the commercial terms that define the investor's protection. These commonly include:
- A liquidation preference, which sets who gets paid first at an exit. A one times non-participating preference, meaning the investor takes the higher of their money back or their pro-rata share, is the market standard for a clean round in India.
- Anti-dilution protection, which adjusts the conversion ratio if a later round is done at a lower price.
- A dividend preference, and various governance or veto rights over key decisions.
Because conversion is compulsory, the eventual equity structure is knowable in advance, which actually helps founders plan the cap table. On a fully-diluted basis, CCPS are always counted as if already converted into equity.
A common point of confusion
Do not confuse compulsorily convertible preference shares with ordinary redeemable preference shares, which are repaid in cash rather than converted into equity. In the startup context the instrument you will see almost universally is the CCPS, precisely because it behaves as equity for regulatory purposes while carrying the preferential economics an investor needs.