CCD Rounds: What, When, How?

A number of startups seem to be doing “CCD Rounds”. What exactly are they? How are they different from a regular funding round? “CCD” is short for “compulsorily convertible debentures”. CCDs are one of the types of instruments that foreign investors are permitted to invest in as FDI (under exchange control laws, CCDs are considered as ‘equity instruments’) 

A CCD Round, as the phrase is commonly used, is essentially an unpriced round. In an unpriced round, the exact pricing of the investment is usually deferred to the next round of financing (i.e., the valuation of the CCDs will be determined based on the valuation at which the next round of funding is raised by the Company). At the time of valuation determination, the CCD is usually converted to convertible preference shares (CCPS), along with the CCPS issued in the next round. 

Wait a minute…but this sounds kinda like a SAFE or a convertible note, doesn’t it? Yep, you got that right! CCD rounds, as they are structured in the current market, have some of the integral attributes of convertible notes, such as deferring the determination of valuation, pricing based on the valuation of the next round, etc. What then distinguishes CCDs from convertible notes? 

Like we discussed in our previous post, under Indian corporate law and exchange control laws, three essential conditions for issuing convertible notes are: 

• Company should be registered as a startup with the DPIIT (Department for Promotion of Industry and Internal Trade).
• Each convertible note issued should be of a value of at least Rs. 25 lakhs (i.e., each individual investor in a convertible note round should invest a minimum of Rs. 25 lakhs).
• Convertible notes may be converted only into equity shares, and not preference shares (such as CCPS).

In addition to the above, a convertible note/SAFE needs to be converted to equity shares within 5 years of issuing them. 

CCDs on the other hand, can be issued without meeting any of the above criteria. In a CCD round where the investor(s) is a VC fund, an important reason why CCD is preferred over convertible notes is the fact that CCDs can be converted into CCPS while convertible notes need to be converted into equity shares. Funds prefer holding their investments in CCPS given the liquidation preference rights (the right to be paid before equity shareholders get paid in a liquidity event such as an exit) that are attached to CCPS. CCD rounds are also witnessed in smaller fund raises in very early stage companies where the investor(s) and founders want to defer valuation discussions. Typically the reason is that all participating investors might not be investing at least Rs. 25 lakhs. 

Greater flexibility of post conversion instruments and non-applicability of minimum investment amount requirement does make the CCD structure a more flexible structure vis-à-vis convertible notes, in an unpriced round. However, in contrast to convertible notes, issuing CCDs is process heavy and requires a formal valuation report (from a registered valuer, and if there are foreign investors in the round, from a chartered accountant/merchant banker) for legal compliance purposes. CCDs, therefore, end up being costlier to issue than convertible notes.

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JoyceLaw is a boutique corporate law firm with a special focus on the startup ecosystem. JoyceLaw represents several founders and startup companies who are at various stages of their lifecycle. We routinely work with our clients in a broad range of matters including fund raise, structuring and documentation of strategic initiatives and partnerships, business structuring, general corporate and commercial matters, ESOPs, regulatory compliance, etc. If you would like to know more about topics discussed in this article, please reach us at [email protected]