Compulsory Convertible Preference Shares
Compulsory Convertible Preference Shares (CCPS) are a type of financial instrument that mix features of both stocks and loans. Valuing CCPS can be tricky because they can be converted to shares.
How are these shares converted to equity? If the company performs well, it might set a higher value per share for conversion, meaning investors get fewer shares. If the company doesn’t do well and conversion is near, more shares at a lower value will be given, which can dilute the owner’s share.
To protect both the company and investors, a cap and floor are set at the start of the contract. This way, both parties know the limits on share value. Until the shares are converted, it's safest to value CCPS at their original cost, not higher. These features make CCPS a good investment by balancing potential returns and risk.
CA L.Muralidharan and CPA L.Mukundan
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