CCDs vs. OCPS: Understanding the Key Valuation Differences

Indian startups often raise capital using tools that sit between debt and pure equity. Compulsorily Convertible Debentures or CCDs and Optionally Convertible Preference Shares or OCPS are the two common tools. Founders and investors often treat these tools as the same at the term sheet stage. The two tools are valued in very different ways and this difference has real effects, on cap tables, tax filings and financial reporting.

What Each Instrument Actually Is

A CCD is a debt instrument that must convert into equity at a time based on terms set when it is issued. The conversion is required. Neither the issuer nor the holder can refuse it.

An OCPS on the hand gives the holder the choice to convert into equity but does not require it. The holder can decide to convert or keep the preference shares and continue receiving dividends and liquidation rights.

That one difference. Conversion, versus optional conversion. Is why these two instruments can't be valued in the same way.

Why CCDs Are Valued Closer to Debt-Plus-Equity

Since conversion is certain, a CCD is typically valued as a hybrid with two parts: a debt-like component reflecting interest payable until conversion, and an equity-like component reflecting the shares the holder will certainly receive at conversion.

This is usually approached through a bond-plus-option framework, or in more complex cases, a binomial or Monte Carlo model, particularly where the conversion ratio depends on a future funding round's pricing. Since conversion isn't optional, there's no need to separately value the "choice" to convert the exercise is really about pricing a guaranteed future equity position.

Why OCPS Require Genuine Option Valuation

An OCPS is fundamentally different, because converting or not is a real, economically meaningful choice — one depending on how the company's share price and prospects evolve.

This makes an OCPS genuinely comparable to a financial option, typically valued using Black-Scholes or a binomial model, treating the right to convert as a call option on the underlying equity. This optionality can be worth a lot, particularly in an early-stage company where future equity value is highly uncertain — the wider the range of plausible outcomes, the more valuable that choice tends to be.

Treating an OCPS as if conversion were guaranteed — the way a CCD is valued — will typically overstate its true value, since it ignores the real possibility that the holder chooses not to convert at all.

Why This Difference Matters in Practice

For Rule 11UA and tax compliance the method used must show the terms of the instrument. A CCD that is valued using an option-pricing model when conversion is required. Or an OCPS that is valued as if conversion was definitely going to happen. Can both lead to numbers that don't stand up if questioned.

For Ind AS reporting, classification as a financial liability, equity, or a compound instrument depends heavily on the specific conversion terms, which directly affects how it appears on the balance sheet and how its fair value is measured going forward.

FEMA pricing on -border investments, fair value at issuance and often at conversion must meet regulatory thresholds. If the methodology for an instrument is wrong FEMA pricing creates a genuine compliance gap, not just a methodology disagreement. The compliance gap shows that the methodology failed to meet thresholds, for that instrument.

For cap table modeling, particularly OPM-based allocation, correctly treating an OCPS's optionality versus a CCD's guaranteed conversion materially changes how value is allocated across share classes.

CCDs and OCPS may look similar on a term sheet, but they represent fundamentally different economic positions, requiring fundamentally different valuation techniques. A CCD's value centers on a guaranteed future equity position alongside its interim debt-like return. An OCPS's value centers on a genuine choice, worth more or less depending on how uncertain the company's future actually is.

Getting this distinction right is very important. At issuance and at every valuation date, after this distinction must be clear. This distinction is what separates a valuation from a valuation that only works until someone reads the conversion terms closely.