CCD Valuation India 2026: Companies Act, FEMA Pricing & Conversion Formula

CCD valuation India is not simply a question of applying a DCF to a debenture. For compulsorily convertible debentures, finance teams have to separate three questions: what the underlying equity is worth, how the conversion formula determines the number of shares, and which Companies Act or FEMA pricing rules apply to the issue. For a foreign investor, this distinction becomes especially important because fully, compulsorily and mandatorily convertible debentures are treated as equity instruments under the RBI foreign-investment framework, and the conversion price or formula must be fixed upfront subject to the applicable fair-value floor.

CCD Valuation India: the practical framework

A CCD starts legally as a debenture but is designed to convert mandatorily into equity. That means an economic valuation often has to look through the instrument to the equity that will ultimately be issued. The valuer and transaction team should therefore map the conversion date, conversion ratio or formula, coupon or accrued return, valuation cap or discount if any, anti-dilution terms, liquidation or preference-like rights, investor protections and any event that changes the number of resultant shares.

The compliance answer is not always the same as the economic-value answer. A registered valuer may be determining the price of securities or resultant equity shares for a Companies Act preferential issue, while a foreign-investment analysis may separately test whether the conversion formula satisfies FEMA pricing rules. A fundraising model may then estimate dilution and post-money ownership. Treating all three as one number is a common source of documentation errors.

1. Companies Act valuation for CCDs

Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 covers preferential offers by unlisted companies and expressly includes fully convertible debentures, partly convertible debentures and other securities convertible into equity. The rule requires pricing on the basis of a registered valuer report for preferential issues. For convertible securities, the rules also provide a mechanism for determining the price of the resultant shares either upfront at the time of the offer or later near the date when the holder becomes entitled to apply for shares, provided the company chooses the applicable route at the time of the offer and makes the required disclosure.

This makes the issue documentation important. The explanatory statement, special resolution, private-placement documents and valuation report should not describe different conversion economics. The valuation date, relevant date, equity value, share count and conversion assumptions should reconcile with the term sheet and board/shareholder approvals.

2. FEMA pricing where the CCD investor is non-resident

The RBI Master Direction on Foreign Investment in India treats debentures that are fully, compulsorily and mandatorily convertible as equity instruments. Debentures that are not fully and compulsorily convertible are generally treated as debt instruments instead, bringing a different regulatory framework into play.

For an unlisted Indian company issuing convertible equity instruments to a person resident outside India, the RBI framework requires the price or conversion formula to be determined upfront. The price at conversion cannot be lower than the fair value worked out at the time of issuance under the applicable FEMA pricing methodology. The same framework also states that foreign-investment instruments with optionality cannot provide an assured exit price. Therefore, a commercially attractive conversion discount has to be drafted around the regulatory floor rather than treated as an unrestricted pricing promise.

If all investors are resident in India, the FEMA foreign-investment pricing rule is not the governing test. Companies Act requirements, the terms of issue, accounting and tax consequences still need their own review.

3. What should actually be valued?

A robust CCD valuation usually begins with the fully diluted equity value of the company and then translates that value into the economics of the instrument. Depending on the terms, this can be straightforward or highly scenario-dependent.

• Underlying equity value: estimate the fair value of the company using an appropriate income, market or asset approach, considering stage, profitability, forecasts and comparable evidence.

• Conversion price: determine the contractual price or formula that converts the CCD principal and, where applicable, accrued amounts into equity shares.

• Dilution: model the post-conversion share count, including existing shares, ESOP pool, other convertibles, CCPS, warrants and any agreed pre-money or post-money treatment.

• Rights and protections: identify whether anti-dilution, conversion resets, participation rights or other terms alter the economics from a plain equity-equivalent instrument.

• Regulatory floor: where FEMA applies, test the contractual conversion formula against the fair-value floor determined at issuance rather than relying only on the future round price.

CCD valuation worked example: conversion discount with a FEMA floor

Consider an illustrative unlisted Indian company raising ₹10 crore from a non-resident investor through fully and compulsorily convertible debentures. Assume the equity valuation at issuance supports a fair value of ₹100 per equity share. The CCD terms say that conversion will occur at a 20% discount to the price of the next qualified equity round, but never below the applicable regulatory floor fixed at issuance. This is only an illustration; actual documentation and valuation may require additional adjustments.

Scenario A: the next round is priced at ₹150 per share. A 20% discount gives a contractual conversion price of ₹120. Because ₹120 is above the ₹100 issuance-date fair-value floor, the ₹10 crore principal would convert into approximately 8.33 lakh shares, before considering any coupon or other contractual adjustment.

Scenario B: the next round is priced at ₹110 per share. A 20% discount would mathematically produce ₹88. If the FEMA floor applicable to the transaction is ₹100, the conversion cannot simply be implemented at ₹88. The floor becomes ₹100, resulting in 10 lakh shares for the ₹10 crore principal, again ignoring any interest or other adjustments for simplicity.

The example shows why valuation and legal drafting must be coordinated before money is received. A term sheet that promises an uncapped future discount can create a conversion outcome that the regulatory pricing framework does not permit.

4. Valuation methods for the underlying equity

There is no single mandatory commercial method for every CCD valuation. The method should fit the business and the purpose of the valuation. A mature cash-generating company may support a DCF with market-multiple cross-checks. A startup with volatile forecasts may require greater reliance on recent arm's-length transactions, scenario analysis or market evidence. An asset-heavy company may need an asset approach as an important cross-check.

Where DCF is used, the valuer should make the forecast period, revenue and margin assumptions, working-capital requirements, capital expenditure, discount rate and terminal assumptions explicit. A conversion formula should not be reverse-engineered merely to achieve the desired investor ownership percentage. The ownership outcome is a result of the negotiated economics and compliant valuation inputs, not a substitute for them.

5. CCD valuation checklist for CFOs and founders

• Confirm whether the CCD is fully and compulsorily convertible; do not assume an optionally or partially convertible debenture receives the same FEMA treatment.

• Reconcile the term sheet, board papers, special resolution, PAS-4/private-placement documents and final debenture terms.

• Define the conversion date, price or formula, treatment of accrued coupon, rounding and the exact fully diluted share-count convention.

• Identify whether the investor is resident or non-resident and apply the relevant FEMA pricing and reporting framework where foreign investment is involved.

• Obtain the required registered valuer report for the Companies Act purpose and clearly identify the valuation date, purpose, standard, methods and assumptions.

• Model dilution across CCDs, CCPS, ESOPs, warrants and other convertibles before approvals are signed.

• Check whether future fundraising discounts, valuation caps or anti-dilution clauses can breach the regulatory floor or create inconsistent outcomes.

• Maintain the valuation report, cap table, approvals, remittance evidence and conversion workings in the transaction data room.

6. Common CCD valuation mistakes

The first mistake is valuing the CCD as if it were a normal non-convertible bond even though the instrument must convert into equity. The second is focusing only on the future conversion price without establishing the equity fair value and regulatory floor at issuance where required. The third is using a valuation report with one share count while the transaction model uses a different ESOP pool or fully diluted capital base.

Other recurring errors include leaving the conversion formula ambiguous, failing to specify whether accrued coupon converts, ignoring other outstanding convertibles, assuming Companies Act and FEMA rules are interchangeable, and drafting an investor exit or return mechanism that functions like an assured price. These issues are usually cheaper to resolve before the subscription documents are executed than during conversion, due diligence or an IPO-readiness exercise.

How CCD valuation connects with the broader valuation stack

For the Companies Act registered-valuer framework, see PGT & Associates' Companies Act Valuation India 2026 guide. For a closely related fundraising instrument, compare the mechanics with our CCPS Valuation India 2026 guide. The two instruments can produce similar dilution economics but differ in legal form, rights, accounting and transaction documentation, so they should not be treated as interchangeable labels.

FAQs on CCD valuation India

Is a CCD treated as equity or debt under FEMA?

A debenture that is fully, compulsorily and mandatorily convertible is treated as an equity instrument under the RBI foreign-investment framework. A debenture that is not fully and compulsorily convertible is generally treated as debt for this purpose, subject to the applicable borrowing framework.

Does the conversion price have to be fixed on day one?

For foreign investment in convertible equity instruments, the RBI framework requires the price or conversion formula to be determined upfront, with the conversion price not falling below the fair value worked out at issuance under the applicable pricing rules. Companies Act Rule 13 has its own timing mechanism for valuation of resultant shares, so both frameworks must be mapped when both apply.

Who can perform a Companies Act valuation of CCDs?

Where valuation is required under the Companies Act, Section 247 and the Registered Valuers framework apply. IBBI identifies Securities or Financial Assets as the relevant asset class for valuations involving shares, debentures and securities.

Can a CCD use a discount to the next funding round?

Commercially, a future-round discount can be part of a conversion formula. But where FEMA pricing applies, the formula must be set upfront and the eventual conversion cannot go below the applicable issuance-date fair-value floor. The specific terms should be checked before signing rather than only at conversion.

Does PGT & Associates provide investment recommendations through this article?

No. This article is educational and focuses on valuation, financial modelling and regulatory coordination. It does not recommend an investment, guarantee a valuation, or promise regulatory approval.

Practical takeaway

The core discipline in CCD valuation is to keep valuation, conversion mechanics and regulation in one reconciled model. Start with the equity value, define the conversion formula precisely, test dilution under multiple scenarios, and then overlay the Companies Act and FEMA requirements that actually apply to the investor and transaction. PGT & Associates can support companies and transaction teams with valuation analysis, cap-table modelling, fundraising financial diligence and documentation readiness in coordination with the relevant legal and regulatory advisers.

Official sources

RBI Master Direction – Foreign Investment in India — treatment of fully and compulsorily convertible debentures and pricing of convertible equity instruments.

India Code – Companies (Share Capital and Debentures) Rules, 2014 — Rule 13 preferential-issue and convertible-security valuation framework.

IBBI – Registered Valuers overview — Section 247 scope and the Securities or Financial Assets valuation class.