finance
When Indian businesses aim to raise capital, they face the critical decision of choosing between equity and debt financing. While equity financing dilutes ownership, debt financing increases financial obligations due to interest payments. An alternative gaining traction is Compulsory Convertible Debentures (CCDs), which merge the characteristics of both equity and debt.
CCDs start as debt instruments but eventually convert into equity after a set timeframe or upon hitting specific milestones. Notably, Flipkart has utilized CCDs during funding rounds to manage ownership dilution while ensuring capital inflow. Similarly, OYO Rooms has implemented CCDs to attract investment while deferring equity dilution until particular growth targets are met.
Initially, CCDs function like traditional debt instruments. Companies that issue CCDs obtain funds from investors, who, in return, receive fixed interest payments. For example, during its fundraising through CCDs, Reliance Jio provided investors with regular interest payments, ensuring they received stable returns.
A key aspect of CCDs is their automatic conversion into equity shares. This conversion occurs at a predetermined date or upon fulfilling certain business conditions. For instance, Zomato's CCDs issued during its growth period converted to equity shares before its IPO, allowing investors to benefit from the surge in the company's valuation.
Once conversion is executed, CCD holders transition to shareholders, aligning their interests with the company's long-term growth objectives. Unlike optional convertible instruments, CCDs enforce mandatory conversion, eliminating the choice to remain as debt.
CCDs enable Indian startups and corporations to secure capital without immediate ownership dilution. For instance, Paytm has successfully utilized CCDs to fund expansion plans while postponing equity dilution until essential growth milestones were achieved.
The set timeline for CCD conversion facilitates better financial planning. Companies such as Byju’s have effectively used CCDs to manage their capital structures, allowing for advanced resource allocation.
Investors appreciate the dual benefits of receiving fixed interest income while having the potential for capital gains. For example, early investors in Nykaa who participated in CCDs experienced significant returns when those debentures converted into shares prior to the company's successful IPO.
Compulsory Convertible Debentures have become an increasingly favored financing option in India, providing benefits for both companies and investors. They offer businesses critical access to funds without immediately diluting ownership while providing investors with fixed income and growth potential.
As India’s startup ecosystem and corporate sector evolve, CCDs are poised to play a significant role in shaping innovative financial strategies.