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With reference to the Compulsorily Convertible Preference Shares, consider the following statements:
1. It gives the assurance of a fixed rate of return plus the opportunity for capital appreciation.
2. These shares get converted to ordinary equity shares after 10-15 years.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'C'. Can you explain this answer?
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Most Upvoted Answer
With reference to the Compulsorily Convertible Preference Shares, cons...
Insurance regulator IRDAI has rejected Fairfax proposal to convert the company’s holdings in compulsory convertible preferred shares (CCPS) issued by Go Digit Infoworks into equity shares.
- CCPS, or Compulsorily Convertible Preference Shares, are a key element of startup financing.
- It gives the assurance of a fixed rate of return plus the opportunity for capital appreciation.
- These shares carry certain terms—if an early investor has CCPS, he can have more rights than other investors who come in later at a higher valuation.
- It also helps investors maintain their stake and have a say even if their stake gets diluted later.
- However, these shares get converted to ordinary equity shares after 10-15 years.
- That is more than sufficient time for most startups to give their investors an exit.
- CCPS also helps founders keep control of a company even if their stake is lower than that of investors.
Hence both statements are correct.
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With reference to the Compulsorily Convertible Preference Shares, cons...
Compulsorily Convertible Preference Shares:
Compulsorily Convertible Preference Shares (CCPS) are a type of preference shares issued by a company that are mandatorily converted into ordinary equity shares at a predetermined time or event. These shares have both debt and equity characteristics and are often used by companies to raise capital.
Statement 1: It gives the assurance of a fixed rate of return plus the opportunity for capital appreciation.
This statement is correct. CCPS typically offer a fixed rate of return in the form of dividends, similar to regular preference shares. This fixed rate of return provides assurance to the investors. However, unlike regular preference shares, CCPS also offer the opportunity for capital appreciation because they are compulsorily converted into ordinary equity shares at a later date. This means that the investors have the potential to benefit from any increase in the company's share price.
Statement 2: These shares get converted to ordinary equity shares after 10-15 years.
This statement is also correct. CCPS have a predetermined conversion period, which is typically 10-15 years. At the end of this period, the shares are automatically converted into ordinary equity shares. The exact conversion terms, including the conversion ratio and the trigger events, are specified in the terms and conditions of the CCPS.
During the conversion process, the CCPS holders become ordinary shareholders and enjoy the same rights and privileges as other equity shareholders. This means that they are entitled to participate in the company's profits and have voting rights in the decision-making process.
Conclusion:
Both statements 1 and 2 are correct. CCPS provide investors with a fixed rate of return as well as the potential for capital appreciation. These shares are converted into ordinary equity shares after a predetermined period, typically 10-15 years.
Compulsorily Convertible Preference Shares (CCPS) are a type of preference shares issued by a company that are mandatorily converted into ordinary equity shares at a predetermined time or event. These shares have both debt and equity characteristics and are often used by companies to raise capital.
Statement 1: It gives the assurance of a fixed rate of return plus the opportunity for capital appreciation.
This statement is correct. CCPS typically offer a fixed rate of return in the form of dividends, similar to regular preference shares. This fixed rate of return provides assurance to the investors. However, unlike regular preference shares, CCPS also offer the opportunity for capital appreciation because they are compulsorily converted into ordinary equity shares at a later date. This means that the investors have the potential to benefit from any increase in the company's share price.
Statement 2: These shares get converted to ordinary equity shares after 10-15 years.
This statement is also correct. CCPS have a predetermined conversion period, which is typically 10-15 years. At the end of this period, the shares are automatically converted into ordinary equity shares. The exact conversion terms, including the conversion ratio and the trigger events, are specified in the terms and conditions of the CCPS.
During the conversion process, the CCPS holders become ordinary shareholders and enjoy the same rights and privileges as other equity shareholders. This means that they are entitled to participate in the company's profits and have voting rights in the decision-making process.
Conclusion:
Both statements 1 and 2 are correct. CCPS provide investors with a fixed rate of return as well as the potential for capital appreciation. These shares are converted into ordinary equity shares after a predetermined period, typically 10-15 years.
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With reference to the Compulsorily Convertible Preference Shares, consider the following statements:1. It gives the assurance of a fixed rate of return plus the opportunity for capital appreciation.2. These shares get converted to ordinary equity shares after 10-15 years.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer?
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