company law

Navigating CCPS Conversion: Compliance with Companies Act, 2013

Conversion of Compulsory Convertible Preference Shares: Compliance Filings Under the Companies Act, 2013

The conversion of Compulsory Convertible Preference Shares (CCPS) into equity shares is a regulated process defined by the terms of issuance. However, it raises pressing questions regarding compliance with the Companies Act, 2013, specifically concerning the requirements for Form SH-7 and Form PAS-3.

Compliance Filings Required for CCPS Conversion

Form PAS-3 is mandatory for reporting equity share allotments following the CCPS conversion. The need for Form SH-7, however, is contingent on the company's authorized share capital.

  • Form SH-7 is required only if the authorized share capital is inadequate to accommodate the converted equity shares. In such instances, an increase in authorized capital is necessary, which mandates the submission of SH-7 before filing PAS-3.

  • Conversely, if the authorized capital is sufficient, SH-7 is not necessary, as the process is merely a reclassification rather than an increase in share capital.

Scenarios Misconstrued as Applicable to CCPS Conversion

It's important to clarify certain scenarios often mistakenly associated with CCPS conversion:

  1. Redemption of Redeemable Preference Shares:

    • This process involves cash outflow, which is not applicable to mandatory CCPS conversion. Therefore, filing SH-7 under this category is inaccurate.

  2. Consolidation or Division of Shares:

    • Some professionals propose using SH-7 for this process; however, it pertains specifically to stock conversion and does not apply to the conversion of preference shares.

  3. Increase in Number of Members and Increase in Share Capital with Central Government Order:

    • These categories are irrelevant to CCPS conversion.

Analysis of SH-7 Applicability in CCPS Conversion

1. Increase in Share Capital Independently by the Company

  • If the post-conversion equity capital exceeds the authorized share capital, SH-7 must be filed under this category to indicate the need for increased authorized capital before the equity shares are allotted via PAS-3.
  • If sufficient authorized capital exists, SH-7 is not required.

2. Other Situations

  • Increase in Number of Members: Not applicable to CCPS conversion.
  • Cancellation of Unissued Shares and Increase in Shares of Another Class: Not relevant for CCPS conversion.

Conclusion

The requirement for filing SH-7 in connection to CCPS conversion is entirely dependent on the company's authorized share capital structure:

  • If authorized capital is insufficient to accommodate the converted equity shares, Form SH-7 must be filed under “Increase in share capital independently by the company” to facilitate an increase in authorized capital.
  • If the authorized capital is adequate, only Form PAS-3 is necessary, selecting the option “Conversion of preference share,” to ensure compliance is streamlined.

Companies should diligently assess their authorized capital to determine the appropriate compliance steps for CCPS conversion.