Valuation for Convertible Instruments
Specialized valuation for CCPS, CCD, and Convertible Notes. Precision modeling for Conversion Ratios and "Cap & Discount" structures by IBBI Registered Valuers.
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What is Convertible Instrument Valuation?
Convertible Instruments, such as Compulsorily Convertible Preference Shares (CCPS) and Compulsorily Convertible Debentures (CCD), are hybrid securities that combine features of both debt and equity. Unlike plain general equity, these instruments have specific rights - such as liquidation preferences, anti-dilution clauses, and variable Conversion Ratios - that make their valuation uniquely complex.
At Biz Valuations, we specialize in the technical appraisal of these hybrid structures. We move beyond simple face-value calculations to determine the Fair Market Value (FMV) of the instrument by accounting for its "option-like" qualities. Whether you are issuing CCDs to a foreign investor or CCPS during a Series A round, we ensure your valuation reflects the specialized nature of the investment.
Why You Need Convertible Instrument Valuation?
Convertible instruments are the preferred vehicle for startup funding and bridge rounds. We provide specialized reports for:
Fundraising (CCPS/CCD)
Determining the fair value of preference shares or debentures being issued to VCs or Angel investors.
Income Tax (Rule 11UA)
Justifying the fair value of convertible securities to avoid tax implications under Section 56(2)(viib) (Angel Tax).
FEMA Compliance
Providing mandatory valuation certificates for Foreign Direct Investment (FDI) to ensure the conversion price meets RBI pricing guidelines.
Conversion Events
Calculating the final number of equity shares to be issued upon the trigger of a conversion event or "Qualified Financing" round.
Financial Reporting (Ind-AS 109)
Valuing embedded derivatives and hybrid instruments for "Fair Value through Profit or Loss" (FVTPL) accounting.
Who Needs Convertible Valuation Services?
Technical Expertise for Hybrid Funding Structures
Our services relate to the specific needs of the startup and private equity ecosystem:
Key Benefits of Working with Biz Valuations
Valuing a convertible instrument is not the same as valuing equity; it requires advanced quantitative modeling.
Hybrid Instruments We Value
We have deep experience in valuing the most common and complex instruments:
Our Valuation Methodologies
We utilize specialized frameworks designed for hybrid securities:
Option Pricing Method (OPM)
Treating the convertible instrument as a "call option" on the company's value, using the Black-Scholes model to value liquidation preferences.
PWERM (Probability Weighted Expected Return Method)
Calculating the value based on the probability of various future events (IPO, Stay Private, or Sale).
Common Stock Equivalent
A simpler method used when conversion is highly likely and rights are minimal.
Binomial Lattice Models
Used for instruments with complex, path-dependent conversion triggers.
Key Regulatory Requirements
Our valuations ensure your convertible instruments pass through all statutory gates:
- Income Tax Rule 11UA: Explicitly requires the valuation of "unquoted shares and securities" (including CCPS).
- RBI Pricing Guidelines: For FDI, the price of the convertible instrument at the time of issuance must not be lower than the fair value of the equity shares.
- Companies Act, 2013: Section 62(1)(c) requires a Registered Valuer's report for the preferential allotment of convertible securities.
- Ind-AS 32 & 109: Classification of the instrument as "Equity," "Liability," or a "Compound Instrument."
Our 4-Step Hybrid Valuation Roadmap
1. Term Sheet Review
We analyze the specific rights (Conversion, Dividend, Liquidation) of the instrument.
2. Equity Value Determination
We first value the Enterprise and Equity using DCF or Market approaches.
3. Allocation Modeling
We apply the Option Pricing Method (OPM) to allocate the total equity value across different classes (Common vs. CCPS).
4. Certification
We issue the final, signed report compliant with the Companies Act or Income Tax Act as required.
Specialized "Rights-Based" Analysis
We define the "fine print" of your Term Sheet that impacts value:
Liquidation Preference:
Valuing the "1x" or "2x" seniority that preference holders have over common shareholders.
Anti-Dilution Rights
Modeling the impact of "Full Ratchet" or "Weighted Average" protections on the conversion price.
Participation Rights
Calculating the value of "Double Dipping" (where holders get their preference AND share in the remaining proceeds).
Coupon / Dividend Valuation
Assessing the impact of cumulative vs. non-cumulative dividends on the instrument's fair value.
Master the Complexity of Your Capital Structure.
Don't let complex instruments lead to regulatory hurdles or investor disputes. Get a technically superior valuation for your CCPS, CCD, or Convertible Notes that stand up to every audit.
Partner with Biz Valuations for expert hybrid instrument insights.
- Built on Experience
- Trusted Across 1,600+ Projects
- Confidence of Leading Businesses
Frequently Asked Questions (FAQs)
1Is the value of CCPS the same as Equity Shares?
Usually not. Because CCPS often have Liquidation Preferences and higher seniority, they are typically valued higher than common equity shares.
2What is the 'Option Pricing Method' (OPM)?
The OPM treats equity as a call option on the company’s enterprise value. It is the most common way to value different classes of shares in a startup.
3Does FEMA allow for variable conversion ratios?
Yes, but the Conversion Price determined at the time of issuance must not be lower than the Fair Market Value at that time.
4Do I need a Registered Valuer for CCD issuance?
Yes. Under the Companies Act, 2013, the issuance of any convertible security on a preferential basis requires a report from an IBBI Registered Valuer.
5What is a 'Valuation Cap' in a Convertible Note?
A cap is the maximum valuation at which your note will convert into equity, protecting investors if the company’s value skyrockets before the next round.
6How does 'Anti-Dilution' affect the valuation?
Anti-dilution rights protect the investor if the company issues shares at a lower price in the future. This "protection" has a financial value that our models capture.
7Can a startup issue CCDs without interest?
Yes, but for Income Tax and FEMA purposes, the "Fair Value" of the instrument must still be established.
8What is PWERM?
The Probability Weighted Expected Return Method values a company based on an analysis of future potential outcomes (like an IPO or Merger) and the probability of each.
9How long does a CCPS/CCD valuation take?
Due to the complex modeling involved, these typically take 7 to 10 business days.
10Why is Ind-AS 109 important for convertibles?
It dictates whether your convertible note is a "Liability" or "Equity" on your balance sheet, which significantly impacts your financial ratios.