When it comes to investing in companies, Normal Shares and Compulsorily Convertible Preference Shares (CCPS Shares) are two popular options, each with its distinct features, benefits, and risks. While both allow investors to own a stake in a company, they differ significantly in terms of rights, returns, and conversion processes. Below is a detailed comparison of Normal Shares and CCPS Shares to help you understand the key differences.
1. Definition
- Normal Shares (Ordinary Shares):
Normal shares, also known as equity shares or common shares, represent an ownership stake in a company. Shareholders of normal shares is entitle to vote in general meetings, receive dividends, and share in the company’s profits through capital appreciation. They represent the risk and reward of owning the company. - CCPS (Compulsorily Convertible Preference Shares):
CCPS are a type of preference share that, after a certain period or upon meeting specific conditions, must convert into equity shares of the company. The key feature of CCPS is its compulsory conversion into ordinary shares. At the time of predetermine ratio and typically after a set number of years or when certain conditions are meet.
2. Voting Rights
- Normal Shares:
Holders of normal shares generally have voting rights at annual general meetings (AGMs) and other shareholder meetings. They can influence decisions related to the company’s governance, mergers, acquisitions, dividends, and other matters. - CCPS Shares:
CCPS holders do not have voting rights unless explicitly mentioned in the terms of the share issue. Even conversion to normal shares, voting rights are grant only after the conversion takes place.
3. Dividend Payments
- Normal Shares:
Dividends on normal shares are usually paying out at the discretion of the company. They are based on the company’s profitability, and the amount can vary from year to year. Dividends is not a guarantee. - CCPS Shares:
CCPS holders typically receive a fixed dividend rate (e.g., 8% per annum). This rate is usually higher than that of common shares because CCPS shares holders are prioritize for dividends before normal shareholders. However, if the company fails to paying dividend, it may accumulate as unpaid dividends, which must be paid later before any dividends are distributed to normal shareholders.
4. Priority in Case of Liquidation
- Normal Shares:
In case of liquidation or winding up of the company, normal shareholders are last in line after all creditors, bondholders, and preference shareholders to receive any proceeds. They bear the highest risk but also stand to gain the most if the company performs well. - CCPS Shares:
CCPS holders enjoy a higher priority over normal shareholders in case of liquidation. They are paying their preferer dividend or liquidation process before any distribution is made to normal equity shareholders. This makes CCPS less risky compared to normal shares.
5. Conversion Feature
- Normal Shares:
Normal shares do not have any conversion feature. Once you buy normal shares, you own them as long as you choose to keep them or sell them. They can appreciate or depreciate in value based on the company’s performance. - CCPS Shares:
The most significant difference between CCPS and normal shares is that CCPS are convertible. They would be convert into equity shares after a specific time slot or once certain conditions are met. The conversion process is predetermine. Which could result in a dilution of the equity of the current shareholders.
6. Risk and Return
- Normal Shares:
Normal shares generally offer higher risk but potentially higher returns. The value of normal shares is directly tag to the company’s performance. They can fluctuate significantly based on market conditions and business performance. Shareholders may also benefit from capital gains if the company’s share price increases. - CCPS Shares:
CCPS are typically considered less risky than normal shares because they offer fixed dividends and have liquidation priority. However, the return may be limited, as the conversion to equity shares occurs at a set time, potentially offering a lower equity stake than initially anticipated. The primary return on CCPS comes from the fixed dividend payments.
7. Impact on Ownership
- Normal Shares:
Normal shareholders directly own a percentage of the company and their ownership is reflecting by the number of shares they hold. The ownership percentage can change if the company issues new shares, diluting the holdings of existing shareholders. - CCPS Shares:
While CCPS holders initially own a preference share, after the compulsory conversion, they are convert into equity shares, which means their ownership in the company is based on the number of normal shares they receive. This conversion can dilute the ownership of existing equity shareholders.
8. Usage in Fundraising
- Normal Shares:
Normal shares are often used in public offerings and are typically held by a broad base of retail and institutional investors. They are more common in mature companies looking to raise capital from the open market. - CCPS Shares:
CCPS is often using by startups and growing companies as a fundraising mechanism, especially. When they wish to raise capital from venture capitalists or private equity firms. They offer a mix of fixed returns and the potential for future equity ownership, making them attractive to investors who are willing to wait for conversion.
9. Regulatory and Tax Treatment
- Normal Shares:
Normal shares are taxed based on capital gains when sold. If dividends are paid, they are also subject to tax. Taxation on normal shares can vary based on the holding period (short-term or long-term). - CCPS Shares:
CCPS shares may have different tax implications compared to normal shares, especially when it comes to dividends, conversion, and capital gains. The fixed dividend may be taxed differently, and the conversion into equity shares may trigger specific tax events, depending on the jurisdiction.
Summary of Differences Between Normal Shares and CCPS Shares
| Feature | Normal Shares | CCPS Shares |
| Definition | Ownership in a company with voting rights | Preference shares that convert to equity |
| Voting Rights | Yes, on most corporate matters | No, unless converted or specified |
| Dividend | Variable, based on company performance | Fixed, prioritized over common shares |
| Priority in Liquidation | Last, after all creditors and preference shares | Higher priority than normal shares |
| Conversion | No conversion | Must convert to equity shares after a period |
| Risk | Higher, dependent on company performance | Lower, fixed dividend and liquidation preference |
| Return | Higher potential for capital appreciation | Fixed dividends, possible future equity |
| Usage in Fundraising | Public offerings, mature companies | Startups, venture capital funding |
Final Remark
The primary difference between Normal Shares and CCPS Shares lies in their structure, rights, and benefits to the investors. Normal shares provide more direct ownership and voting power but come with higher risk. On the other hand, CCPS Shares offer fixed dividends, liquidation priority, and less immediate ownership but are convertible to equity after a certain period, allowing investors to benefit from the company’s growth.
Both investment options have their place in a company’s capital structure, depending on the company’s needs and the investor’s preferences. Whether you choose normal shares or CCPS will depend on your risk tolerance, expected return, and investment strategy and learn more . . .