Pre-IPO investors are issued equity instruments at a lower valuation compared to retail investors. However, these equity instruments come with certain restrictions such as lock-in restrictions, and the accounting can be complex. This article deals with the accounting of convertible instruments issued to financial institutions as a part of pre-IPO funding.
FACT PATTERN
The new company will be soon launching its IPO. As a part of its pre-IPO funding, it has issued CCPS (Compulsorily Convertible Preference Shares) to SBI. These instruments are convertible into equity shares on the IPO taking place. The conversion ratio is variable depending upon the timing of the IPO and the valuation of the company at IPO, after deducting from the valuation a discount is typically available to pre-IPO investors. All pre-IPO investors that are issued these instruments are treated equally. The pre-IPO investors are provided a discount over the valuation of the company to compensate for the lock-in restrictions applicable to pre-IPO investors and for the uncertainty on the occurrence of the IPO and the timing of the IPO. If the IPO does not happen by a certain date, then the conversion will occur by a formula predetermined on the date of issue of the CCPS, that will provide as many shares, as are required to settle the liability, for e.g., if the CCPS amount is R100, and the share price is Rs. 1 the liability will be settled by providing 100 shares t
