A convertible note is a debt instrument that converts into equity shares upon the occurrence of specified triggers, typically the next priced funding round. The Ministry of Corporate Affairs notification of 2017 permitted startup companies (recognised by DPIIT) to issue convertible notes under the Companies Act 2013.
The MCA notification of 2017 permits startup companies (DPIIT-recognised) to issue convertible notes with a minimum investment of Rs 25 lakh per subscriber. The note must convert into equity shares or be repaid within five years. For foreign investors, FEMA regulations require compliance with RBI\'s master direction on foreign investment: the convertible note must be issued at a price determined in accordance with the pricing guidelines (for non-residents, at not less than fair value determined by a SEBI-registered merchant banker using internationally accepted pricing methodologies), and the company must file Form FC-GPR upon conversion.
AMLEGALS advises startups and investors on structuring convertible note instruments, negotiating key terms (discount, valuation cap, interest, maturity, conversion triggers, most-favoured-investor protection), FEMA and RBI compliance for foreign-investor participation, and the documentation of convertible note subscription agreements.
Advising on convertible note terms: discount, valuation cap, interest, maturity, conversion mechanics.
Advising startups on obtaining and maintaining DPIIT recognition, which is a prerequisite for issuing convertible notes.
Advising on FEMA pricing, reporting (FC-GPR) and RBI compliance for convertible notes with foreign investors.
Drafting convertible note subscription agreements and board/shareholder resolutions.
Advising on conversion triggers, anti-dilution adjustments and the mechanics of note-to-equity conversion.
Advising on the use of Simple Agreement for Future Equity (SAFE) equivalents under Indian law and their regulatory treatment.
A convertible note is a debt instrument issued by a startup company (recognised by DPIIT under the Startup India scheme) that is repayable or convertible into equity shares at the option of the holder, upon the occurrence of specified events, within a period not exceeding five years. The MCA notification of 2017 permits startup companies to issue convertible notes with a minimum investment of Rs 25 lakh per note.
Yes. FEMA Non-Debt Instrument Rules 2019 permit a person resident outside India to acquire convertible notes issued by an Indian startup company. The investment must comply with RBI pricing guidelines, entry route requirements (automatic or approval), sectoral caps and reporting obligations (filing Form CN with the AD bank and Form FC-GPR upon conversion).
A convertible note is a debt instrument with a maturity date, interest rate and repayment obligation if conversion does not occur. A SAFE (Simple Agreement for Future Equity) is not a debt instrument — it is an agreement to receive equity at a future priced round, with no maturity, no interest and no repayment right. Indian regulatory treatment of SAFEs is not explicitly addressed; the instrument must be carefully structured to avoid classification as a deposit under the Companies Act or as an external commercial borrowing under FEMA.
On the occurrence of the conversion trigger (typically the next qualified financing round), the convertible note converts into equity shares (or CCPS) at a price determined by applying the agreed discount or valuation cap to the price paid by the new investors in the qualifying round. The company must file Form FC-GPR (for foreign investors) or other prescribed forms with the AD bank.
The MCA notification prescribes a minimum investment of Rs 25 lakh per convertible note. This applies to each subscription — a single convertible note issuance must be at least Rs 25 lakh per subscriber.
No. No engagement is treated as accepted until conflicts, scope and terms are confirmed in writing.
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