Convertible Notes (India)

TL;DR

Indian convertible-note rules (Companies Act + RBI FEMA): typically Compulsorily Convertible Debentures with a 5-yr maximum tenor and FEMA-compliant pricing.

Convertible-note structures in India operate under both the Companies Act 2013 and RBI's FEMA framework. The RBI introduced a dedicated 'convertible note' regime for DPIIT-recognised startups in 2017: amounts of ≥₹25 lakh from a single investor, convertible within 5 years from issue at investor's option, with conversion price either pre-agreed or determined per FEMA pricing guidelines at conversion. For non-DPIIT startups, the typical instrument is a Compulsorily Convertible Debenture (CCD) — a debt instrument that must convert to equity at or before maturity (typically 18–60 months), priced at issuance with a fixed conversion ratio.

Unlike US SAFEs or UK ASAs, the Indian convertible-note regime is more rigid: max 5-year tenor, FEMA pricing rules on conversion for foreign investors, and CCD interest must be tax-deducted at source until conversion. Most Indian seed rounds today use CCDs or the DPIIT convertible-note for foreign-investor rounds.

Worked example

A Mumbai SaaS DPIIT-recognised startup raises ₹6 Cr from a US-based angel via the RBI convertible-note regime: 5-year max tenor, 20% discount at Series A conversion, ₹25 lakh minimum cheque per investor, FC-GPR filed within 30 days. Converts at next-round price 14 months later — the angel ends up with 4.2% of post-conversion equity at a ₹20 Cr cap-equivalent price.

Common pitfalls

• Setting CCD maturity beyond 5 years for a DPIIT-recognised startup convertible note — RBI rejection.
• Mis-pricing the conversion below FEMA fair-value thresholds and triggering FC-GPR rejection.
• Failing to deduct TDS on CCD interest accruals and creating a CCD-conversion tax surprise.

When this shows up in a pitch deck

Indian seed decks state '₹6 Cr CCD round from foreign angel — converts at Series A at 20% discount, max 5-year tenor'.

Related terms

• DPIIT-Recognised Startup — Indian government recognition (Startup India) for under-10-yr-old, sub-₹100 Cr-revenue innovative companies — unlocks tax holidays and angel-tax exemption.
• FEMA / ODI Compliance — Indian FEMA and RBI Overseas Direct Investment rules governing inbound foreign equity, share-pricing minimums, and Indian residents' overseas investments.
• SAFE — Y Combinator's Simple Agreement for Future Equity — a contract that gives an investor the right to equity in a future priced round, with no debt or interest.
• ASA (Advance Subscription Agreement) — UK SEIS/EIS-compatible alternative to a SAFE: cash paid up-front for shares issued at the next round, with a 6-month longstop to keep relief.
• Convertible Note — Short-term debt that converts into equity at a future priced round, typically with a discount, a valuation cap, and an interest rate.

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