Chartered Accountant · ICAI M.No. 153926 · FRN 136869W
The startup-only rule
Normally a company taking a loan that converts to shares would fall foul of the deposit rules. A specific exemption lets a DPIIT-recognised startup raise a convertible note — but only if a single investor puts in ₹25 lakh or more in one tranche, and the note converts to equity (or is repaid) within 10 years. Confirm the current threshold and tenure, which can change by notification.
How conversion works
The note carries a valuation cap and/or a discount, so when you raise your next priced round the note converts into shares at the better of the two — rewarding the early investor for the risk. Until conversion it sits as a borrowing, not equity, which is why pricing and valuation are deferred to the next round.
Notes versus CCDs — an example
A DPIIT startup raises ₹50 lakh from one angel on a convertible note with a ₹5 crore cap; at the next round, priced at ₹8 crore, the note converts at the ₹5 crore cap, giving the angel more shares. A company that is not DPIIT-recognised would instead use CCDs (compulsorily convertible debentures) to achieve a similar effect. For a foreign investor, FEMA and FC-GPR rules also apply. Our startup service can paper the round.