STARTUPs – CONVERTIBLE NOTE – DEBT FUNDING

Let us first understand what is Convertible Note?

There are lots of funding opportunities available to the eligible Startups by way of equity dilution, by issuing debt instruments or through iSAFE instruments etc.

Convertible Note is one of the instruments for getting funding through iSAFE. iSAFE means India Simple Agreement for Future Equity. This is very popular in India for making Investment through convertible Note.

Convertible Note simple meaning is that an instrument convertible into equity shares or repayable within a period not exceeding ten years from the date of issue.

Definition as per the provisions of the Companies Act, 2013:

Convertible note” means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.

What is eligibility for issuing Convertible Note?

As per the provisions of the Companies Act, 2013, the Convertible note has not been considered as Deposit subject to the following conditions:

An amount of twenty five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding ten years from the date of issue) in a single tranche, from a person.

Here “start-up company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognized as Startup by the DPIIT.

It is pertinent to note here that only the recognized Startups are eligible to issue the Convertible Note and the amount raised through Convertible Note should not be less than INR 25,00,000/- in a single tranche.

Further, the same should be either converted into Equity Shares or repaid within a period not exceeding ten years from the date of issue.

Whether foreign Investors can also invest through Convertible Note?

Yes, Foreign Investors can also purchase the Convertible Notes issued by the Indian Startups subject to compliance of the provisions of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and Foreign Exchange Management (Mode of Payment and Reporting of Non Debt Instruments) Regulations, 2019.

Benefits for Startups raising fund through Convertible Note-

• Quick and Easy financing
• No lengthy and heavy compliance burden
• Favorable terms for Entrepreneur in the Agreement
• No Valuation worries for early-stage Startups as valuation happens in this at later stage
• Cost friendly

For more details and assistance, kindly reach us at compliance@pramahlawmen.com.