Convertible notes and CCPS for startups

A convertible note lets an investor put money in now and take equity later, usually at the next priced round, at a discount or within a valuation cap. For a startup recognised by DPIIT, an amount of ₹25 lakh or more received from a person in a single tranche through a convertible note is not a deposit under the Companies (Acceptance of Deposits) Rules, 2014, provided it converts into equity shares or is repaid within 10 years of issue. The note is approved by the board, and the shares issued on conversion are allotted and reported in PAS-3.

Compulsorily convertible preference shares (CCPS) are the usual instrument in priced angel and venture rounds. They carry a preference on dividend and on winding up, and must convert into equity shares on the terms fixed at issue. They are issued by private placement under sections 42 and 62(1)(c): a special resolution, a registered valuer's report, an offer letter in PAS-4, and allotment within 60 days of receiving the money, followed by PAS-3. The authorised capital must provide for preference shares, which may need an SH-7 first.

Where the investor is outside India, FEMA applies. CCPS and compulsorily convertible debentures count as equity instruments: the price cannot be below fair value, the conversion price or formula is fixed upfront, and the issue is reported in FC-GPR within 30 days. A startup can issue a convertible note of ₹25 lakh or more to a non-resident, reported to the RBI in Form CN within 30 days. The practice runs the Companies Act and FEMA steps together, and keeps the cap table in line through to conversion.