Convertible Note (India)
CONVERTIBLE NOTE
Governed by the Companies Act 2013 and SEBI Regulations
Issued pursuant to the Companies (Acceptance of Deposits) Amendment Rules 2017 — DPIIT-Recognised Startup Exemption
This Convertible Note is issued on [Note Date] at [Issuer City] by:
Issuer: [Issuer Name] (CIN: [Issuer CIN], DPIIT Certificate: [DPIIT Certificate]), having its registered office at [Issuer Address] (hereinafter referred to as "the Company"); and
In favour of: [Investor Name] (PAN: [Investor PAN]), residing/having its principal place of business at [Investor Address] (hereinafter referred to as "the Noteholder").
Investor Type: [Investor Type]
1. PROMISE TO PAY / CONVERT
1.1 For value received, the Company hereby acknowledges receipt of the principal amount of [Principal Amount] from the Noteholder and promises to either repay this amount with accrued interest to the Noteholder, or to issue equity shares to the Noteholder upon conversion, all on the terms and conditions set out in this Note.
1.2 This Note shall mature on [Maturity Date] (the 'Maturity Date'), being not more than five (5) years from the date of issue, in compliance with the Companies (Acceptance of Deposits) Amendment Rules 2017.
1.3 Interest shall accrue on the outstanding principal at [Interest Rate] from the date of issue until the date of conversion or repayment.
2. CONVERSION MECHANICS
2.1 Automatic Conversion: Upon the closing of a Qualifying Financing (an equity financing in which the Company raises at least [Qualifying Financing] in aggregate, excluding the conversion of any notes), this Note shall automatically convert into equity shares of the Company at the lower of: (i) the Discount Price: the price per share paid by new investors in the Qualifying Financing multiplied by (1 minus [Conversion Discount]); and (ii) the Cap Price: the price per share calculated by dividing the Valuation Cap of [Valuation Cap] by the Company's fully diluted capitalisation immediately before the Qualifying Financing.
2.2 On conversion, the total amount converted shall be the principal amount plus all accrued interest to the date of conversion. The number of shares to be issued shall be the total converted amount divided by the applicable conversion price.
2.3 Optional Conversion: The Noteholder may elect to convert this Note at any time prior to the Maturity Date by written notice to the Company, in which case the conversion price shall be the Cap Price.
2.4 Conversion at Maturity: If a Qualifying Financing has not occurred by the Maturity Date, the Noteholder may elect to: (i) convert the Note at the Cap Price; or (ii) require repayment of the principal plus all accrued interest.
3. FEMA COMPLIANCE (FOR FOREIGN INVESTORS)
3.1 Where the Noteholder is a foreign investor or Non-Resident Indian, this Note is issued in compliance with the Foreign Exchange Management Act 1999, the Foreign Exchange Management (Debt Instruments) Regulations 2019, and the applicable FDI Policy.
3.2 The Company shall file an Advance Remittance Form (ARF) with its Authorised Dealer bank within 30 days of receipt of funds from the Noteholder.
3.3 Upon conversion of this Note, the Company shall file Form FC-GPR with the RBI through its Authorised Dealer bank within 30 days of issue of shares to the Noteholder.
3.4 The conversion price at the time of conversion shall comply with the FEMA pricing norms — the price per share shall not be less than the fair market value determined by a SEBI-registered merchant banker or a Chartered Accountant using DCF methodology.
3.5 The Company shall include this Note in its Annual Return on Foreign Liabilities and Assets (FLA Return) filed with the RBI by 15 July each year.
4. REPRESENTATIONS AND COVENANTS
4.1 The Company represents that: (i) it is validly incorporated and in good standing under the Companies Act 2013; (ii) it holds a valid DPIIT recognition certificate (No. [DPIIT Certificate]); (iii) this Note is validly issued and enforceable; and (iv) the issuance of this Note does not violate any applicable law, the Company's constitutional documents, or any existing agreement.
4.2 The Company covenants that it shall: (i) maintain its DPIIT recognition throughout the term of this Note; (ii) promptly notify the Noteholder of any Qualifying Financing proposal; (iii) not issue any security senior to this Note without the Noteholder's prior written consent; and (iv) use the proceeds of this Note for the Company's business operations as communicated to the Noteholder.
5. GOVERNING LAW AND DISPUTE RESOLUTION
5.1 This Note is governed by the Companies Act 2013, the Indian Contract Act 1872, and applicable SEBI and FEMA regulations.
5.2 Any dispute arising from or in connection with this Note shall be resolved by arbitration under the Arbitration and Conciliation Act 1996, with the seat of arbitration at [Issuer City]. The language of arbitration shall be English.
Company (Authorised Signatory)
________________
Signature
Noteholder (Investor)
________________
Signature
What Is a Convertible Note (India)?
A Convertible Note in India records the parties' agreement in writing, defining what each is required to do and the consequences if they do not.
Governed by the Companies Act 2013 and SEBI Regulations, convertible notes are legally recognised for DPIIT-recognised startups following the 2017 amendment to the Companies (Acceptance of Deposits) Rules. Under this framework, convertible notes issued by eligible startups are exempt from deposit rules and must convert or be repaid within five years of issuance.
For foreign investors, compliance with FEMA, the RBI's Foreign Exchange Management (Debt Instruments) Regulations 2019, and the FDI Policy is essential. Key requirements include a minimum investment of ₹25 lakh per note, five-year conversion deadline, ARF filing on receipt of funds, and FC-GPR filing on conversion.
The convertible note typically includes a conversion discount (10–25%), a valuation cap, an interest rate (8–12% per annum), and a qualifying financing threshold that triggers automatic conversion. These mechanisms reward early investors for the risk of investing before formal valuation.
The legal framework governing the Convertible Note (India) in India draws on several key statutes and regulatory bodies. Under Indian law, the Indian Contract Act 1872 governs contractual obligations, with Section 10 setting essential requirements for valid agreements. The Companies Act 2013 regulates corporate entities through the Registrar of Companies (ROC) and Ministry of Corporate Affairs (MCA). The Industrial Disputes Act 1947 and state labour commissioners govern employment disputes. The Information Technology Act 2000 and IT (Reasonable Security Practices) Rules 2011 protect personal data. The Income Tax Act 1961 and Goods and Services Tax Act 2017 govern tax obligations through the Central Board of Direct Taxes (CBDT) and GST Council. Parties executing a Convertible Note (India) in India should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Indian Contract Act, 1872 sets the foundational requirements.
When Do You Need a Convertible Note (India)?
You need an India Convertible Note when raising early-stage (pre-seed or seed) funding from angel investors, friends and family, or early-stage venture funds and you want to defer the valuation negotiation to a future, larger financing round. The convertible note allows you to close funding quickly without the time and cost of a full valuation exercise and shareholder agreement.
You need this instrument specifically if your company is a DPIIT-recognised startup. The convertible note framework (as amended in 2017) is available only to DPIIT-recognised startups — other companies cannot use this instrument under the simplified regulatory framework.
You need this document when raising foreign investment at the early stage. The convertible note is the most commonly used instrument for foreign angel investment in Indian startups, as it allows foreign funds to be received quickly while deferring formal equity issuance and FEMA compliance relating to share pricing to the conversion event.
You need this agreement when the valuation is difficult to establish. Convertible notes are designed for situations where the company's value is highly uncertain — the conversion mechanism confirms early investors are compensated for their risk through the discount and cap, while founders avoid giving up more equity than necessary at the earliest stage.
Parties in India should prepare a Convertible Note (India) proactively rather than waiting for a dispute to arise. Courts interpret agreements based on the written terms rather than oral representations. Under Indian law, the Indian Contract Act 1872 governs contractual obligations, with Section 10 setting essential requirements for valid agreements. The Companies Act 2013 regulates corporate entities through the Registrar of Companies (ROC) and Ministry of Corporate Affairs (MCA). The Industrial Disputes Act 1947 and state labour commissioners govern employment disputes. The Information Technology Act 2000 and IT (Reasonable Security Practices) Rules 2011 protect personal data. The Income Tax Act 1961 and Goods and Services Tax Act 2017 govern tax obligations through the Central Board of Direct Taxes (CBDT) and GST Council. Where the transaction involves regulated activities, prior approval from the relevant authority may be required before execution.
What to Include in Your Convertible Note (India)
A thorough India Convertible Note should contain the following key elements.
Parties: Full legal names, CIN (company), PAN, and addresses of the issuer (startup company) and the investor. For foreign investors, passport or company registration details and country of incorporation.
Principal Amount: Total note amount in INR (minimum ₹25 lakh for foreign investors). For domestic investors, no minimum applies.
Interest Rate: Annual interest rate (typically 8–12%), accrual basis (simple or compound), and treatment of accrued interest on conversion (converts into equity with principal).
Conversion Mechanics: Automatic conversion upon qualifying financing (minimum fundraise threshold), conversion price (lower of discount price and valuation cap price), and optional manual conversion rights.
Conversion Discount: Percentage discount (typically 15–25%) to the price per share paid by new investors in the qualifying financing round.
Valuation Cap: Maximum pre-money valuation for conversion purposes, providing downside protection for early investors in high-valuation future rounds.
Qualifying Financing: Minimum aggregate investment amount that triggers automatic conversion (e.g., ₹2 crore or USD 500,000).
Term and Repayment: Five-year maximum term (mandatory under Companies Act 2013 framework); repayment provisions if no qualifying financing occurs.
FEMA Compliance (for foreign investors): ARF filing obligation, FC-GPR obligation on conversion, FDI pricing compliance, and five-year conversion deadline.
Governing Law: Indian law, Companies Act 2013, SEBI Regulations, and FEMA/RBI guidelines.
Additional compliance elements for a Convertible Note (India) used in India include: Under Indian law, the Indian Contract Act 1872 governs contractual obligations, with Section 10 setting essential requirements for valid agreements. The Companies Act 2013 regulates corporate entities through the Registrar of Companies (ROC) and Ministry of Corporate Affairs (MCA). The Industrial Disputes Act 1947 and state labour commissioners govern employment disputes. The Information Technology Act 2000 and IT (Reasonable Security Practices) Rules 2011 protect personal data. The Income Tax Act 1961 and Goods and Services Tax Act 2017 govern tax obligations through the Central Board of Direct Taxes (CBDT) and GST Council. Forms-legal.com provides this template as a starting point for India-compliant documentation.
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Reference this free template in an article, syllabus, or research note:
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"Convertible Note (India) (India)." Forms Legal, 2026, https://forms-legal.com/india/business/contracts/convertible-note-india.
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Frequently Asked Questions
Yes, convertible notes are legal for eligible startups in India following a significant regulatory amendment in 2017. Prior to this amendment, convertible notes presented significant legal uncertainty under Indian law, primarily because they involved a loan (debt instrument) with an option to convert into equity — a structure that raised questions under the Companies Act 2013 regarding issuance of securities and the Foreign Exchange Management Act 1999 (FEMA) for foreign investors. The legal framework was clarified by the following key regulatory changes:
Companies (Acceptance of Deposits) Amendment Rules, 2017: The Ministry of Corporate Affairs amended the Companies (Acceptance of Deposits) Rules 2014 to specifically exempt 'convertible notes' issued by DPIIT-recognised startups from being treated as 'deposits' under the Companies Act 2013. This was critical because startup convertible notes would otherwise have been subject to stringent deposit acceptance rules. Under the exempted framework, a convertible note is defined as an instrument evidencing receipt of money initially as debt, which is repayable at the option of the holder or convertible into equity shares within five years from the date of issue. FEMA Notification: The RBI amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations to permit foreign investors to invest in DPIIT-recognised startups through convertible notes.
The conversion discount and valuation cap are the two primary economic mechanisms in a convertible note that compensate early investors for the risk they take by investing before the company's valuation is formally established. Understanding these mechanisms is essential for both startup founders and early-stage investors in India. Conversion Discount: The discount gives convertible note holders the right to convert their note into equity at the next qualifying financing round at a price that is a specified percentage below the price paid by new investors in that round. For example, if a note has a 20% discount and new investors in the Series A pay ₹100 per share, the note holder converts at ₹80 per share (₹100 × (1 – 20%) = ₹80), receiving more shares for the same investment amount. The discount typically ranges from 15% to 25% in Indian startup practice, reflecting the earlier risk taken by the note holder. Valuation Cap: The valuation cap sets a maximum pre-money valuation at which the note will convert into equity, regardless of the actual valuation established in the qualifying financing round. For example, if a note has a ₹10 crore valuation cap and the Series A is raised at a ₹25 crore pre-money valuation, the note holder converts as if the pre-money valuation were ₹10 crore (the cap) rather than ₹25 crore — effectively giving the note holder a larger ownership percentage than new Series A investors. The valuation cap protects early investors from excessive dilution in high-valuation fundraising rounds.
Foreign investment through convertible notes in Indian DPIIT-recognised startups is subject to compliance requirements under the Foreign Exchange Management Act 1999 (FEMA), the RBI's Foreign Exchange Management (Debt Instruments) Regulations 2019, and the FDI Policy. Ensuring FEMA compliance at the convertible note stage is critical to avoid complications at the conversion and exit stages. Key FEMA Compliance Requirements:
Minimum Investment Amount: Foreign investors must invest a minimum of INR 25 lakh (approximately USD 30,000) in a single tranche per convertible note issuance by a DPIIT-recognised startup. Five-Year Conversion Deadline: The convertible note must convert into equity shares or be repaid within five years from the date of issuance. This is a hard deadline under the RBI notification — extensions beyond five years are not permitted. FDI Reporting (Advance Remittance Form): When the foreign investor remits funds to the Indian startup, the startup must file an Advance Remittance Form (ARF) with the Authorised Dealer bank (AD bank) within 30 days of receipt of funds, reporting the amount received and the nature of the investment (convertible note). FC-GPR Filing: Upon conversion of the note into equity shares (or CCPS/CCDs), the startup must file Form FC-GPR with the RBI through the AD bank within 30 days of issue of shares. The FC-GPR filing must report the details of the shares issued, the conversion price, and the foreign investor's details.
A Convertible Note (India) does not legally require a lawyer in India, and individuals and businesses may draft and execute the document independently. The Indian Contract Act, 1872 does not mandate legal representation for the creation or signing of this type of document. However, seeking independent legal advice from a qualified India lawyer is recommended for transactions involving substantial financial value, complex regulatory requirements, or cross-border elements where multiple legal jurisdictions may apply. A lawyer can verify that the document complies with all applicable statutory requirements, identify potential risks specific to the transaction, and confirm that the terms adequately protect the interests of all parties involved. The Supreme Court of India has jurisdiction over disputes arising from this type of document, and Registrar of Companies (ROC) may impose additional compliance obligations depending on the nature of the underlying transaction. Professional legal review is particularly advisable where the document will be submitted to government agencies or used as evidence in legal proceedings.
A Convertible Note (India) does not legally require a lawyer in India, though legal advice is recommended. Under Indian law, the Indian Contract Act 1872 governs agreements. The Companies Act 2013 and Registrar of Companies (ROC) regulate corporate documents. The Information Technology Act 2000 governs electronic contracts and data protection. The Consumer Protection Act 2019 provides consumer rights. The Income Tax Act 1961 requires tax compliance. Forms-legal.com provides this template as a starting point — always review with a qualified Indian advocate for significant transactions. Under India law, Indian Contract Act, 1872, parties should seek independent legal advice from a qualified lawyer to confirm compliance with all applicable requirements. Under Indian law, the Indian Contract Act 1872 governs contractual obligations, with Section 10 setting essential requirements for valid agreements. The Companies Act 2013 regulates corporate entities through the Registrar of Companies (ROC) and Ministry of Corporate Affairs (MCA). Forms-legal.com provides this template as a starting point for India-compliant documentation.
This template is provided for informational purposes only and does not constitute legal advice. Laws vary by jurisdiction and change over time. Consult a qualified attorney for advice specific to your situation.Full disclaimer
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