Convertible Note (“CN”) is an attractive financing instruments for early stage funding of Startups due to its flexibility and advantages. StartUps issues CN as a way to meet funds requirement without giving up equity ownership.
As per 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.
Only Startups recognised by the DPIIT (Department for Promotion of Industry and Internal Trade) can issue convertible notes.
In this regard, please note that the term ‘start-up’ or “start-up company” means a private company incorporated under the Companies Act, 2013 (18 of 2013) or the Companies Act, 1956 (1 of 1956) and recognized as start-up in accordance with the notification issued by the Department of industrial Policy and Promotion, Ministry of Commerce and Industry”
- What is the tenure of CN?
CN must be converted into equity shares or repaid within 10 years from the date of issue.
- What is the minimum tranche of Convertible Note?
In addition to the above, please note that the investment amount per investor should not be less than INR 25 lakhs in a single tranche.
- What is the procedure for issuance of CN?
- Finalize the terms and conditions of CN Agreement.
- Preparation/drafting of CN agreement duly containing the terms and conditions of issuance and redemption of CN as agreed between the Investor(s) and the company.
- Convening a board meeting for the approval of CN Agreement and issuance of CN subject to approval of shareholders in general meeting of the company.
- Convening an extra-ordinary general meeting of the shareholders for approval of issuance of CN.
- Filing of e-form MGT-14 with Registrar of Companies (“ROC”) for registration of CN Agreement within 30 days of passing of special resolution.
- Issuance of offer letter to the proposed investors for subscription of convertible notes.
- Receipt of investment money from the respective investor through banking channels.
- Convening of the board meeting for allotment of CN to the investors and issuance of CN certificates to the respective investors.
- File Form CN with RBI within 30 days from the date of the receipt of fund (applicable only if Convertible Note is issued to person resident outside India). Reporting under The Foreign Exchange Management Act, 1999.
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