Know about Convertible Notes for Indian Startups
For the last few years, one of the most focused areas of the Indian government has been startups. Furthermore, the government has been supporting not only local businesses but also foreign companies to help them maximize their potential and promote India as an investor’s hub worldwide. To achieve the goal, a number of measures have been taken. One of the critical measures includes issuing convertible notes for Indian startups for raising funds.
In seed investment, convertible notes are a popular mode of investment. For foreign investors in India, the government had earlier permitted only fully or compulsorily convertible instruments. These instruments were ‘compulsorily convertible debentures’ or ‘compulsorily convertible preference shares.’
Characteristics of Convertible Notes for Indian Startups
An amendment in Indian company law forbade the use of convertible notes for deposits. In 2017, the Reserve Bank of India made necessary amendments to exchange control regulations for allowing startups to raise funds with convertible notes. Given below are the characteristics of this amendment, to issue convertible notes for Indian startups to foreign investors:
- A convertible note is an instrument issued to prove the money received by a startup as a debt initially. It is repayable by the holder. On the other hand, you can also convert it into equity shares of the startup depending on agreeable terms and conditions.
- A startup can issue a convertible note worth a minimum of INR 2.5 Million to a foreign investor.
- The startup engaged in a business covered under the approval route of the regulatory framework of FDI needs the government’s approval before issuing any convertible note. However, the startups in automatic routes do not require any such authorization and can freely issue the convertible notes.
- The holder of a convertible note can transfer it freely as per the pricing regulations of RBI. The RBI states that the holder can’t make a transfer with an assured return. Moreover, the price must comply with a fair market value.
- Any convertible note issued to a foreign investor or transferred needs to be reported to the RBI as per the reporting requirements.
India as a Future Startup Hub
India is ranked third in most tech startups with over 4750 startups, following the United States and England. This step of raising funds by issuing convertible notes to Indian startups provides them with ample worldwide opportunities for the investor.
However, the implementation of pricing guidelines to maintain a fair market reduces the impact of convertible notes. Therefore, startups have been hoping that RBI will spare the convertible notes from its pricing guidelines. This amendment will allow businesses to this instrument to its full extent.
With startups growing all over the country, the chance for many ventures to go unnoticed is very high. This is because of the lack of legal and professional knowledge in India’s company law. Not many people with a startup idea have ideas or techniques to raise funds.
3E Accounting services can help you raise funds and make a startup profitable. We have a solution to all your business problems to prevent you from a fiasco. Our team of highly professional and experienced members offers different India business setup services. Reach out to us to learn more about business strategies and how you can grow your startup and make it successful. For any queries, you can contact us via mail or phone.