Fundraising & Deal

Convertible Note Agreement

A convertible note may be issued only by a startup recognised by the Department for Promotion of Industry and Internal Trade. If the Company is not recognised, use compulsorily convertible preference shares instead — money received against a note issued by an unrecognised company is a deposit. Execute on stamp paper of the value prescribed in the State of execution.

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Issued by [COMPANY NAME], a DPIIT-recognised startup

THIS CONVERTIBLE NOTE AGREEMENT is made at [PLACE] on [DATE]

BETWEEN:

(1)[COMPANY NAME], a private limited company incorporated under the Companies Act, 2013, bearing CIN [CIN], recognised as a startup by the Department for Promotion of Industry and Internal Trade under recognition number [DPIIT NUMBER] dated [DATE], having its registered office at [ADDRESS] (the "Company"); and

(2)[INVESTOR NAME], [particulars, PAN and residential status under the Foreign Exchange Management Act, 1999] (the "Investor").

The Founders named in Schedule 3 join this Agreement for the purposes of Clause 9 only.

Recitals

A.The Company carries on the business of [DESCRIBE] (the "Business") and is a recognised startup.

B.The Investor has agreed to advance to the Company the Principal Amount on the terms of this Agreement, convertible into equity securities of the Company as set out below.

C.The Board and, where required, the shareholders of the Company have approved the issue of the Note.

NOW THEREFORE the parties agree as follows:

1. Definitions

1.1In this Agreement:

"Conversion Shares" means the equity securities issued to the Investor on conversion of the Note.

"Discount" means [PERCENTAGE] per cent.

"Fully Diluted Basis" means the total share capital of the Company assuming conversion of all convertible securities and exercise of all options and other rights to acquire shares, including the entire employee stock option pool whether or not granted, but excluding the Conversion Shares and the shares issued in the Qualified Financing itself.

"Liquidity Event" means the winding up of the Company, the sale of all or substantially all of its assets or undertaking, any merger, amalgamation or scheme resulting in a change of control, or any transfer of securities resulting in a change of control.

"Maturity Date" means the date falling [NUMBER] years after the Issue Date, being within the maximum period permitted for a convertible note to remain outstanding without being treated as a deposit.

"Note" means the convertible note constituted by this Agreement, in the form of the certificate in Schedule 1.

"Principal Amount" means ₹ [AMOUNT], being not less than ₹ 25,00,000.

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Notes for use

These notes accompany the template and explain the drafting choices, the compliance points and the mistakes most often made with this document. They appear as a final page in the Word file, intended to be deleted before the document is executed.

Three conditions, all mandatory

The note is exempt from the deposit rules only if the issuer is a startup recognised by the Department for Promotion of Industry and Internal Trade, the amount received from a person in a single tranche is not less than ₹ 25,00,000, and the note converts into equity shares or is repaid within the maximum permitted period. Fail any one and the money is a deposit, which brings the whole of the deposit regime with it. Confirm the recognition is subsisting on the issue date, not merely that it was once granted.

The maximum period was extended

The permitted period was originally five years and has been extended to ten. A significant amount of secondary commentary still states five years. Check the current text of the Companies (Acceptance of Deposits) Rules, 2014 and, where a non-resident is investing, the exchange control rules, on the date of issue rather than relying on an article. Clause 1.1 is drafted to take the number from the definition so that a change is a one-line edit.

Non-resident investors — the extra layer

Where the Investor is a person resident outside India, the additional conditions are that the Company operates in a sector where foreign investment is permitted under the automatic route, that the minimum of ₹ 25 lakh per tranche is met, that Form CN is filed with the authorised dealer bank within 30 days of issue, and that conversion complies with the pricing floor with Form FC-GPR filed within 30 days of allotment. A note left unconverted and unrepaid past the permitted period is a contravention requiring compounding, with the associated cost and delay.

The pricing floor is the structural trap

A valuation cap set attractively low can produce a conversion price below the fair market value certified at the time of conversion. For a resident investor that is not a problem. For a non-resident it means the conversion cannot lawfully occur at the agreed price. Clause 3.6 confronts this rather than hiding it. Raise it with counsel when the cap is being negotiated, not when the next round is closing.

Face value floor

Shares cannot be issued below face value. A company with ₹ 10 shares and an aggressive cap can generate a formula price below ₹ 10. Incorporating with ₹ 1 shares removes the problem at no cost. Clause 3.5 provides a fallback but a fallback is not a solution.

Automatic conversion at maturity

Clause 3.4 defaults to conversion if the Investor says nothing. This is deliberate. A note that simply matures unconverted leaves an early-stage company with a repayment obligation it usually cannot meet, and, for a non-resident holder, a regulatory contravention. Investors sometimes want repayment as the default; explain why that is worse for both sides than an automatic conversion with an election to demand repayment.

Interest and withholding

Interest paid or credited to the noteholder is taxable in the holder’s hands and attracts deduction of tax at source. The withholding provisions were consolidated into a single section of the Income-tax Act, 2025 with effect from 1 April 2026; use the current section number on the challan and in any certificate. For a non-resident holder, treaty relief requires a tax residency certificate and the prescribed declaration. Many companies set the rate at nil precisely to avoid all of this.

Angel tax is no longer a consideration

Section 56(2)(viib) of the Income-tax Act, 1961 was omitted with effect from assessment year 2025-26 and has not been re-enacted. Conversion at a discount to the then fair market value does not create a charge on the Company. Keep the valuation record anyway: it is required for company law and, for a non-resident, for exchange control.

Cap or discount, not both

The Investor converts at the lower of the two prices. Investors occasionally propose applying the discount to the cap price. That is a materially better deal for them and should be a conscious concession, not a drafting accident.

What goes in the denominator

Whether the unallocated option pool and other outstanding notes count in the fully diluted figure when applying the cap can change the conversion price by a third. Clause 1.1 defines it explicitly. If the definition is negotiated, run the numbers both ways before agreeing.

Corporate approvals

A convertible note is an offer of securities on a private placement basis and a borrowing that may result in an issue of shares. Section 62(3) of the Companies Act, 2013 requires a special resolution where a loan may be converted into shares, and Form MGT-14 follows. Do not treat the note as a simple loan approved by the board alone.

Stamp duty

The agreement and the note certificate attract State-specific duty; the Conversion Shares attract duty on issue under the Indian Stamp Act, 1899 as amended. Duty on a bond or on an agreement differs by State — identify the right article before executing, since an understamped instrument is inadmissible until duty and penalty are paid.

Current as of

Reflects Indian law current as of {{DATE OF USE}}. Deposit rules, exchange control reporting and DPIIT recognition criteria all change — verify before issue and have the instrument settled by counsel.

This is a ready-to-use template provided for convenience. Laws and requirements change, and every situation is different — please have it reviewed by a qualified professional (a lawyer, company secretary, or chartered accountant as relevant) before you rely on it.