Fund · Startups
How are convertible notes, CCPS and SAFE-style instruments treated in India?
How convertible notes, compulsorily convertible preference shares and SAFE-style instruments are treated under Indian law.
Indian company and exchange control law does not recognise a SAFE in its original United States form, since an instrument generally has to convert on pre-agreed terms within a defined period. A convertible note, available to a startup under specific rules, and compulsorily convertible preference shares are the two instruments generally used instead. Both convert into equity shares, since only a fully and compulsorily convertible instrument is treated as equity for foreign exchange purposes. An instrument with an option not to convert is treated as debt.
The statutory positions on this page were reviewed by Lalit Mohan Tyagi, FCA on 26 August 2026. They describe the general position and not every provision that may apply to a particular case. Confirm your own position with the firm before you act on it.
Why can a startup in India not simply use a US-style SAFE?
A Simple Agreement for Future Equity, as used in the United States, generally has no fixed conversion date and no fixed maximum period before it converts or is repaid.
Indian company and exchange control law generally requires an instrument accepted from an investor to convert into equity, or otherwise be settled, within a defined period.
As a result, an open-ended agreement in the US form is not directly usable, and Indian startups use a convertible note or preference shares instead.
What is a convertible note, and who can issue one?
A convertible note is a debt instrument that converts into equity shares, or is repaid, within a defined period from the date of issue.
Under Indian company law, a convertible note in this specific form can generally only be issued by a startup, as defined for this purpose.
It is a commonly used instrument for an early, single-investor bridge round ahead of a larger priced round.
What is the maximum period within which a convertible note must convert or repay?
A convertible note must convert into equity shares or be repaid within a prescribed maximum period from the date of issue.
If neither happens within that period, the instrument falls outside the specific convertible note framework and its treatment needs to be reconsidered.
The exact number of years for this maximum period is stated in the statutory basis table below.
What are compulsorily convertible preference shares?
Compulsorily convertible preference shares are preference shares that must convert into equity shares, on terms agreed at issue, with no option to remain as preference shares indefinitely.
They generally carry a fixed conversion ratio or a ratio calculated by a pre-agreed formula, set out in the share subscription agreement.
They are widely used in a priced funding round, since they let an investor hold preference rights until conversion.
Why does compulsory and full convertibility matter for foreign investment?
Foreign exchange law treats an instrument as equity, referred to as a capital instrument, only where it is fully and compulsorily convertible into equity shares.
A fully and compulsorily convertible instrument can generally be issued to a foreign investor under the same route as an ordinary equity share.
An instrument that is only optionally convertible is not treated as a capital instrument for this purpose.
How does an optionally convertible instrument get treated differently?
An optionally convertible debenture or optionally convertible preference share is treated as debt under foreign exchange law, since conversion is not guaranteed.
Debt raised from a foreign investor generally falls under a separate borrowing framework, with its own conditions and reporting.
A startup intending to raise funding as equity should confirm that the instrument it plans to use is, in fact, fully and compulsorily convertible.
What terms are usually negotiated in a convertible note?
The conversion trigger, typically the next priced funding round, is set out alongside a valuation cap and a discount to that round's price.
An interest rate, even if notional, is often included, since the instrument is legally a debt instrument until conversion.
The maximum period before conversion or repayment, described above, is also stated in the note.
Does a convertible note issued to a foreign investor need FEMA reporting?
Yes. A convertible note issued to a person resident outside India is separately reported under the FEMA reporting framework described on the FEMA reporting page.
A minimum investment amount, prescribed under FEMA, applies to a convertible note issued to a foreign investor.
The reporting timeline and form used differ from the FC-GPR filing used for an ordinary equity allotment.
Statutory basis
| Position | Rests on | Stated as at | Status |
|---|---|---|---|
| Only a startup, as defined for this purpose, can issue a convertible note under the specific rules that create this instrument. | Companies Act, 2013 read with the Companies (Acceptance of Deposits) Rules, 2014, as amended, and the FEMA (Non-Debt Instruments) Rules, 2019 | August 2026 | Verified |
| A convertible note must convert into equity shares or be repaid within a maximum period prescribed under the applicable rules, from the date of its issue. | Companies (Acceptance of Deposits) Rules, 2014, as amended, and the FEMA (Non-Debt Instruments) Rules, 2019 | August 2026 | Verified |
| Only a fully and compulsorily convertible preference share or debenture is treated as a capital instrument, meaning equity, under FEMA; an instrument with an option is treated as debt. | FEMA (Non-Debt Instruments) Rules, 2019 | August 2026 | Verified |
| A convertible note issued to a person resident outside India must be for a minimum investment amount prescribed under FEMA. | FEMA (Non-Debt Instruments) Rules, 2019 | August 2026 | Verified |
Can a startup issue an uncapped convertible note like a US SAFE?
Indian rules generally require a defined maximum period before conversion or repayment, so an open-ended instrument in the US SAFE form is not directly usable.
Does a convertible note count as a deposit under company law?
A convertible note issued under the specific rules for that instrument is treated separately from an ordinary deposit, subject to meeting the conditions those rules set.
What happens if a convertible note is not converted within the prescribed period?
The instrument falls outside the specific convertible note framework, and its treatment needs to be reconsidered against general company law and FEMA rules.
Are optionally convertible debentures used by startups in India?
They are used in some structures, but are treated as debt under FEMA rather than equity, which affects how the funding is reported and repaid.
Does converting a note into shares need a fresh valuation?
A conversion generally follows the price formula agreed in the note itself, though a valuation can still be needed for company law and tax compliance at conversion.
Related pages in this section
Last reviewed 26 August 2026.