Convertible note in India: rules for startups and investors

A convertible note lets an investor fund a startup now and settle the price later, when a priced round sets it. That is why notes are popular for small early rounds and bridges.

In India, though, a note isn't a contract you can write any way you like. Company law decides who can issue one and for how long, and RBI's foreign exchange rules decide how foreign money comes in.

What is a convertible note in India?

A convertible note is money a startup receives as debt, which the holder can later convert into equity shares or have repaid, within ten years of issue. Until it converts, it sits in the books as a liability, not as share capital, so the holder is a creditor rather than a shareholder.

RBI's Master Direction on Foreign Investment in India gives the formal definition in paragraph 2.5: an instrument issued by a startup company, evidencing money received initially as debt, repayable at the holder's option or convertible into equity shares within ten years, on events agreed in the instrument.

Valuation cap and discount

Most notes fix the price at conversion by formula. A discount gives the holder shares below the next round's price. A valuation cap sets a maximum price, whatever the round's valuation. The holder usually gets whichever of the two gives more shares.

Sample, illustrative	Price per share
Next round price	Rs 100
Price after a 20% discount	Rs 80
Price implied by the cap	Rs 50
Conversion price used	Rs 50, the lower

In this sample, a Rs 50 lakh note converts into one lakh shares. The terms are invented for illustration; the arithmetic is what matters.

Who can issue a convertible note and how much must it be?

Only a DPIIT-recognised startup can issue one, and each investor must put in at least Rs 25 lakh in a single tranche. Outside that exemption, money raised this way would usually count as a deposit under the Companies Act, which carries conditions a young private company can't easily meet.

The exemption sits in the Companies (Acceptance of Deposits) Rules, 2014. It excludes from deposits an amount of Rs 25 lakh or more received by a startup company from a person, in a single tranche, by way of a convertible note. That copy of the Gazette text still shows the original five-year limit.

A notification of 7 September 2020, summarised by AZB & Partners, extended the window to ten years. A June 2026 Bar & Bench piece confirms the current position: DPIIT-recognised startups only, at least Rs 25 lakh per investor, converted or repaid within ten years.

If you aren't yet recognised, start there. DPIIT recognition benefits for fundraising covers what it unlocks.

How do RBI's FEMA rules treat convertible notes from foreign investors?

Foreign investors can buy convertible notes from an Indian startup for Rs 25 lakh or more in a single tranche, under paragraph 6.14 of RBI's Master Direction. Conversion into equity must follow the FDI entry route, sectoral caps and pricing guidelines, and sectors needing government approval need it for the note too.

The Master Direction, updated up to 15 June 2026, adds these conditions:

• Citizens and entities of Pakistan or Bangladesh can't invest through this route.
• Money must come by inward remittance through banking channels or from a repatriable account; an escrow account used for it must close within six months.
• NRIs and OCIs can also hold notes on a non-repatriation basis.
• Notes can be transferred between residents and non-residents if entry routes and pricing guidelines are met.
• Repayment or sale proceeds can be sent abroad or credited to a repatriable account.

Reporting of the issue to RBI through your bank is governed by FEMA's separate reporting regulations, which the Master Direction points to. Pricing is the trap: a deep discount can collide with the fair value rules on conversion, so check it with a FEMA adviser before you sign.

A note defers the price, not the paperwork: the limits on who issues it, how much and for how long are fixed by law.

How does a convertible note compare with CCPS and an iSAFE?

A convertible note is debt that can be repaid. CCPS are preference shares that must convert into equity, so the investor is a shareholder from day one. An iSAFE in India is usually issued as CCPS, priced later by a cap and discount, and can't be redeemed.

	Convertible note	CCPS	iSAFE
What the holder is	A creditor until conversion	A preference shareholder	Usually a CCPS holder
Can be repaid?	Yes, at the holder's option	No, must convert	No
Who can issue	DPIIT-recognised startups only	Any company	Any company issuing CCPS
Minimum cheque	Rs 25 lakh per investor, one tranche	None set by law	None set by law
Price set	At conversion, by formula	Usually at issue	At conversion, by cap and discount

The difference between CCPS and CCDs explains the share and debenture options in more depth, and iSAFE notes in India explained covers how that instrument is drafted.

What should founders check before signing a convertible note?

Check four things first: that the company is DPIIT-recognised, that each cheque is at least Rs 25 lakh in one tranche, what happens at maturity if no round arrives, and how the cap and discount will convert on your cap table. The maturity clause matters most.

Because a note can be repaid, a round that never comes can turn it into a debt the company owes. Read what triggers repayment, whether the holder can choose conversion at a set price instead, and whether a most-favoured-nation clause updates the note if later investors get better terms.

Define the qualifying round in the note itself: what kind of round triggers conversion, whether the holder or the company decides, and which documents the holder must sign. Conversion is an allotment of equity shares, so the usual company filings follow, and a foreign holder's conversion must again meet the pricing guidelines.

Then model it. Stack every note and iSAFE outstanding, convert them at the next round's likely price, and see what founders and the new investor own. The term sheet clauses investors read closely are the ones that will apply after conversion. This post explains the rules; it isn't legal advice, so have a lawyer review the note.

Questions

Who can issue a convertible note in India?

Only a startup company recognised by the DPIIT. For other companies, money raised this way would usually count as a deposit under the Companies Act, with heavy conditions. The startup can issue notes to resident and, under RBI rules, to non-resident investors, subject to sector approvals where they apply.

What is the minimum amount for a convertible note in India?

Rs 25 lakh or more from each investor, in a single tranche. The Companies (Acceptance of Deposits) Rules exclude such notes from the definition of deposit, and RBI's Master Direction on foreign investment sets the same Rs 25 lakh single-tranche floor for non-resident investors.

How long can a convertible note stay outstanding in India?

Up to ten years from the date of issue. Within that period the note must convert into equity shares or be repaid at the holder's option. The limit was five years until a September 2020 amendment to the deposit rules, and RBI's definition also uses ten years.

Is a convertible note better than an iSAFE or CCPS?

Neither is better in general. A note is debt and can be repaid, which protects the investor if no round happens. An iSAFE is usually issued as CCPS, so it is equity from day one and can't be redeemed. A lawyer can advise which suits a given round.

Sources: Reserve Bank of India, Master Direction: Foreign Investment in India, updated up to 15 Jun 2026 · Tripura High Court library copy of the Gazette text, Companies (Acceptance of Deposits) Rules, 2014 · AZB & Partners, Amendment to Acceptance of Deposits Rules for start-up companies, 30 Sep 2020 · Bar & Bench, Convertible Notes and SAFE notes in India: the dilemma, 9 Jun 2026

For more on how startup funding works in India, read the MyStartupValley blog or visit mystartupvalley.com.