How to Review a Convertible Note in India (CCD Structure)

A convertible note is money now, equity later, priced by a formula instead of a valuation argument. In the US that is one instrument. In India it is two, and they are not interchangeable. Most bridge rounds here use a Compulsorily Convertible Debenture (CCD) under Section 71 of the Companies Act, 2013, debt until it converts, then treated as pure equity, permanently. A smaller set of DPIIT-recognised startups instead use the RBI's purpose-built "convertible note", which genuinely stays debt, repayable at the holder's choice, until conversion actually happens. The biggest mistake founders and angels make is treating these as the same document with different names. This guide (published by Adira, which makes contract review and CLM software, so we have a commercial stake in you getting good at this, but the guide stands on its own) walks through both, with the maths and the FEMA mechanics for foreign money.

What a convertible note actually is, and which of the two you have

Both instruments do the same commercial job: an investor pays now, gets equity later, at a price set by a cap and/or discount rather than a valuation fixed today. Where they differ is legal character.

A CCD is a debenture issued under Section 71 that must convert into shares, wholly or in part, "at the time of redemption." Because conversion is compulsory, Indian courts and regulators treat it as economically equity, even while it sits on the balance sheet as debt pre-conversion. Any company, startup or not, can issue one.

The RBI "convertible note" is narrower: available only to a DPIIT-recognised startup, only in tranches of Rs 25 lakh or more, and its defining feature is that the holder can choose repayment instead of conversion. It stays debt in substance until the holder elects otherwise or a conversion trigger occurs.

Read the conversion clause first: does it say "shall convert" (CCD, compulsory) or "at the option of the holder" (RBI convertible note)? That phrase changes almost everything downstream, including what happens if the company never raises another round.

Who signs it and what triggers conversion

A convertible note sits between a SAFE-style instrument and a plain loan: the company gets cash without a priced round, and the investor gets a claim that converts into equity, usually triggered by the next "Qualified Financing" (a priced round raising above a stated minimum), sometimes an acquisition, an IPO, or the maturity date itself. Founders use it for a bridge between rounds, or a seed round too small to justify a full valuation fight; investors use it because a cap and discount protect their downside if the company's value climbs fast before the next round.

Principal, interest, cap and discount, worked with real numbers

Unlike a SAFE, a convertible note (either flavour) usually carries interest, because it is formally a debt instrument until it converts. That interest feeds directly into the conversion maths, where it quietly differs from an iSAFE.

Worked example. A DPIIT-recognised startup issues an RBI convertible note: principal Rs 60,00,000, simple interest at 8% per annum, an 18-month term, a Valuation Cap of Rs 8,00,00,000, and a Discount of 15%, against 80,00,000 fully diluted shares outstanding. At exactly maturity, the company closes a Series A at a Rs 20,00,00,000 pre-money valuation, with a new investor putting in Rs 5,00,00,000.

Accrued interest = Rs 60,00,000 x 8% x (18/12) = Rs 7,20,000. Total conversion amount = Rs 60,00,000 + Rs 7,20,000 = Rs 67,20,000.

Round price = Rs 20,00,00,000 / 80,00,000 shares = Rs 25.00/share.

Cap price = Rs 8,00,00,000 / 80,00,000 shares = Rs 10.00/share.

Discount price = Rs 25.00 x (1 − 0.15) = Rs 21.25/share.

The lower price governs: Rs 10.00 (cap). Shares issued = Rs 67,20,000 / Rs 10.00 = 6,72,000 shares.

Compare that to a note with no interest: Rs 60,00,000 / Rs 10.00 = 6,00,000 shares. The accrued interest alone bought the noteholder 72,000 extra shares, worth Rs 7,20,000 at the cap price, purely from sitting unconverted for 18 months. This trips people moving from SAFE or iSAFE maths, where there is no interest line at all. Check: is interest simple or compounding, and does it stop accruing at the trigger date or keep running until closing?

Adding the new investor's 20,00,000 shares (Rs 5,00,00,000 / Rs 25.00), fully diluted shares total 1,06,72,000. The noteholder's stake is 6,72,000 / 1,06,72,000, roughly 6.3%, for a Rs 60,00,000 cheque, more than double the 2.8% a straight round-price conversion (no cap, no interest) would give.

Maturity: the feature a SAFE and an iSAFE do not have

A convertible note has a maturity date. A SAFE or iSAFE does not, which is why a note is riskier for founders and safer for investors on the downside. Does the note convert automatically at the cap price if no priced round has happened by then, or fall due for repayment? If repayment is the holder's option, can the company actually pay, or does maturity force a renegotiation from weakness? Is there an extension mechanism, and whose consent does it need?

The test: Ctrl+F "Maturity Date" and read the very next clause. Silence on the consequence is not neutral, it defaults to whichever party has more leverage when the date arrives, usually the investor.

Seniority: debt until it isn't, and the surprise in insolvency

Pre-conversion, a CCD or convertible note ranks as unsecured debt: ahead of equity, behind secured lenders, in a wind-down. What surprises people is what happens to a CCD's ranking once conversion is compulsory.

In M/S IFCI Limited v. Sutanu Sinha, Civil Appeal No. 4929/2023 (Supreme Court, decided 9 November 2023), IFCI had subscribed to CCDs in a road-project company that later went insolvent, and argued it should sit on the Committee of Creditors as a financial creditor. The Court disagreed: because the CCDs were compulsorily convertible, with no repayment of principal, they did not amount to "financial debt" under the IBC and had to be treated as equity. This traced back to the older test in Narendra Kumar Maheshwari v. Union of India, 1989 AIR 2138: an instrument that does not contemplate repayment of principal does not function as a debenture in the classic sense, whatever the cover page calls it.

A CCD-holder who assumes they can fall back on creditor status if the company fails is often wrong. A genuine RBI convertible note, which does contemplate repayment, sits on firmer ground here.

FEMA compliance if the investor is not resident in India

If the investor is a non-resident, only the RBI convertible note route (or a CCD, a recognised FEMA equity instrument) works cleanly, and only for a DPIIT-recognised startup. The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 define a "Convertible Note" as an instrument "issued by a startup company acknowledging receipt of money initially as debt... which is convertible into such number of equity shares of that company... upon occurrence of specified events." The outer conversion or repayment window now runs to ten years, extended from the instrument's original five-year cap.

Source: Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (TaxGuru, full text)

Four conditions apply: the issuer must be DPIIT-recognised; the investor must put in Rs 25 lakh or more per tranche (Pakistan and Bangladesh citizens and entities are excluded); the conversion price cannot be lower than the fair value determined at issuance, not at conversion, the reverse of the usual FEMA rule for a fresh equity round; and the company must file Form CN with its Authorised Dealer bank within 30 days of receiving the money, then Form FC-GPR within 30 days of conversion.

Source: RBI Master Direction on Reporting under FEMA, 1999

Miss the DPIIT recognition, the Rs 25 lakh floor, or the filing, and the standard FEMA contravention penalty applies: up to three times the sum involved, or Rs 2 lakh if the amount cannot be quantified, plus a continuing daily penalty, under Section 13, FEMA, 1999.

CCD vs pure debt: the deposit-rules trap

Section 2(31) of the Companies Act, 2013 defines "deposit" broadly enough to catch almost any money a company receives that does not fit a carve-out in the Companies (Acceptance of Deposits) Rules, 2014. Two carve-outs matter here, and it is easy to confuse them.

Rule 2(1)(c)(ix) exempts "bonds or debentures compulsorily convertible into shares of the company within ten years" from the deposit definition. This is the CCD route: no DPIIT recognition, no Rs 25 lakh minimum, available to any company, provided conversion is compulsory within ten years.

Rule 2(1)(c)(xviia) separately exempts "an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into ... equity shares," for amounts of Rs 25 lakh or more, issued only by a DPIIT-recognised startup. This is the RBI convertible note route.

Source: Rule 2(1)(c), Companies (Acceptance of Deposits) Rules, 2014 (Indian Kanoon)

Fall outside both, and the money risks being an unauthorised deposit. Section 73(1) bars accepting deposits outside the manner Chapter V permits, and Section 76A sets the penalty: a fine of Rs 1 crore to Rs 10 crore for the company, or twice the deposit amount if lower, plus repayment with interest, and imprisonment up to seven years or a fine of Rs 25 lakh to Rs 2 crore for every officer in default.

Source: Section 73, Companies Act, 2013 (CAIRR)

One side effect of the CCD route: because conversion is compulsory, Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 exempts fully convertible debentures from creating a Debenture Redemption Reserve, a requirement that still applies to non-convertible or partly convertible debt.

An iSAFE or bare SAFE, by contrast, has no interest and no maturity date, and (for an iSAFE) is structured as an agreement to issue CCPS, not debt at all. Founders often prefer that for exactly this reason, nothing falls due if the next round is delayed; investors sometimes prefer a note because a maturity date creates pressure to resolve things. See how to review a SAFE or iSAFE in India for that instrument's mechanics.

Red flags

Normal	Red flag	Why it matters
Conversion clause clearly states "shall convert" (CCD) or "at the option of the holder" (RBI note)	Ambiguous language mixing both, or unclear which instrument this is	Determines FEMA treatment, deposit-rules exemption, and insolvency ranking
Interest rate, accrual basis, and stop-accrual date all stated	Interest rate stated with no accrual mechanics, or silent on when it stops	Interest can materially change the number of shares issued, as shown above
Maturity date paired with an explicit automatic outcome (convert at cap, or repayment due)	Maturity date stated with no consequence specified	Defaults to whichever party has leverage when the date arrives
DPIIT recognition and Rs 25 lakh minimum both confirmed, for the startup-note route	Startup not DPIIT-recognised, or tranche below Rs 25 lakh, using the note route anyway	Falls outside Rule 2(1)(c)(xviia); risks unauthorised deposit exposure
Foreign investor instrument is a CCD or a proper RBI convertible note	Foreign investor asked to sign a bare, undefined "convertible note"	May not report cleanly through Form CN or qualify as a recognised FEMA instrument
Conversion price floor tied to fair value at issuance (for FEMA cases)	Conversion price floor tied to fair value at conversion, or undefined	Gets the FEMA pricing direction backwards; can block RBI reporting
Qualified Financing has a defined minimum raise size, and cap/discount both defined with "lower of the two" stated	Any priced round triggers conversion, or only one of cap/discount is defined	A small round or ambiguous pricing can force an unintended outcome

Bad clause, better clause

Bad: "The Company issues this Convertible Note to the Investor for Rs 60,00,000. The Note carries interest at 8% per annum and will convert into equity shares upon the Company's next financing round, at a 15% discount to the price paid by new investors."

What is wrong: no valuation cap, no fully diluted basis for computing conversion, no minimum raise size for the triggering round, no maturity date or consequence, and no statement of whether this is a CCD or the DPIIT-startup route, so its FEMA and deposit-rules treatment cannot be checked.

Better: "The Company issues this Convertible Note to the Investor for Rs 60,00,000, repayable at the option of the Investor or convertible into equity shares of the Company on the terms below, pursuant to Rule 2(1)(c)(xviia) of the Companies (Acceptance of Deposits) Rules, 2014, the Company being a DPIIT-recognised startup. Interest accrues at 8% per annum, simple, from the date of receipt until the earlier of conversion or repayment. Upon a Qualified Financing (a priced equity round raising not less than Rs [X] from new investors), the outstanding principal and accrued interest shall convert into equity shares at the lower of (a) Rs 8,00,00,000 divided by the Company's fully diluted share capital immediately before the Qualified Financing, and (b) the round price per share reduced by 15%. If no Qualified Financing occurs by [Maturity Date, no later than 10 years from issue], the Investor may elect either repayment of principal and accrued interest, or conversion at the Valuation Cap price."

What changed: the instrument names its statutory basis, states plainly that it is debt repayable at the holder's option, defines the fully diluted basis, gates the trigger with a minimum raise size, and closes the maturity gap with an explicit election.

How this interacts with related documents

• The term sheet. The conversion maths here, cap, discount, fully diluted basis, feeds directly into the Series A cap table the term sheet negotiates. See how to review a term sheet in India.
• MFN clauses. Multiple notes issued over a bridge period often carry MFN rights against each other; check the cascade before agreeing to a low cap.

You can mark up a convertible note clause by clause, and check the conversion and maturity language against the checklist above, for free in Weave.

US and global contrast

In the US, a convertible note is one instrument, not two: debt with interest, a maturity date, a cap and/or discount, governed by ordinary contract law, with no equivalent of India's "deposit" regime or FEMA pricing rules. There is no DPIIT recognition requirement, no Rs 25 lakh floor, and no separate CCD concept, since US law does not distinguish "compulsorily convertible" debt from ordinary convertible debt the way Indian insolvency law now does after IFCI v. Sutanu Sinha. A US lawyer reviewing an Indian note for the first time typically misses the CCD-versus-RBI-note distinction entirely, because nothing in US practice maps onto it.

FAQ

Is a convertible note the same as a CCD in India? Not necessarily. A CCD must convert into shares, available to any company. The RBI "convertible note" is narrower, for DPIIT-recognised startups only, in tranches of Rs 25 lakh or more, and lets the holder choose repayment instead. Read the conversion clause to see which you have.

Does a convertible note always carry interest? Usually, since both start life as debt. Interest accrues into the conversion amount and changes the shares issued, unlike an iSAFE or SAFE, which carry none.

What happens if the company never raises another round before maturity? Depends entirely on the text. Some notes convert automatically at the cap price; some give the holder a choice between conversion and repayment; some are silent, which usually favours whoever has more leverage.

Can a foreign investor hold a CCD-style convertible note? Yes, a CCD is a recognised FEMA equity instrument. A bare, undefined "convertible note" is riskier, since it may not report cleanly through Form CN or FC-GPR.

Is a CCD treated as debt or equity if the company goes insolvent? As equity, per the Supreme Court in IFCI Limited v. Sutanu Sinha (2023). Because conversion is compulsory with no repayment of principal, CCDs are not "financial debt" under the IBC, so a holder generally cannot claim creditor status in a CIRP on the CCD alone.

Do I need DPIIT recognition to issue a convertible note? Only for the RBI route under Rule 2(1)(c)(xviia). A CCD under Rule 2(1)(c)(ix) needs none, since its exemption depends only on being compulsorily convertible within ten years.

This guide gets you to understanding how a convertible note works in India, which of the two instruments you have, and the numbers and clauses to check before signing. It does not tell you whether the note in front of you, given your DPIIT status, investor residency, and cap table, is correctly structured or fairly priced. That depends on facts this page cannot see, and is not legal advice. Talk to a lawyer, and a chartered accountant for the FEMA and tax angles, before you issue or accept one.