India Update: Issue of Convertible Notes by Start-up Companies

    View Authors February 2017

    In keeping with the government of India’s “Start-up India” initiative, the Reserve Bank of India (RBI) has opened a new avenue for investments into start-ups in India. With effect from January 10, 2017, foreign investors are permitted to invest in Indian start-ups by subscribing to “convertible notes” issued by such companies. The notification issued by the RBI amends the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations 2000 (FEMA Regulations) – main regulations that govern transfer/ issue of instruments between residents and non-residents.

    The notification defines a “convertible note” to be an instrument issued by a start-up company denoted as debt, which is convertible into equity of such start-up company within five years from the date of issue, upon occurrence of specified events as per the terms and conditions identified in the note.

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