Startups can issue convertible notes to foreign investors

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The Reserve Bank of India (RBI) has amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (TISPRO), through a notification on 10 January to allow startups to issue convertible notes to foreign investors.

Startup_business,_rocket_launchThe key amendments are as follows:

Definition of “convertible note”: Regulation 2 of TISPRO has been amended to include the definition of “convertible note” as an instrument issued by a startup company showing a receipt of money as debt, repayable at the option of the holder, or an instrument which is convertible into a number of equity shares of a startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

Minimum investment amount: The minimum investment amount needs to be equal to or more than ₹2.5 million (US$37,000) receivable in a single tranche.

Requirement of governmental approval: Any startup company that is engaged in a sector where foreign investment requires prior government approval under schedule 1 of TISPRO may issue convertible notes to a non-resident with such prior approval. Transfer of such convertible notes would also require prior governmental approval.

Receipt of consideration and escrow account: The consideration would be received by inward remittance through banking channels or by debit to the non-resident external account, foreign currency non-resident (bank) account or escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.

Issuance to non-resident Indians: A non-resident Indian can acquire convertible notes only on a non-repatriation basis in accordance with schedule 4 of TISPRO.

Transfer from non-resident to non-resident: A person resident outside India is allowed to acquire or transfer, by way of sale, convertible notes from or to a person resident in or outside India provided that the transfer takes place in accordance with the pricing guidelines prescribed by the RBI.

Reporting requirements: Startup companies would be required to furnish reports of issuance of convertible notes to the RBI.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley and Munich. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.