When you raise money in India, you rarely sell plain equity shares at the seed stage. Instead you use convertible instruments that let you defer the valuation fight and stay compliant with the rules on foreign money. Four instruments dominate Indian cap tables: CCPS, CCD, iSAFE and convertible notes. Each turns into equity shares later, but they differ in who can issue them, their legal form, and how FEMA treats a cheque from outside India. Here is what a first-time founder needs to know.
CCPS: the workhorse of priced rounds
Compulsorily Convertible Preference Shares are preference shares that must convert into equity shares on agreed triggers, such as the next round, an IPO, or a long-stop date. Because the conversion is compulsory and never optional, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 treat CCPS as an equity instrument, so a foreign investor can buy them under the FDI route. CCPS carry investor protections like a liquidation preference, anti-dilution and a nominal dividend, and are issued under Sections 42, 55 and 62 of the Companies Act, 2013. Most institutional Indian VC term sheets, from Series A onward, are structured as CCPS.
CCD: debt features with a compulsory equity exit
Compulsorily Convertible Debentures are a debt-style instrument that must convert into equity, and are usually structured to convert within 10 years so they are not treated as a "deposit" under company law. Any private company can issue them, not only a startup, which makes CCDs popular for parent-to-subsidiary funding and for investors who want a coupon plus equity upside. Under FEMA, because conversion is compulsory, a CCD is also an equity instrument from day one.
iSAFE: the founder-friendly angel instrument
The India Simple Agreement for Future Equity was released by 100X.VC in July 2019 as a lightweight adaptation of Y Combinator's SAFE. The key point: in India an iSAFE is issued as CCPS, which is what makes it enforceable under company law and compliant under FEMA. It is deliberately stripped down, with minimal governance rights, a nominal dividend and standard conversion triggers, so it suits fast angel and accelerator cheques. Because it is CCPS underneath, the same equity treatment and filings apply.
Convertible Notes: a startup-only bridge
A convertible note is the only instrument here that starts life as actual debt. Under Indian rules, only a DPIIT-recognised startup may issue one. The holder can either convert into equity or ask for repayment, and that conversion or repayment must happen within 10 years. There is also a hard floor on the cheque size: any single investor, resident or non-resident, must put in at least INR 25 lakh in one tranche, and it cannot be built up from smaller amounts. When the money comes from abroad, the startup must additionally operate in a sector where 100% FDI is allowed under the automatic route. Notes are ideal for a quick bridge before a priced round, when you want to postpone setting a valuation.
The FEMA points for foreign investment
- Keep conversion compulsory. CCPS, CCD and iSAFE count as equity instruments only if conversion is mandatory. An instrument that is optionally convertible or redeemable at the holder's choice gets reclassified by FEMA as debt (external commercial borrowing), which is far more restrictive. Avoid that trap.
- Mind the pricing floor. Shares or convertibles issued to a non-resident cannot be priced below fair market value, determined by an internationally accepted methodology and certified by a SEBI-registered Category I merchant banker or a chartered accountant.
- File on time. Allotment of equity instruments (equity shares, CCPS, CCD) to a foreign investor must be reported in Form FC-GPR on the RBI's FIRMS portal within 30 days. A convertible note issued to a non-resident is reported separately in Form CN, also within 30 days. File the annual FLA return as well.
- Register with DPIIT early. Recognition is what unlocks the ability to issue convertible notes and several other startup benefits.
Which one, when
Reach for a convertible note or iSAFE for a fast, low-cost seed or bridge. Use CCPS for a priced institutional round where investors want board and protective rights. Use a CCD when you want debt-like features or are funding a subsidiary. Whatever you pick, have a company secretary or lawyer run the FC-GPR or Form CN filing, because missed FEMA reporting carries penalties under the Act.