Issue of Compulsory Convertible Debentures & Convertible Notes

All about Convertible Notes and Compulsory Convertible Debentures (CCD)

Safe agreement or safe notes in India mean convertible note or compulsorily convertible debentures. A start-up can use many instruments to raise funds as mentioned above. If you want to issue instruments which can be converted into equity at future date and valuation then the most suitable instruments are Convertible notes and Convertible Debentures.

The difference between Convertible Notes and Compulsorily Convertible Debentures is as follows:

 Convertible NotesCompulsory Convertible debentures (CCD)
Pre-requisites to issue Convertible notes and compulsorily convertible debenturesOnly a Private Limited company can issueOnly Private limited companies can issue 
 You should be a recognised start-up by DIPPNo such condition
 Minimum amount to be subscribed by 1 person should be 25 lakhs or MoreNo Such Condition
Procedure to issue Convertible Notes and Convertible Debentures (CCD)

Step 1: Pass a board resolution and conduct EOGM authorising the issue of CN. File form MGT 14

Step 2: Issue CN

Step 1: Pass a board resolution and conduct EOGM authorising the issue of CN. File form MGT 14

Step 2: Once the investor deposits the money file PAS 3

Requirement of Valuation report for convertible notes or convertible debenturesThe valuation report is not requiredThe valuation report is not required if issued to domestic investors. Required if raised from foreign investors.
Which one is better – Convertible Notes or CCDIf issuing to foreign investors then Convertible notes should be preferred.If issuing to domestic investors then CCD is the only option.
Option to convertThe convertible notes are convertible in equity at the option of buyer.These are compulsorily convertible in Equity Shares.
Requirement of Valuation reportValuation Report not requiredValuation report required only when issued to foreign investors
Our Analysis:

The convertible notes are best suited when issuing them to foreign investors as they are well known in Silicon Valley. CCD’s are most suited when domestic investors are involved.