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 Notes | Compulsory Convertible debentures (CCD) | |
|---|---|---|
| Pre-requisites to issue Convertible notes and compulsorily convertible debentures | Only a Private Limited company can issue | Only Private limited companies can issue |
| You should be a recognised start-up by DIPP | No such condition | |
| Minimum amount to be subscribed by 1 person should be 25 lakhs or More | No 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 debentures | The valuation report is not required | The valuation report is not required if issued to domestic investors. Required if raised from foreign investors. |
| Which one is better – Convertible Notes or CCD | If issuing to foreign investors then Convertible notes should be preferred. | If issuing to domestic investors then CCD is the only option. |
| Option to convert | The convertible notes are convertible in equity at the option of buyer. | These are compulsorily convertible in Equity Shares. |
| Requirement of Valuation report | Valuation Report not required | Valuation 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.