Start-ups get more flexibility on structuring convertible notes

KR Srivats New Delhi | Updated on September 08, 2020

MCA amends deposit rules; move to provide relief for start-ups in uncertain times

The Corporate Affairs Ministry (MCA) has sweetened the deal for start-ups by allowing them to raise funds through convertible instruments on extended terms of repayment — upto ten years, without being categorised as ‘deposits’ for company law compliance purposes.

A convertible bond is a debt security that provides an investor with a right to exchange the bond for pre-determined number of shares on a maturity date. Till then, the bond holders will get interest on the money invested through the Convertible Note or bond.

MCA has now amended seven-year-old ‘acceptance of deposits’ rules to specify that an amount of ₹25 lakh or more received by a start-up by way of a convertible note (convertible into equity shares or repayable within a period of ten years from the date of issue) in a single tranche, from a person would not be considered as a ‘deposit’.

RBI directive

Prior to this change, the maximum repayment period for the convertible note was only five years.

This latest move comes when start-ups are facing cash crunch and uncertain times due to Covid-19. It also comes on the heels of the Reserve Bank of India (RBI) allowing banks to lend to start-ups under priority sector lending guidelines.

Experts’ take

Atul Pandey, Partner, Khaitan & Co, said this MCA move gives promoters an extended window to repay monies raised against existing convertible notes. “Convertible note as an instrument is still finding its ground in India, and this change is expected to make them more attractive”, he said.

Aseem Chawla, Managing Partner, ASC Legal, said the amendment will enable start-ups to raise funds through convertible instruments whose terms of repayment can now be extended to 10 years from the current stipulated period of maximum five years. This would provide additional flexibility to the investors and the start-up community to raise funds having a longer term of repayment or conversion into equity, he said.

Harish Kumar, Partner, L&L Partners, said that the limits of total deposit from members doesn’t apply to a private company which is a start-up for five years from date of incorporation. This time period has now been amended to ten years. “This means a start-up private company can accept deposits from its members without any time limit till ten years from its incorporation,” he said.

Published on September 08, 2020

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