Convertible Notes in India for Foreign Investors: Everything That Changed in 2026

Picture this. An angel investor sitting in San Francisco decides to back an Indian startup. He transfers money. No shares change hands. No valuation is set. The deal is simple — the money will turn into equity at the startup's next funding round, at a better price than what that round offers.

In Silicon Valley, this happens every day. It takes one document, a few hours, and a wire transfer.

In India, the exact same deal runs into three separate rule books — the Companies Act, the Foreign Exchange Management Act, and the Income Tax Act. Miss even one requirement across these three, and what looked like a clean angel investment turns into an illegal deposit, a regulatory violation, or a transaction your bank simply refuses to process.

This blog explains the 2026 rules for convertible notes in plain terms — what they are, who can use them, what conditions cannot be skipped, and where deals most often go wrong.

What Indian Law Calls a Convertible Note

The Companies (Acceptance of Deposits) Rules, 2014 gives convertible notes their legal definition in India. In simple terms: it is a document recording that a company has received money as a loan, which will either be paid back or turned into equity shares when certain agreed conditions are met.

The words "received as a loan" are the key. In the United States, a SAFE — Simple Agreement for Future Equity — is not a loan. It has no repayment date, no interest, and sits outside the loan framework entirely. In India, a convertible note sits squarely inside the loan framework from the first day. It shows up on the startup's balance sheet as a liability. If the note earns interest, that interest has tax consequences for both sides.

This is not a minor legal technicality. It shapes every obligation the company and the investor carry until the note either converts or gets repaid.

Four Conditions That Must All Be Met — Without Exception

A foreign investor — whether from the US, UK, Singapore, or anywhere else — can only invest in an Indian startup through a convertible note if four specific conditions are met at the same time. Missing any single one makes the investment legally problematic.

Condition 1: The Startup Must Hold DPIIT Recognition

This comes first. No DPIIT recognition, no convertible note — full stop.

The Department for Promotion of Industry and Internal Trade runs India's Startup India programme. To get recognised, a company must be a Private Limited Company registered under the Companies Act, 2013, must have been incorporated within the past 10 years, must have annual revenue below ₹100 crore in every year since starting up, and must genuinely be building something new — a product, a service, a model that didn't exist before.

If a company doesn't have this recognition and still accepts money under a convertible note structure, the amount received gets treated as a deposit under the Companies Act. That triggers an entirely different set of rules — ones that startups specifically cannot comply with and are trying to avoid.

Condition 2: Each Investment Must Be at Least ₹25 Lakh in One Go

Every single tranche from every single investor must be at least ₹25 lakh — roughly USD 30,000 — paid in one transfer. You cannot split a smaller amount into multiple payments to reach this number. Each payment stands on its own.

This rules out convertible notes for small friend-and-family investments. If a US investor wants to put in ₹10 lakh, a convertible note is not the right tool. The alternatives are either a proper priced equity round or a structure built around Compulsorily Convertible Preference Shares — more on that later.

Condition 3: The Note Must End Within 10 Years

Every convertible note issued to a foreign investor must reach one of two endings within 10 years from the day it was issued — it either converts into equity shares, or the company pays it back in full. This window was extended from 5 years to 10 years in 2023, giving startups and investors considerably more time to find a natural conversion event.

If a note reaches the 10-year mark without converting or being repaid, the company is in violation of FEMA. Fixing this after the fact requires going through the RBI's compounding process — which is time-consuming and expensive.

Condition 4: The Sector Must Allow Full Foreign Ownership

Convertible notes from foreign investors count as FDI under FEMA. So before the money comes in, the startup's sector must be one where 100% foreign ownership is allowed without government approval.

For most technology, SaaS, B2B e-commerce, and product-focused companies, this is not an issue — 100% FDI is permitted under the automatic route, meaning no permission is needed before the note is issued. But for startups in regulated sectors like media, defence, or financial services, sectoral limits must be checked and potentially resolved before any foreign convertible note is accepted.

The Conversion Price Trap — Where Most Founders Learn The Hard Way

The appeal of a convertible note is the deferred valuation. Founders and investors agree to discuss the price later. What most people don't realise is that FEMA enforces a price floor — and that floor was set on the day the note was issued, not the day of conversion.

Here is what this means in practice. When the note converts into equity, the price per share cannot be lower than the Fair Market Value of those shares on the date the note was originally issued. Not today's value. The value from back when the money came in.

In a standard US deal, a valuation cap or discount lets the early investor get shares at a meaningfully lower price than the next round. In India, if the company has grown significantly since the note was issued, the FEMA price floor may eat into or eliminate the discount benefit the investor was expecting.

The practical solution is to get a formal FMV certificate from a SEBI-registered Category I Merchant Banker or a Registered Valuer at the time the note is issued — not at conversion. This document establishes the baseline price on record, so there is no ambiguity when the conversion event arrives.

Reporting To The RBI — Form CN Within 30 Days

Every time a foreign investor puts money into an Indian startup through a convertible note, the startup must report it to the RBI. This is done through Form CN, filed on the RBI's FIRMS portal, and it must happen within 30 days of the money arriving.

The filing needs the startup's Corporate Identity Number (CIN), the DPIIT recognition certificate number, details about the investor and the amount received, the Foreign Inward Remittance Certificate (FIRC) from the bank, and KYC documents for the investor.

Miss the 30-day window and a Late Submission Fee kicks in under FEMA. Skip the filing entirely and the problem compounds — because when a Series A investor arrives and runs their due diligence, they will check that every prior foreign investment was properly reported to the RBI. Unfiled convertible notes are almost always discovered at this stage, and they delay closings until the violations are regularised.

Why a Standard US Safe Cannot Be Used For Indians Investments

The Y Combinator SAFE has become the default early-stage investment document in the US for a reason — it is simple, inexpensive to draft, and gives founders flexibility on valuation timing. None of these features translate into Indian law.

Under India's Companies Act, a SAFE is not recognised as a security. Under FEMA, it is not a defined FDI instrument. When a foreign investor's money arrives linked to a SAFE, the bank has no recognised category to report it under. The money either cannot be accepted at all, or gets misclassified as a loan or deposit — creating problems in either direction.

The Indian market has developed an alternative called the iSAFE — India SAFE. The iSAFE captures the commercial intent of the original instrument: deferred valuation, a cap, a discount at conversion. But it implements this through Compulsorily Convertible Preference Shares, which are a recognised FDI instrument under FEMA and can be properly reported. The documentation is more involved than a US SAFE, but it is legally sound.

For founders who prefer the convertible note framework, experienced India counsel can map SAFE-equivalent economics — the cap, the discount — into a convertible note structure that works within FEMA's rules.

The Interest Question — And Why It Creates a Tax Obligation

Because a convertible note is debt under Indian law, any interest it earns is taxable. For a foreign investor earning interest on a note issued by an Indian startup, that interest is income arising in India — and the startup is responsible for deducting withholding tax before paying it.

The standard withholding rate is 20% under domestic Indian tax law. If the foreign investor comes from a country that has a Double Taxation Avoidance Agreement with India, they may be entitled to a lower rate — but only if they provide a valid Tax Residency Certificate to the startup before interest is paid.

Many startups structure notes to accrue interest on paper without paying it until conversion or repayment. This is common, but it does not eliminate the tax obligation — it just defers it. When the note converts and accrued interest is added to the principal being converted into shares, the TDS and FEMA implications of that capitalised interest must be addressed in the conversion paperwork.

Investors From Countries Sharing a Border With India

FEMA imposes a special rule for investors from seven countries that share a land border with India: China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan, and Afghanistan.

Investment from these countries — including through convertible notes — requires prior government approval through the government route, regardless of sector. This is not lifted by DPIIT recognition or any startup-specific exemption.

The rule covers beneficial ownership, not just the name on the paperwork. If the actual controlling investor behind a Cayman Islands or Singapore SPV is from one of these countries, the land-border rule applies to that convertible note. Founders accepting angel rounds with international investors should verify beneficial ownership early — not at the point of filing.

How Accorp Partners Helps With Convertible Note Compliance

For Indian startups raising from foreign investors, the compliance requirements around convertible notes are more layered than most first-time founders expect. DPIIT recognition, the FMV certificate at note issuance, Form CN within 30 days, FIRC documentation, and a clean ongoing FEMA record all have to be in place — and all of it gets examined when institutional money arrives at Series A.

Accorp Partners handles end-to-end India incorporation and FEMA compliance for startups — from the initial company registration in India through SPICe+, DPIIT recognition filing, RBI reporting for each foreign investment event, and the compliance trail that makes a future equity round straightforward.

For foreign investors evaluating convertible note positions in Indian startups, Accorp's team advises on documentation requirements, applicable DTAA rates on interest payments, and pre-investment FEMA compliance reviews.

More on Accorp Partners' India incorporation services here:

https://accorppartners.com/services/incorporation/india-incorporation

Frequently Asked Questions

Q: Can a company without DPIIT recognition accept money through a convertible note?

A: No. DPIIT recognition is the foundational requirement for issuing convertible notes under the FEMA framework. Without it, money received under a convertible note structure is classified as a deposit under the Companies Act — which triggers compliance obligations that most startups are not set up to meet. Recognition must come before any note is issued.

Q: What is the smallest amount a foreign investor can put into an Indian convertible note?

A: ₹25 lakh per tranche per investor is the floor. This must be met in a single payment — it cannot be built up across smaller amounts over time. An investor putting in ₹12 lakh at a time cannot use the convertible note framework, regardless of how many tranches they plan to invest.

Q: How many years does an investor have before the note must convert or be repaid?

A: 10 years from the date the note was issued, following the 2023 amendment that extended this from the previous 5-year maximum. A note that neither converts nor is repaid by this deadline creates a FEMA violation that typically requires RBI compounding to resolve.