All such investment plans have to be first approved by tge SEBI. Collecting money from open market is strictly regulated by various mandates of SEBI.

Partnership firm is not suitable for this task.

Private limited company is best suited for this.

Dear Client,

Only NRI`s are permitted to invest in CNs that also only through inward remittence via bank channel, NRE/ FCNR(B) or Escrow account. Hope u r aware of such accounts. Foreign investmetn in few industries need go.vt approval like such as cement, paper and pulp, leather, tyre and rubber, light electrical industries, consumer goods, consumer durables, light machine tools, light industrial machinery, light engineering industries etc.

Check accordingly.

1) What is the step by step procedure to issue convertible notes to investors and accept funds ? -

2) In order to make it a single transaction of more than INR 25,00,000 can all the investors form a legal entity which then makes the investment on their behalf to our company ? - no needed , even an individual can.

3) If such an entity can be formed, what is the most appropriate form:

a) Partnership Firm, or

b) LLP, or

c) Private Limited Company

1) a start up company issuing convertible notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channels or by debit to the NRE / FCNR (B) / Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.

2) Provided that an escrow account for the above purpose shall be closed immediately after the requirements are completed or within a period of six months, whichever is earlier. However, in no case continuance of such escrow account shall be permitted beyond a period of six months.

3) startup company issuing convertible notes shall be required to furnish reports as prescribed by Reserve Bank.

4) A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered / incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of twenty-five lakh rupees or more in a single tranche.

Dear Sir,

The CN route of investment is available to individuals resident outside india (NRI) may purchase CN for min 25Lac for a Specified Terms through the proper banking channel.

The document attached by you is self explanatory and will need an Escrow account for this purpose. The amount received in single trench will be paid on the holders option which is 1. Repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, 2. Within a period not exceeding five years from the date of issue of the CN, 3. Upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.

As this is investment in the startup company incorporated under the Companies Act1956 or Companies Act 2013 so no fresh Pvt. Ltd Company/LLP/Partnership is required.

Hi

Kindly follow the general guidelines issued by Reserve Bank of India(refer to link below) (https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NTF377F37181BC5130459C98E5E188EC48E7F5.PDF)

I) The Step by Step procedure to issue convertible notes is detailed as below

a) Hold the board meeting and pass board resolution for convening the meeting of members and approving draft notice of meeting of members.

b) Hold the general meeting and pass the special resolution.

c) In case shares are to be issued in lieu of Debt at later date( less than 5 years from date of issue) upon occurrence of specified events according to the terms of the Note, then the computation of fair valuation of shares done should be done by a chartered accountant as per the guidelines issued by the erstwhile Controller of Capital Issues.

d) Sent letter of offer in Form PAS.4 along with application form to the proposed subscribers.

e) File Form MGT.14 along with the fees as provided in the Companies (Registration of Offices and Fees)

Rules, 2014, with the Registrar within 30 days of passing the resolution.

f) The explanatory statement annexed to the notice for the general meeting required u/s 102 shall disclose the

basis or justification for the price (including premium, if any) at which the offer or invitation is being made.

g) The money should be received by the start up company only through banking channels.

II) Single transaction of more than Rs25Lakhs-

a) Yes. LLP is the most appropriate form.

b) Overseas Private Limited and Partnership(registered) are also preferred mode to make investment in a start up company against issue of convertible notes .

However all of these three will need to consider their local accounting and taxation laws(dividend distribution, share purchase, Interest with holding tax , Coupon rates etc) before making investment in india. Given that we have double taxation avoidance treaty with many countries, these entities will ofcourse benefit through investments made through convertible note

Hope this information is useful.

the convertible note unlike a CCD does not require filing a valuation certificate on the issue date.

2) convertible note is better option to raise funds from investors

3)The investee startup company issuing convertible notes to the Permitted Investors is

required to receive the investment amount by way of inward remittance through banking

channels or by debit to the NRE / FCNR (B) / escrow account maintained in accordance

with the Foreign Exchange Management (Deposit) Regulations, 2016.Consideration may be received in an escrow account, provided the escrow account is closed as soon as the funds are utilized or within six months, whichever is earlier

4)Holders of the convertible notes are allowed to transfer the same to third parties, provided,

such transfer complies with the pricing guidelines issued by the RBI.

5)‘convertible note’ as a security can remain to be debt until 5 years

and not mandatorily be required to be converted into equity shares of the investee startup

company

optionally convertible debentures are considered External Commercial Borrowings (ECBs) and are required to comply with the more stringent ECB Guidelines.

Following are the salient features of the Notification:

– Definition of convertible note: The notification defines a

convertible note as follows:

– An instrument issued by a startup

company evidencing receipt of money;

– This instrument is initially treated

as debt;

– It is convertible into such number

of equity shares of such startup company within a period 5 years from the date

of issue, upon occurrence of specified events, as per the other terms and

conditions agreed to and indicated in the instrument.

Please see the detail on RBI Master Guide chapter V on ECB.

Other answers to your questions are:

1. 5 years

2. Under subscriptions are not a matter here as CN is allotted in 25 lac trenches.

3. The holder have option to get paid with in 5 years or compulsorily to equity of the startup.

4 Allotted to individuals NRI so no matter of subscription.

I will update more on point4

A convertible note is an instrument issued as debt and convertible into equity of a startup at the option of the holder, upon a future contingency taking place, usually when the startup obtains an additional round of investments.

Therefore, convertible notes allow investors to invest in startups without concerns about their valuations, which are difficult to determine at the inception, as convertible notes are merely an instrument advanced as a loan and converted to equity at a later stage when the startup’s business model is more evolved.

Reserve Bank of India (RBI) has by way of a notification dated 10 January 2017 (Notification), amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (FEMA 20/2000), implementing a key change in the foreign exchange policy by allowing startup

companies to issue convertible notes to foreign investors.

A startup company issuing convertible notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channels or by debit to NRE / FCNR (B) / Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.

The startup company issuing convertible notes shall be required to furnish reports as prescribed by Reserve Bank.

This Notification is only applicable only to entities defined as startups. Startup companies includes the following:

– A company wherein 5 years have not elapsed from the date of its incorporation; – Its turnover for any of those

years does not exceed Rs. 25 crores;

convertible note’ means an instrument issued by a start up company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such start up company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instruments.

A convertible debenture is a type of loan issued by a company that can be converted into stock. Convertible debentures are different from convertible bonds because debentures are unsecured; in the event of bankruptcy, the debentures are paid after other fixed-income holders.

The Permitted Investors are may purchase New Instrument issued by startup companies

for a minimum amount of INR 25,00,000 or more.

A Permitted Investor is permitted to acquire or transfer, by way of sale, convertible notes,

from or to, a person resident in India or another Permitted Investor provided the transfer

takes place in accordance with the pricing guidelines as prescribed by RBI

It is

unclear whether any amendment would be carried out in the External Commercial Borrowing

Policy in the future since a ‘convertible note’ as a security can remain to be debt until 5 years

and not mandatorily be required to be converted into equity shares of the investee startup

company unlike the other capital instruments permitted to be issued under the Principal

Regulations.

The terms of conversion will have to be determined upfront

In the simplest terms the Convertible Note is an IOU as in “I owe you money!” and can be linked to the expected return rather than a valuation and percentage of ownership getting away from the valuation quagmire for a seed stage investment.

when does a Convertible Note / SAFE make sense?

When the value of the startup cannot be determined easily

When the value of the startup cannot be agreed upon between the founders and the investor within meaningful bounds

When the focus for both the investor and founders is to be very efficient with their time and the investment is for very short time horizons – seed round to get to a fund raise or bridge round .