INSUBCONTINENT EXCLUSIVE:
Startups get up to 10 years for converting debt investment into equityNew Delhi: The government has extended the timeline up to ten years
likely to give relief to budding entrepreneurs to deal with the impact of the COVID-19 pandemic.Earlier, changing convertible notes into
equity shares was allowed for up to five years from the day when the initial convertible note was issued
in this investment, the investor is given the option that if the startup performs well or achieves some performance milestones in the
future, the investor can ask the startup to issue equity shares of the company against the money they had initially invested as a
loan/debt."Convertible note means an instrument issued by a startup company acknowledging 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 startup company, within a period
not exceeding ten years from the date of issue of the convertible note, upon the occurrence of specified events as per the other terms and
conditions agreed to and indicated in the instrument," the note said.According to experts, convertible notes have increasingly emerged as
attractive financing instruments for early-stage funding of startups since its inception in 2017.Unlike convertible debentures /debts,
convertible notes offer the flexibility of optional conversion into equity without determining the conversion ratio upfront (and fewer
regulatory covenants), Sumit Singhania, Partner, Deloitte India, said."Extending such optionality to 10 years will help ease the burden on
startups to prove the concept to early-stage investors (especially in highly innovative cases requiring longer gestation for building scale)
without triggering mandatory pre-mature exits
This policy move ought to enable a new generation of startups to raise seed capital /loan with better promise of retaining investments," Mr
Singhania said.Rudra Kumar Pandey, Partner, General Corporate, said that it seems that the government wishes to extend the flexibility to
the startup companies for appropriate valuation and conversion of the convertible note by additional five years until the startups can
secure its next round of funding and to save them from the impact of COVID and liquidity issues."Startups operating across the sectors will
