SAFE Note, CCD & CCPS Structuring

A Simple Agreement for Future Equity — widely used in US startups — has no specific legal recognition under the Companies Act 2013 or SEBI frameworks. Indian regulators treat SAFEs as convertible instruments; FEMA (Non-Resident) Regulations 2019 require that any instrument accepted from a foreign investor must comply with the NDI Rules 2019 pricing guidelines (Rule 21) and be reported via FIRMS/FC-GPR on conversion. Most Indian startup counsel use CCDs/CCPS instead, which have explicit legal treatment.

A CCD is a debenture that mandatorily converts into equity at a pre-agreed price or formula before the end of its tenure. Under the Companies Act 2013, CCDs are treated as equity for Section 186 limits. Under FEMA, CCDs from foreign investors are treated as FDI from the date of issue (NDI Rules, Schedule 1) — no separate forex approval needed, but pricing at issue and conversion must comply with Rule 21 (DCF/NAV floor). ECB treatment does not apply to CCDs.

Compulsorily Convertible Preference Shares carry: preference dividend (typically cumulative or non-cumulative at a stated rate); preference in liquidation over equity; anti-dilution rights (broad-based weighted average or full ratchet) on future down rounds; pro-rata participation rights; and drag-along/tag-along. CCPS converts to equity on specified trigger (IPO, time, or Series events). Under FEMA, CCPS is treated as equity FDI from the date of issue — Section 47(ii) exempts conversion from capital gains for the investor.

Section 56(2)(viib) of the Income Tax Act (formerly "angel tax"): when a closely held company issues shares at a price exceeding the FMV (DCF or NAV — assessee's choice), the excess is taxable as income from other sources in the company's hands. Finance Act 2024 abolished Section 56(2)(viib) for issuances made on or after 1 April 2024 — no angel tax for new rounds. For earlier rounds under ongoing investors, Section 56(2)(x) in the investor's hands may apply if shares are received at below-FMV consideration.

NDI Rules 2019: (1) receive remittance; (2) file FC-GPR Part A on FIRMS portal within 30 days of issuance of CCPS/CCD; (3) annual FC-GPR Part B by 15 July each year (all outstanding FDI instruments). Delay in FC-GPR Part A: LRS (Late Submission Fee) under the Foreign Exchange (Compounding Proceedings) Rules 2000 — fee proportional to time delay. On conversion to equity, file fresh FC-GPR Part A within 30 days of conversion.