According to a news release from the DPIIT, the government has extended the timeframe for startups to convert loan financing into equity shares by up to 10 years, a step that is expected to alleviate the effect of the COVID-19 epidemic on fledgling entrepreneurs.
Holders of convertible notes may convert them into equity shares up to five years after the original issuance date of the note. Ten years have been added to the original time frame. Convertible notes, a kind of debt or loan instrument, may be used by investors to invest in a business.
As an alternative, investors may ask for equity shares in return for their original loan or debt investment if they believe that a firm is doing well or has reached certain performance milestones.
If a specified event occurs as per the other terms and conditions agreed to and indicated in the instrument, a convertible note is defined as an instrument issued by a startup acknowledging receipt of money initially as debt, which the holder may repay at his or her discretion or which may be converted into an equivalent number of equity shares in the startups.
According to experts, convertible notes have grown in popularity since their launch in 2017 as a financing option for early-stage firms. While convertible debentures and debts require an upfront determination of the conversion ratio, convertible notes, according to Deloitte India Partner Sumit Singhania, do not require such a determination.
Even in highly inventive scenarios that need longer gestation to create scale, extending this option to 10 years would alleviate the strain on businesses to justify their ideas to early-stage investors without triggering required pre-mature exits.
Because of this legislative change, a new generation of start-ups will be able to raise seed capital or loans with a higher chance of keeping their investments, Singhania said.
A partner at General Corporate, Rudra Kumar Pandey, believes that the government wants to provide entrepreneurs an extra five years of flexibility in valuing and converting convertible notes so that they may obtain their next round of investment and avoid the negative effects of COVID and liquidity difficulties.
When it comes to the startup community as a whole, “startups working in all industries would profit from this move,” Pandey added.
Published by – Kiruthiga K
Edited by – Kritika Kashyap
