The government has extended the timeline to ten years for startups to convert debt investments made in the company into equity, a decision that according to a press note from the DPIIT. Previously, the option to convert convertible bonds into stock was allowed for up to five years from the day the first convertible bond was issued. That term has now been extended to ten years.

An investor can invest in a startup through convertible bonds, which is a type of debt/loan instrument. But with 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 shares of the company against the money they initially invested as loan/debt.

“Convertible Bond” means an instrument issued by a start-up company that initially recognizes the receipt of money as debt, which is repayable at the option of the holder, or which can be converted into such a debt within a period of not more than ten years. number of shares of such start-up company. years from the issuance date of the convertible note, after the occurrence of specified events according to the other terms agreed upon and indicated in the instrument,” the note stated.

According to experts, since its inception in 2017, convertible bonds have increasingly emerged as attractive financing instruments for early financing of startups.

Unlike convertible bonds/debt, convertible bonds offer the flexibility of optional conversion to equity without the need to pre-determine the conversion rate (and fewer regulatory covenants), said Sumit Singhania, Partner, Deloitte India.

Extending such optionality to 10 years will ease the burden on startups to prove the concept to early-stage investors (especially in highly innovative cases that require longer maturity to build scale) without triggering mandatory premature exits. This policy move would also allow a new generation of start-ups in raising seed capital/loan with better promise to hold investment,” Singhania said.

Rudra Kumar Pandey, Partner, General Corporate, said it appears that the government wants to give start-ups more flexibility for appropriate valuation and conversion of the convertible bond with another five years until the startups are able to secure the next round. to set. of funding and to save them from the impact of COVID and liquidity problems.

“Startups operating in all sectors will benefit from this change, especially those in the financial, educational and retail sectors,” said Pandey.

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