The Convertible Loan Agreement serves as a crucial financing instrument in the Indian market, particularly for startups and growing companies seeking flexible funding options. It provides a hybrid financing solution that combines elements of debt and equity, allowing companies to secure immediate funding while deferring equity valuation discussions. This document is especially valuable during bridge financing rounds or when traditional equity valuation is challenging. The agreement must comply with Indian regulatory requirements, including the Companies Act 2013, SEBI guidelines, and FEMA regulations for foreign investments. It typically includes detailed provisions for loan terms, conversion mechanisms, investor rights, and protection measures, making it suitable for both domestic and international funding arrangements while ensuring alignment with Indian legal framework.
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1. Parties: Identification of the Lender and Borrower with complete legal details
2. Background: Context of the loan, brief description of the borrower's business, and purpose of the convertible loan
3. Definitions: Definitions of key terms used throughout the agreement
4. Loan Amount and Disbursement: Details of the loan amount, disbursement conditions and process
5. Interest: Interest rate, calculation method, payment frequency, and default interest provisions
6. Repayment Terms: Repayment schedule, prepayment provisions, and payment mechanics
7. Conversion Rights: Terms and conditions for conversion of loan to equity, including trigger events and conversion price mechanism
8. Conversion Process: Detailed procedure for exercising conversion rights and implementation of conversion
9. Representations and Warranties: Standard and specific representations and warranties from both parties
10. Borrower Covenants: Positive and negative covenants binding the borrower
11. Events of Default: Circumstances constituting default and consequences thereof
12. Termination: Conditions and process for termination of the agreement
13. Governing Law and Jurisdiction: Applicable law and courts having jurisdiction
14. Notices: Process and addresses for serving notices under the agreement
1. Security: Include when the loan is secured by any assets or guarantees
2. Information Rights: Include for additional reporting and information access rights for the lender
3. Board Observer Rights: Include when lender is granted right to appoint board observer
4. Anti-dilution Protection: Include to protect conversion rights against dilution from new share issuances
5. Tag-Along Rights: Include when lender requires right to participate in sale of shares by promoters
6. Foreign Investment Compliance: Include when lender is a foreign entity to ensure FEMA compliance
7. Most Favored Nation: Include to ensure lender gets best terms offered to future convertible loan lenders
1. Schedule 1 - Conditions Precedent: List of conditions to be satisfied before loan disbursement
2. Schedule 2 - Form of Drawdown Notice: Template for requesting loan disbursement
3. Schedule 3 - Conversion Mechanics: Detailed calculations and examples of conversion price and share allocation
4. Schedule 4 - Form of Conversion Notice: Template notice for exercising conversion rights
5. Schedule 5 - Cap Table: Current and post-conversion shareholding structure
6. Schedule 6 - Company Information: Key corporate and financial information of the borrower
7. Appendix A - Board Resolution: Format of board resolution approving the convertible loan
8. Appendix B - Shareholder Resolution: Format of shareholder resolution approving the convertible loan
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