Convertible Loan Note Agreement Template for India

A Convertible Loan Note Agreement is a sophisticated financing instrument that allows you to structure debt investments with the option to convert into equity shares at predetermined conditions. Under Indian law, this document creates legally binding obligations between lenders and borrowing companies while providing flexibility for future equity conversion based on company performance or funding milestones.

When do you need this document?

You need this agreement when raising bridge financing for your startup or growth company, particularly when current valuation discussions are premature or contentious. This document is essential if you're an early-stage company seeking immediate capital without diluting ownership immediately, or if you're an investor wanting debt security with equity upside potential. The agreement becomes crucial when foreign investors are involved, as it must comply with FEMA regulations and RBI guidelines on external commercial borrowings. You'll also require this document when structuring pre-Series A funding rounds, providing working capital during expansion phases, or creating convertible instruments that automatically trigger during qualified financing events.

Key legal considerations

Your agreement must clearly define conversion triggers, including qualified financing events, maturity dates, and default scenarios that activate conversion rights. Interest calculation methods, payment schedules, and conversion price mechanisms require precise drafting to avoid disputes. You must address investor rights during the loan period, including information rights, board representation, and anti-dilution protections. Security interests and guarantees need careful structuring to ensure enforceability under Indian law. The document should specify jurisdiction for dispute resolution and comply with Indian Stamp Act requirements for proper registration. Consider including provisions for early repayment, conversion caps, and discount rates to protect both parties' interests.

Legal requirements in India

Under the Companies Act 2013, your company must obtain board approval and shareholder consent for borrowing arrangements and potential equity issuance upon conversion. SEBI regulations apply to conversion mechanisms, requiring compliance with securities laws and disclosure requirements. If foreign investment is involved, FEMA approval and RBI notifications become mandatory, with specific limits on foreign direct investment in your business sector. The agreement must comply with transfer pricing regulations under the Income Tax Act 1961, particularly regarding interest rates and conversion terms. Proper stamp duty payment according to state-specific rates under the Indian Stamp Act ensures legal validity and enforceability. Additionally, you must maintain statutory registers and file necessary forms with the Registrar of Companies upon loan disbursement and potential conversion.