What are SAFE notes in India?

To boost up the Indian financial economy and to promote foreign investment in startup companies, the government introduces the concept of SAFE Notes in the form of Convertible Notes by amending the Companies Act, 2013 / related rules and Foreign Exchange (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, w.e.f January 10, 2017, which allow Startup Companies to issue SAFE Notes in the form of Convertible Notes to an eligible Investor. Startup Companies use Convertible Notes to raise money in their early stages. It is a kind of financial instrument which consists of both debt as well as equity components.

SAFE Notes in the form of Convertible notes may be issued to both persons resident in India and persons resident outside India. SAFE Note means Simple Agreement for Future Equity. SAFE is an agreement between the Investor and Investee Company whereby an Investor invests a certain amount in the Investee Company on the terms and conditions mentioned in the SAFE Agreement. The invested amount is either repayable to investors or convertible in Equity Shares of the Investee Company on the happening of a certain event mentioned in the SAFE Agreement or after the expiry of a certain period.

As per rule 2(1)(c)(xvii) of The Companies (Acceptance of Deposits) Rules, 2014

Convertible Note means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.

Meaning of Startup Company

“Start-up Company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognized as such in accordance with notification number 16[G.S.R. 127 (E), dated the 19th February 2019 issued by the Department for Promotion of Industry and Internal Trade];

Difference between SAFE Notes and Convertible Bonds

Convertible Bonds and SAFE Notes in the form of Convertible Notes are very similar in nature. Both include debt as well as equity components. But the major difference is that SAFE Notes can only be issued by Startup companies.

Condition to be satisfied for issuing SAFE notes in the form of Convertible Notes by Startup

• Minimum value of Investment in single transaction is Rs. 25,00,000/- or more.

• Time period within which that Investment is converted into Equity shares is 5 years (increased to 10 years).

 Points to Remember

• A person resident outside India (other than an individual who is a resident of Pakistan or Bangladesh or an entity or company which is registered and incorporated in Pakistan or Bangladesh), may purchase SAFE Notes in India from an Indian startup company.

• A startup company engaged in a sector where investment by a person resident outside India requires Government Approval may issue SAFE Notes with prior permission of the Government. Issuance of equity shares against such SAFE Notes shall be in compliance with direct entry route, sectoral caps, pricing guidelines, and other attendant conditions for foreign investment.

• A startup company issuing SAFE Notes to a person resident outside India shall receive the amount of consideration by inward remittance through a banking channel or by debit to the NRE/FCNR (B)/Escrow accounts maintained by the person in accordance with Foreign Exchange Management (Deposit) Regulation 2016. Repayment or sale proceeds are also to be made through the same route by crediting to NRE/FCNR (B)/Escrow accounts.

• A Non-Resident or an overseas citizen of India may also acquire SAFE Notes in India on a non-repatriation basis in accordance with Schedule 4 of these Regulations. A person resident outside India may acquire or transfer by way of sale, Convertible Notes, from or to a person resident in or outside India, provided the transfer takes place in accordance with the entry routes and pricing guidelines as prescribed for capital Instruments.

Reporting required under FEMA Act / RBI

The Indian startup company issuing SAFE Notes in the form of convertible notes to persons resident outside India shall report such inflow to the Authorized dealer bank within 30 days of receipt of funds against the issue of such SAFE Notes in India.

Consequences of delay in reporting

If delay in reporting to the authorized dealer bank as per the time prescribed by RBI then the person shall be liable for payment of late fees. The payment of late submission fees is an additional option for regularizing reporting delays without undergoing the compounding procedure. Amount of late submission fees is changed from time to time by the RBI after consultation with the Central Government.

Key Takeaways

The concept of SAFE Notes is relatively new in India and is gaining momentum. A key feature of these policy announcements has been to boost fundraising options for startups by permitting startups to raise funds through the issuance of SAFE Notes in India which was earlier not allowed. This policy relaxation will help innovative startups raise capital in their initial stage and explore funding opportunities with both domestic and foreign investors. The crux of this policy is to attract foreign investors to invest in India.

For more information and updates, you can contact CA Rajeev Gupta or visit our website www.sigmac.co.in

About the Author: This article is contributed by CA Rajeev Gupta, Partner – SIGMAC & Co, Chartered Accountants, Location- Delhi NCR and Gurgaon.

In case of any query please feel free to contact us at: rajeev@sigmac.co.in

Follow us on :

Disclaimer: This content has been prepared for the general guidance of the reader on matters of interest only. It should not be treated as professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information or provisions of the law contained in this article. Author and/ or SIGMAC & Co., Chartered Accountants, its members, employees and agents accept no liability and disclaim all responsibility for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it.

7 Corporate Legal Advisory Services:

We offer a comprehensive range of corporate legal consultancy services in India, which reflects our knowledge and experience in a variety of legal practice areas. Whatever service you choose, you may remain compliant and competitive. Among the primary areas of specialization are,

1. Mergers and Acquisitions: Creating synergy Mergers and acquisitions (M&A) are commonly used to produce synergies that result in the merged firm being worth more than the two companies independently.
   
   
2. Contractual Law: Contract law is the corpus of law that governs, enforces, and analyses agreements involving the exchange of products, services, real estate, or money. An agreement established between two or more people or business entities that promise to perform something in exchange for a gain or advantage is legally binding, according to contract law.
   
   
3. Corporate and Commercial Law: Corporate law oversees the establishment of corporations, shareholder rights, mergers, and acquisitions, whereas business law or commercial law governs the selling and distribution of goods.

4. Insolvency Law and Restructuring: Because insolvency and restructuring involve mounds of documentation, lawyers must be organized and able to prioritize their task, especially when dealing with many assignments. With so much at risk, attention to detail is critical when drafting asset sale agreements or court paperwork.

5. Concessions and Public Procurement: The Public Procurement and Concessions Commission (PPCC) has launched a number of public awareness efforts to measure public opinion on the effects of Liberia’s public procurement implementation program.

6. Antitrust and Competition Law: Antitrust and competition laws strive to prevent anti-competitive practices from undermining the benefits of a competitive market. According to the Company’s Antitrust Policy, every director, officer, and employee is responsible for adhering to all applicable antitrust and competition laws.
    
7. Real Estate and Construction: Antitrust and competition laws strive to prevent anti-competitive practices from undermining the benefits of a competitive market. According to the Company’s Antitrust Policy, every director, officer, and employee is responsible for adhering to all applicable antitrust and competition laws.

In India, we offer a wide range of business legal advising services. We take great satisfaction in declaring that we rely on the most trusted Corporate Insolvency Process in India to provide complete peace of mind to our clients. We have carved a place in the business by having years of experience working with enterprises suffering from financial failure and insolvency. So, if your company is unable to satisfy its pending financial obligations to its lender, we can assist you by modifying the loan repayment schedule.

For more information and updates, you can contact CA Rajeev Gupta or visit our website www.sigmac.co.in

About the Author: This article is contributed by CA Rajeev Gupta, Partner – SIGMAC & Co, Chartered Accountants, Location- Delhi NCR and Gurgaon.

In case of any query please feel free to contact us at: rajeev@sigmac.co.in

Follow us on :

Disclaimer: This content has been prepared for the general guidance of the reader on matters of interest only. It should not be treated as professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information or provisions of the law contained in this article. Author and/ or SIGMAC & Co., Chartered Accountants, its members, employees and agents accept no liability and disclaim all responsibility for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it.