Start up get 10 years to convert debt into equity

Tags: Economics/Business

In a major relief to the start up companies in India the government of India has extended the period for converting the debt instrument  issued by the start up into equity shares  to 10 years from the earlier 5 years .

According to the Department for Promotion of Industry and Internal Trade(DPIIT) under the Ministry of Commerce and Industry , a convertible note can be converted into equity shares or redeemed within 10 years from its issuance by a startup company.  This is likely to help the start up in raising funds . 

What is a convertible note 

It  is a debt paper issued by a company to its investor for the money it has received from them . The debt is converted into equity shares after a certain time period or is redeemed after a certain time period .

 How it works 

Suppose a startup company A receives Rs 100 from an investor B. The company issues a paper to B saying it has received Rs 100 from B for 5 years and it will pay an interest of 2 percent per annum to B. The paper also mentioned  that company A will return back the Rs 100 amount to B or instead of paying Rs 100 it will convert it into 2  equity shares of the company after 5 years.

For a detailed definition of Start up in India see 16 January 2022 post