How Mandatory Conversion Changes a Startup Financing

How mandatory conversion changes a startup financing

A compulsory convertible debenture sits between an immediate equity round and conventional repayable debt. Its defining commitment is straightforward: the principal must become equity under agreed terms. The investor does not ordinarily retain a general choice to demand repayment of that principal in cash.

That structure can help a startup raise capital before a priced round, preserve cash that might otherwise be needed for principal repayment, or postpone the immediate allotment of shares. It does not eliminate dilution, default exposure, compliance work, or difficult negotiations about valuation. Instead, it concentrates those issues in the conversion formula, pre-conversion protections, resulting share class, and applicable legal framework.

For Indian startups, the labels “debt,” “equity,” and “hybrid” can each be relevant in different contexts. Company law, foreign investment, insolvency, tax, and accounting may ask different questions about the same instrument. A sound analysis therefore begins with the contract and then examines each applicable regime separately.

What is a compulsory convertible debenture?

A compulsory convertible debenture, or CCD, is a debenture whose principal must convert into shares on an agreed date or after a specified event. Unlike an optionally convertible instrument, it does not ordinarily give the holder a general election between receiving shares and recovering principal in cash. Mandatory conversion is the defining feature.

A CCD can nevertheless look debt-like before conversion. Principal remains outstanding, and the documents may provide for interest to be paid or accrued. Once conversion occurs and the company allots shares, the holder becomes an equity owner with the rights attached to the resulting share class. This is why CCDs are often described as hybrid securities, although that description is not a universal legal, tax, accounting, regulatory, or insolvency classification. A general financial explanation similarly emphasizes mandatory conversion, possible pre-conversion interest, and equity ownership after conversion. Investopedia explains these core CCD features.

Before the resulting shares are allotted, a CCD holder generally does not possess the voting rights attached to those future shares. The investor may, however, receive separately negotiated information rights, consent rights, board-observer arrangements, or contractual covenants. Those protections arise from the transaction documents and applicable law; they are not equivalent to ordinary shareholder voting rights.

It is therefore useful to separate the CCD’s central characteristics from negotiated terms:

Central characteristic	Transaction-specific term
Principal must convert under the agreed terms	Whether the instrument is secured
A conversion date or trigger must be identifiable	Interest rate and payment mechanics
Shares are issued through the conversion process	Contractual ranking or subordination
The holder becomes a shareholder after allotment	Information, observer, and consent rights
Share entitlement follows the agreed formula	Anti-dilution or price-adjustment clauses
	Transfer restrictions
	Default remedies
	Liquidation treatment
	Put, buyback, call-back, or exit arrangements

A put, redemption, buyback, call-back, fixed-return, or guaranteed-exit provision is not an inherent CCD benefit. Such language should be treated as a separate negotiated feature and reviewed under the laws and regulatory rules relevant to the company, investor, and transaction. It may also conflict commercially with an instrument intended to convert compulsorily rather than return principal.

The CCD lifecycle can be summarized in six stages:

1. Issuance: The investor subscribes, and the company issues the CCD under approved transaction documents.
2. Pre-conversion period: Principal remains outstanding; interest is paid or accrued as agreed.
3. Trigger: A fixed date, maturity, qualifying financing, valuation milestone, or another defined event occurs.
4. Calculation: The company identifies the conversion amount and applies the contractual price, ratio, cap, discount, or adjustment.
5. Allotment: The relevant number and class of shares are issued after the applicable corporate actions.
6. Post-conversion ownership: The former CCD holder becomes a shareholder, and the cap table reflects the resulting dilution.

How a CCD moves from issuance to equity

The documents should explain not only when conversion is expected but also what happens if the expected event never occurs.

A CCD might convert on:

• a fixed calendar date;
• its stated maturity date;
• completion of a qualifying equity financing;
• achievement of a specified valuation or business milestone; or
• another objectively defined contractual trigger.

No single trigger is compulsory for every transaction. The selected mechanism must be clear, workable, and reviewed for compatibility with the rules that apply to the particular issuer and investor. Secondary Indian startup guidance identifies qualifying financings, valuation milestones, and maturity as possible conversion events rather than universal defaults. The Startup Zone describes these possible trigger structures.

Issuance and the pre-conversion period

At issuance, the investor funds the company and receives the CCD rather than the shares that will eventually result from conversion. During the pre-conversion period, the documents track the outstanding principal and determine how interest is handled.

Depending on the agreement, interest might be:

• paid periodically in cash;
• accrued for later cash payment;
• added to the amount that converts; or
• addressed through another expressly documented mechanism.

Mandatory conversion of principal does not automatically determine the treatment of interest. Interest should be included in the conversion amount only if the governing documents provide for that outcome and the treatment is permissible under the applicable rules.

The holder’s position during this period should not be reduced to a label such as “creditor” or “future shareholder.” Contractually, the investor may have payment rights, reporting rights, covenants, or remedies. At the same time, the holder generally lacks the voting and economic rights attached to shares that have not yet been issued.

For example, a company might agree to provide management accounts, notice of a proposed financing, or consent rights over specified actions. These provisions can protect the investor without making the holder an ordinary voting shareholder. Founders should assess their practical effect on decision-making instead of assuming that delayed share issuance means the investor has no influence.

The need for a long-stop mechanism

Suppose the intended conversion trigger is the company’s next qualifying financing. What happens if that financing never closes?

As a drafting safeguard, the CCD should contain a long-stop conversion mechanism rather than leaving the result to future negotiation. The documents might require conversion on a final date using a fixed price, a valuation formula, or another agreed method. The appropriate structure is transaction-specific; the important point is that the failed-trigger scenario should be resolved before funds are invested.

Long-stop provisions should answer questions such as:

• Which date is used for the calculation?
• Does accrued interest convert?
• Which valuation or price applies?
• What happens if information required by the formula is unavailable?
• How will a calculation dispute be resolved?
• How are fractional entitlements handled?
• Which share class will be issued?
• What approvals, records, and filings must be addressed?

These are drafting questions, not a claim that one long-stop formula is legally required in every CCD. The transaction team should verify the chosen mechanism against current law and the company’s governing documents.

The conversion sequence

At conversion, the parties will generally need to:

1. identify the outstanding principal and any other amount expressly made convertible;
2. determine the applicable price, ratio, valuation cap, discount, or adjustment;
3. calculate the number of shares;
4. apply the agreed treatment of rounding and fractional entitlements;
5. identify the class of shares to be issued;
6. complete the applicable corporate approvals and actions;
7. allot and record the shares;
8. complete any applicable reporting or filings; and
9. update the statutory records and fully diluted cap table.

This is a high-level transaction sequence, not a current list of mandatory Indian forms or deadlines. The precise process should be verified against primary authorities in force when the CCD is issued and again when it converts.

After allotment, the investor’s voting, dividend, liquidation, transfer, and other economic rights depend on the class issued and the company’s articles, shareholders’ agreement, and other governing documents. Conversion into ordinary equity may therefore produce a materially different result from conversion into a share class carrying negotiated preferences.

Conversion price, share entitlement, and founder dilution

The conversion formula determines how much of the company the investor receives. Small drafting differences can have large ownership consequences.

A conversion ratio states how many shares are issued for each debenture or unit of convertible value. A conversion price states the price per share used to divide the conversion amount.

The basic fixed-price calculation is:

Shares issued = Conversion amount ÷ Conversion price per share

For example:

₹1,00,000 ÷ ₹25 per share = 4,000 shares

That result is before considering convertible interest, adjustments, or fractional-share provisions. The figures come from a published CCD dilution illustration. Rakesh Narula & Co. uses the ₹1,00,000 and ₹25 example.

Common conversion approaches

A CCD could use one or more of the following:

• Fixed price: A predetermined rupee amount per share.
• Fixed ratio: Each CCD converts into a stated number of shares.
• Valuation cap: The conversion price is calculated by reference to a maximum company valuation.
• Financing-round discount: The CCD converts at a stated discount to the price paid by new investors.
• Cap-and-discount formula: The documents select between, or otherwise combine, the cap price and discounted round price.

These are contractual approaches, not assurances that every formula is available or permissible in every transaction. The documents must define which capitalization figure is used, how any cap interacts with a discount, and what happens when more than one adjustment applies. Transactions involving non-residents require separate, current review of pricing, valuation, eligibility, and reporting rules.

Illustrative discount calculation

Assume new investors pay ₹100 per share and the CCD provides a 20% discount:

Discounted price = ₹100 × (1 − 20%) = ₹80 per share

If the conversion amount is ₹1,00,000:

₹1,00,000 ÷ ₹80 = 1,250 shares

This is an arithmetic illustration adapted from the common 20% discount structure described for convertible financings. The actual outcome depends on the agreement’s definition of the financing price, the interaction with any valuation cap, and applicable adjustments. J.P. Morgan illustrates how a 20% discount lowers the conversion price.

Caps and discounts can increase the investor’s share entitlement by lowering the effective conversion price. If the company’s valuation rises sharply, a valuation cap may allow the CCD holder to receive more shares for the same investment than a new investor entering at the later-round price. That is economically valuable to the CCD investor but increases dilution for existing holders.

When accrued interest converts

Interest does not automatically become equity merely because the principal does. If the agreement makes accrued interest convertible, that amount is added to the principal before the conversion price is applied.

A published startup-financing illustration uses:

• Principal: ₹75 lakh
• Accrued interest: ₹7 lakh
• Total amount used for conversion: ₹82 lakh

The ₹82 lakh total applies only if the governing agreement makes the ₹7 lakh of accrued interest convertible. Otherwise, the interest may remain payable in cash or be handled under another contractual provision. The underlying ₹75 lakh, ₹7 lakh, and ₹82 lakh illustration appears in this founder guide.

A dilution example

Assume two founders each hold 5,00,000 shares. There are 10,00,000 shares outstanding, so each founder owns 50%.

If conversion produces 2,00,000 new shares:

• Existing shares: 10,00,000
• New conversion shares: 2,00,000
• Post-conversion total: 12,00,000

Each founder then holds:

5,00,000 ÷ 12,00,000 = approximately 41.67%

The CCD holder owns approximately 16.67%, before accounting for an option pool, other convertibles, or shares issued in the financing that triggered conversion. These figures are drawn from a published CCD cap-table example. The same example shows each founder falling from 50% to approximately 41.67%.

This illustrates the difference between legal dilution and economic dilution. Legal dilution occurs when shares are allotted. Economic dilution should be modeled when the CCD is issued because the company has already accepted a future equity obligation.

A fully diluted model should include:

• every founder and existing shareholder;
• the existing and proposed option pool;
• each CCD;
• other notes, debentures, warrants, or convertibles;
• accrued interest that may convert;
• every valuation cap and discount;
• adjustment and anti-dilution clauses;
• shares issued in the triggering round; and
• the class of shares each investor will receive.

At minimum, the model should show an up round, a down round, and a long-stop conversion. It should state assumptions about fractional shares, price adjustments, option-pool expansion, and non-resident pricing rather than concealing them inside formulas.

Rights and risks before and after conversion

The economic balance changes throughout the CCD lifecycle.

At issuance

The investor commits capital without immediately receiving the final shares. The company obtains funding while postponing equity allotment. Both sides become dependent on the accuracy and completeness of the conversion provisions.

For the company, the attraction may be cash-flow flexibility or delayed valuation. For the investor, it may be a pre-conversion return combined with later equity participation. Neither result is automatic: a CCD may not provide periodic cash income, and an unclear conversion formula can produce an unexpected ownership outcome.

During the pre-conversion period

Potential investor benefits include:

• cash or accrued interest, if agreed;
• exposure to future equity value;
• information or consent rights, if negotiated;
• conversion-price protection, if included; and
• contractual remedies for specified breaches.

Potential investor risks include:

• issuer default before conversion;
• insolvency before shares are allotted;
• valuation risk;
• mandatory exposure to equity rather than a general cash-repayment election;
• illiquidity;
• transfer restrictions;
• limited ordinary shareholder control before conversion; and
• uncertainty about the value and rights of the resulting shares.

A CCD does not eliminate default risk. A startup may fail to pay cash interest, breach a covenant, or become insolvent before conversion. Recovery then depends on the instrument’s terms, any security or subordination, whether conversion has occurred, and the applicable insolvency framework.

No founder or investor should assume that the word “debenture” automatically creates creditor priority. General convertible debt may be secured or unsecured, senior or subordinated, and its insolvency position depends on structure and governing law. A global law-firm overview likewise treats ranking and shareholder-like protections as matters of drafting rather than automatic attributes. Norton Rose Fulbright discusses these structural variables.

For the issuer, the pre-conversion period may preserve cash if principal is not scheduled for repayment. The company may still face cash-interest obligations, reporting duties, negative covenants, compliance costs, and restrictions that complicate operations or a later fundraising.

At conversion

Conversion resolves some uncertainty and crystallizes other consequences. The investor’s share count becomes fixed under the applicable formula, the founders’ legal ownership percentages fall, and disagreements about caps, discounts, interest, or adjustments become immediate.

Friction may arise if a new lead investor dislikes an older CCD’s terms. A low valuation cap, broad adjustment clause, unusual consent right, or ambiguous share-class provision can make the new round harder to price and negotiate.

After conversion

The former CCD holder is now a shareholder. Its rights depend on:

• the class of shares issued;
• the company’s articles or equivalent governing documents;
• any shareholders’ agreement;
• reserved-matter provisions;
• transfer rights and restrictions; and
• liquidation and distribution terms.

Conversion does not create a liquid exit. Private-company shares may remain difficult to sell, and transfers may be affected by contractual restrictions, company approvals, pre-emption provisions, or applicable law. One investor-oriented review, for example, describes a sample CCD agreement in which private transfers required board approval; that is an illustration of transaction-specific drafting, not a universal rule. The Alt Investor discusses that sample arrangement.

Put rights, call-back mechanisms, buybacks, redemption features, fixed returns, and liquidation preferences should all be analyzed separately. They are not inherent in a CCD, and their availability or enforceability should not be assumed without transaction-specific review.

CCDs compared with other startup financing instruments

The most useful comparisons focus on repayment rights, valuation timing, cash requirements, control, dilution visibility, investor eligibility, and compliance burden—not on whether one instrument is universally better.

The following is a high-level commercial comparison, not a statement of operative Indian law for every transaction:

Instrument	Mandatory conversion	Possible cash repayment	Interest or dividend concept	Timing of share issuance	Pre-conversion status	Valuation timing	Primary founder concern
CCD	Yes, under agreed terms	Principal ordinarily has no general holder repayment election	Interest may be paid, accrued, or converted as agreed	On the trigger or long-stop date	Debenture holder with contractual rights	Fixed initially or determined by formula	Future dilution and conversion mechanics
Optionally convertible debenture (OCD)	No	May preserve a choice between conversion and repayment	Interest concept	If conversion occurs	Debenture holder	Depends on conversion terms	Repayment exposure and investor optionality
Non-convertible debenture (NCD)	No	Ordinarily repaid according to its terms	Interest concept	No conversion shares	Debt instrument	No conversion valuation	Debt service and repayment capacity
Ordinary convertible note	Often converts on a financing, but not necessarily in every outcome	Repayment, extension, or negotiated conversion may remain possible	Interest commonly accrues	Usually on a financing or another agreed event	Noteholder	Commonly deferred	Maturity risk and cap-table complexity
Indian Convertible Note	Depends on its terms and regulatory framework	May contemplate repayment or conversion	Depends on the documents	On conversion	Regulated convertible instrument	Often deferred	Eligibility and regulatory conditions
CCPS	Yes, if the term means compulsorily convertible preference shares	Not structured as ordinary principal repayment	Dividend concept	Preference shares exist from issuance; conversion occurs later	Preference shareholder	Established through issue and conversion terms	Preference rights and eventual ordinary-equity dilution
Direct equity	Not applicable	No principal repayment	Dividend, if declared and payable	Immediately	Shareholder from closing	Negotiated in the round	Immediate dilution and valuation

A CCD differs from an OCD because the CCD’s principal must follow the agreed path to shares. An OCD may preserve investor optionality between conversion and repayment. An NCD does not convert and ordinarily contemplates repayment under its terms.

Ordinary convertible notes require care in comparison. They commonly convert after a qualifying financing, but if that financing does not occur, their documents may permit repayment, extension, or another negotiated outcome. Those possibilities should not be imported into the definition of a CCD.

An Indian Convertible Note is also not simply another name for a CCD. Secondary Indian guidance describes Convertible Notes as operating under a distinct startup-eligibility and regulatory framework, so founders should verify current primary rules rather than use the terms interchangeably. Treelife outlines this distinction between Indian Convertible Notes and CCDs.

Direct equity fixes the share price and issues ownership immediately. A CCD postpones allotment and may, depending on its formula, defer the final conversion price. The trade-off is less immediate visibility into issued-share dilution and a later conversion process.

CCPS and CCDs may both lead to equity-linked ownership, but they begin as different instruments. Governance, distributions, conversion mechanics, accounting, and regulatory treatment require transaction-specific analysis.

A founder choosing among these instruments should ask:

• Must the company preserve cash that would otherwise fund principal repayment?
• Is valuation genuinely uncertain, or are the parties postponing a difficult negotiation?
• How visible must dilution be at signing?
• Does the investor require current shareholder rights?
• Who is eligible to issue or subscribe?
• Is foreign investment involved?
• What compliance work will the structure create?
• What happens if the next financing does not occur?

When a startup might consider a CCD

A startup might consider a CCD when raising money before a priced equity round, bridging a financing period, preserving cash, or negotiating while valuation remains uncertain. These are possible use cases, not proof that a CCD is the best structure.

Delaying the share issue can postpone legal dilution and potentially defer the final valuation calculation. It does not postpone the need to understand the economics. The promised conversion already affects fully diluted ownership and may influence how a later investor prices the next round.

A founder decision framework

Before selecting a CCD, answer seven questions:

1. What financing is expected next? Identify the likely timing, size, and investor type.
2. How certain is the trigger? Define a qualifying financing objectively and include a workable failed-trigger alternative.
3. Can the company fund cash interest? If not, determine whether accrual or conversion is legally and commercially appropriate.
4. What dilution is acceptable? Model the cap, discount, interest, adjustments, and option-pool effect.
5. What rights does the investor need before conversion? Distinguish information rights from control rights.
6. Will a non-resident invest? If so, obtain current advice on FEMA, pricing, valuation, eligibility, conversion, and reporting.
7. Can the company execute the process? Budget for approvals, documents, valuation work, reporting, accounting, and cap-table maintenance.

Scenario analysis

A useful model should show at least five outcomes.

Up round: The next financing occurs at a higher-than-expected valuation. A cap or discount may give the CCD holder a lower conversion price and more shares than new investors receive for the same amount.

Down round: The new financing price is below expectations. Test whether the discount remains relevant, whether the valuation cap changes the result, and whether adjustment provisions create additional dilution.

No qualifying financing: Apply the long-stop formula. Confirm the conversion date, price, share class, treatment of interest, and required transaction steps.

Default before conversion: Identify cash-interest arrears, covenant remedies, security, subordination, and potential insolvency consequences. Mandatory conversion does not protect either party from business failure.

Conversion followed by a new round: Model both the conversion shares and the new-money shares, including any option-pool increase implemented as part of the financing.

Multiple CCDs add complexity when they carry different caps, discounts, triggers, interest provisions, side letters, or adjustment clauses. The same applies when CCDs sit alongside notes, warrants, or preference instruments. Inconsistent terms can create disputes about conversion order and the capitalization figure used in each formula.

A CCD should not be characterized as automatically faster, cheaper, safer, or more founder-friendly than a priced round. Suitability depends on the company’s financing path, the investor’s requirements, the documents, and the compliance burden.

Are CCDs debt or equity in India?

The accurate short answer is: classification depends on the legal or analytical context.

Calling a CCD “debt,” “equity,” or a “hybrid” may describe part of its economics, but no single label should be assumed to govern company law, FEMA, insolvency, tax, and accounting simultaneously.

Because the available supporting material here is secondary rather than primary authority, the following matrix should be used as an issue checklist—not as a definitive statement of current Indian law:

Context	Practical question	Appropriate approach
Company-law process	How must the instrument be authorized, offered, issued, converted, and allotted?	Verify the Companies Act, current rules, company authorities, and transaction facts. Do not infer the required process from an economic label.
FEMA or FDI	How is a fully and compulsorily convertible instrument treated for foreign-investment purposes?	Secondary legal analysis describes these instruments as equity instruments for FDI purposes. Confirm current FEMA and RBI materials, eligibility, sectoral conditions, pricing, valuation, conversion, and reporting.
Insolvency	Does the holder have a repayment claim or qualify as a financial creditor?	Examine the actual terms, whether principal repayment is contemplated, whether conversion has occurred, and current insolvency law and case law.
Tax	How are interest, conversion, and a later sale treated?	Obtain current tax advice based on the issuer, investor, terms, and transaction. No generic CCD label resolves every tax consequence.
Accounting	Is the instrument a liability, equity instrument, or compound instrument?	Apply the relevant accounting framework to the contractual terms. Current professional and primary-source verification is required.

FEMA and foreign investment

A supplied law-firm analysis reports that fully and compulsorily convertible debentures are treated as equity instruments for Indian FDI purposes. That statement should be verified against the FEMA and RBI materials in force at the transaction date, and it does not determine the instrument’s tax, accounting, insolvency, or company-law treatment. The Chambers analysis describes the reported FDI classification.

Foreign investment may introduce questions concerning:

• investor eligibility;
• sectoral caps and conditions;
• entry route;
• pricing and valuation;
• the permitted conversion formula;
• reporting;
• transfers; and
• put, buyback, return, or exit provisions.

A commercially attractive cap, fixed-return provision, or exit arrangement should not be assumed permissible merely because it appears in a term sheet. Current primary materials and transaction-specific advice are essential.

Insolvency and the repayment-of-principal test

The supplied secondary legal analysis describes an insolvency test focused on whether the instrument’s terms contemplate repayment of principal. If principal must become equity and is not repayable under the instrument, that feature may support equity treatment for the particular insolvency question being considered.

In IFCI Limited v. Sutanu Sinha, the CCDs at issue had matured into equity before the investor sought financial-creditor treatment in the company’s insolvency process. The secondary analysis reports that the NCLT and NCLAT rejected the investor’s position and that the Supreme Court upheld the repayment-of-principal analysis. The reported procedural history and analysis are summarized here.

That conclusion must be kept narrow. The dispute arose in an insolvency setting, concerned particular instruments and facts, and involved CCDs that had matured into equity. It does not by itself determine the tax, accounting, FEMA, or company-law treatment of every CCD.

Founders and investors should therefore resist categorical statements such as:

• “A CCD is always debt until conversion.”
• “A CCD is always equity from issuance.”
• “A CCD is always a compound financial instrument.”
• “A CCD holder always ranks ahead of shareholders.”
• “FDI treatment settles every other classification question.”

Approval procedures, pricing, valuation, tax, accounting, forms, and deadlines should all be verified against current primary authorities. None should be inferred from a generic description of CCDs or from one insolvency decision.

A due-diligence checklist before signing CCD documents

A CCD term sheet should be converted into a clause-level checklist before approval.

Economic and conversion terms

Confirm:

• principal amount and issue price;
• interest rate;
• whether interest is paid in cash or accrued;
• payment dates and calculation method;
• whether accrued interest converts;
• conversion trigger;
• qualifying-financing definition;
• maturity or long-stop date;
• fixed conversion price or ratio;
• valuation cap;
• financing-round discount;
• interaction between the cap and discount;
• adjustment events;
• capitalization definition used in formulas;
• treatment of option-pool increases;
• treatment of fractional entitlements; and
• dispute-resolution process for calculations.

Governance and investor rights

Determine:

• the holder’s voting status before conversion;
• information and inspection rights;
• affirmative covenants;
• negative covenants and consent matters;
• board-observer or nomination arrangements;
• the class of shares issued on conversion;
• post-conversion voting and economic rights;
• transfer restrictions;
• security, if any;
• contractual ranking and subordination;
• default events and remedies;
• liquidation treatment;
• treatment on a sale or change of control; and
• whether the holder must join an existing or future shareholders’ agreement.

Any put, call-back, redemption, buyback, fixed-return, or guaranteed-exit language should receive specific legal and regulatory review rather than being treated as boilerplate.

Cap-table requirements

Prepare a pro forma cap table showing:

• each founder;
• each current investor;
• the employee option pool;
• every CCD holder;
• every other convertible instrument;
• accrued interest that may convert;
• shares issued on conversion;
• shares issued in the triggering round; and
• ownership by share class.

At minimum, show an up-round and down-round outcome. A robust model should also include conversion on the long-stop date and conversion immediately before another equity financing.

Process sequence

The transaction team should map the process at a high level:

1. corporate approvals;
2. offering and transaction documents;
3. valuation work;
4. issuance and receipt of funds;
5. applicable allotment and issuance actions;
6. applicable corporate and regulatory reporting;
7. monitoring of interest and conversion triggers;
8. conversion approvals and calculations;
9. allotment of shares; and
10. statutory-record and cap-table updates.

This sequence intentionally avoids naming forms, thresholds, valuation methods, or deadlines. Those details should be confirmed from current primary authorities rather than copied from undated or secondary checklists.

Additional foreign-investor review

Where a non-resident participates, separately confirm:

• investor eligibility;
• sectoral caps and conditions;
• entry route;
• pricing requirements;
• valuation support;
• permitted conversion terms;
• reporting obligations;
• transfer provisions;
• exit rights;
• put or buyback language; and
• consequences of later transfers or restructuring.

Downside tests

The documents and model should answer what happens if:

• the expected financing never occurs;
• the company breaches a covenant;
• interest cannot be paid;
• the issuer becomes insolvent;
• conversion produces fractional entitlements;
• required approvals are delayed;
• a new financing is priced below the cap;
• the company reorganizes its share capital;
• the investor wants to transfer the CCD; or
• either party seeks an early exit.

Legal, tax, accounting, FEMA, and valuation reviews should remain separate workstreams. A conclusion under one regime does not resolve the others.

Finally, prepare a one-page decision summary recording:

• why the CCD is being used;
• the expected and long-stop conversion dates;
• modeled post-conversion ownership;
• cash cost before conversion;
• investor rights before and after conversion;
• downside scenarios; and
• unresolved questions for professional advisers.

A CCD replaces an ordinary principal-repayment election with a contractual path to equity. That can be useful before a priced round or when preserving cash matters, but the real outcome turns on conversion economics, fully diluted ownership, pre-conversion protections, and regime-specific compliance. Model several outcomes, document what happens if the expected trigger fails, and obtain current Indian legal, tax, accounting, valuation, and FEMA advice before issuing or investing.

Lunera describes itself as partnering early with technical founders and welcomes direct pitches without requiring a warm introduction. Its published material does not state that it uses, offers, or recommends CCD financing. Technical founders can learn more or use the pitch route available on the Lunera website.

Frequently asked questions

Can a CCD holder choose cash repayment instead of receiving shares?

Generally, no. The defining feature of a CCD is that principal must convert into equity under the agreed terms rather than remain subject to a general holder election between shares and cash repayment.

That does not prevent the documents from addressing default, damages, unpaid interest, or other remedies. Any redemption, put, buyback, or exit provision must be analyzed separately and should not be assumed valid or available in every structure.

Does interest on a CCD get paid in cash or convert into equity?

Either treatment may be possible depending on the documents and applicable rules. Interest might be paid periodically, accrued for later cash payment, or included in the conversion amount.

The agreement should state the result expressly. Mandatory conversion of principal does not, by itself, establish that accrued interest also converts.

Do CCD investors have voting rights before conversion?

Generally, CCD investors do not have the voting rights attached to shares that have not yet been allotted. They may have separately negotiated information rights, covenants, consent rights, or board-observer arrangements.

After conversion, voting rights depend on the class of shares issued and the company’s governing and shareholder documents.

Are CCDs treated as debt or equity in India?

There is no universal answer across all Indian regimes. Supplied secondary legal analysis describes fully and compulsorily convertible debentures as equity instruments for FDI purposes, while insolvency treatment may turn on the instrument’s terms, whether conversion has occurred, and whether principal repayment is contemplated.

Company-law process, FEMA, insolvency, tax, and accounting must each be analyzed separately using current primary authorities and transaction-specific professional advice.

How do compulsory convertible debentures dilute founders?

A CCD dilutes founders when the company allots new shares on conversion. The number of shares depends on the conversion amount and the applicable price or ratio. Convertible interest, valuation caps, discounts, adjustment provisions, and option-pool changes can increase the resulting share count.

Although legal dilution occurs at allotment, founders should model the obligation on a fully diluted basis when the CCD is issued. That reveals the likely ownership effect before conversion appears on the issued-share cap table.