# CCD vs CCPS for Foreign Investors under the FDI Rules in India (2026)

> Source: https://krystal7.com/insights/compulsorily-convertible-debentures-ccd-preference-shares-fdi
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: CA Nandini
> Published: 09 Feb 2026; updated 24 Oct 2026
> Summary: CCDs and CCPS count as FDI only when fully and mandatorily convertible, with the conversion formula fixed upfront and Form FC-GPR due in 30 days.

*Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.*

## AI Overview Summary

- Rule 2(k) of the NDI Rules treats debentures and preference shares as FDI equity instruments only if they are fully paid and fully and mandatorily convertible; optionally convertible instruments are ECB.
- The price or conversion formula of a CCD or CCPS must be fixed at issue, and the conversion price can never fall below the fair value worked out on the issue date.
- A CCD pays interest that is deductible but limited by section 177 of the Income Tax Act, 2025, while CCPS dividends come only from profits and are not deductible.
- A DPIIT recognised start up can issue convertible notes to a non resident for INR 25 lakh or more in a single tranche, and reports them in Form CN within 30 days.
- The company reports CCDs and CCPS issued to a non resident in Form FC-GPR within 30 days and files Form PAS-3 within 15 days of a private placement allotment.

**CCDs and CCPS are both FDI equity instruments under rule 2(k) of the NDI Rules. Each must be fully paid and fully and mandatorily convertible. The price or conversion formula must be fixed at issue, and conversion cannot be below the issue date fair value. A CCD pays deductible interest and ranks as debt until it converts. CCPS pay dividends only from profits. Both go in Form FC-GPR within 30 days.**

This page explains which instruments a foreign investor can hold under the FDI rules, and how CCDs and CCPS differ. It also covers warrants, partly paid shares, convertible notes for start ups, the FEMA reports and the company law steps.

## What is the difference between CCD and CCPS?

A CCD is a debenture that must convert into equity shares, and until then the company owes interest on it. A CCPS is a preference share that must convert, and until then it carries a preferential dividend payable only from profits. FEMA treats both as equity instruments. Company law and income tax treat them differently.

For FEMA, the label does not matter much. Both count as foreign direct investment, both are priced under rule 21 of the NDI Rules and both are reported in Form FC-GPR. The choice turns on the company law and tax differences in the table.

| Point | CCD | CCPS |
|---|---|---|
| Nature under the Companies Act | Debenture (section 71) | Preference share capital (section 43) |
| FEMA status if fully and mandatorily convertible | Equity instrument, FDI | Equity instrument, FDI |
| Return before conversion | Interest, payable whether or not there are profits | Dividend, payable only out of profits (section 123) |
| Deduction for the company | Interest deductible, subject to section 177 and transfer pricing | Dividend not deductible |
| Voting rights | None (section 71(2)) | Limited (section 47(2)) |
| Ranking on winding up | With other creditors | After creditors, before equity |
| Accounting under Ind AS 32, if conversion is into a fixed number of shares | Compound instrument; the present value of the interest is a liability, the rest is equity | Equity, where the dividend is discretionary |
| Main company law approval | Special resolution (section 71(1)) and preferential issue rules | Special resolution (rule 9) and preferential issue rules |
| Tax on the return for a foreign company | Rupee interest at 35 percent plus surcharge and cess, or the treaty rate | Dividend at 20 percent under section 207, or the treaty rate |
| Conversion into equity | Not a transfer (section 70(1)(z)) | Not a transfer (section 70(1)(zb)) |

We see venture investors use CCPS in most rounds. Foreign parents funding a subsidiary choose CCDs more often, because interest gives them a return before the subsidiary makes profits.

## Which instruments count as equity instruments under the NDI Rules?

Rule 2(k) of the NDI Rules lists four equity instruments: equity shares, convertible debentures, preference shares and share warrants. The explanation limits debentures and preference shares to those that are fully paid and fully and mandatorily convertible. Anything optionally or partly convertible is debt and falls under the ECB rules.

The [Foreign Exchange Management (Non Debt Instruments) Rules, 2019](https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083), updated on rbi.org.in to 2 Sep 2026, set the definitions. Paragraphs 4.6 and 4.7 of the [Master Direction on Foreign Investment in India](https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200) repeat them.

| Instrument | Equity instrument under FEMA? | Condition | Rule |
|---|---|---|---|
| Equity shares, fully paid | Yes | None beyond pricing and caps | Rule 2(k) |
| Partly paid equity shares | Yes | 25 percent upfront, balance within 12 months | Rule 2(k), explanation |
| Compulsorily convertible debentures | Yes | Fully paid, fully and mandatorily convertible | Rule 2(k), explanation |
| Compulsorily convertible preference shares | Yes | Fully paid, fully and mandatorily convertible | Rule 2(k), explanation |
| Share warrants | Yes | 25 percent upfront, balance within 18 months; price or formula upfront | Rule 2(k), explanation; rule 21 |
| Optionally or partly convertible debentures | No, debt | ECB rules apply | Borrowing and Lending Regulations |
| Non convertible or redeemable preference shares | No, debt | ECB rules apply | Borrowing and Lending Regulations |
| Convertible notes of a start up | Separate instrument | INR 25 lakh or more, single tranche | Rules 2(e) and 18 |

The explanation adds two limits on exits. An equity instrument can carry an optionality clause, but only after a minimum lock in of one year. It cannot give the investor a right to exit at an assured price. Paragraph 4.8 of the Master Direction says the lock in is one year or the sector specific period, whichever is higher.

A guaranteed return, such as a put option at a fixed internal rate of return, takes the instrument out of the equity category. We rewrite investor puts as "at fair value on the exercise date" to keep them inside the rule.

An instrument that fails rule 2(k) is debt. From 16 Feb 2026, borrowing from a non resident follows Schedule I of the Borrowing and Lending Regulations. [FEMA 3(R)(5)/2026-RB of 9 Feb 2026](https://rbi.org.in/ScriptS/BS_FemaNotifications.aspx?Id=13306) rewrote that schedule. An optionally convertible debenture then needs a Loan Registration Number before drawdown. The borrower also files Form ECB 2 within seven calendar days after the end of each month in which an event changes the borrowing. Our [ECB guide](/insights/ecb-loan-from-foreign-parent-india) covers that route.

## How must the conversion formula be fixed?

The explanation to rule 21(2)(a) of the NDI Rules fixes the price or conversion formula of a convertible instrument at issue. The price at conversion cannot be lower than the fair value on the issue date. So a ratio can adjust later, but only within a formula agreed at issue and never below that floor.

A typical CCPS term sheet sets a conversion ratio of one equity share for each CCPS, with an anti dilution adjustment. That adjustment is a formula fixed at issue, so it meets the first condition. It must also carry a floor equal to the fair value per equity share on the issue date. Without that floor, a down round can breach the second condition.

The Companies Act gives more room. Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 offers two methods for the conversion price. The company chooses one at the time of the offer:

1. Fix the price upfront, on a registered valuer's report given at the offer stage.
2. Fix the price later, not earlier than 30 days before the holder becomes entitled to apply for shares. The valuer's report must then be dated within 60 days of that entitlement date.

The second method does not work on its own for a non resident, because FEMA wants the formula at issue. We use the first method for foreign investors, with the formula and the floor written into both the special resolution and the instrument terms.

| Conversion term | Companies Act (rule 13) | FEMA (rule 21) | Works for a foreign investor? |
|---|---|---|---|
| Fixed ratio set at issue | Allowed under the upfront method | Allowed | Yes |
| Anti dilution formula set at issue, with a floor | Allowed under the upfront method | Allowed if the price never falls below issue date fair value | Yes |
| Anti dilution formula with no floor | Allowed | Breach if the price falls below issue date fair value | No |
| Price fixed at conversion by a new valuation | Allowed under the later method | Formula not fixed at issue | No |
| Conversion at the next round price, with a discount | Allowed if disclosed | Only with a floor at issue date fair value | With a floor only |

## How are CCDs and CCPS priced for a foreign investor?

The issue price of a CCD or CCPS cannot be below fair value under rule 21 of the NDI Rules. A Chartered Accountant, a SEBI registered merchant banker or a practising cost accountant certifies fair value using an internationally accepted method. The certificate must not be more than 90 days old on the date of issue.

Paragraph 8.11 of the Master Direction sets the 90 day limit. Because the instrument converts later, two numbers matter. The first is the issue price of the CCD or CCPS. The second is the fair value of one equity share on the issue date, which becomes the conversion floor.

We ask the valuer to state both numbers in the same certificate. A valuation that gives only the instrument value leaves the floor open to argument. That argument usually comes years later, with a new valuer and new numbers.

The Companies Act adds a registered valuer's report for a preferential issue under section 62(1)(c) and rule 13. That report fixes the price for company law. We use the higher of the two values as the issue price. Our page on [FEMA pricing guidelines](/insights/fema-pricing-guidelines-share-valuation) explains the methods.

## Is there a cap on the coupon or dividend?

No. The NDI Rules and the Master Direction on Foreign Investment, updated to 15 Jun 2026, set no ceiling on CCD interest or CCPS dividends. The limits come from elsewhere: CCPS dividends need distributable profits, and CCD interest must be at arm's length and passes the section 177 interest limit.

We still see term sheets that refer to a ceiling linked to the SBI prime lending rate. That ceiling is not in the current NDI Rules or the Master Direction. The ECB cost rules do not apply either, because a CCD that meets rule 2(k) is not an ECB.

The practical limits are these:

1. **CCPS dividend.** Section 123 of the Companies Act, 2013 allows dividends only out of profits. A loss making start up cannot pay the preference dividend in cash, whatever the rate.
2. **CCD interest between related parties.** Interest a subsidiary pays to its foreign parent is an international transaction. It must be at arm's length and goes into Form 48 (old Form 3CEB) under section 172 of the Income Tax Act, 2025.
3. **Interest limitation.** [Section 177](https://www.incometaxindia.gov.in/w/section-177-77) caps the deduction for interest on debt from a non resident associated enterprise. The cap applies where that interest exceeds INR 1 crore in a tax year. The deduction cannot exceed 30 percent of EBITDA, and the excess carries forward for up to eight tax years.

Section 177(7)(a) defines debt to include any financial instrument that gives rise to deductible interest. A CCD is equity for FEMA but debt for this test.

## How are CCD interest and CCPS dividends taxed?

The company deducts tax under section 393(2) of the Income Tax Act, 2025 on CCD interest or CCPS dividends paid to a non resident. Rupee interest to a foreign company bears 35 percent plus surcharge and cess. Dividends bear 20 percent under section 207. A treaty rate applies with a tax residency certificate and Form 41.

[Section 393(2)](https://www.incometaxindia.gov.in/w/section-393-6) covers payments to non residents in serial 17 of its table. CCD interest is in rupees. It is not interest on a foreign currency borrowing under [section 207](https://www.incometaxindia.gov.in/w/section-207-78), so the general 35 percent rate for a foreign company applies.

The surcharge for a foreign company is 2 percent where income exceeds INR 1 crore, and 5 percent above INR 10 crore. Health and education cess adds 4 percent. Treaty rates are lower. Interest is 15 percent under the treaties with the US, the UK and Singapore, and 10 percent with Germany, Japan and the Netherlands. In practice the treaty rate applies without surcharge or cess. That position rests on tribunal rulings and not on the Act, so confirm it with your tax adviser.

| Payment or event | Provision | Domestic rate for a foreign company | Typical treaty rate |
|---|---|---|---|
| CCD interest in rupees | Section 393(2), serial 17 | 35 percent plus surcharge and cess | 15 percent (US, UK, Singapore); 10 percent (Germany, Japan, Netherlands) |
| CCPS dividend | Section 393(2); section 207 | 20 percent plus surcharge and cess | 10 percent (UK, Netherlands, France); 15 or 25 percent (US) |
| Interest deduction for the company | Section 177; section 35(b)(ii) | Limited to 30 percent of EBITDA for AE debt above INR 1 crore; disallowed if TDS unpaid | Not applicable |
| Dividend deduction for the company | Not deductible | Not applicable | Not applicable |
| Conversion of CCD into shares | Section 70(1)(z) | Not a transfer | Not applicable |
| Conversion of CCPS into equity shares | Section 70(1)(zb) | Not a transfer | Not applicable |

The company deposits the TDS by the 7th of the next month, or 30 April for March, under rule 218(2). It reports the payment in Form 144 (old Form 27Q). Each remittance also needs Form 145 (old Form 15CA), and Form 146 (old Form 15CB) where it applies. Our guide to [TDS on payments to non residents](/insights/tds-on-payments-to-non-residents) explains the forms.

If the company misses the TDS, section 35(b)(ii) disallows the whole interest until the year it pays the tax. That rule replaced section 40(a)(i) of the 1961 Act.

## What are share warrants and partly paid shares under FEMA?

Rule 2(k) lets a non resident subscribe to partly paid equity shares and share warrants, with set payment periods. At least 25 percent of the total consideration comes upfront in both cases. The balance on partly paid shares comes within 12 months. The balance on warrants comes within 18 months.

The explanation to rule 2(k) and rule 21 add pricing conditions for warrants. The price or conversion formula is fixed upfront. The share warrants must be issued in line with SEBI regulations or other applicable law. In practice, warrants are mostly a listed company instrument.

Partly paid shares suit a foreign parent that wants to commit capital now and fund it in stages. Paragraph 2.4 of Annex 1 to the Master Direction runs the 60 day allotment clock from each call payment. The company reports the issue in Form FC-GPR and the calls through the AD bank.

A CCD or CCPS cannot be partly paid. Rule 2(k) requires both to be fully paid. A staged CCPS round therefore needs separate tranches, each with its own allotment, PAS-3 and FC-GPR.

## How do convertible notes work for start ups?

Under rule 18 of the NDI Rules, a DPIIT recognised start up can issue convertible notes to a non resident for INR 25 lakh or more in a single tranche. The note starts as debt and converts into equity, or is repaid, within ten years. The start up reports the issue in Form CN within 30 days.

Rule 2(e) defines the convertible note. Rule 2(an) ties "startup company" to DPIIT notification G.S.R. 127(E) of 19 Feb 2019. Rule 18 sets the conditions:

1. **Who can invest.** Any person resident outside India, except citizens of Pakistan or Bangladesh and entities registered there (rule 18(1)).
2. **Amount.** INR 25 lakh or more in a single tranche (rule 18(1)).
3. **Approval sectors.** Where the sector needs government approval for foreign investment, the notes need it too (rule 18(2)).
4. **Conversion.** Equity issued on conversion follows the entry route, caps and pricing guidelines (rule 18(2); paragraph 6.14.3).
5. **NRIs and OCIs.** They can buy notes on a non repatriation basis under Schedule IV (rule 18(4)).
6. **Payment.** By inward remittance or from a repatriable account. Any escrow account must close within six months (paragraph 6.14.4).
7. **Term.** Conversion or repayment within ten years of issue, at the holder's option (rule 2(e) and paragraph 6.14.8).

Company law treats the note as a deposit exemption, not a share. Rule 2(1)(c)(xvii) of the Companies (Acceptance of Deposits) Rules, 2014 covers convertible notes. It excludes INR 25 lakh or more that a start up receives as a convertible note in a single tranche. The note must convert or be repaid within ten years. A [PIB document on start up provisions](https://static.pib.gov.in/WriteReadData/specificdocs/documents/2026/feb/doc2026214789601.pdf), published in February 2026, lists this exemption.

We use convertible notes for a first cheque from a foreign angel when the start up has no agreed valuation. Once a priced round is near, CCPS are simpler, because the FEMA price is fixed and the Companies Act treats them as capital. Our guide to [DPIIT recognition for a foreign owned start up](/insights/dpiit-startup-recognition-foreign-owned-startup) covers eligibility.

## Which FEMA reports apply to CCDs, CCPS and convertible notes?

CCDs and CCPS issued to a non resident go in Form FC-GPR within 30 days, under regulation 4(1) of FEMA 395/2019-RB. A start up reports convertible notes in Form CN within 30 days of issue or transfer. A transfer of CCDs or CCPS between a resident and a non resident goes in Form FC-TRS within 60 days.

[FEMA 395/2019-RB](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0), amended to 13 Jun 2026, sets these forms in regulation 4. The annual FLA return by 15 July then covers all foreign held instruments (regulation 4(2)).

| Event | Form | Due | Rule |
|---|---|---|---|
| Issue of CCDs or CCPS to a non resident | Form FC-GPR | 30 days from issue | Regulation 4(1) |
| Issue of convertible notes to a non resident | Form CN | 30 days from issue | Regulation 4(12) |
| Transfer of convertible notes between resident and non resident | Form CN | 30 days from transfer | Regulation 4(12) |
| Transfer of CCDs or CCPS between resident and non resident | Form FC-TRS | 60 days from transfer or receipt of funds, whichever is earlier | Regulation 4(3) |
| Annual return of foreign liabilities | FLA return | 15 July each year | Regulation 4(2) |
| Conversion of CCDs or CCPS into equity shares | No form named for conversion | We found no provision in regulation 4 or the Master Direction | Agree the filing with the AD bank in writing before conversion |

Neither regulation 4 nor the Master Direction says how to report the conversion of a CCD, a CCPS or a convertible note. We found no RBI text that requires a fresh Form FC-GPR on conversion, and none that exempts it. On our reading, the equity shares are a new issue and the AD bank may ask for Form FC-GPR within 30 days of allotment. Ask the AD bank before the conversion date and keep its reply on file. Our [FC-GPR filing guide](/insights/fc-gpr-filing-timeline-and-process-for-foreign-founders) lists the attachments.

## What company law steps does a CCD issue need?

A CCD issue to a foreign investor needs a special resolution under section 71(1), because the debentures carry a conversion option. It is also a preferential offer under section 62(1)(c), made by private placement under section 42 and rule 14. The company files Form PAS-3 within 15 days and issues debenture certificates within six months.

[Section 71](https://www.incometaxindia.gov.in/w/section-71-99) sets the core rules:

1. Section 71(1) allows debentures with an option to convert into shares, wholly or partly, at the time of redemption. A special resolution in general meeting must approve the issue.
2. Section 71(2) bars debentures with voting rights.
3. Section 71(3) lets a company issue secured debentures on prescribed terms, which sit in rule 18 of the Share Capital and Debentures Rules.
4. Section 71(4) requires a debenture redemption reserve out of profits available for dividend.
5. Section 71(5) requires a debenture trustee only for a prospectus or an offer to the public or to more than 500 members.

A privately placed, unsecured CCD issue to one foreign investor needs no debenture trustee. Rule 18(1) applies to secured debentures. Those need a charge, a debenture trustee and a trust deed in Form SH-12. Most foreign investor CCDs are unsecured, so the trust deed rules do not apply. We could not open the current text of rule 18, so read it on mca.gov.in if you plan to secure the issue.

The redemption reserve is a judgement call. Section 71(4) ties the reserve to redemption. A CCD that must convert is never redeemed. On our reading, it needs no reserve, but we record the reasoning in the board minutes because some auditors take the other view. Rule 18(7) of the Share Capital and Debentures Rules sets the reserve percentages and the exempt issuers. It has been amended more than once. We could not open the current text, so read rule 18(7) on mca.gov.in before you settle the point.

CCDs raise a deposit question. Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 lists amounts that are not deposits. The list covers money from listed foreign sources, subject to FEMA, and debentures that must convert into shares within a set period. A 2022 ICAI Board of Studies note gives that period as ten years. We could not open the rule text. Check the clause number, the foreign source wording and the period on mca.gov.in before you rely on the exclusion.

The private placement steps are the same as for shares. They are a special resolution for each offer, Form PAS-4, a separate bank account, allotment within 60 days and Form PAS-3 within 15 days. Our guide to [private placement under section 42](/insights/private-placement-pas-4-foreign-investors) covers them. The conversion itself needs no fresh shareholder approval, because section 62(3) exempts a conversion under terms approved by special resolution before issue.

Stamp duty applies on the issue of debentures. SEBI's stamp duty FAQs give the rate as 0.005 percent under the Indian Stamp Act, 1899, as amended from 1 Jul 2020. The depository collects it on a demat issue. Check the rate on the issue date, because the Stamp Act and its Schedule set it. The company keeps a register of debenture holders and, on conversion, files Form PAS-3 within 30 days for the equity shares allotted.

## What company law steps does a CCPS issue need?

A CCPS issue needs authority in the articles and a special resolution under rule 9 of the Share Capital and Debentures Rules. The resolution sets the dividend, conversion, voting and redemption terms. The issue is also a preferential offer under section 62(1)(c) and section 42. The company must have enough authorised preference share capital.

Rule 9 requires the company to have no subsisting default in redeeming preference shares or paying preference dividends. The resolution must state the priority of dividend, any participation in surplus, whether dividends are cumulative and the conversion terms. It must also state the voting rights and the manner of redemption, if any. The explanatory statement covers the size of the issue, the terms, the price and the expected dilution on conversion.

The authorised capital needs two checks. The memorandum must carry enough preference share capital for the CCPS. It must also leave enough equity share capital for the shares the CCPS will convert into. We increase both in one resolution and file Form SH-7 within 30 days. Our [authorised capital service](/services/increase-authorized-capital.html) handles the filing.

CCPS holders vote only on limited matters under section 47(2). They vote on resolutions that directly affect their rights and on winding up or reduction of capital. They get full voting rights if the preference dividend stays unpaid for two years. Investors who want board level control take it through the shareholders' agreement and the articles, not through the CCPS.

The tenure follows section 55, which limits preference shares to twenty years. Rule 10 extends this to thirty years for infrastructure projects. A CCPS that converts within the term never reaches redemption.

## CCD or CCPS, which should a foreign investor choose?

Choose CCPS when the investor wants capital that ranks ahead of equity and does not need a cash return before conversion. Choose CCDs when the investor, usually a foreign parent, wants a deductible interest return from day one. Choose a convertible note only when the company is a DPIIT start up and no valuation is agreed.

Our usual choices look like this:

1. **Venture round with an agreed valuation.** CCPS, for the liquidation preference and the simple FEMA pricing.
2. **Foreign parent funding a loss making subsidiary.** CCPS or equity, because interest would only add to the losses.
3. **Foreign parent funding a profitable subsidiary.** CCDs, because the interest is deductible and returns cash before conversion.
4. **Bridge round in a DPIIT start up with no agreed valuation.** A convertible note of at least INR 25 lakh per investor.
5. **Investor who wants a fixed exit return.** None of these, because an assured exit price breaks rule 2(k). An ECB fits instead.

For a foreign parent, CCDs carry a hidden cost. The subsidiary withholds tax on every interest payment and needs a transfer pricing report. The section 177 cap also applies once interest to the parent passes INR 1 crore. Where the subsidiary is small, those costs often outweigh the tax saving. We model both routes before the board meeting. Our [FEMA compliance service](/services/fema-compliances.html) covers the filings either way.

## What changed in 2026

We found no 2026 change to the FDI definitions of CCDs and CCPS in rule 2(k) of the NDI Rules. Three things around them changed. RBI rewrote the ECB framework for optionally convertible instruments from 16 Feb 2026. The Income Tax Act, 2025 replaced the 1961 Act from 1 Apr 2026. Press Note 2 (2026 Series) redefined the land border test. This page carries a publish date of 9 Feb 2026, and the text states the law as on 23 Oct 2026.

| Old rule | New rule | Date | Instrument |
|---|---|---|---|
| Optionally convertible debentures under the ECB Master Direction | Schedule I of the Borrowing and Lending Regulations | 16 Feb 2026 (Gazette) | FEMA 3(R)(5)/2026-RB of 9 Feb 2026 |
| TDS on payments to non residents under section 195 | Section 393(2), serial 17 | 1 Apr 2026 | Income Tax Act, 2025 |
| Dividend rate for non residents under section 115A | Section 207 | 1 Apr 2026 | Income Tax Act, 2025 |
| Interest limitation under section 94B | Section 177 | 1 Apr 2026 | Income Tax Act, 2025 |
| Conversion not a transfer under section 47(x) and (xb) | Section 70(1)(z) and (zb) | 1 Apr 2026 | Income Tax Act, 2025 |
| Disallowance for unpaid TDS under section 40(a)(i) | Section 35(b)(ii) | 1 Apr 2026 | Income Tax Act, 2025 |
| Form 3CEB, Form 27Q, Forms 15CA and 15CB | Form 48, Form 144, Forms 145 and 146 | 1 Apr 2026 | Income Tax Rules, 2026 |
| Land border beneficial ownership not defined for FDI | Tied to control and to the thresholds in rule 9(3) of the PML Rules | 15 Mar 2026 (Press Note); effective on FEMA notification | Press Note 2 (2026 Series) |

### What has happened since

The ECB notification is dated 9 Feb 2026, the publish date of this page. It took effect on its Gazette date of 16 Feb 2026. The Cabinet approved the land border change on 10 Mar 2026. Its [release](https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2237806&reg=3&lang=2) says investors with non controlling beneficial ownership of up to 10 percent from a land border country can use the automatic route. The investee reports the details to DPIIT. [Press Note 2 (2026 Series)](https://www.dpiit.gov.in/static/uploads/2026/03/b9da5830b052c2f2d788593e97d07c63.pdf) of 15 Mar 2026 defines the beneficial owner by the PMLA and rule 9(3) of the PML Rules. It does not itself state the 10 percent figure, and it takes effect from the date of the FEMA notification.

The Ministry of Finance then amended the NDI Rules. The Gazette notification of the [NDI (Third Amendment) Rules, 2026](https://egazette.gov.in/WriteReadData/2026/273406.pdf) (S.O. 3030(E) of 12 Jun 2026) lists two earlier 2026 amendments: S.O. 2174(E) of 1 May 2026 and S.O. 2186(E) of 2 May 2026. The [NDI Rules on rbi.org.in](https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083), updated up to 2 Sep 2026, carry the beneficial owner test as Explanation 2 to rule 6(a). Read both May notifications on egazette.gov.in for the exact insertion date.

For CCDs and CCPS, test the ownership chain of a land border investor under the current rule 6(a) before you fix the entry route.

## Worked example

### CCPS with an anti dilution floor

A US venture fund invests INR 50 crore in a Bengaluru start up, a Private Limited company. It takes 5,00,000 CCPS of INR 10 face value at INR 1,000 each. Each CCPS converts into one equity share, with a weighted average anti dilution adjustment. The figures are illustrative.

| Item | Working | Result |
|---|---|---|
| Amount invested | 5,00,000 × INR 1,000 | INR 50,00,00,000 |
| Fair value of one equity share on the issue date (rule 21 certificate) | Valuer's report | INR 800 |
| Initial conversion price | INR 1,000 per CCPS, 1:1 | 5,00,000 equity shares |
| Conversion floor under rule 21 | Issue date fair value | INR 800 per share |
| Maximum equity shares on conversion | 50,00,00,000 ÷ 800 | 6,25,000 shares |
| Down round: formula gives INR 850 | 50,00,00,000 ÷ 850 | 5,88,235 shares (rounded down) |
| Deeper down round: formula gives INR 720 | Below the INR 800 floor | Capped at 6,25,000 shares |

If the term sheet has no floor, the deeper down round would give 50,00,00,000 ÷ 720 = 6,94,444 shares. The extra 69,444 shares would be issued below the issue date fair value, which rule 21 does not allow. So we write the INR 800 floor into the CCPS terms and the special resolution.

### CCDs from a UK parent

A UK parent holds all the equity of a profitable Indian subsidiary. It subscribes INR 20 crore of CCDs at 9 percent a year, converting into equity after five years. The parent is an associated enterprise, and the subsidiary has EBITDA of INR 4 crore for tax year 2026-27. The figures are illustrative.

| Item | Working | Result |
|---|---|---|
| Annual interest | 20,00,00,000 × 9 percent | INR 1,80,00,000 |
| TDS at the India UK treaty rate | 1,80,00,000 × 15 percent | INR 27,00,000 |
| TDS without the treaty (35 percent, 2 percent surcharge, 4 percent cess) | 1,80,00,000 × 37.128 percent | INR 66,83,040 |
| Section 177 limit: 30 percent of EBITDA | 4,00,00,000 × 30 percent | INR 1,20,00,000 |
| Excess interest disallowed this year | Lower of (1,80,00,000 minus 1,20,00,000) and 1,80,00,000 | INR 60,00,000 |
| Carry forward | Up to eight tax years | INR 60,00,000 |

The treaty rate needs the parent's tax residency certificate and Form 41 on file. The subsidiary deposits the TDS by the 7th of the following month, and reports the interest in Form 144 and in Form 48. It deducts INR 1,20,00,000 this year. The INR 60,00,000 balance waits for a year with spare EBITDA capacity.

If the same INR 20 crore came in as CCPS, there would be no TDS until a dividend is declared, and no deduction. The subsidiary would pay more corporate tax now. The parent would get cash only by dividend, taxed at 10 percent under the India UK treaty.

## Common mistakes

1. **Adding an assured exit price.** A put at a fixed return breaks rule 2(k). Fix: price any put at fair value on the exercise date, after the one year lock in.
2. **Leaving the conversion formula open.** FEMA needs the price or formula at issue. Fix: write the ratio, the adjustment formula and the floor into the terms.
3. **Writing anti dilution without a floor.** A down round can push the price below issue date fair value. Fix: cap the adjustment at the fair value per share on the issue date.
4. **Valuing only the instrument.** The conversion floor needs the equity fair value on the issue date. Fix: ask the valuer to state both numbers in one certificate.
5. **Issuing optionally convertible instruments as FDI.** These are ECB. Fix: make conversion compulsory, or follow the ECB rules with an LRN.
6. **Forgetting authorised equity capital for conversion.** The conversion fails without room in the equity capital. Fix: increase preference and equity capital together.
7. **Missing TDS on CCD interest credited but unpaid.** Section 393 applies at credit or payment, whichever is earlier. Fix: deduct when the interest is booked.
8. **Ignoring section 177 on parent CCDs.** Interest above 30 percent of EBITDA is not deductible in the year. Fix: model EBITDA before you fix the coupon.
9. **Filing PAS-3 in 30 days for a private placement.** Section 42(8) gives 15 days. Fix: diarise 15 days from allotment.
10. **Issuing a convertible note below INR 25 lakh.** Rule 18(1) needs at least INR 25 lakh in a single tranche. Fix: combine the tickets or use CCPS.

## Checklist

1. Choose the instrument by comparing tax, voting, ranking and the investor's return.
2. Check the sector, entry route, cap and land border status of each investor.
3. Obtain a rule 21 fair value certificate stating the instrument value and the equity value on the issue date.
4. Obtain the registered valuer's report under section 62(1)(c) and rule 13.
5. Draft the terms with a fixed ratio or formula, a floor at issue date fair value and no assured exit price.
6. Increase authorised preference and equity capital, and file Form SH-7.
7. Pass the special resolutions under section 71(1) or rule 9, and under rule 14, and file Form MGT-14.
8. Send Form PAS-4, collect the money in a separate bank account and allot within 60 days.
9. File Form PAS-3 within 15 days and Form FC-GPR, or Form CN for notes, within 30 days.
10. Issue the certificates or credit the demat accounts, and update the registers.
11. Deduct TDS on interest or dividends, file Forms 144, 145 and 146, and report related party interest in Form 48.
12. Record the conversion, allot the equity shares and file Form PAS-3 within 30 days.

## Key terms

- **Compulsorily Convertible Debenture (CCD)**: A CCD is a debenture that must convert into equity shares within a fixed period. Rule 2(1)(c)(ix) of the Companies (Acceptance of Deposits) Rules, 2014 excludes debentures compulsorily convertible within ten years from deposits. Under FEMA, CCDs issued to a foreign investor are equity instruments reported in Form FC-GPR. (https://krystal7.com/glossary#compulsorily-convertible-debenture)
- **Compulsorily Convertible Preference Shares (CCPS)**: Preference shares that must convert into equity shares on terms set at issue. The Non Debt Instruments Rules, 2019 treat them as equity only if they are fully, compulsorily and mandatorily convertible, and the conversion price can never be lower than the fair value worked out at issue. (https://krystal7.com/glossary#compulsorily-convertible-preference-shares)
- **Equity instruments (NDI Rules)**: The instruments a person resident outside India can hold as FDI under rule 2(k) of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019. They are equity shares, fully and mandatorily convertible debentures and preference shares, and share warrants, with partly paid shares and warrants subject to set payment periods. (https://krystal7.com/glossary#equity-instruments-ndi-rules)
- **Convertible note (FEMA)**: An instrument issued by a startup company that records money received as debt, repayable or convertible into equity shares within ten years. Rule 18 of the FEMA Non Debt Instruments Rules, 2019 lets a non resident buy one for INR 25 lakh or more in a single tranche, reported in Form CN within 30 days. (https://krystal7.com/glossary#convertible-note)
- **Form CN**: The reporting form for a convertible note that a DPIIT recognised startup issues to a person resident outside India, used instead of Form FC-GPR. A convertible note is debt acknowledging money received that can convert into equity, and the Non Debt Instruments Rules, 2019 allow startups to issue it. (https://krystal7.com/glossary#form-cn)
- **Form FC-GPR**: The report an Indian company files with the Reserve Bank of India on the FIRMS portal after issuing equity instruments to a person resident outside India. Regulation 4(1) of FEMA 395/2019-RB requires it within 30 days of the issue. The shares must be issued within 60 days of receiving the money, or the money is refunded within 15 days after. (https://krystal7.com/glossary#form-fc-gpr)
- **Optionality clause**: A term that lets a foreign investor exit through a put or call option. Paragraph 4.8 of the RBI Master Direction on Foreign Investment allows it in an equity instrument after a minimum lock in of one year, with no assured exit price and subject to the pricing guidelines. (https://krystal7.com/glossary#optionality-clause)
- **Pricing guidelines (FEMA)**: Rule 21 of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 sets the price floor and ceiling for unlisted shares. A resident selling to a non resident must receive at least fair value. A non resident selling to a resident may receive at most fair value, certified by a Chartered Accountant, SEBI registered merchant banker or practising cost accountant. (https://krystal7.com/glossary#pricing-guidelines)

## Frequently Asked Questions

### What is the difference between CCD and CCPS?

A CCD is a debenture that must convert into equity and pays interest until then, whether or not the company makes profits. A CCPS is a preference share that must convert and pays a dividend only out of profits. Rule 2(k) of the NDI Rules treats both as FDI equity instruments if fully paid and mandatorily convertible.

### Are CCDs treated as FDI or ECB?

CCDs are FDI if they are fully paid and fully and mandatorily convertible, under rule 2(k) of the NDI Rules. Debentures that are optionally or partly convertible are debt. They follow the ECB rules in Schedule I of the Borrowing and Lending Regulations, rewritten by FEMA 3(R)(5)/2026-RB.

### Can an Indian company issue optionally convertible debentures to a foreign investor?

Yes, but only as an external commercial borrowing. The instrument fails rule 2(k) of the NDI Rules, so FDI rules do not apply. The company follows Schedule I of the Borrowing and Lending Regulations and takes a Loan Registration Number before drawdown. It files Form ECB 2 within seven calendar days after the end of any month in which the borrowing changes.

### Must the conversion ratio be fixed at the time of issue?

Yes. The explanation to rule 21(2)(a) of the NDI Rules fixes the price or conversion formula of a convertible instrument at issue. An anti dilution adjustment is allowed if its formula is in the terms from day one. The conversion price can never fall below the fair value on the issue date.

### Can the conversion price be lower than fair value at issue?

No. Rule 21 of the NDI Rules says the price at conversion cannot be lower than the fair value worked out at the time of issue. A down round adjustment must stop at that floor. Shares issued below it breach FEMA and need compounding, so we write the floor into the CCPS or CCD terms.

### Is there a limit on interest on CCDs issued to foreign investors?

The NDI Rules and the Master Direction set no cap on CCD interest. Interest a subsidiary pays its foreign parent must be at arm's length under the transfer pricing rules. Where interest to the associated enterprise exceeds INR 1 crore, section 177 of the Income Tax Act, 2025 limits the deduction to 30 percent of EBITDA.

### How is interest on CCDs paid to a non resident taxed?

The company deducts tax under section 393(2) of the Income Tax Act, 2025. Rupee interest to a foreign company is taxed at 35 percent plus surcharge and cess. A treaty can cut this, for example to 15 percent under the India US and India UK treaties. The company needs a tax residency certificate and Form 41.

### How is dividend on CCPS paid to a foreign investor taxed?

The company deducts tax under section 393(2) of the Income Tax Act, 2025. The rate is 20 percent under section 207 plus surcharge and cess, or the treaty rate. The treaty rate is 10 percent under the UK, Netherlands and France treaties. Under the US treaty, it is 15 or 25 percent.

### Is conversion of CCDs or CCPS into equity taxable?

No. Section 70(1)(z) of the Income Tax Act, 2025 says converting a company's debentures into its shares is not a transfer. Section 70(1)(zb) says the same for converting preference shares into equity shares of that company. The investor pays capital gains tax only when it later sells the equity shares.

### What is the minimum amount for a convertible note from a foreign investor?

INR 25 lakh or more in a single tranche, under rule 18(1) of the NDI Rules. Only a DPIIT recognised start up can issue convertible notes. Citizens and entities of Pakistan and Bangladesh cannot invest in them. The note must convert or be repaid within ten years of issue.

### Which form reports convertible notes issued to non residents?

Form CN, under regulation 4(12) of FEMA 395/2019-RB. The start up files it within 30 days of issuing the notes to a person resident outside India. Form CN also covers a transfer of the notes between a resident and a non resident, within 30 days of the transfer.

### Do CCDs need a debenture trustee?

Not usually. Section 71(5) of the Companies Act, 2013 requires a debenture trustee only for a prospectus, a public offer or an offer to more than 500 members. Secured debentures under rule 18(1) need a trustee and a trust deed in Form SH-12. Most privately placed CCDs to a foreign investor are unsecured.

### Do CCPS holders have voting rights?

Only limited ones. Under section 47(2) of the Companies Act, 2013, preference shareholders vote on resolutions that directly affect their rights. They also vote on winding up and capital reduction. They get full voting rights if the preference dividend remains unpaid for two years. Investors usually secure control rights through the shareholders' agreement.

### Which FEMA form reports CCPS and CCDs issued to foreign investors?

Form FC-GPR on the FIRMS portal, within 30 days of issue, under regulation 4(1) of FEMA 395/2019-RB. CCDs and CCPS are equity instruments under rule 2(k) of the NDI Rules, so they are reported like equity shares. A later transfer between a resident and a non resident goes in Form FC-TRS within 60 days.

### Can a foreign investor hold partly paid shares or warrants?

Yes. Rule 2(k) of the NDI Rules allows partly paid equity shares and share warrants. At least 25 percent of the consideration comes upfront. The balance comes within 12 months for partly paid shares and 18 months for warrants. The price or conversion formula of warrants is fixed upfront.

### Do CCDs count as deposits under the Companies Act?

Usually not, but check the rule text. Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 excludes certain foreign money, subject to FEMA. It also excludes debentures compulsorily convertible into shares within a set period, and convertible notes of start ups of INR 25 lakh or more. Confirm the clause and the period on mca.gov.in.

## Sources

- Reserve Bank of India, Foreign Exchange Management (Non Debt Instruments) Rules, 2019, updated up to 2 Sep 2026, https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083
- Reserve Bank of India, Master Direction on Foreign Investment in India, updated up to 15 Jun 2026, https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200
- Reserve Bank of India, Foreign Exchange Management (Mode of Payment and Reporting of Non Debt Instruments) Regulations, 2019, amended up to 13 Jun 2026, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0
- Reserve Bank of India, Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, FEMA 3(R)(5)/2026-RB, 9 Feb 2026, https://rbi.org.in/ScriptS/BS_FemaNotifications.aspx?Id=13306
- Income Tax Department (text of the Companies Act, 2013), section 71, https://www.incometaxindia.gov.in/w/section-71-99
- Income Tax Department (text of the Companies Act, 2013), section 62, https://www.incometaxindia.gov.in/w/section-62-101
- Income Tax Department (text of the Companies Act, 2013), section 42, https://www.incometaxindia.gov.in/w/section-42-118
- Press Information Bureau, Provisions in the Companies Act, 2013 to support Startups, February 2026, https://static.pib.gov.in/WriteReadData/specificdocs/documents/2026/feb/doc2026214789601.pdf
- Income Tax Department, Income Tax Act, 2025, section 177, https://www.incometaxindia.gov.in/w/section-177-77
- Income Tax Department, Income Tax Act, 2025, section 70, https://www.incometaxindia.gov.in/w/section-70-127
- Income Tax Department, Income Tax Act, 2025, section 393, https://www.incometaxindia.gov.in/w/section-393-6
- Income Tax Department, Income Tax Act, 2025, section 207, https://www.incometaxindia.gov.in/w/section-207-78
- Press Information Bureau, Cabinet approves changes in guidelines on investments from countries sharing land border with India, 10 Mar 2026, https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2237806&reg=3&lang=2
- Department for Promotion of Industry and Internal Trade, Press Note No. 2 (2026 Series), 15 Mar 2026, https://www.dpiit.gov.in/static/uploads/2026/03/b9da5830b052c2f2d788593e97d07c63.pdf
- Legislative Department, India Code, Companies Act, 2013 with subordinate legislation, including the Companies (Share Capital and Debentures) Rules, 2014 (rules 9, 10, 13 and 18) and the Companies (Acceptance of Deposits) Rules, 2014, https://www.indiacode.nic.in/handle/123456789/2114
- Ministry of Finance, Foreign Exchange Management (Non Debt Instruments) (Third Amendment) Rules, 2026, S.O. 3030(E), 12 Jun 2026, https://egazette.gov.in/WriteReadData/2026/273406.pdf
- Securities and Exchange Board of India, Frequently Asked Questions on the Indian Stamp Act, 1899 amendments and rules, https://www.sebi.gov.in/sebi_data/faqfiles/dec-2021/1639980911330.pdf

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