CCPS vs CCD vs convertible notes: choose what is right for you

Every funding round starts with a choice most founders make too quickly: which instrument to issue. CCPS, CCDs and convertible notes all end up as equity, but they get there differently, and along the way the same instrument can be equity under one law, debt under another and a liability on your balance sheet.

This guide covers what each instrument is, how each law treats it, the deadlines that start the day money lands in your bank account, and what is changing in 2026.

At a glance: the complete comparison

Part 1: Issue timelines, the deadlines that start when money arrives

Most compliance failures in fundraising are not about the instrument. They are about missed clocks. Here is the sequence for a CCPS or CCD round with a foreign investor.

Two clocks, not one. Under Section 42, securities must be allotted within 60 days of receiving the money. If not, the money must be refunded within 15 days after the 60-day period, with 12% interest from the 61st day. The money must sit in a separate account at a scheduled bank and can only be used for allotment or refund. FEMA runs an identical clock for foreign money: allot within 60 days of receipt or refund within the next 15 days, a maximum of 75 days from receipt. FC-GPR must then be filed within 30 days of allotment.

The FC-GPR clock starts at allotment, not when money arrives. That catches out companies where funds land weeks before shares are formally allotted. But the 60-day allotment clock is the one to diarise first: unallotted share application money beyond that window is itself a FEMA violation, and filing FC-GPR on time does not fix it.

You cannot touch the money until PAS-3 is filed. Application money can only be used after the return of allotment is filed within 15 days of allotment. Late PAS-3 filing attracts a penalty of ₹1,000 a day, up to ₹25 lakh, on the company, directors and promoters.

Do not start a new round before closing the last one. A fresh private placement offer cannot be made until earlier offers are allotted, abandoned or withdrawn.

Convertible notes have a different timeline. Notes issued to foreign investors are not reported on FC-GPR at issue. They go on Form CN within 30 days, and FC-GPR applies only when the note converts into shares. Sources differ on whether the 30 days runs from the date of issue or from receipt of funds, so file within 30 days of whichever comes first. Transfers of notes also need a Form CN filing within 30 days.

Part 2: CCPS, preference shares that may not be equity in your books

What they are. CCPS convert into equity after a set period or on specified events. They give investors a fixed return plus upside, and they help founders keep control even when their stake is smaller than the investors'.

Maximum conversion period. As preference shares, CCPS must convert within 20 years. Only companies setting up infrastructure projects can go beyond, up to 30 years. A typical term sheet lets the holder convert any time up to 20 years from issue.

Pricing the conversion. Under the Companies Act, where convertible securities are issued on a preferential basis, the price of the resulting shares can be fixed upfront on a registered valuer's report at the time of the offer, or set later, closer to conversion. FEMA currently requires the conversion price or formula to be fixed at issue for foreign investors, and RBI's draft rules would drop that requirement. With foreign investors, fix the price upfront.

The accounting surprise. Under the Companies Act, CCPS are preference shares. In accounting they could be equity, a liability or both, because Ind AS 32 looks at substance, not form.

Part 3: CCDs, debt today and equity tomorrow

What they are. CCDs are debt instruments that must convert into equity after a set period or on specified events. They are debt at issue but certain to become equity. Company law regulates them as debentures under Section 71 read with Rule 18.

Do you need a debenture trustee? Not always. A trustee is required when debentures are offered to the public or to more than 500 members. The Rule 18 conditions, including the trustee and trust deed requirements, apply to secured debentures. Where a trustee is required, the trust deed must be executed within 60 days of allotment. Secured debentures cannot have a redemption period beyond 10 years, except for infrastructure companies. Most startup CCDs are unsecured and privately placed with a few investors, so check which rules actually apply to your issue.

Debenture certificates. For debentures not held in demat form, certificates must be issued within 6 months of allotment.

The Supreme Court case everyone quotes. In Narendra Kumar Maheshwari v. Union of India [(1990) Suppl. SCC 440], the Supreme Court held that an instrument compulsorily convertible into shares is equity, not debt. But the case concerned capital issues control, and whether CCDs are debt or equity was not the question before the court.

Part 4: Convertible notes, fast and flexible, only for DPIIT startups

Origin. MCA introduced the convertible note by amending the Deposit Rules on 29 June 2016. It is defined as money received initially as debt, repayable at the holder's option or convertible into equity on specified events.

Foreign investors. RBI's notification of 10 January 2017 allowed non-residents to buy convertible notes of ₹25 lakh or more in a single tranche, excluding citizens and entities of Pakistan and Bangladesh. Form CN is required only for foreign investors.

Five years or ten? The 2017 FEMA rules required conversion within five years, and for a while notes to residents had ten years while notes to non-residents had five. The current NDI Rules allow ten years. The Deposit Rules also cap the tenure at ten years, and it cannot be extended by contract without restructuring.

Current conditions.

• Only DPIIT-recognised startups can issue notes.
• ₹25 lakh minimum per investor per tranche.
• Conversion or repayment within 10 years.
• Notes can be issued after a CCPS round, as long as the company still qualifies as a startup.
• Issuance must follow the Companies Act and the NDI Rules, including pricing, entry routes and sectoral caps.

Late filing penalties. Late Form CN or FC-GPR filing is a FEMA contravention. Penalties can be up to three times the amount involved, or ₹2 lakh where the amount cannot be quantified. Compounding amounts for certain reporting delays are capped at ₹2 lakh if you approach RBI voluntarily.

Eligibility has widened. DPIIT raised the startup turnover limit from ₹100 crore to ₹200 crore, and to ₹300 crore for deep-tech startups, in February 2026.

Part 5: How to choose

Frequently asked questions

How long do I have to allot shares after receiving money?

60 days. If you miss it, refund within the next 15 days or pay 12% interest from the 61st day.

When is PAS-3 due?

Within 15 days of allotment for private placements.

When is FC-GPR due?

Within 30 days of allotment, not from when the money was received.

How long can a convertible note stay unconverted?

Up to 10 years.

Are CCDs debt or equity?

Equity for FEMA, debt for income tax until conversion, and it depends on the terms for accounting.

Can CCPS be a liability?

Yes, if the terms include mandatory dividends, IPO-linked cash redemption, or conversion into a variable number of shares.