CCPS SAFE notes in India: structure, investor rights, and compliance

Compulsorily Convertible Preference Shares (CCPS) are the legal backbone of almost every SAFE-like investment made into an Indian startup today. The iSAFE note, the 100X.VC template, and most angel-fund term sheets all arrive at the same destination: CCPS allotted at a notional valuation, with conversion into equity triggered by a priced round or a liquidity event. What the instrument looks like on the surface (simple, quick, deferred valuation) is quite different from what it contains under the hood. CCPS can carry liquidation preferences, anti-dilution protection, reserved matters consent, and dividend-triggered voting rights that do not appear in the Y Combinator SAFE from which iSAFE was adapted. Understanding the full architecture before you sign matters, because once CCPS is allotted, every subsequent funding round, acquisition, and IPO runs through the rights you agreed to at the seed stage.

What are CCPS SAFE notes and how do they work in India?

CCPS SAFE notes are Compulsorily Convertible Preference Shares structured to replicate the economics of a Simple Agreement for Future Equity (SAFE) within India’s company law framework. The investor puts in money today; the company allots preference shares that carry a nominal dividend and certain protective rights; those shares automatically convert into equity shares on a qualifying trigger event, typically a priced funding round, a liquidity event, or the expiry of the maximum tenure under the Companies Act, 2013.

The distinction from a standard CCPS priced round is mainly one of intent and timing. In a standard Series A or Series B, CCPS is used as the primary investment instrument with full investor-rights negotiation: a negotiated price per share, liquidation waterfall, anti-dilution mechanics, board seat, and reserved matters are all agreed at the time of allotment. In a CCPS SAFE structure, the intent is to defer valuation and close quickly, as close to the spirit of the Y Combinator SAFE as Indian law permits.

The practical challenge is that Indian law does not permit truly open-ended pricing. Under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), any equity instrument issued to a non-resident investor must carry a price or a pricing formula fixed at the time of issuance, and conversion must not happen below the Fair Market Value (FMV) established at that point. For a purely domestic round, the Companies Act, 2013 does not mandate an FMV floor in the same way, but the obligation to file Form PAS-3 with the Ministry of Corporate Affairs (MCA) and to have a registered valuer certify value under Section 247 for private placements means that valuation is never truly absent; it is simply deferred or anchored to a nominal figure.

How does a CCPS SAFE note differ from an iSAFE note?

The iSAFE note and the CCPS SAFE note refer to the same underlying instrument (CCPS) but they differ in the source template, the investor rights typically included, and the investor profile for which each is designed.

The iSAFE (India Simple Agreement for Future Equity) was introduced by 100X.VC in July 2019 as a standardised, lightweight template for Indian angel investors and accelerators. The 100X.VC iSAFE template is deliberately stripped of the governance rights that institutional investors typically require. It carries a nominal dividend (1-2%), a 20-year conversion backstop, and standard conversion triggers. It does not typically include anti-dilution protection, liquidation preference multiples, or reserved matters consent rights. Speed and simplicity are the design goals.

The CCPS SAFE note, as used by early-stage VCs, micro-VCs, and angel funds that write slightly larger cheques, typically layers institutional investor rights on top of the same CCPS structure. The table below maps the key differences.

Table 1: iSAFE note vs CCPS SAFE note: feature comparison

Feature	iSAFE note (100X.VC template)	CCPS SAFE note (VC/angel fund)
Legal form	CCPS	CCPS
Investor profile	Individual angels, accelerators	Micro-VCs, angel funds, seed VCs
Valuation cap	Optional, often absent	Usually present
Discount on conversion	Standard (15-20%)	Negotiated (10-25%)
Liquidation preference	Statutory only (return of paid-up capital)	Contractual 1x non-participating or participating
Anti-dilution	Not typically included	Broad-based weighted average or full ratchet
Reserved matters	Minimal or absent	Typically included from seed stage
Board seat or observer rights	Rarely	Sometimes at larger cheque sizes
Voting rights trigger	Dividend default (statutory, Section 47(2))	Contractual plus statutory
FDI eligible	Yes (CCPS = equity instrument under NDI Rules)	Yes
Angel tax applicability	Abolished (Finance Act, 2024, effective April 2025)	Abolished

What is the legal framework governing CCPS in India?

CCPS is governed by three primary sections of the Companies Act, 2013, plus FEMA and the NDI Rules for foreign investors. The Act itself does not define CCPS as a named instrument or prescribe a dedicated compliance procedure for it, a gap noted in a February 2026 analysis by Cyril Amarchand Mangaldas, which observed that the Act “remains silent on the issuance of CCPS” and contains no “enabling or restricting provisions in relation to CCPS even when CCPS as an instrument has been around for many years.” That silence has created a workable but practitioner-dependent compliance structure built on general provisions.

Section 43 of the Companies Act, 2013 establishes that Indian companies limited by shares may issue only two classes of shares: equity shares and preference shares. CCPS falls within the preference share class. The two-class limitation is why the US-form SAFE, which sits outside both equity and debt, cannot be imported directly into the Indian structure, and it must be housed within a recognised class.

Section 55 of the Companies Act, 2013 governs the issuance and redemption of preference shares. The critical constraint for CCPS is the 20-year maximum tenure: preference shares issued by unlisted companies must convert or be redeemed within 20 years. For listed companies, the Securities and Exchange Board of India (SEBI) ICDR Regulations, 2018 impose a stricter limit: 18 months for a preferential issue and 60 months for a qualified institutional placement (per Regulation 162). This 20-year backstop is the long-stop conversion trigger in every iSAFE and CCPS SAFE note in India.

Section 42 of the Companies Act, 2013 governs private placements. CCPS is almost always issued through private placement. The key obligations under Section 42 include: an offer made to a maximum of 200 persons per financial year (excluding qualified institutional buyers and employees under an ESOP), a Private Placement Offer cum Application Letter (Form PAS-4) prepared and filed before the offer is made, a special or ordinary resolution passed at a general meeting (the class of resolution depends on the Articles), and a Return of Allotment filed in Form PAS-3 with the Registrar of Companies (RoC) within 30 days of allotment.

Section 62 of the Companies Act, 2013 governs the further issue of capital. On conversion of CCPS into equity shares, the company issues new equity shares. This issuance is governed under Section 62, which requires that the conversion be pre-approved in the terms of the original CCPS issuance and that shareholders’ rights under the Articles are not violated. The original board resolution and subscription agreement typically include a provision authorising the board to allot equity shares on conversion without requiring a fresh general meeting, reducing friction at conversion.

Section 247 of the Companies Act, 2013 requires that a Registered Valuer (registered with the Insolvency and Bankruptcy Board of India, IBBI) provide a valuation report for share issuances under private placement. The report must pre-date the board meeting approving the issuance. Typically, the valuation report is expected to be no older than 90 days at the time of filing.

What SEBI regulations apply to CCPS?

For unlisted companies raising from private investors, SEBI regulations do not directly apply. SEBI’s ICDR Regulations, 2018 become relevant only at IPO or when the company is listed. Regulation 2(1)(k) of ICDR classifies CCPS as a “convertible security.” Under Regulation 14, promoters may subscribe to CCPS to meet the minimum promoter contribution of 20% for an IPO on the main board. All outstanding CCPS must convert to equity before listing, which creates a conversion event that founders and early investors should plan for well before the DRHP is filed.

For Angel Funds registered as Category I Alternative Investment Funds (AIFs) under the SEBI (AIF) Regulations, 2012, there are additional framework-level considerations when the fund subscribes to CCPS. Angel fund investments are restricted to companies that have been incorporated for less than ten years, have a turnover below ₹25 crore, and are not promoted by family groups or relatives of the investor. These restrictions apply at the fund level but affect which startups can raise from angel funds structured as Category I AIFs.

What investor rights are embedded in a CCPS SAFE note?

This is where CCPS SAFE notes depart most sharply from the stripped-down iSAFE template. An investor subscribing to CCPS through a term sheet or subscription agreement will typically negotiate rights that sit in three categories: economic rights, governance rights, and exit-related rights. Founders who have only seen the 100X.VC iSAFE template are frequently surprised by the weight of rights in a VC-backed CCPS SAFE note.

Economic rights: liquidation preference and dividends

Liquidation preference defines what the CCPS investor receives before equity shareholders on a winding up, acquisition, or contractual “deemed liquidation event” (which the SHA may define to include a sale of more than 50% of assets or a change of control).

The standard at seed stage in India is 1x non-participating liquidation preference. The investor receives the greater of (a) their invested amount (1x) or (b) their pro-rata share of proceeds if CCPS were treated as if converted to equity. They choose one; they do not receive both. This is founder-friendly. A participating preference (where the investor receives the 1x first and then also participates in residual proceeds as if converted) can leave common shareholders with very little on a modest exit. Full participating preference is increasingly uncommon at seed stage but does appear in term sheets from investors who are filling a convertible bridge gap.

Dividends on CCPS accrue at the rate agreed in the term sheet, typically 0.001% to 1% per annum in SAFE-style structures (some use 0.001% as a nominal amount to satisfy the Companies Act requirement for a dividend rate on preference shares). Dividends on CCPS are paid only when the company has distributable profits under Section 123 of the Companies Act, 2013. In practice, pre-revenue and early-revenue startups rarely pay preference dividends, but the rate matters for a different reason: if dividends remain unpaid for two consecutive financial years, preference shareholders gain voting rights on all resolutions under Section 47(2) of the Companies Act, 2013. This is a statutory right that cannot be contracted away. Founders should track dividend payment status carefully once the company becomes profitable.

Economic rights: anti-dilution protection

Anti-dilution protection adjusts the CCPS investor’s conversion ratio if the company issues new shares at a price lower than the price at which the investor subscribed (a “down round”). The two main variants are:

1. Broad-based weighted average (BBWA): The conversion price is adjusted using a formula that accounts for both the lower price of the new issuance and the dilutive volume. Most institutional seed rounds use BBWA because it is moderate in its dilutive impact on founders.
2. Full ratchet: The conversion price resets to the lower price of the new issuance, regardless of volume. A full ratchet can wipe out founder ownership in a significant down round. This is uncommon at seed stage but does appear in distressed bridge financings.

The LetsVenture standard CCPS term sheet template published on the Startup India portal provides a conversion factor adjusted for future bonus issues, share splits, consolidations, and anti-dilution triggers. Founders should read the conversion formula carefully before signing because the mechanics are embedded in schedules that receive less attention than headline valuation.

Governance rights: reserved matters and board rights

Reserved matters are actions the company cannot take without the affirmative vote of the CCPS investor (or the class of CCPS holders). Typical reserved matters in a seed-stage CCPS note include: amendments to the AOA or MOA that affect CCPS holder rights; issuance of new shares or instruments that rank senior to or pari passu with CCPS; declaration of dividends on equity shares while CCPS dividends are in arrears; material change in business; and related-party transactions above a specified threshold.

Board or observer rights are less common at seed stage for small cheque sizes but become standard as the ticket size grows. An investor writing ₹5 crore or above into a CCPS SAFE note will typically request at least an observer seat at board meetings.

Table 2: Typical investor rights by cheque size in a CCPS SAFE note

Investor rights	Below ₹50 lakh	₹50 lakh to ₹2 crore	Above ₹2 crore
1x non-participating liquidation preference	Occasionally	Usually	Almost always
Anti-dilution (BBWA)	Rarely	Sometimes	Usually
Reserved matters	Rarely	Sometimes	Usually
Observer seat	No	Occasionally	Sometimes
Board seat	No	No	Occasionally
Pro-rata rights in future rounds	Rarely	Sometimes	Usually
Information rights (annual accounts)	Statutory only	Statutory only	Enhanced (quarterly MIS)

How does conversion work and what are the triggers?

Conversion of CCPS into equity shares is automatic on the occurrence of a trigger event as defined in the subscription agreement. The conversion formula determines how many equity shares each CCPS converts into. Getting this formula right at the time of issuance is non-negotiable, because the formula fixes the economics of every future round.

The standard triggers in a CCPS SAFE note are:

1. Qualified financing: A priced equity round (usually a Series A or priced seed) above a minimum amount specified in the subscription agreement. On this event, the CCPS converts at the lower of (a) the price per share in the qualified financing multiplied by (1 minus the agreed discount) or (b) the price implied by the valuation cap. If a cap exists but the financing price implies a higher conversion, the cap protects the investor. If no cap exists, the investor converts at the discount to the financing price.
2. Change of control or liquidity event: An acquisition, merger, or sale of all or substantially all assets. On this event, if no qualified financing has occurred, the CCPS investor receives their liquidation preference from the proceeds before equity shareholders participate.
3. Dissolution or winding up: The company is wound up. CCPS holders are paid before equity shareholders in the statutory priority.
4. Long-stop conversion: The expiry of the maximum tenure defined in the subscription agreement, which must not exceed 20 years under Section 55 of the Companies Act, 2013. Most CCPS SAFE notes set this at 10 years as a practical matter, with the subscription agreement defining the conversion price at that point (typically at the last agreed FMV or at par, depending on negotiation).

The conversion mechanism on a qualified financing works as follows. Suppose an investor subscribed to CCPS at ₹10 per share (the nominal issue price) based on a valuation of ₹5 crore, with a 20% discount and a ₹15 crore cap. At Series A, the company is valued at ₹50 crore and issues Series A shares at ₹100 per share. The discount would imply a conversion at ₹80 per share (₹100 x 0.80). The cap would imply a conversion at ₹30 per share (₹15 crore cap divided by shares outstanding at the time, but the formula is laid out in the subscription agreement). The investor converts at ₹30 (the cap-implied price) because it is more favourable.

What happens to CCPS at an IPO?

All outstanding preference shares must convert into equity shares before a company lists on a stock exchange. Under SEBI ICDR Regulations, 2018, CCPS is not a permissible instrument to retain on listing. The conversion event at IPO is thus a regulatory requirement, not merely a commercial trigger. CCPS holders should ensure their subscription agreement includes an IPO conversion clause that is explicit about timing (typically, conversion occurs on receipt of in-principle approval from the stock exchange or at filing of the DRHP), the conversion price formula that applies, and the resulting equity shares being subject to any lock-in requirements that SEBI may prescribe.

FEMA and FDI compliance for foreign investors subscribing to CCPS

CCPS is classified as a “non-debt instrument” under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules), which means it constitutes equity from the date of issuance, not from the date of conversion. This has significant compliance implications.

Under Rule 21 of the NDI Rules, the issue price of CCPS to non-resident investors must be at least equal to the Fair Market Value as determined by a SEBI-registered Merchant Banker or a practising Chartered Accountant using internationally accepted pricing methodology (typically a Discounted Cash Flow approach). The conversion price must also not be lower than this FMV. This is the pricing floor that separates CCPS from a US SAFE: a US SAFE can be truly “unpriced” at issuance, whereas CCPS issued to foreign investors must carry a valuation-anchored issue price at the time of allotment.

What this means in practice is the following. A foreign investor who subscribes to a CCPS SAFE note with a nominal issue price of ₹10 per share and a valuation cap of ₹15 crore is not receiving an open-ended instrument. The ₹10 issue price must be supportable as the FMV (or an amount above FMV) at the time of issuance. If the registered valuer certifies FMV at ₹10, that is the floor; conversion cannot produce equity at below ₹10 per share. If at Series A the conversion would imply ₹8 per share (because the cap triggers at a lower implied price), that conversion violates FEMA pricing norms under the NDI Rules, 2019. The structure must be corrected before Series A closes. Treelife regularly sees this problem surface in due diligence for Series A investors.

The mandatory FEMA compliance sequence for a foreign investor subscribing to CCPS is:

1. Valuation report from a SEBI-registered Merchant Banker or Chartered Accountant, pre-dating the board meeting approving allotment. Report validity is typically treated as 90 days.
2. Board resolution approving allotment at the certified FMV or above.
3. Allotment of CCPS and issuance of share certificate.
4. Filing of Form FC-GPR on the RBI’s Single Master Form (FIRMS portal) through the Authorised Dealer (AD) bank within 30 days of allotment.
5. At conversion: a second Form FC-GPR filing is required to report the equity shares allotted to the non-resident on conversion of CCPS.
6. Annual reporting: the company must file the Annual Return on Foreign Liabilities and Assets (FLA Return) by 15 July each year through the RBI FLAIR portal.

Late filing of Form FC-GPR carries a penalty of up to three times the transaction amount under FEMA, 1999. The 30-day window is strict. AD banks have increased scrutiny on CCPS filings where the issue price appears nominal relative to market conditions, particularly since the January 2025 update to the RBI Master Direction on Foreign Investment in India.

Table 3: FEMA compliance timeline for a foreign investor subscribing to CCPS

Step	Action	Deadline	Penalty for non-compliance
Pre-issuance	Valuation report from qualified certifier	Before board meeting	Allotment may be irregular
Allotment	Board resolution + share certificate	As per subscription agreement	N/A if within agreed timeline
Post-allotment	Form FC-GPR via FIRMS portal with AD bank	Within 30 days of allotment	Up to 3x transaction amount (FEMA, 1999)
Conversion	Second Form FC-GPR on equity share allotment	Within 30 days of conversion	Up to 3x transaction amount
Annual	FLA Return on RBI FLAIR portal	By 15 July each year	Compounding/adjudication under FEMA

Sectoral caps apply. CCPS subscribed by foreign investors counts towards the FDI ceiling in the sector. Startups in sectors with FDI caps (insurance at 74%, for instance) must monitor the fully diluted foreign ownership, because CCPS is treated as already converted for the purpose of computing foreign ownership under Rule 23 of the NDI Rules.

The 2026 FEMA NDI Amendment Rules (effective Q1 2026) introduced a beneficial ownership disclosure requirement for investors from countries sharing a land border with India. This does not affect the CCPS structure itself, but companies receiving FDI from such investors must obtain DPIIT approval irrespective of the route before allotment.

What is the tax treatment of CCPS SAFE notes?

The tax treatment of CCPS in India covers four distinct events: issuance, dividend receipt, conversion, and exit. Each has a different tax outcome.

Tax at issuance

The abolition of angel tax under Section 56(2)(viib) of the Income Tax Act, 1961, effective April 2025 (via the Finance Act, 2024), removed the tax that applied when a closely held company issued shares at a price exceeding FMV. This tax was a major friction point for early-stage fundraising and affected both domestic and foreign investors before abolition. As of FY 2025-26, CCPS issued at a premium above FMV does not trigger Section 56(2)(viib) tax in the hands of the company. The investor-side Section 56(2)(x) provisions on gifts and non-arm’s-length receipts remain in place for secondary transactions, but are not typically relevant to primary CCPS subscriptions.

Tax on dividends

Dividends received on CCPS are taxable in the hands of the investor as “income from other sources” under Section 56(2)(i) of the Income Tax Act, 1961, at the applicable income tax rate. The dividend distribution tax regime was abolished in FY 2020-21 and the dividend is now taxed at the investor’s marginal rate. For resident Indian investors, dividend income is added to total income and taxed as per slab. For non-resident investors, dividends on shares of Indian companies are taxable in India subject to the applicable Double Taxation Avoidance Agreement (DTAA).

Given that most CCPS SAFE notes carry a nominal dividend rate of 0.001% to 1%, the actual dividend liability is minimal at the early stage. But the moment a startup turns profitable and considers paying dividends on equity shares while CCPS dividends are in arrears, the Section 47(2) voting rights issue and the dividend payment sequencing must be handled correctly.

Tax on conversion: Section 47(xb) exemption

The conversion of CCPS into equity shares is not treated as a “transfer” for capital gains purposes under Section 47(xb) of the Income Tax Act, 1961. No capital gains tax arises at the time of conversion. This is one of the most important tax advantages of CCPS over convertible debentures or other debt-like instruments where conversion may trigger tax.

However, the cost of acquisition of the equity shares received on conversion is treated as the original subscription price paid for the CCPS. The holding period for capital gains purposes starts from the date of allotment of the original CCPS, not from the date of conversion into equity. This matters for investors who want to qualify for the long-term capital gains (LTCG) rate: if the combined holding period (CCPS plus equity) exceeds 24 months for unlisted shares (or 12 months for listed shares), the disposal qualifies as LTCG.

Tax on exit: capital gains on equity shares post-conversion

After conversion, the equity shares are subject to standard capital gains taxation on disposal.

For unlisted equity shares held for more than 24 months: LTCG taxed at 12.5% without indexation under Section 112 of the Income Tax Act, 1961 (post the Finance Act, 2024 amendments that aligned listed and unlisted LTCG rates).

For unlisted equity shares held for 24 months or less: Short-term capital gains (STCG) taxed at the investor’s applicable slab rate.

The holding period clock starts from the original CCPS allotment date, as noted. An investor who subscribed to CCPS in January 2024 and converts in July 2026 has an effective holding period of 30 months across both instruments. On disposal of the equity shares post-conversion, the entire gain would qualify for LTCG treatment at 12.5%.

Table 4: Tax treatment summary for CCPS SAFE notes

Tax event	Tax provision	Tax outcome
Issuance at premium above FMV	Section 56(2)(viib), Income Tax Act 1961	Abolished from April 2025 (Finance Act, 2024)
Dividend receipt (resident investor)	Section 56(2)(i)	Taxable at slab rate
Dividend receipt (non-resident investor)	Section 115A / DTAA	Taxable per applicable treaty rate
Conversion of CCPS to equity	Section 47(xb)	Not a transfer; no capital gains tax
LTCG on disposal of post-conversion equity (unlisted, held 24+ months)	Section 112	12.5% without indexation
STCG on disposal of post-conversion equity (unlisted, held under 24 months)	Section 48	Slab rate

Structuring decisions: when should a startup choose a CCPS SAFE note?

The right instrument depends on the stage, the investor, the ticket size, and whether the round includes foreign investors. There is no single correct answer, but there is a structured way to think about the choice.

A CCPS SAFE note is appropriate when: the investor is an Indian angel fund or micro-VC writing a cheque between ₹50 lakh and ₹3 crore; the investor wants some protective rights beyond the bare-minimum iSAFE template but is willing to keep the structure lightweight; the startup is not DPIIT-recognised (which would otherwise qualify it for a Convertible Note); or the investor mix includes both domestic and foreign participants, making a single CCPS structure more practical than splitting between a Convertible Note (DPIIT-domestic) and a separate instrument.

An iSAFE note from the 100X.VC template is appropriate when: the investor is an individual angel or an accelerator with a very small ticket; speed is the overriding priority; and the investor is not asking for anti-dilution or liquidation preference multiples.

A priced CCPS round is appropriate when: the startup has enough traction to defend a valuation; an institutional investor is leading and expects full investor rights from the term sheet; or the company is raising above ₹5 crore and the cap table will be anchored for an extended period.

A Convertible Note under Section 62(3) of the Companies Act, 2013 is appropriate when: the startup is DPIIT-recognised; each investor writes at least ₹25 lakh in a single tranche; the conversion window of up to 10 years is acceptable; and the debt nature of the instrument is acceptable to both parties. The Convertible Note is the closest Indian analogue to the Y Combinator SAFE in terms of simplicity and regulatory recognition, but it is restricted to DPIIT-recognised startups.

Table 5: Instrument selection guide for Indian seed-stage startups

Factor	iSAFE note	CCPS SAFE note	Convertible Note	Priced CCPS round
DPIIT recognition required	No	No	Yes	No
Minimum ticket	No floor	No statutory floor	₹25 lakh per investor	No floor
FMV pricing floor (domestic)	Nominal (₹10)	Required (Section 247)	Required (Section 247)	Required
FMV pricing floor (foreign investor)	Required (NDI Rules)	Required (NDI Rules)	Required (NDI Rules)	Required
Investor rights (anti-dilution, liquidation preference)	Rarely included	Usually included	Structurally limited	Fully included
Conversion tenure	Up to 20 years	Up to 20 years	Up to 10 years	20 years (unlisted)
Suited for stage	Pre-seed to seed	Seed to pre-Series A	Seed (DPIIT only)	Series A and above
Speed of execution	Fastest	Fast	Fast (if DPIIT recognised)	Slower

Common mistakes that cost founders at Series A

Several structuring errors in CCPS SAFE notes create expensive problems when a Series A investor begins due diligence. These are patterns Treelife’s legal team sees consistently across transactions.

Mistake 1: Issuing CCPS to foreign investors without a formal valuation report

Founders who move quickly to close a foreign angel investor sometimes skip the registered valuer report and file Form FC-GPR with a nominal issue price. This creates a FEMA irregularity that the AD bank may flag at the FC-GPR filing stage, or that will surface when a Series A investor’s legal counsel runs FEMA diligence. Regularisation is possible through compounding with the RBI, but it takes time (typically 3-6 months), delays the next round, and signals compliance weakness to the institutional investor. The fix costs far more than the valuation report would have.

Mistake 2: Using a pricing formula that implies below-FMV conversion at Series A

If the valuation cap on a CCPS SAFE note is set too low relative to the FMV at issuance, the cap-implied conversion price at Series A can fall below the original FMV. For foreign investors, this violates FEMA NDI Rules because conversion below the issue-time FMV is not permitted. The entire CCPS structure must be renegotiated or restructured before the Series A can close. This is common when founders use a cap that was set as a rough number during negotiation without running the FEMA pricing test.

Mistake 3: Assuming the iSAFE template protects founders from full investor rights

The 100X.VC iSAFE template is indeed founder-friendly in its standard form. But investors who use “iSAFE” as a label in conversation will often present a subscription agreement with full investor rights that go well beyond the 100X.VC standard. The label does not determine the contents of the subscription agreement. Founders should read the actual document, not rely on the name of the template.

Mistake 4: Not accounting for CCPS in the fully diluted cap table

Under NDI Rules, CCPS is treated as already converted for the purpose of computing foreign ownership thresholds. Founders who track ownership on an “issued equity shares only” basis can find that their foreign ownership, on a fully diluted basis, has crossed a sectoral cap or the 50% threshold that triggers Foreign-Owned or Controlled Company (FOCC) status. FOCC reclassification as of January 2025 requires Form DI filing within 30 days of reclassification under the updated RBI Master Direction.

Mistake 5: Not including an IPO conversion clause in the subscription agreement

SEBI requires all convertible securities to convert before listing. If the subscription agreement does not include an explicit IPO conversion clause with a defined conversion price formula, the conversion mechanics at IPO must be negotiated with every CCPS holder individually. For a company with 15-20 CCPS investors from seed and bridge rounds, this creates significant pre-IPO legal work. The right time to fix this is at the time of the original CCPS subscription, not during the DRHP preparation.

Treelife practitioner note

In the CCPS and seed-round structuring engagements we have run at Treelife, the most underappreciated issue is the interaction between the valuation cap and the FMV floor for foreign investors. Founders and investors often agree on a cap informally before the lawyers are engaged. When the valuation report comes in at a number that makes the cap-implied conversion price fall below the issue-time FMV for a foreign investor, there is no easy fix that does not involve renegotiating the cap, increasing the issue price, or restructuring part of the round as a domestic-only tranche.

The second pattern we see consistently is that CCPS from multiple rounds (a 100X.VC iSAFE note from year one, a seed VC CCPS SAFE note from year two, and a bridge CCPS from year three) all sit on the cap table with different conversion formulas, different liquidation preferences, and different reserved matters. At Series A, the institutional investor’s counsel must reconcile all three. Where the instruments have conflicting reserved matters (one instrument requires consent for any new equity issuance, another requires consent for any debt), the company can find itself unable to take any action without three separate investor consents. Building a clean, consistent CCPS framework from the first round is significantly cheaper than unwinding a fragmented one at Series A.

Treelife’s typical approach for a seed-stage CCPS SAFE note is to use a subscription agreement that is specific about the conversion formula (cap, discount, long-stop price), states the liquidation preference explicitly (1x non-participating), limits reserved matters to a defined short list, and includes an IPO conversion clause that obviates the need for a separate exercise later. We also make sure the valuation report pre-dates the board meeting and that Form FC-GPR is filed within the 30-day window for any foreign investor. The compliance cost of getting this right at allotment is a fraction of the cost of regularising it before a Series A closes.

Case study: seed CCPS SAFE note with a foreign angel investor

Situation: A pre-Series A SaaS founder based in Bengaluru had raised a 100X.VC iSAFE note from a domestic angel in FY 2023-24 and was closing a second seed round of ₹1.5 crore from a US-based NRI angel investor who insisted on a 20% discount and a ₹20 crore valuation cap.

Challenge: The original iSAFE did not include a formal valuation report (it was a domestic round with a nominal ₹10 issue price). The new round was foreign, requiring a proper FMV certification. The cap of ₹20 crore implied a conversion price that, against the DCF-based FMV of ₹18 crore, was technically above FMV, but only barely, leaving no buffer if the FMV shifted before Series A. The subscription agreement from the investor’s US lawyer used a participating liquidation preference clause that the founders had not noticed.

What Treelife did: Commissioned a registered valuer report certifying FMV at ₹16 crore (a more conservative DCF output), which gave the cap headroom above FMV. Renegotiated the liquidation preference to 1x non-participating. Added an IPO conversion clause and a qualified financing definition tied to a minimum Series A size of ₹5 crore. Filed Form FC-GPR within 28 days of allotment.

Outcome: Series A closed 14 months later with no FEMA diligence issues. The CCPS conversion at Series A was clean and mathematically consistent with the original documents. Time saved in Series A legal diligence: approximately 3 weeks.

Frequently asked questions on CCPS SAFE notes in India

Q: Is a CCPS SAFE note the same as an iSAFE note?
A: They use the same legal instrument (CCPS) but are not identical. An iSAFE note typically follows the 100X.VC template, which is stripped of most investor rights. A CCPS SAFE note as used by seed VCs and angel funds typically includes liquidation preference, anti-dilution, and reserved matters. The terms of the subscription agreement, not the label, determine what rights are included.

Q: Can a CCPS SAFE note be issued to a foreign investor without a valuation report?
A: No. Under FEMA NDI Rules, 2019, CCPS issued to non-resident investors must be priced at or above FMV determined by a SEBI-registered Merchant Banker or Chartered Accountant. Issuing without this valuation report creates a FEMA contravention that can only be remedied through compounding with the RBI.

Q: What is the maximum tenure for CCPS in an unlisted Indian company?
A: 20 years from the date of allotment, under Section 55 of the Companies Act, 2013. For listed companies, SEBI ICDR Regulations impose shorter limits: 18 months for a preferential issue, 60 months for a qualified institutional placement.

Q: What is the penalty for late filing of Form FC-GPR after CCPS allotment to a foreign investor?
A: Under FEMA, 1999, late or non-filing of Form FC-GPR can attract a penalty of up to three times the amount of the contravening transaction. The filing must be made within 30 days of allotment through the RBI’s FIRMS portal via the company’s AD bank.

Q: Does angel tax apply to CCPS issued at a premium today?
A: No. The Union Budget 2024-25 abolished angel tax under Section 56(2)(viib) of the Income Tax Act, 1961 for all classes of investors, effective April 2025. CCPS issued at a premium above FMV no longer generates a tax liability in the company’s hands.

Q: Is conversion of CCPS into equity shares taxable as capital gains?
A: No. Conversion of CCPS into equity shares is specifically excluded from the definition of “transfer” under Section 47(xb) of the Income Tax Act, 1961, so no capital gains tax arises at conversion.

Q: How is the holding period calculated for LTCG on equity shares received on CCPS conversion?
A: The holding period starts from the original date of CCPS allotment and runs through the holding period of the equity shares post-conversion. For unlisted shares, LTCG treatment requires a combined holding period of more than 24 months. LTCG on unlisted shares is taxed at 12.5% without indexation under Section 112 of the Income Tax Act, 1961.

Q: What happens if the company fails to raise a priced round and the CCPS conversion is triggered by the long-stop date?
A: The CCPS converts into equity shares at the long-stop conversion price defined in the subscription agreement, which is typically the last agreed FMV or at par (₹10), depending on what was negotiated. The company must convene a board meeting, issue equity shares, update the register of members, and file Form MGT-14 (if applicable) and Form PAS-3 with the RoC within 30 days.

Q: Can a company buy back CCPS before conversion?
A: Buyback of CCPS is permissible under Section 68 of the Companies Act, 2013, subject to the conditions and limits prescribed (free reserves test, 25% paid-up capital and free reserves ceiling, etc.). However, most CCPS subscription agreements include restrictions on buyback without investor consent as a reserved matter. Buyback is not the standard exit route; conversion followed by IPO or acquisition is the expected pathway.

Q: What FEMA filings are required after CCPS converts into equity?
A: A second Form FC-GPR must be filed with the RBI within 30 days of the equity share allotment on conversion, reporting the number of equity shares allotted and the conversion price. The company must also update its Foreign Investment reporting on the FIRMS portal and ensure the FLA Return reflects the change in instrument classification.

Q: If a founder is an NRI and subscribes to CCPS, does FEMA apply?
A: Yes. An NRI subscribing to CCPS in an Indian company is investing on a repatriable or non-repatriable basis under FEMA. Repatriable investments are governed by the NDI Rules including the FMV pricing requirement and Form FC-GPR filing. Non-repatriable investments are governed under Schedule IV of the NDI Rules. The NRI must route the investment through an NRE or NRO account accordingly.

Q: What if the CCPS investor is an AIF registered with SEBI?
A: SEBI-registered AIFs investing into CCPS are governed by SEBI (AIF) Regulations, 2012. Category II AIFs (which include most early-stage VC funds) are permitted to invest in CCPS. For Cat I Angel Funds, the investee company must be incorporated for less than 10 years with turnover below ₹25 crore. The AIF’s investment in CCPS counts towards the 25% single company investment limit applicable to Cat II AIFs (under Regulation 15(1)(c) of the AIF Regulations).

Q: Can a startup issue CCPS with participating liquidation preference at seed stage?
A: Legally, yes. Commercially, it is inadvisable. Participating liquidation preference means the CCPS holder receives both their preference amount and their equity-equivalent share of remaining proceeds on exit. This reduces the equity return for founders and common shareholders on any exit below a very high multiple. Institutional Series A investors also view participating preference at seed stage as a red flag that will complicate their own term sheet negotiation. Standard market practice in India at seed stage is 1x non-participating.

Q: How does the 2026 FEMA amendment affect CCPS investment from border-country investors?
A: Under Press Note 2 (2026) and the FEMA (NDI) Amendment Rules, 2026, investments from beneficial owners in countries sharing a land border with India require prior government approval regardless of sector or entry route. This applies to CCPS subscriptions by such investors. The SOP issued by DPIIT on 04/05/2026 outlines the procedural architecture for processing these proposals. Companies should conduct beneficial ownership diligence on all foreign CCPS subscribers before allotment.

Regulatory references:

• Companies Act, 2013: Section 43 (classes of share capital), Section 47 (voting rights), Section 47(2) (dividend default voting rights for preference shareholders), Section 55 (preference share tenure), Section 42 (private placement), Section 62 (further issue of capital), Section 68 (buyback), Section 123 (dividends), Section 247 (registered valuer)
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: Regulation 2(1)(k) (convertible security definition), Regulation 14 (promoter contribution), Regulation 162 (CCPS conversion tenure for listed companies)
• SEBI (Alternative Investment Funds) Regulations, 2012: Regulation 15(1)(c) (Cat II single company limit)
• Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules): Rule 21 (pricing guidelines for equity instruments), Rule 23 (downstream investment and FOCC classification)
• Foreign Exchange Management Act, 1999: Penalty provisions for FEMA contravention
• RBI Master Direction on Foreign Investment in India (January 2025 update): FC-GPR filing requirement, Form DI for FOCC reclassification
• RBI FIRMS portal: Single Master Form for FC-GPR, FC-TRS filings
• FEMA (NDI) Amendment Rules, 2026 and Press Note 2 (2026): Border country investor approvals
• Income Tax Act, 1961: Section 47(xb) (CCPS to equity conversion not a transfer), Section 56(2)(i) (dividends as income from other sources), Section 56(2)(viib) (angel tax, abolished April 2025 via Finance Act, 2024), Section 112 (LTCG tax rate), Section 115A (non-resident dividend taxation)
• Finance Act, 2024: Abolition of Section 56(2)(viib) angel tax, LTCG rate alignment

External sources:

• Ministry of Corporate Affairs
• Reserve Bank of India
• SEBI
• Income Tax India
• Startup India, DPIIT
• IFSCA