The Note Conversion Agreement is a critical document used when companies wish to convert outstanding debt obligations into equity shares, often as part of startup funding rounds or corporate restructuring. It's particularly relevant in the Indian market where companies frequently use convertible notes as a bridge financing tool. The agreement must comply with various Indian regulations including the Companies Act, 2013, SEBI regulations (if applicable), and FEMA rules for foreign investors. The document typically outlines conversion triggers, valuation mechanisms, shareholder rights post-conversion, and necessary regulatory compliance steps. It's especially important in scenarios where early-stage companies have issued convertible notes to investors and are ready to transform that debt into equity, usually during a qualified financing round or at maturity.
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1. Parties: Identification of the Company and the Note Holder(s)
2. Background: Recitals explaining the existing note arrangement and intention to convert
3. Definitions: Key terms used throughout the agreement including Conversion Price, Conversion Shares, Note Amount, etc.
4. Conversion Terms: Core terms including conversion ratio, price, timing, and mechanism for conversion
5. Conditions Precedent: Prerequisites that must be satisfied before conversion can occur
6. Conversion Mechanics: Detailed process for executing the conversion, including notice requirements and documentation
7. Representations and Warranties: Statements of fact by both parties regarding their capacity, authority, and other material aspects
8. Company Covenants: Ongoing obligations of the company regarding the converted shares and corporate governance
9. Note Holder Covenants: Obligations of the note holder regarding the conversion process and post-conversion period
10. Termination: Circumstances under which the agreement can be terminated and consequences
11. Governing Law and Jurisdiction: Specification of Indian law as governing law and jurisdiction for disputes
12. Miscellaneous: Standard boilerplate provisions including notices, amendments, and severability
1. Anti-dilution Protection: Provisions protecting note holders from dilution of their equity stake, used when specifically negotiated
2. Board Nomination Rights: Rights of note holders to nominate directors post-conversion, included for significant investors
3. Tag-Along Rights: Rights of converted shareholders to participate in future share sales, used for minority protection
4. Lock-in Period: Restrictions on transfer of converted shares, included when stability in shareholding is desired
5. Foreign Investment Compliance: Additional provisions for compliance with FEMA and RBI regulations, required for foreign note holders
6. Tax Provisions: Specific provisions addressing tax implications and responsibilities, included when complex tax issues are involved
7. Information Rights: Rights of converted shareholders to receive company information, included for significant investors
1. Original Note Details: Copy or details of the original promissory note or debt instrument
2. Conversion Calculation: Detailed methodology and examples of conversion calculations
3. Form of Conversion Notice: Template notice to be used when exercising conversion rights
4. Shareholding Pattern: Pre and post-conversion shareholding structure of the company
5. Corporate Authorizations: Copies of board and shareholder resolutions approving the conversion
6. Amendments to Company Documents: Required changes to articles of association or other company documents
7. Regulatory Approvals: List and copies of required regulatory approvals for the conversion
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