iSAFE vs CCPS vs CCD in India: Which Funding Instrument Does a Startup Actually Use?

Written by: Prakhar Rai, Founder, My Legal Pal | Bar Council of India | LL.B, NLSIU Bangalore | Master of Business Laws Reviewed by: Deepashree Agnihotri, Corporate Lawyer, My Legal Pal

Table of Contents

Quick answer

There is no such thing as a single “SAFE note” under Indian company law. When a founder or investor says “let’s do a SAFE,” they are usually referring to one of four legally distinct instruments, each with a different statutory basis, a different conversion mechanism, and a different compliance burden:

iSAFE, 100X.VC’s standardized instrument, structured as Compulsorily Convertible Preference Shares (CCPS) issued under Section 42 and Section 55 of the Companies Act, 2013.
CCPS-based SAFE note, a bespoke version of the same idea: preference shares with SAFE-style economics (valuation cap, discount, no interest, no maturity date) instead of standard preference share terms.
CCD (Compulsorily Convertible Debenture), debt on the balance sheet until conversion, issued under Section 71 read with Section 42, converting into equity on a defined trigger.
Genuine convertible note, a short-term, unsecured instrument specifically permitted for DPIIT-recognized startups under the Companies (Acceptance of Deposits) Rules, 2014, and separately regulated for foreign investment under FEMA.

A plain US-style SAFE, the Y Combinator template, an instrument that is neither debt nor equity, with no conversion mechanism recognized under Indian company law, has no direct legal basis in India. Section 43 of the Companies Act, 2013 recognizes only two classes of share capital: equity and preference. Anything that isn’t a share and isn’t a debt instrument compliant with the Deposits Rules risks being treated as an illegal deposit under Section 73 of the Companies Act, with the company and its officers exposed to penalties. So every “SAFE” actually used in India has been re-engineered to fit into one of the four buckets above.

This piece works through what each instrument actually is, the statutory citations that matter, the math behind cap-vs-discount conversion (with worked numbers), the 2026 regulatory changes that affect the choice, and the mistakes that show up most often in term sheets. If you’re reviewing a specific SAFE, iSAFE, or CCD term sheet clause by clause, that’s what our Term Sheet and SAFE Note Review service is built for, this article is about picking the right instrument in the first place.

Why “SAFE” doesn’t mean one thing in India

Section 43 of the Companies Act, 2013 recognizes only two classes of share capital: equity and preference. There’s no third “neither debt nor equity” category for a plain US-style SAFE to sit in, and Section 73 treats an instrument that’s neither compliant equity nor compliant debt as a potential illegal deposit. For the full walkthrough of why the Y Combinator template can’t be used as-is in India, see our SAFE Notes Guide. What that piece doesn’t cover is that “restructure it to fit” produces four genuinely different instruments, not one workaround, and picking the wrong one is where the mistakes below actually happen.

Instrument 1: iSAFE (100X.VC’s instrument)

iSAFE is a standardized term sheet created by the VC firm 100X.VC, modeled on the economics of a US SAFE but restructured as Compulsorily Convertible Preference Shares (CCPS).

Legal structure: The investor is allotted CCPS at the time of investment, not at a future conversion event. The company issues actual preference shares on day one, under Section 42 (private placement) and Section 55 (issue and redemption of preference shares) of the Companies Act, 2013. What varies is the conversion ratio into equity shares, which is calculated later based on the valuation cap, discount, or the next priced round, whichever mechanic the term sheet specifies.

Why this matters: the investor is a shareholder of record from day one, with whatever voting and information rights the CCPS terms attach (100X.VC’s standard iSAFE gives limited information rights and no board seat, but this varies by negotiated version), which sidesteps the Section 73 deposit-classification risk entirely.

What triggers conversion: Typically a “next equity financing” above a specified threshold, an exit event (acquisition, IPO), or a long-stop date after which the investor can force conversion at the valuation cap.

Compliance checklist:

Board resolution and special resolution (Section 42/Section 62(1)(c))
Private placement offer letter (Form PAS-4) to each investor
Separate bank account for application money
Allotment within 60 days, filing of Form PAS-3 within 15 days of allotment
If any investor is foreign, Form FC-GPR within 30 days of allotment, with the issue price at or above fair market value per FEMA pricing guidelines
DPIIT startup recognition is not mandatory for iSAFE (unlike genuine convertible notes), but most issuers are DPIIT-recognized anyway for other tax and regulatory benefits

Instrument 2: CCPS-based SAFE note (the bespoke version)

This is the same legal wrapper as iSAFE, negotiated bilaterally rather than issued on 100X.VC’s standard paper. Most Indian angel and seed rounds that call themselves “SAFE notes” are actually this.

Where it differs from iSAFE in practice:

Terms are individually negotiated, so anti-dilution provisions, information rights, pro-rata rights, and MFN (most-favored-nation) clauses vary deal to deal, where the iSAFE template is standardized.
Because it’s not a named product with a fixed brand of legitimacy, diligence on a bespoke CCPS SAFE note requires reading the actual preference share terms attached as an annexure, not just the SAFE-style cover sheet, since the enforceable rights sit in the Memorandum/Articles amendment and the share subscription agreement, not in the “SAFE” language itself.
The compliance obligations are identical to iSAFE: Section 42 private placement process, PAS-4, PAS-3, FC-GPR for foreign investors, FEMA pricing compliance.

The clause that gets missed most often: because these are bespoke, the valuation cap and discount mechanics are sometimes drafted ambiguously, for example, not specifying whether the discount applies to the pre-money or post-money valuation of the priced round, which produces materially different share counts (see the worked example below). This is one of the most common defects we flag during term sheet review.

Instrument 3: CCD (Compulsorily Convertible Debenture)

A CCD is structured as debt at issuance, governed by Section 71 of the Companies Act, 2013 (which deals with debentures) read with Section 42 (private placement of securities, since a compulsorily convertible debenture is treated as a convertible security for private placement purposes) and Section 71(1), which permits a company to issue debentures with an option to convert into shares, provided such issue is approved by a special resolution.

Why a founder or investor would choose a CCD over a CCPS structure:

FEMA treatment: Under the FEMA Non-Debt Instruments Rules, 2019, a compulsorily and mandatorily convertible debenture is classified as a non-debt instrument if the conversion is compulsory (not optional), meaning foreign investment via CCD is treated the same way as equity investment for the purposes of sectoral caps and pricing guidelines (Regulation 9A). This is important: if the debenture were optionally convertible, it would instead be treated as External Commercial Borrowing (ECB), which brings a completely different and more restrictive regulatory regime (RBI’s ECB framework, end-use restrictions, all-in-cost ceilings). Getting “compulsory” vs “optional” wrong in the drafting isn’t a stylistic choice, it determines which regulator’s rules apply.
Balance sheet treatment: Until conversion, a CCD sits as debt, which can matter for accounting presentation, debt covenants with other lenders, and how the company’s leverage looks to future investors, though because conversion is compulsory (not at the holder’s option), it is generally treated as equity-like for most practical valuation purposes despite the balance sheet label.
No dividend obligation: Unlike CCPS, which as preference shares typically carry a (often nominal or zero, but sometimes cumulative) dividend right, a CCD does not require dividend declaration, interest, if any, is contractual, and many CCDs used for SAFE-style deals carry no interest at all, mirroring the “no interest” convention of a true SAFE.

Conversion trigger: Identical menu to CCPS structures, qualifying financing round, valuation cap, discount, or long-stop date, the difference is purely in what the instrument looks like on the balance sheet before conversion happens.

Compliance checklist:

Special resolution for issuance (Section 71 read with Section 42)
Debenture trust deed is not mandatory for compulsorily convertible debentures issued to a limited group under private placement (unlike secured non-convertible debentures), but many issuers still use one for clarity
PAS-4, PAS-3, and, critically, correct classification of the conversion feature as compulsory, not optional, in both the debenture instrument and any side letter
FC-GPR for foreign investment, filed on the date of issue of the CCD (not on conversion), since the instrument is treated as a non-debt instrument from inception when compulsorily convertible

Instrument 4: The genuine convertible note (not the same thing)

Indian founders frequently use “convertible note” and “SAFE” interchangeably; they’re not the same thing under Indian law, and the exemption that makes a genuine convertible note work is narrower than most founders assume:

It is available only to a company recognized as a startup by DPIIT.
It must be a single-tranche instrument of not less than ₹25 lakh, repayable or convertible into equity within a period of not exceeding 10 years from the date of issue.
It is issued in one tranche, to one investor, in a single instance, repeated small issuances to the same investor structured as separate “notes” to stay under scrutiny would defeat the exemption’s intent and risk deposit reclassification.

Because Rule 2(1)(c)(xvii) specifically carves convertible notes out of the definition of “deposit,” a DPIIT-recognized startup issuing a compliant convertible note does not need to run the Section 42 private placement process, does not need a special resolution for the issuance itself under the deposit exemption (though board approval and other Companies Act formalities for the eventual share issuance on conversion still apply), and does not trigger Section 73 deposit restrictions.

Where this goes wrong most often:

DPIIT recognition lapses or was never obtained. If the company isn’t DPIIT-recognized at the time of issuance, the Rule 2(1)(c)(xvii) exemption simply doesn’t apply, and the instrument is scrutinized as an ordinary deposit, with the ₹25 lakh minimum and 10-year conversion window becoming irrelevant technicalities on an instrument that was never eligible for the exemption in the first place.
Foreign investors and FEMA. A convertible note issued to a non-resident investor is separately regulated under FEMA, specifically, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 permit issuance of convertible notes by startups to persons resident outside India, subject to sectoral caps, entry route conditions, and pricing guidelines (the conversion price cannot be lower than fair value at the time of issuance). This is a parallel compliance track to the Companies Act exemption, satisfying Rule 2(1)(c)(xvii) does not automatically satisfy FEMA, and vice versa.
Sub-₹25 lakh notes disguised as convertible notes. We’ve seen term sheets structure a ₹10-15 lakh friends-and-family check as a “convertible note.” Below the ₹25 lakh threshold, it isn’t a convertible note under the Rules, it’s either a deposit (non-compliant, penal exposure) or needs to be restructured as CCPS/CCD instead.

Comparison table: iSAFE vs CCPS SAFE note vs CCD vs convertible note

Feature	iSAFE	CCPS SAFE note	CCD	Convertible Note
Legal nature at issuance	Preference shares (equity)	Preference shares (equity)	Debenture (debt, compulsorily convertible)	Debt (specifically exempted from deposit rules)
Statutory basis	Companies Act §§ 42, 55	Companies Act §§ 42, 55	Companies Act §§ 42, 71	Deposits Rules 2014, Rule 2(1)(c)(xvii)
Who can issue	Any private company	Any private company	Any private company	DPIIT-recognized startups only
Minimum ticket size	No statutory minimum	No statutory minimum	No statutory minimum	₹25 lakh (single tranche)
Investor status at issuance	Shareholder immediately	Shareholder immediately	Debenture holder until conversion	Note holder (creditor) until conversion
Private placement process (PAS-4/PAS-3)	Required	Required	Required	Not required (deposit-exempt)
Foreign investor route	FC-GPR, FEMA NDI Rules, treated as equity	FC-GPR, FEMA NDI Rules, treated as equity	FC-GPR if compulsorily convertible; ECB rules if optionally convertible	FEMA NDI Rules, separate convertible-note-specific conditions
Max conversion window	Deal-specific, typically tied to next round or long-stop date	Deal-specific	Deal-specific	Max 10 years by rule
Standardization	High (100X.VC template)	Low (bespoke per deal)	Low (bespoke per deal)	Moderate (rule-constrained but freely drafted within it)

The math that actually decides your cap table: cap vs. discount

Every one of these instruments typically carries two conversion mechanics, a valuation cap and a discount, and the term sheet usually says the investor gets the more favorable of the two (i.e., whichever produces more shares for the same investment). Founders frequently don’t run this math until the priced round is actually being papered, by which point it’s too late to renegotiate.

Worked example:

Investment amount: ₹50,00,000
Valuation cap: ₹125 per share (i.e., the cap sets an effective price ceiling of ₹125/share regardless of the priced round’s actual price)
Discount: 20%
Next priced round price: ₹200 per share

Cap-based conversion: ₹50,00,000 ÷ ₹125 = 40,000 shares

Discount-based conversion: Discounted price = ₹200 × (1 − 0.20) = ₹160 per share ₹50,00,000 ÷ ₹160 = 31,250 shares

Since the instrument converts at whichever mechanic gives the investor more shares, the cap wins here, the investor gets 40,000 shares instead of 31,250, a difference of 8,750 shares (roughly 28% more) purely because the priced round landed well above where the cap implied it would.

Why this matters for founders: every additional share issued to a SAFE/CCPS/CCD investor on conversion dilutes existing shareholders, including the founders and the ESOP pool, by exactly that amount. A cap that was set casually months before the priced round, often because “everyone else was using ₹100 crore as a round number”, can end up being far more dilutive than the founders modeled, especially if the company outperforms and the priced round comes in at a materially higher valuation than the cap implied. Running this conversion math against your actual expected priced-round range, before signing the SAFE/CCPS/CCD, is the single highest-leverage five minutes a founder can spend on the instrument.

A second, equally common drafting gap: whether the discount applies before or after accounting for the new money raised in the priced round (i.e., pre-money vs. post-money discount mechanics). The two produce different share counts, and ambiguous drafting on this point routinely becomes a dispute at the exact moment the priced round is closing, the worst possible time to discover it.

If you’re trying to judge whether a specific cap number is fair rather than just how it converts, that’s a benchmarking question, not a mechanics one, and our SAFE Note Review guide covers current cap ranges by startup category.

What changed in 2026: the regulatory backdrop

Press Note 2 of 2026 (DPIIT): Building on the bordering-country investor framework first introduced by Press Note 3 of 2020, Press Note 2 of 2026 refines the government-approval-route requirements for investment structures, including convertible instruments, where beneficial ownership traces back to an entity in a country sharing a land border with India. For any round involving investors with layered holding structures, tracing ultimate beneficial ownership before issuing any convertible instrument (not just priced equity) is now a necessary diligence step, since the approval-route trigger applies regardless of which of the four instruments above is used.

FEMA NDI Amendment Rules, 2026: Amendments during 2026 tightened pricing guideline compliance for convertible instruments issued to non-residents, reinforcing that the conversion price on any compulsorily convertible instrument (CCPS, CCD, or a convertible note issued to a non-resident) cannot be set below fair market value as determined under Rule 21 read with the applicable valuation methodology, reinforcing that a valuation cap set for a foreign investor needs a defensible fair-value basis, not just a number founders and investors agreed on informally.

SEBI’s March 2025 amendments: While primarily aimed at listed-company rights issues, SEBI’s amendments to disclosure and timeline standards have had a knock-on effect on how institutional investors in later-stage private rounds expect conversion mechanics to be documented, increasing pressure for cleaner, SEBI-style disclosure language even in private CCPS and CCD term sheets where it isn’t strictly mandated, because the same investors are often also public-market participants who default to that documentation standard.

If your round involves any of these triggers, a foreign investor, a bordering-country-linked structure, or an institutional investor migrating private-round documentation standards from their listed-company practice, flag it during term sheet negotiation, not after signature.

Mistakes that actually happen

1. Routing application money through a personal account. We’ve seen early-stage rounds where, to move quickly, investor funds are wired to a founder’s personal account “temporarily” before being transferred to the company account. For any private placement (iSAFE, CCPS SAFE note, or CCD), Section 42 requires application money to be received in a separate bank account of the company, routing through a personal account, even briefly, is a compliance defect that can void the private placement and, for foreign investors, creates a separate FEMA reporting problem since the funds didn’t arrive through an authorized banking channel in the company’s name.

2. Assuming angel tax exemption is automatic. DPIIT recognition does not, by itself, exempt a company from angel tax scrutiny under Section 56(2)(viib) of the Income Tax Act. The exemption requires a separate declaration (Form 2) to DPIIT confirming the startup meets specific conditions (aggregate paid-up capital and share premium thresholds, among others), a company can be DPIIT-recognized for the convertible note exemption above and still not have filed the separate angel tax exemption declaration, leaving any premium on share issuance (including on conversion of a CCPS or CCD above face value) exposed to tax scrutiny.

3. Leaving “qualifying financing” undefined. Almost every conversion trigger references a “qualifying financing” or “equity financing” round above some threshold. When that threshold isn’t tightly defined, does it count a bridge round? Does it count financing from existing investors only, with no new money?, founders and investors end up disputing whether a conversion event has actually occurred, sometimes months after a round has already closed on the assumption that it did.

4. Treating iSAFE’s standard template as non-negotiable. Because iSAFE is a branded, standardized product, founders sometimes assume its terms are fixed. They’re a starting point, not a mandate, information rights, pro-rata rights, and MFN clauses in a specific iSAFE issuance are still commercially negotiable between the company and 100X.VC or the specific fund using the template.

Frequently asked questions

What’s the difference between iSAFE and a CCPS-based SAFE note? Legally, they’re the same structure, both are Compulsorily Convertible Preference Shares issued under Sections 42 and 55 of the Companies Act, 2013. The difference is standardization: iSAFE is 100X.VC’s branded, templated version, while a CCPS-based SAFE note is a bespoke instrument negotiated deal-by-deal, meaning its terms (anti-dilution, information rights, MFN clauses) need individual review rather than reliance on a known template.

My term sheet just says “SAFE.” How do I tell whether I’m actually being offered CCPS or a CCD? Check what the company is issuing you on day one, not what the cover sheet calls it. If you’re allotted shares (you appear on the register of members as a shareholder), it’s a CCPS structure, iSAFE or a bespoke SAFE note. If you’re issued a debenture certificate and the instrument sits as a liability on the balance sheet until conversion, it’s a CCD. The annexure or share/debenture certificate tells you the truth regardless of what the term sheet’s headline calls it.

Can any Indian startup issue a convertible note? No. A genuine convertible note under Rule 2(1)(c)(xvii) of the Companies (Acceptance of Deposits) Rules, 2014 is available only to companies recognized as startups by DPIIT, in a single tranche to a single investor, of at least ₹25 lakh, convertible or repayable within 10 years. A company without DPIIT recognition, or a smaller ticket size, needs a different instrument, typically CCPS or CCD.

Does a CCD count as foreign direct investment (FDI) or external commercial borrowing (ECB)? It depends entirely on whether conversion is compulsory or optional. Under the FEMA Non-Debt Instruments Rules, 2019, a compulsorily and mandatorily convertible debenture is treated as a non-debt instrument (i.e., FDI-equivalent), subject to sectoral caps and pricing guidelines. An optionally convertible debenture is instead treated as ECB, which brings a materially different and more restrictive regulatory framework. This distinction needs to be unambiguous in the drafting.

Does a CCD’s valuation cap get tested against FEMA fair market value the same way a CCPS cap does? Yes, when the CCD is compulsorily convertible and issued to a foreign investor, it’s treated as a non-debt instrument, so the same FEMA pricing floor applies: the conversion price implied by the cap can’t fall below fair market value at issuance, the same rule that governs CCPS and iSAFE. This is where a low cap set purely on commercial grounds can quietly breach FEMA pricing rules regardless of which of the two equity-linked instruments you used.

Which instrument fits your round?

Raising from 100X.VC or a fund that specifically uses the iSAFE template: iSAFE, on their standard paper, with negotiated modifications.
Raising from angels or a fund using bespoke SAFE-style paper, want equity from day one: CCPS-based SAFE note, but have the specific instrument reviewed, since bespoke drafting is where ambiguity creeps in.
Want the investment to sit as debt until conversion, or have a foreign investor where FDI-equivalent treatment matters: CCD, with the compulsory (not optional) conversion feature drafted unambiguously.
DPIIT-recognized, raising at least ₹25 lakh in a single tranche, want the lightest compliance path: genuine convertible note under Rule 2(1)(c)(xvii).

Whichever instrument fits, the clauses that actually create risk, the cap/discount mechanics, the conversion trigger definition, anti-dilution, and FEMA pricing compliance for foreign investors, are exactly the ones that need line-by-line review before signature, not after. That’s the specific, document-level work our Term Sheet and SAFE Note Review service does: reviewing your actual iSAFE, CCPS, CCD, or convertible note term sheet clause by clause against these exact issues.

Related reading:

This article is for informational purposes and does not constitute legal advice. Funding instrument selection depends on your company’s specific facts, investor mix, and regulatory exposure, consult a qualified corporate lawyer before finalizing term sheet terms.