First, identify the instrument. A document marketed as a SAFE may use a convertible security or another structure, and its label does not establish its Indian legal treatment. Read the executed terms, approvals and allotment records before deciding which company-law provisions apply. The conversion mechanics and amendment process must be checked against those documents. When a founder says "the terms have moved", the first question is whether they moved by the contract's own arithmetic or by someone's say-so.
The Indian "SAFE". A convertible instrument, most often CCPS or CCDs, issued to identified investors by private placement under Section 42 of the Companies Act, 2013 (as substituted by the Companies (Amendment) Act, 2017, requiring an offer-cum-application to persons identified by the Board) and allotted under Section 62(1)(c), which requires a special resolution and a price supported by a registered valuer's report. The number of equity shares it converts into is fixed by a formula in the instrument: a valuation cap, a discount to the next priced round, or both, triggered by a qualifying financing, a sale, or a long-stop date.
Have the terms actually moved, or is this the formula working?
Run the arithmetic before the argument. Most conversion disputes are founders discovering what a cap and a discount do when the priced round comes in lower than hoped.
Worked example. An investor put in Rs 1 crore on an instrument with a valuation cap of Rs 20 crore and a twenty per cent discount to the next priced round, converting at whichever gives the investor more shares. Case one: the round is priced at Rs 40 crore pre-money. The discount gives Rs 32 crore, the cap gives Rs 20 crore, so the investor converts at Rs 20 crore and Rs 1 crore buys five per cent of the pre-round equity. Case two: the round is priced at Rs 15 crore. The discount gives Rs 12 crore, which is lower than the cap, so the investor converts at Rs 12 crore and Rs 1 crore buys about 8.3 per cent. Nothing has been varied. The founders' dilution rose because the round price fell, and the instrument always said it would. What would be a variation is the investor asking for the Rs 12 crore price in case one, or for the new round's liquidation preference on the converted shares when the instrument gave none.
Can the investor or the new round change our conversion terms?
Identify whose consent the documents actually require. An amendment must satisfy the instrument and the shareholders agreement, including any agreed approval threshold. A founder does not automatically have an individual veto merely by holding ordinary shares. As a matter of company law, where the change touches the rights attached to a class of shares, Section 48(1) requires the consent in writing of the holders of not less than three-fourths of the issued shares of that class, or a special resolution at a separate meeting of that class, and the proviso adds that if the variation affects another class, three-fourths of that class must consent too. Section 48(2) then gives holders of ten per cent of the class who did not consent the right to apply to the Tribunal within twenty-one days to have the variation cancelled, and the variation has no effect until the Tribunal confirms it. Apply those class-approval rules to the rights actually being varied or affected, alongside the contractual amendment requirements. Do not assume that every founder must separately consent. The reserved matters clause in your shareholders agreement will usually list "variation of the terms of any securities" as one requiring specific consents, and that clause controls here.
What if the investor is non-resident?
Then a floor applies that neither side can waive. Paragraph 8.1.2 of the Reserve Bank's Master Direction on Foreign Investment in India requires that for convertible equity instruments the price or conversion formula be determined upfront at the time of issue, and that the price at conversion shall not in any case be lower than the fair value worked out at the time of issuance under the FEMA rules. Paragraph 8.1.1 fixes that fair value for an unlisted company by any internationally accepted pricing methodology on an arm's length basis, certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant. Paragraph 4.6 adds that convertible debentures must be fully and mandatorily convertible to count as equity instruments at all. So a conversion price below the fair value in the valuation report filed at issue is not just a breach of contract, it is a FEMA problem for the company, while a higher price is permitted. If the formula would, on the actual round, produce a price below that floor, the floor wins.
- The instrument itself: the terms of issue of the CCPS or CCDs as approved by the special resolution and filed with the Registrar, including the cap, discount, trigger, long-stop and most-favoured-nation clauses
- The share subscription agreement and shareholders agreement, especially the definitions of qualifying financing and fully diluted capital, the anti-dilution clause, and the amendment and consent clauses
- The articles of association as altered when the instrument was issued, because rights not written into the articles bind only the signatories
- The valuation report filed with the Section 62(1)(c) allotment, and the FEMA reporting for a non-resident investor, because that report fixes the conversion floor
- The cap table on a fully diluted basis, including the ESOP pool, on which see our guide to ESOPs, because a pool created before conversion changes the arithmetic
- The new round's term sheet, so you can see which of its terms are being asked to reach back into the converting instrument
What do anti-dilution and MFN clauses do at conversion?
An anti-dilution clause in the converting instrument protects the investor if a later round is priced below its conversion price, by a full ratchet or a weighted average. A most-favoured-nation clause lets the investor take the terms of any later convertible instrument if they are better. Both are legitimate and both are contract. What they are not is a licence to import the new round's liquidation preference, board seat or veto into the converted shares unless the instrument says the converting shares take the same class and rights as the new round's shares, which many do. Read that sentence. It decides whether your early investor converts into ordinary equity or into the new preferred class with everything attached.
Where do we take a real dispute?
To the clause that says where. Nearly every subscription agreement has an arbitration clause, and the founders' first move is an application under Section 9 of the Arbitration and Conciliation Act, 1996 for interim protection, for instance to restrain an allotment on disputed terms until the arbitrator decides, as explained in our note on urgent orders before arbitration. Company-law questions run in parallel: an application to the Tribunal under Section 48(2) if a class variation was pushed through, and rectification under Section 59 if shares were allotted or entered on the register without sufficient cause. A converting investor and a new lead usually need each other to close, and the required consents should be identified before allotment. Use any consent rights you actually hold at that stage.
What I tell founders at this stage
Do the conversion arithmetic yourself, on a spreadsheet, from the instrument's words, before you take a call with anyone. Half the "moved terms" I see are the formula. The other half are a new investor's lawyer drafting the round documents as if the old instrument said what the new investor wishes it said. In that half you have consent rights in the contract, class rights under Section 48 and a FEMA price floor if the money came from abroad, and the way to use them is a short letter that quotes the clause, states the number of shares the formula produces and declines to sign anything else. Our guide to the term sheet explains how these clauses got there in the first place.