Debt vs Equity — how should the money come in?
Founder loan, bank borrowing, private placement, convertibles or FDI — three questions, then the route that fits and its exact filing chain.
1. Where is the money coming from?
How it works
- Identify the source of funds — the legal route differs completely for a bank, a director, an Indian investor and a foreign investor.
- Apply your dilution preference — equity, debt, or compulsorily convertible instruments.
- Test serviceability — debt that cash flows can’t service isn’t financing, it’s a future default.
- Read the resulting filing chain and the traps specific to that route, with links to the full moment pages.
FAQs
What decides whether to raise debt or equity?
Three things dominate: who the money is coming from (a bank, a founder, an Indian or a foreign investor), whether you can tolerate dilution, and whether current cash flows can service interest. Each combination lands on a different legal route with its own Companies Act filing chain.
Is a loan from a director a deposit?
Not if the director gives a written declaration that the funds are their own and not borrowed for the purpose (Companies (Acceptance of Deposits) Rules 2014, Rule 2(1)(c)(viii)). The loan is still reported annually in DPT-3 as an exempted deposit.
Can a foreign investor simply lend money to an Indian company?
A straight foreign loan is External Commercial Borrowing under FEMA, with eligibility conditions and monthly RBI reporting. Compulsorily convertible instruments (CCPS/CCDs) are treated as equity under the FDI route instead, which is why most early-stage cross-border money comes in that way.
Does angel tax still apply on share premium?
No. The provision taxing share premium above fair market value (the “angel tax”, s.56(2)(viib)) was omitted by the Finance (No. 2) Act 2024 with effect from AY 2025-26, so it does not apply to shares issued from FY 2024-25 (1 April 2024) onward. A defensible valuation is still good hygiene for pricing and FEMA purposes.
Can a loan be converted into equity later?
Only if the conversion option was built into the loan terms and approved by a special resolution up front, under Section 62(3) of the Companies Act 2013. A plain loan cannot be converted afterwards by mutual agreement alone.