Rule 18 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 18 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 lets a person resident outside India buy convertible notes issued by an Indian startup company for twenty five lakh rupees or more in a single tranche. It covers approval, conversion into equity, payment, NRI and OCI holdings and transfers of the notes. The note itself is defined in rule 2(e), where the conversion window was lengthened to ten years in 2022.
This article is based on the Rules as notified on 17 October 2019 (S.O. 3732(E)) as amended by the notifications named in this article; the latest amendment consulted is S.O. 4870(E) dated 2 September 2026. Amendments made after that date should be checked in the Gazette. There is no official consolidated text. Rule 18 is as notified on 17 October 2019; none of the 19 amending notifications changes its text, but two definitions it relies on were amended. Reporting of an issue of convertible notes is explained in our FC-GPR reporting page.
A person resident outside India other than a citizen of Pakistan or Bangladesh or an entity registered or incorporated there may buy convertible notes of an Indian startup for twenty five lakh rupees or more in a single tranche. A startup in a sector needing Government approval may issue the notes only with that approval. Equity shares issued on conversion must meet the entry route, sectoral cap and pricing guidelines. A note may now run up to ten years (rule 2(e), S.O. 1802(E), 12 April 2022). An NRI or OCI may acquire notes on non-repatriation basis under Schedule IV.
The two definitions behind rule 18
Convertible note (rule 2(e)): an instrument issued by a startup company acknowledging receipt of money initially as debt, repayable at the option of the holder, or convertible into such number of equity shares of that company, within a period not exceeding ten years from the date of issue, upon occurrence of specified events as per the other terms agreed and indicated in the instrument. S.O. 1802(E), the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules, 2022 (12 April 2022) substituted "ten years" for "five years".
Startup company (rule 2(an)): as substituted by S.O. 3492(E), the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2024 (16 August 2024), a private company incorporated under the Companies Act, 2013 and identified as "startup" under the Government of India notification number G.S.R. 127(E) dated 19 February 2019 issued by the Department for Promotion of Industry and Internal Trade, as amended from time to time. As notified, the clause referred to G.S.R. 180(E) of 17 February 2016. See our article on Indian company, control, startup and investor classes and, for the note as an instrument, equity instruments, convertible notes and units.
Rule 18, sub-rule by sub-rule
| Sub-rule | Text of the Rule (as notified; unchanged) |
|---|---|
| (1) | A person resident outside India (other than an individual who is a citizen of Pakistan or Bangladesh or an entity registered or incorporated in Pakistan or Bangladesh) may purchase convertible notes issued by an Indian startup company for an amount of twenty five lakh rupees or more in a single tranche |
| (2) | A startup company engaged in a sector where investment by a person resident outside India requires Government approval may issue convertible notes to a person resident outside India only with such approval. Further, issue of equity shares against such notes shall be in compliance with the entry route, sectoral caps, pricing guidelines and other attendant conditions for foreign investment |
| (3) | The mode of payment and other attendant conditions for remittance of sale or maturity proceeds shall be specified by the Reserve Bank |
| (4) | A NRI or an OCI may acquire convertible notes on non-repatriation basis in accordance with Schedule IV |
| (5) | A person resident outside India may acquire or transfer by way of sale convertible notes from or to a person resident in or outside India, provided the transfer takes place in accordance with the entry routes and pricing guidelines as prescribed for capital instruments |
Reading sub-rule (1)
The threshold is stated as "twenty five lakh rupees or more in a single tranche": each purchase must reach the amount. The wording keeps out an individual who is a citizen of Pakistan or Bangladesh and an entity registered or incorporated in either, in these words. That list differs from the land-border rule in rule 6(a), which was rewritten in May 2026; see our article on rule 6. The Rules do not say how the two interact, and the reader should confirm against the official text for an investor from a land-border country.
Reading sub-rule (2)
Approval comes first where the startup's sector needs it; the sectors and routes are in Schedule I, explained in our article on the automatic route and the Government route. On conversion, the equity shares are an issue to a non-resident like any other, and the pricing rules apply; see pricing of shares issued to non-residents.
Sub-rules (3) to (5)
Sub-rule (3) leaves payment and remittance to the Reserve Bank; the mode of payment for convertible notes is in the Mode of Payment and Reporting Regulations, explained in our article on payments for NRIs, LLPs, FVCIs and convertible notes under regulation 3. The reporting of convertible notes is in regulation 4, explained in our article on FLA return, LEC, InVi and convertible note returns. Sub-rule (4) sends NRI and OCI purchases on non-repatriation basis to Schedule IV; see our article on Schedule IV. Sub-rule (5) allows purchases and sales of the notes in or outside India, subject to entry routes and pricing guidelines "as prescribed for capital instruments".
What the Master Direction adds
The Reserve Bank's Master Direction - Foreign Investment in India, updated up to June 15, 2026, restates rule 18 in paragraph 6.14 and adds statements of its own, not found in the Rule: that the payment can be received by inward remittance through banking channels or by debit to a repatriable foreign currency or Rupee account under the Deposit Regulations, 2016; that an escrow account for the purpose should be closed immediately after the requirements are completed or within six months, whichever is earlier; that the note may be converted or repaid within 10 years at the option of the holder, with repayment or sale proceeds remittable or creditable to a repatriable account; and that convertible notes were permitted as an investment option for startups with effect from January 10, 2017. The Rule's own text does not mention those points.
For wider background on startup funding, see our guides on convertible notes and SAFE notes and FEMA compliance for startups receiving FDI.
A worked example
Lakshya Components Private Limited, a private company identified as a startup, receives a term sheet from Nordvik Holdings for a convertible note of fifty lakh rupees, in one tranche. The amount clears the twenty five lakh threshold. Lakshya's sector is on the automatic route, so no approval is needed at issue. The note will convert into equity within the contractual window, which can now be up to ten years from issue, at a price that must satisfy the pricing guidelines at the time of conversion. If the note had been bought in two tranches of ten lakh rupees each, neither would satisfy rule 18(1).
Need help with a foreign convertible note?
A convertible note raises FEMA questions at issue, on conversion and at repayment, and each stage has its own report. Our FC-GPR reporting team can help once the terms are fixed.
Key takeaways
- Rule 18 allows a non-resident to buy a startup's convertible notes of twenty five lakh rupees or more in a single tranche.
- Citizens and entities of Pakistan and Bangladesh are excluded by the words of sub-rule (1).
- Sectors needing Government approval need it for the notes; conversion must meet route, cap and pricing.
- The conversion window is up to ten years since 12 April 2022; startup status follows G.S.R. 127(E) since 16 August 2024.
- NRIs and OCIs may hold the notes on non-repatriation basis under Schedule IV.
Read next
- Rule 2 of the FEM (Non-debt Instruments) Rules, 2019: equity instruments, convertible notes, non-debt instruments and units
- Rule 21 of the FEM (Non-debt Instruments) Rules, 2019: pricing of shares issued to non-residents
- Rule 8 of the FEM (Non-debt Instruments) Rules, 2019: ESOPs, sweat equity and Share Based Employee Benefits
- Convertible notes and SAFE notes explained
Disclaimer: Based on the Gazette text of the instrument this article names, as notified and as amended by the notifications named in the article (for the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 the latest amendment consulted is S.O. 4870(E) dated 2 September 2026), as consulted on 2 October 2026. There is no official consolidated text; the provisions were read with each amendment applied. Sectoral caps, entry routes, conditions, forms and time limits change by notification, press note and circular; later changes should be checked on the Gazette, DPIIT and Reserve Bank sites. This article is general information, not legal advice; check the official text before acting.