Markdown to ReST on sdist in setup.py (untested, but the basic gist is correct)

setup.py

import sys

# ...

if len(sys.argv) > 1 and sys.argv[1] == 'sdist':
    import pypandoc
    with open('README', 'w') as fh:
        fh.write(pypandoc.convert('README.md', 'rst'))

setup(
    # ...
)