Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed quarterly against RBI Master Directions, CBDT notifications and NDI Rules amendments
Introduction
A valuation report dated 1 January is worthless for an allotment made on 2 April. Not weakened, not questionable — worthless.
The valuation certificate must not be more than 90 days old on the date of allotment of shares. If your valuation is dated January 1, 2026, the shares must be allotted by March 31, 2026. If the allotment is delayed beyond 90 days, a fresh valuation is required — there is no extension mechanism.
That is one of several ways a foreign investment into India fails at the last step, after the term sheet is signed, the money has been remitted and the board has resolved to allot.
The wider problem is that a single number — the price per share — has to satisfy three separate regimes at once. FEMA sets a floor below which shares cannot be issued to a non-resident. The Income-tax Act has its own valuation machinery with different rules and different consequences. And the Companies Act requires a registered valuer for a preferential allotment, who may be a different professional from the one FEMA accepts.
Get the number right for one and wrong for another and the transaction either does not complete or completes with an exposure attached.
This guide sets out what each regime requires, who can certify, what RBI actually scrutinises in a DCF, and the specific reasons FC-GPR filings are rejected.
About this guide
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. Valuation is the point where a funding round meets three regulators, and it is the most common reason a completed investment sits unreported past its deadline.
Where a rule is settled we state it and cite the source. Where practice differs from the strict rule — and on who may certify a FEMA valuation it does — we say so, because what the AD bank will accept matters as much as what the rule permits.
Primary sources: the Reserve Bank of India for the NDI Rules, Master Directions and FIRMS reporting; the Income Tax Department for Rule 11UA and the related provisions; and the Ministry of Corporate Affairs for the Companies Act requirements on preferential allotment.
1. Three regimes, one number
| FEMA | Income-tax | Companies Act | |
|---|---|---|---|
| What it controls | The price at which shares may be issued to or transferred from a non-resident | Whether a tax charge arises on the issue or transfer | Whether the allotment procedure is valid |
| Mechanism | Floor price on issue to a non-resident; ceiling on transfer from a non-resident to a resident | Fair market value machinery under Rule 11UA and related provisions | Preferential allotment requires a valuation report |
| Who certifies | Chartered Accountant, SEBI-registered Category I Merchant Banker, or practising Cost Accountant | Merchant banker for specified methods; CA for others | Registered valuer |
| Consequence of failure | Contravention; FC-GPR rejected; penalties | Tax charge on the company or the recipient | Defective allotment |
1.1 They do not automatically agree
The three regimes use overlapping but not identical machinery. A valuation prepared for one purpose does not necessarily satisfy the others.
Every FEMA valuation should be cross-checked against Rule 11UA to ensure it does not trigger deemed income additions or capital gains issues simultaneously.
Our corporate tax and FEMA teams brief the valuer jointly for this reason. The practical approach is to brief the valuer on all three purposes at the outset and obtain a report that addresses each, rather than commissioning a general valuation and hoping it works everywhere.
2. FEMA: the floor and the ceiling
FEMA does not tell you what your company is worth. It tells you what you may not do.
| Transaction | The constraint |
|---|---|
| Issue of shares to a non-resident | Cannot be priced below fair market value as certified. Issuing below FMV needs RBI approval. |
| Transfer from a resident to a non-resident | Cannot be below fair market value — a floor |
| Transfer from a non-resident to a resident | Cannot exceed fair market value — a ceiling |
| Acquisition of shares in an overseas entity by a resident | Cannot exceed FMV as certified — the ODI cap |
2.1 The logic behind the direction
Read as a whole, the rules prevent value leaving India cheaply and prevent value entering India expensively.
Shares issued to a foreign investor below FMV would transfer value out. Shares bought back from a foreign investor above FMV would take money out. Each is constrained in the direction that protects the Indian side of the transaction.
Once that logic is clear, remembering which way the floor and ceiling run becomes straightforward.
2.2 Pricing above the floor is permitted
A foreign investor paying more than FMV is not constrained by FEMA. The floor is a minimum, not a target.
That matters commercially: a competitive round priced well above the DCF output does not create a FEMA problem. What it may create is an Income-tax question on the recipient side, which is section 9.
3. Who can certify
Under Rule 21 of the NDI Rules 2019, the valuation must be certified by a Chartered Accountant, a SEBI-registered Category I Merchant Banker, or a practising Cost Accountant. For share swaps, only a SEBI Merchant Banker or a recognised foreign Investment Banker qualifies. The certifier’s name and registration number must appear in the report.
3.1 Where practice is stricter than the rule
Published guidance is not uniform here, and the difference matters.
One position emphasises the Rule 21 list: the valuation must be certified by a SEBI-registered Merchant Banker or a Chartered Accountant holding a valid Certificate of Practice, with merchant banker certification described as required for companies with investment exceeding ₹25 crore in many practical scenarios.
Another states it more firmly: share pricing for inbound FDI or outbound ODI must be certified by a SEBI-registered Category I Merchant Banker, not an IBBI Registered Valuer alone.
The reconciliation is that Rule 21 sets the permitted class, while individual AD banks apply their own credit and compliance standards on top. For a large or complex transaction, a merchant banker report is materially less likely to attract queries.
The practical rule: confirm with your AD bank which professional they will accept before commissioning the report. A CA certificate that the bank declines to process costs the same time as no report at all.
3.2 The IBBI registered valuer point
An IBBI Registered Valuer is the professional the Companies Act requires for a preferential allotment. That is a different requirement from FEMA’s, and holding one registration does not satisfy the other.
Many professionals hold more than one qualification, which is why a single report can often cover both purposes — but only if the person actually holds both, and the report says so.
3.3 The detail that gets reports rejected
The certifier’s name and registration number must appear in the report.
A report signed without the registration number is incomplete on its face. So is one that does not identify which capacity the professional is signing in.
4. Methods, and the requirement that actually matters
RBI requires any internationally accepted pricing methodology for valuation on an arm’s-length basis. DCF, NAV, Earnings Capitalisation, Market Price, and Comparable Transaction methods are all acceptable.
4.1 The rule is not which method, it is why
The report must document which method was used and why — unexplained methodology is the most common ground for AD bank rejection.
That sentence is the single most useful thing in this guide. FEMA does not prescribe a method. It requires that the method chosen is internationally accepted, applied on an arm’s-length basis, and explained.
A report that produces a number with no reasoning about method selection is the most common rejection, and it is entirely avoidable.
4.2 Choosing the method
| Method | Fits where | Weak where |
|---|---|---|
| Discounted Cash Flow | Operating businesses with reasonably projectable cash flows | Pre-revenue companies, where projections are speculative |
| Net Asset Value | Asset-heavy companies, holding companies, dormant entities | Businesses whose value is in earnings rather than assets |
| Earnings Capitalisation | Stable, mature businesses with consistent earnings | Growth companies and cyclical businesses |
| Market Price | Listed securities | Unlisted companies, which is most of what this guide concerns |
| Comparable Transaction | Where genuinely comparable recent transactions exist | Where the “comparables” are not comparable, which is common |
Where more than one method could apply, use more than one and reconcile them. A report that triangulates is considerably harder to challenge than one that asserts.
5. DCF in practice, and what RBI scrutinises
The Discounted Cash Flow method is the most widely used for FEMA valuations, particularly for wholly-owned subsidiaries and joint ventures.
5.1 The components
The key components include a projection period, typically five years of detailed cash flow projections; a discount rate or WACC, usually 12 to 18% for Indian companies, reflecting country risk premium; terminal value, calculated using the Gordon Growth Model or an exit multiple approach; and working capital adjustments for changes in receivables, payables and inventory.
| Component | Typical position | What to watch |
|---|---|---|
| Projection period | Five years of detailed projections | Projections that were prepared for investors rather than for valuation |
| Discount rate | 12–18% WACC for Indian companies | A rate at the bottom of the range needs justification |
| Terminal value | Gordon Growth or exit multiple | Terminal value dominating total value is a red flag |
| Working capital | Adjustments for receivables, payables, inventory | Frequently omitted in quickly-prepared reports |
5.2 The pitfall
A common pitfall is using overly aggressive growth assumptions. RBI officials reviewing FC-GPR filings will scrutinise projections that show unrealistic revenue growth, especially for early-stage companies.
There is a structural tension here that founders and CFOs should understand.
Aggressive projections raise the DCF valuation, which raises the FEMA floor price. A high floor is not helpful to the company — it constrains what the investor can be charged and, more importantly, it invites scrutiny.
The projections used for the valuation should be the company’s genuine base case, documented and internally consistent with the board-approved budget. A DCF built on the deck shown to investors, with a hockey stick, is exactly what gets queried.
5.3 Where DCF is the wrong method
For a pre-revenue company, or a newly incorporated subsidiary with no operating history, DCF is being applied to numbers that are not projections in any meaningful sense.
For a newly incorporated wholly owned subsidiary being funded at par, the analysis is usually simpler and NAV-based. Where a valuation is required at all, say so and explain why the method fits.
6. The 90-day trap
The valuation certificate must not be more than 90 days old on the date of allotment of shares. If the allotment is delayed beyond 90 days, a fresh valuation is required — there is no extension mechanism.
6.1 Why this catches transactions
The sequence in a typical round runs: term sheet, diligence, definitive documents, valuation, funds remitted, board allots, FC-GPR filed.
The valuation is usually obtained early, because the investor wants to know the floor before documents are drafted. Then diligence takes longer than expected, a condition precedent slips, or the investor’s own approvals take an extra month.
By the time the board is ready to allot, the report is stale, and nobody notices until the AD bank asks for its date.
6.2 The control
Diarise the expiry date on the day the report is received, and work backwards from it. If the allotment cannot happen within the window, commission a fresh report rather than allotting on a stale one and hoping.
An allotment made on an expired valuation is not curable by obtaining a new report afterwards. The allotment has already happened at a price that was not validly certified.
7. The sequence, and the two clocks running through it
Shares must be allotted within 60 days of receiving funds from the non-resident investor. Form FC-GPR must then be filed within 30 days of allotment through the RBI FIRMS portal.
| Step | Deadline | Runs from |
|---|---|---|
| Valuation obtained | Valid for 90 days | Date of the report |
| Funds received from the investor | — | — |
| Shares allotted | 60 days | Receipt of funds |
| FC-GPR filed | 30 days | Date of allotment |
7.1 The three clocks interact
This is the planning point. The 90-day valuation window, the 60-day allotment window and the 30-day filing window are not independent.
Funds received on day 45 of a valuation’s life leave 45 days to allot — not 60. The binding constraint is whichever expires first.
A group that remits funds late in the valuation window has compressed its own allotment timeline without realising, and the board meeting that would have been comfortable is now urgent.
7.2 What happens if the 60 days pass
Where shares are not allotted within the prescribed period, the funds cease to be a valid share subscription and the position has to be addressed — typically by refund, or by regularisation, depending on the circumstances.
This is not a filing delay that can be caught up. It changes what the money is.
7.3 The FC-GPR file
The FC-GPR filing requires a valuation certificate, KYC documents, board resolution, and other supporting documentation. In practice that includes the Foreign Inward Remittance Certificate, the AD bank’s KYC on the remitter, and a company secretary’s certificate.
Assemble it on the day of allotment. See FC-GPR, FC-TRS and RBI documentation.
8. Angel tax is gone. FEMA pricing is not.
This is the most consequential recent change, and it is widely misread.
The Reserve Bank of India’s FDI pricing guidelines under FEMA still require that shares issued to non-residents be priced at or above the fair market value determined by a SEBI-registered merchant banker. This floor price mechanism operates independently of the Income Tax Act and remains fully in effect.
While the Income Tax Act no longer requires valuation for angel tax purposes, FEMA pricing guidelines still mandate that shares issued to non-residents be priced at or above fair market value.
8.1 What actually changed
The angel tax provision taxed the excess where a company issued shares above fair market value, treating the premium as income of the company. Its abolition removes that specific charge.
What it does not remove:
- The FEMA floor price, which operates under a different statute for a different purpose
- The valuation requirement for the FC-GPR filing
- Income-tax provisions on the recipient side, which are separate from the abolished provision
- The Companies Act valuation requirement for a preferential allotment
8.2 The misreading to avoid
“Angel tax has been abolished, so we do not need a valuation” is wrong on three counts. It confuses one tax provision with the valuation requirement generally, ignores FEMA entirely, and ignores the Companies Act.
A funding round from a foreign investor still needs a valuation report, still needs it dated within 90 days of allotment, and still needs it filed with FC-GPR.
9. The income-tax side that survives
Rule 11UA remains the income-tax machinery for determining fair market value of unquoted shares, and it continues to matter for provisions other than the abolished one.
9.1 The recipient side
Where shares are received for consideration below fair market value, a charge can arise in the hands of the recipient. This operates independently of the provision that was abolished and applies to transfers as well as issues.
For a foreign investor subscribing at or above FEMA floor, this is usually not in issue. It becomes relevant in secondary transfers, restructurings and intra-group transfers where the price is not set by an arm’s-length negotiation.
9.2 The 2023 tightening on preference shares
Until 25 September 2023, companies were allowed to use any method as deemed fit by the merchant banker for valuing preference shares. The merchant banker is now required to use only the specified methods.
For groups issuing compulsorily convertible preference shares — which is the standard instrument in Indian venture and private equity structures — this narrowed the available approach.
9.3 The convertible instrument trap
This one deserves careful attention because it can produce a tax cost on a down round.
Under FEMA, convertible instruments cannot be converted at a price lower than the fair value of such instruments at the time of issuance. In a scenario where there is a drop in the valuation of the company, the tax FMV of the shares at the time of conversion may be lower than the price at which the convertible instruments were issued.
Read that carefully. FEMA fixes the conversion price by reference to the value at issuance. If the company’s value has fallen by the time conversion occurs, FEMA still requires conversion at the higher original price — while the income-tax fair market value at conversion is lower.
The two regimes pull in opposite directions, and the group is caught between them. For any structure using convertible instruments, model this before issuance rather than discovering it at conversion.
10. The Companies Act layer
A preferential allotment under the Companies Act requires a valuation report from a registered valuer, alongside a special resolution and an explanatory statement.
Three points for foreign-owned companies:
The professional may be different. The Companies Act requires an IBBI Registered Valuer. FEMA permits a CA, merchant banker or cost accountant. Where the same person holds both, one report can serve both purposes if it is drafted to do so.
The procedure matters as much as the number. An allotment made without the required resolution or explanatory statement is procedurally defective regardless of the price.
The timing has to align. The special resolution, the valuation, the receipt of funds and the allotment all have their own windows, and they have to be sequenced so that none has expired when the allotment is made.
Where this is being run alongside incorporation or a first funding round, see forming a foreign company in India for how the sequence fits together.
11. Why FC-GPR filings actually get rejected
In our experience the reasons cluster tightly.
| Reason | The fix |
|---|---|
| Unexplained methodology — the most common ground for AD bank rejection | The report must state which method was used and why that method fits this company |
| Valuation more than 90 days old at allotment | Diarise the expiry on receipt; commission a fresh report rather than allotting late |
| Certifier’s registration number missing | Check the report before filing, not after |
| Certifier not within the class the AD bank accepts | Confirm with the bank before commissioning |
| Issue price below the certified floor | There is no cure short of RBI approval; price at or above the floor |
| Aggressive projections unsupported by history | Use the board-approved base case, documented |
| Report addresses valuation generally, not the FEMA question — see FEMA advisory | A FEMA valuation must cite the applicable NDI Rule and address the pricing floor or ceiling; a general valuation report will be rejected |
| Allotment beyond 60 days of receipt of funds | Track the clock from the FIRC date |
| KYC or FIRC inconsistent with the remitter | Reconcile the remitter, the subscriber and the shareholder before allotment |
| Shareholding pattern in FC-GPR not reconciling to the register | Update the register of members before filing |
A FEMA valuation must specifically cite the applicable NDI Rule, address the pricing floor or ceiling, be certified by RBI’s prescribed professional class, and be submitted with the FC-GPR or FC-TRS filing. A general valuation report does not satisfy these requirements and will be rejected by the AD bank.
That last point is worth isolating. A perfectly competent valuation report prepared for, say, an internal purpose or a shareholder discussion will not do. The report has to be addressed to the FEMA question.
12. Penalties
A missing or non-compliant FEMA valuation is a contravention under Section 13 of FEMA 1999. Penalties can reach three times the amount involved in the contravention, or ₹2 lakh if the amount cannot be quantified. For continuing violations, a daily fine of ₹5,000 applies. RBI can also restrict the company from raising future foreign capital.
The RBI can reject the FC-GPR filing, the company faces FEMA compounding penalties of up to three times the amount involved, and the Enforcement Directorate may initiate separate proceedings.
12.1 The consequence that matters commercially
Of everything in that list, the one with the sharpest practical effect is the restriction on raising future foreign capital.
A company with an unresolved FEMA contravention has a problem at its next round, because the incoming investor’s counsel will find it in diligence alongside your ROC filing record and the AD bank will be dealing with a company already on record as non-compliant.
12.2 Compounding
Where a contravention has occurred, compounding is the mechanism for regularising it with the RBI. It converts an open, accruing exposure into a determined and closed one.
For a group planning a further round or a sale, closing the item is generally preferable to disclosing an open one, because an open contravention has to be quantified and indemnified in the transaction documents anyway.
13. Three transactions, worked through
Scenario A — The round that slipped past 90 days
A US investor agrees to fund an Indian company. A merchant banker report is obtained on 10 February to establish the floor. Diligence runs long; a condition precedent on a licence takes six weeks. Funds are remitted on 5 May and the board allots on 20 May.
The problem. The valuation expired on 11 May. The allotment on 20 May was made on a stale certificate.
Why it happened. Nobody diarised the expiry. The valuation was treated as a document obtained at the start of the process rather than as a certificate with a life.
What would have prevented it. Diarising the expiry on receipt, and either accelerating the allotment or commissioning a fresh report in early May. A second report is a cost; an invalid allotment is a contravention.
Scenario B — The DCF that invited scrutiny
An early-stage Indian company raising from a foreign investor produces a DCF built on the projections in its investor deck — revenue growing from ₹2 crore to ₹80 crore over five years.
The problem. RBI officials reviewing FC-GPR filings scrutinise projections showing unrealistic revenue growth, especially for early-stage companies. The filing is queried, and the company has to justify assumptions it cannot support from its trading history.
The irony. The aggressive projections raised the DCF valuation, which raised the FEMA floor. The company created a constraint against itself and drew attention doing it.
What would have worked. The board-approved base case, documented and internally consistent, with the method choice explained — and consideration of whether DCF was the appropriate method at all for a company at that stage.
Scenario C — The convertible on a down round
A group issues compulsorily convertible preference shares to its parent at a valuation set in 2024. By conversion in 2026 the business has contracted and the company’s value has fallen materially.
The problem. Under FEMA, convertible instruments cannot be converted at a price lower than the fair value at the time of issuance. Conversion must happen at the higher 2024 price. Meanwhile the income-tax fair market value at conversion is lower.
The exposure. The mismatch between the two regimes can produce a tax cost on a transaction the group regarded as a mechanical conversion.
What would have helped. Modelling the downside at issuance. For groups using convertibles, the conversion mechanics deserve as much attention as the issue price.
14. Instrument type changes the analysis
Most guidance assumes equity shares. Indian FDI structures routinely use other instruments, and each carries its own valuation question.
| Instrument | The valuation question |
|---|---|
| Equity shares | The standard case: floor price on issue to a non-resident |
| Compulsorily convertible preference shares | Priced at issuance, with the conversion price fixed by reference to fair value at that time — see section 9.3 |
| Compulsorily convertible debentures | Same conversion constraint; also engages the borrowing framework analysis |
| Share warrants | Pricing at issue, with the balance consideration and exercise mechanics needing attention |
| Rights issue to an existing non-resident shareholder | Pricing rules apply, though the analysis differs from a fresh preferential allotment |
| Bonus issue | No consideration passes, so the pricing question is different, but the reporting obligation remains |
| Swap of shares | Only a SEBI Merchant Banker or a recognised foreign Investment Banker may certify |
14.1 Why CCPS dominates, and what that means
Compulsorily convertible preference shares are the standard instrument in Indian venture and private equity structures because they are treated as equity for FDI purposes while giving the investor preference economics.
Two consequences follow for valuation. The instrument must be priced at issuance under the FEMA floor, and separately the conversion mechanics must be set in a way that works when conversion actually happens — which may be years later at a different valuation.
Groups that treat the conversion as a mechanical step, rather than as an event with its own regulatory and tax consequences, are the ones caught by the mismatch described in section 9.3.
14.2 The 2023 narrowing on preference shares
The tightening described in section 9.2 bears directly on this. Until 25 September 2023, any method deemed fit by the merchant banker could be used for valuing preference shares; only specified methods are now permitted.
A group relying on a pre-2023 template or a valuer’s habitual approach should confirm the method used is within the permitted set.
15. Transfers: the FC-TRS side
Most of this guide concerns a fresh issue of shares. A transfer of existing shares between a resident and a non-resident engages the same machinery in a different direction.
15.1 The direction determines the constraint
On a transfer from a resident to a non-resident, the price cannot be below fair market value — the resident must not undersell. On a transfer from a non-resident to a resident, the price cannot exceed fair market value — the resident must not overpay.
Both are the same protective logic applied to the party remaining in India.
15.2 Where this bites for foreign groups
Three situations recur.
An intra-group reorganisation. Moving the Indian subsidiary from one group entity to another looks internal, but if one side is resident and the other non-resident, the pricing guidelines apply and FC-TRS reporting follows.
A founder buy-out. Where a foreign parent buys out an Indian minority shareholder, the ceiling applies — the parent cannot pay above FMV, whatever was commercially agreed.
An exit to an Indian buyer. Where the foreign parent sells its Indian subsidiary to a domestic acquirer, the ceiling applies to what the Indian buyer may pay.
That last point is worth flagging early in any sale process, because a negotiated price above the certified FMV cannot simply be paid.
15.3 The reporting
FC-TRS is filed within the prescribed period for qualifying transfers between a resident and a non-resident, with the valuation certificate among the supporting documents. See FEMA compliance and FDI reporting.
16. Twelve mistakes
- Allotting on a valuation more than 90 days old. There is no extension mechanism.
- Commissioning a general valuation report rather than one addressed to the FEMA question.
- Not explaining the method choice. The most common ground for AD bank rejection.
- Assuming angel tax abolition removed the valuation requirement. The FEMA floor operates independently and remains fully in effect.
- Using investor-deck projections in the DCF, raising the floor and inviting scrutiny.
- Not confirming with the AD bank which professional class they will accept.
- Omitting the certifier’s registration number.
- Losing track of the 60-day allotment clock from receipt of funds.
- Treating the three clocks as independent. The binding constraint is whichever expires first.
- Using an IBBI Registered Valuer alone where the AD bank expects a merchant banker.
- Ignoring the convertible instrument mismatch between FEMA conversion price and tax FMV.
- Leaving a contravention open rather than compounding it before the next round.
17. Checklist
Before commissioning the valuation
- Transaction direction identified: issue to non-resident, transfer in, transfer out, or ODI
- Applicable constraint identified: floor or ceiling
- AD bank confirmed on which professional class they will accept
- Valuer briefed on all three purposes: FEMA, income-tax and Companies Act
- Board-approved projections available, not investor-deck projections
- Target allotment date established, so the 90-day window can be planned backwards
The report
- Cites the applicable NDI Rule and addresses the pricing floor or ceiling expressly
- States the method used and explains why that method fits this company
- Where more than one method applies, reconciles them
- DCF components documented: projection period, WACC, terminal value basis, working capital adjustments
- Certifier’s name, capacity and registration number on the face of the report
- Date recorded and expiry diarised
The transaction
- Special resolution and explanatory statement passed where a preferential allotment, with subscription documents executed
- Funds received and FIRC obtained
- Allotment within 60 days of receipt of funds and within the valuation’s 90-day life
- Issue price at or above the certified floor
- Board resolution allotting, properly minuted
- Register of members updated before filing
- FC-GPR filed within 30 days of allotment with the valuation certificate, FIRC, KYC and CS certificate
- Share certificates issued, statutory registers updated and demat position addressed
Round closing soon?
The valuation is usually obtained first and forgotten about, and then the allotment happens on a certificate that expired three weeks earlier. Tell us your target allotment date and the shape of the round and we will work backwards to when the valuation should be commissioned, what the report needs to say, and how the three clocks line up.
18. Frequently asked questions
Q1. Do we still need a valuation now that angel tax has been abolished?
Yes. The FDI pricing guidelines under FEMA still require shares issued to non-residents to be priced at or above fair market value, and that floor price mechanism operates independently of the Income Tax Act and remains fully in effect. The valuation certificate is also required for the FC-GPR filing, and a preferential allotment separately requires a registered valuer’s report under the Companies Act.
Q2. How long is a FEMA valuation certificate valid?
The certificate must not be more than 90 days old on the date of allotment. If the valuation is dated 1 January, the shares must be allotted by 31 March. Where allotment is delayed beyond 90 days, a fresh valuation is required, and there is no extension mechanism. An allotment made on an expired certificate cannot be cured by obtaining a new report afterwards.
Q3. Who can certify a valuation for FDI purposes?
Under Rule 21 of the NDI Rules 2019, a Chartered Accountant, a SEBI-registered Category I Merchant Banker, or a practising Cost Accountant. For share swaps, only a SEBI Merchant Banker or a recognised foreign Investment Banker qualifies. The certifier’s name and registration number must appear in the report. Individual AD banks may apply stricter standards, so confirm before commissioning.
Q4. Is a merchant banker always required?
Not under the rule, but often in practice. Rule 21 permits a CA or cost accountant as well, and merchant banker certification is commonly described as required for larger transactions. Some guidance states more firmly that inbound FDI pricing must be certified by a SEBI-registered Category I Merchant Banker. Confirm with your AD bank which professional they will accept before the report is commissioned.
Q5. Which valuation method does RBI require?
None specifically. RBI requires any internationally accepted pricing methodology applied on an arm’s-length basis, and DCF, NAV, earnings capitalisation, market price and comparable transaction methods are all acceptable. What matters is that the report documents which method was used and why — unexplained methodology is the most common ground for AD bank rejection.
Q6. What is the floor price for issuing shares to a non-resident?
The fair market value as certified. Shares issued to a non-resident cannot be priced below that value, and issuing below it requires RBI approval. Pricing above the floor is permitted, because the floor is a minimum rather than a target, though a price well above FMV may raise questions on the income-tax side for the recipient.
Q7. Does a ceiling apply anywhere?
Yes. On a transfer from a non-resident to a resident, the price cannot exceed fair market value, and for outbound investment the shares acquired in an overseas entity cannot exceed certified FMV. The logic is consistent: the rules prevent value leaving India cheaply and prevent money leaving India expensively.
Q8. How long do we have to allot shares after receiving funds?
Sixty days from receipt of funds from the non-resident investor. Form FC-GPR must then be filed within 30 days of allotment through the RBI FIRMS portal. Note that these clocks interact with the valuation’s 90-day life, and the binding constraint is whichever expires first.
Q9. What happens if we miss the 60-day allotment window?
The funds cease to be a valid share subscription and the position must be addressed, typically by refund or by regularisation depending on the circumstances. This is not a filing delay that can simply be caught up later — it changes the character of the money that was received.
Q10. What is the most common reason an FC-GPR is rejected?
Unexplained methodology in the valuation report. FEMA does not prescribe a method, but it requires the report to state which method was used and why that method fits the company. A report that produces a number without reasoning about method selection is the most common rejection and is entirely avoidable.
Q11. Can we use a valuation report prepared for another purpose?
No. A FEMA valuation must specifically cite the applicable NDI Rule, address the pricing floor or ceiling, be certified by the prescribed professional class, and be submitted with the FC-GPR or FC-TRS filing. A general valuation report, however competent, does not satisfy these requirements and will be rejected by the AD bank.
Q12. What does RBI look for in a DCF?
Realistic assumptions. Typical components are a five-year projection period, a WACC of 12 to 18% for Indian companies reflecting country risk, terminal value on a Gordon Growth or exit multiple basis, and working capital adjustments. Officials scrutinise projections showing unrealistic revenue growth, particularly for early-stage companies, so use the board-approved base case rather than investor-deck projections.
Q13. Do aggressive projections help or hurt?
They hurt. Aggressive projections raise the DCF valuation, which raises the FEMA floor price — constraining what the investor can be charged and inviting scrutiny of assumptions the company cannot support from its trading history. The valuation should rest on the genuine base case, documented and consistent with the board-approved budget.
Q14. What is the penalty for a non-compliant valuation?
A missing or non-compliant FEMA valuation is a contravention under Section 13 of FEMA 1999, with penalties reaching three times the amount involved, or ₹2 lakh where the amount cannot be quantified, plus ₹5,000 per day for continuing violations. RBI can also restrict the company from raising future foreign capital, which is often the sharpest commercial consequence.
Q15. What is the issue with convertible instruments?
Under FEMA, convertible instruments cannot be converted at a price lower than the fair value at the time of issuance. Where the company’s value has fallen by conversion, FEMA still requires conversion at the higher original price while the income-tax fair market value at conversion is lower. The two regimes pull in opposite directions and this should be modelled before issuance.
Q16. Does an IBBI Registered Valuer satisfy the FEMA requirement?
Not by itself. An IBBI Registered Valuer is what the Companies Act requires for a preferential allotment; FEMA has its own prescribed class under Rule 21. Many professionals hold more than one qualification, so a single report can often serve both purposes — but only where the person actually holds both and the report states the capacity in which it is signed.
Q17. How do the Companies Act and FEMA requirements fit together?
A preferential allotment requires a special resolution, an explanatory statement and a registered valuer’s report under the Companies Act, while FEMA sets the floor price and its own certification requirements. Both must be satisfied, the professionals may differ, and the timing of the resolution, valuation, receipt of funds and allotment must be sequenced so none has expired at allotment.
Q18. We think we have a past contravention. What should we do?
Consider compounding, which regularises the contravention with the RBI and converts an open, accruing exposure into a determined and closed one. For a group planning a further round or a sale, closing the item is generally preferable to disclosing an open one, because an open contravention has to be quantified and indemnified in the transaction documents in any event.
Related reading
- Step-by-step guide to forming a foreign company in India — where the first allotment and FC-GPR fit in the sequence
- Best business structures in India for foreign companies — FDI routes, sectoral caps and Press Note 3
- Repatriating profits from India — where pricing guidelines apply on the way out
- Significant beneficial ownership and Form BEN-2 — the other filing that follows a change in shareholding
Talk to us before the valuation is commissioned
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. Valuation coordination, FEMA pricing analysis, preferential allotment procedure, FC-GPR and FC-TRS filings and compounding where there is a historic contravention — run as one workstream, because the number has to satisfy three regulators at once.
How we usually start. Tell us the transaction direction, the target allotment date and the shape of the round. We come back with which constraint applies, what the report needs to say, when it should be commissioned so the 90-day window fits, and how the allotment and filing clocks line up against it.
Sources
- Reserve Bank of India — NDI Rules 2019, Master Directions on FDI, FIRMS portal and compounding
- Income Tax Department — Rule 11UA and related valuation provisions
- Ministry of Corporate Affairs — Companies Act, 2013 provisions on preferential allotment and registered valuers