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FEMA Valuation and Foreign Share Issuance
Two decisions sit behind every rupee a foreign parent puts into an Indian company. Which instrument it subscribes to, and at what price. Get the first wrong and the investment is debt under a different regime. Get the second wrong and the filing is returned.
- Equity, CCPS and CCD compared
- Floor, ceiling and who certifies
Fair Value CertifiedPer FEMA pricing guidelines
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Quick Answer
What are the pricing guidelines for issuing shares to a foreign investor?
Equity instruments issued or transferred to a person resident outside India must be priced at or above fair market value. A transfer from a non-resident to a resident must be at or below it. Fair value is certified by a SEBI-registered merchant banker or a chartered accountant in practice, using an internationally accepted methodology applied on an arm's length basis.
The rule, and the decision that comes before it
- Equity shares, compulsorily convertible preference shares and compulsorily convertible debentures are all equity instruments under FEMA, so all three are foreign direct investment and all three are reported on Form FC-GPR.
- Anything that is not fully and mandatorily convertible is debt, and falls under the external commercial borrowing framework instead.
- The conversion price, or the formula for arriving at it, must be fixed when the instrument is issued, not at conversion.
- The floor protects India on the way in. A foreign investor may pay more than fair value, never less.
- The ceiling protects India on the way out. A non-resident may receive no more than fair value on a transfer to a resident.
- Subscription at incorporation is at face value. Every issue after that needs a valuation, including a top-up from the same parent.
Capital structuring under FEMA and the pricing rules are treated together on this page because the instrument choice determines which rules apply. For the reporting that follows, see FDI compliance and FEMA advisory in India. For whether the investment is permitted at all, see FDI automatic route vs government approval.
Capital Structuring
Capital structuring under FEMA
Before any pricing question arises, a foreign parent has to decide what it is subscribing to. FEMA divides the answer in two, and the division is binary rather than a spectrum. An instrument is either an equity instrument, in which case it is foreign direct investment, or it is not, in which case it is borrowing.
| Instrument | Classification | Regime that applies |
|---|---|---|
| Equity shares | Equity instrument | FDI. Pricing guidelines, Form FC-GPR. |
| Compulsorily convertible preference shares | Equity instrument | FDI. Pricing guidelines, Form FC-GPR. |
| Compulsorily convertible debentures | Equity instrument | FDI. Pricing guidelines, Form FC-GPR. |
| Share warrants | Equity instrument | FDI, with a part payment upfront and the balance within a prescribed period. Confirm the current proportion and window. |
| Optionally convertible instruments | Debt | External commercial borrowing framework. Different eligibility, maturity, cost ceiling and end-use rules. |
| Non-convertible debentures and shareholder loans | Debt | External commercial borrowing framework. |
| Convertible notes | Equity instrument, startups only | FDI, restricted to recognised startups and subject to their own conditions. Reported on Form CN. |
The three layers of a capital structure
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Authorised capital
The ceiling up to which the company may issue shares. It sets the MCA registration fee slab and the state stamp duty, and increasing it later needs a shareholder resolution and a further fee.
Set it with room for the next two tranches rather than at exactly what is needed today.
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Subscribed and paid-up capital
What the parent has committed to take, and what it has actually paid for. Paid-up capital is what funds the business and what is reported under FEMA.
There is no statutory minimum, but reducing it later is a court-supervised process rather than a filing.
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Quasi-equity and debt
CCPS and CCDs sit above equity in the capital stack while still counting as FDI. Genuine debt sits outside FDI altogether and comes with maturity, cost and end-use restrictions.
The mix determines the tax position, which is dealt with below.
Why groups tranche the funding
Committing the whole of a multi-year funding requirement at incorporation locks in an authorised capital, a stamp duty cost and a valuation that will all be wrong within a year. Most groups subscribe a working amount at incorporation and fund in tranches afterwards.
That is sound, and it carries one consequence people forget: every tranche after the first needs its own valuation, its own allotment inside the sixty-day window, and its own Form FC-GPR. Three tranches is three sets of filings, not one.
Instruments Compared
Equity vs CCPS vs CCD
All three are foreign direct investment. The differences are commercial and fiscal rather than regulatory, and they matter most on the way out, when the parent wants its money back or a buyer wants to know what it is acquiring.
| Equity shares | CCPS | CCD | |
|---|---|---|---|
| FEMA treatment | Equity instrument, FDI | Equity instrument, FDI | Equity instrument, FDI |
| Reporting | Form FC-GPR within 30 days of allotment | Form FC-GPR within 30 days of allotment | Form FC-GPR within 30 days of allotment |
| Pricing at issue | Not below fair market value | Not below fair market value | Not below fair market value |
| Conversion terms | Not applicable | Price or formula fixed at issue | Price or formula fixed at issue |
| Return to the investor | Dividend, discretionary | Preferential dividend, ranking ahead of equity | Interest coupon, contractual until conversion |
| Deductible for the Indian company | No | No | Interest is deductible, subject to transfer pricing and the thin capitalisation limit below |
| Ranking on liquidation | Last | Ahead of equity, behind debt | Ahead of both, as a debt instrument until it converts |
| Voting | Full, immediately | Limited until conversion | None until conversion |
| Typical use | Wholly owned subsidiary funding where simplicity matters | Investor rounds needing a liquidation preference and anti-dilution | Parent funding where an interest deduction and a senior position are wanted |
Choosing between them
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Equity shares
The default for a wholly owned subsidiary. One instrument, one class, no conversion mechanics and nothing to explain in diligence five years later. Where the parent owns everything, a liquidation preference over itself achieves nothing.
Choose it unless there is a specific reason not to.
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CCPS
Suited to a joint venture or an external investor round, where the point is a preference on exit, an anti-dilution ratchet and a defined conversion mechanic. The preferential dividend is not deductible, so the attraction is structural rather than fiscal.
Rarely the right answer for a parent funding its own subsidiary.
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CCD
The interest coupon is deductible for the Indian company, which is the reason groups reach for it. It also ranks ahead of equity until conversion.
The deduction is not free: the coupon must be at arm's length under transfer pricing, and Section 94B caps it. Both are dealt with in the tax section.
The trap: optionally convertible is not convertible
An instrument only counts as an equity instrument if it is fully and mandatorily convertible. An option to convert, an option to redeem, an assured return, or a put at a pre-agreed price can all recharacterise the instrument as debt.
The consequence is not cosmetic. Debt from a non-resident is governed by the external commercial borrowing framework, with its own eligibility, minimum maturity, all-in-cost ceiling and end-use restrictions. An instrument that was reported on Form FC-GPR as FDI, but is properly debt, is a contravention from the date of issue, and it is a contravention that compounds every year the instrument remains outstanding.
Term sheets drafted to international norms routinely include exactly these features. They do not survive contact with FEMA, and the time to find that out is at the term sheet, not at the filing.
Share Subscription
Share subscription by a foreign parent
Share subscription by a foreign parent works differently at incorporation than it does on every tranche after it, and that difference is where most of the trouble comes from.
The first subscription
The foreign parent subscribes to the memorandum for all shares but one, with a nominee holding the remaining share to satisfy the two-member minimum for a private limited company. Shares are taken at face value because there is no business to value on the date of incorporation, so no valuation certificate is required.
What still applies: the subscription money must come through banking channels, shares must be allotted within sixty days of receipt, Form FC-GPR is due within thirty days of allotment, and share certificates within two months. The commencement declaration in Form INC-20A cannot be filed until the subscription money is actually in.
Every subsequent tranche
This is where the position changes and where groups are caught out, because internally the second tranche feels identical to the first.
- A valuation is required. The company now has a business, so face value is no longer the answer. The issue must be at or above fair market value, certified before the allotment.
- The board must approve a fresh allotment, and a private placement or rights issue procedure under the Companies Act applies depending on how it is done.
- The sixty-day clock runs again from receipt of the money, with a refund obligation if it is missed.
- A fresh Form FC-GPR within thirty days of that allotment.
- Fresh share certificates within two months, with state stamp duty payable on them.
- Authorised capital may need increasing before the allotment, which is itself a shareholder resolution and a filing.
None of this is difficult. It is simply a sequence with a valuation at the front of it, and the failure mode is treating the money as available to draw on the day it lands rather than on the day the allotment is made.
Money in the account is not capital
An inward remittance sitting in the bank before an allotment has been made is share application money, not paid-up capital. It cannot be treated as the company's own funds, it must be allotted against within sixty days, and if it is not, it must be refunded within the following fifteen days. Beyond that it attracts interest and is treated as a deposit, with its own regulatory consequences.
The practical answer is to have the valuation, the board resolution and the allotment paperwork ready before the remittance is initiated, rather than starting the process when the money arrives.
Pricing Rule
The floor and the ceiling
The direction of the rule follows the direction of the value. Whenever value could leave India cheaply there is a constraint; whenever it could only arrive, there is not.
| Transaction | Constraint | Why |
|---|---|---|
| Fresh issue to a non-resident | Not below fair market value | Issuing cheaply would transfer value out of the Indian company to the foreign investor. |
| Transfer, resident to non-resident | Not below fair market value | Selling cheaply would move value abroad. |
| Transfer, non-resident to resident | Not above fair market value | Buying expensively would move value abroad. The rule reverses because the direction reverses. |
| Transfer, non-resident to non-resident | No pricing constraint | No Indian value crosses the border. Reporting may still apply. |
| Subscription at incorporation | Face value | There is no business to value on the date of incorporation. |
| Listed company | Priced in accordance with SEBI guidelines | The market provides the reference, so the methodology differs from an unlisted company. |
The floor is a floor, not a target
A foreign investor may pay a premium far above fair value and frequently does, because commercial valuation in a funding round has little to do with a discounted cash flow model. The valuation certificate establishes the minimum, and it is not evidence that the negotiated price was wrong. Companies sometimes try to make the valuation match the round price, which is the wrong instinct and produces a weaker report.
Valuation
Who can value, and how
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Who may certify
- A merchant banker registered with SEBI. Commonly required or preferred on larger transactions.
- A chartered accountant holding a certificate of practice. Accepted for most unlisted company transactions.
- A registered valuer under the Companies Act, where that separate requirement also applies.
Where a transaction needs both a FEMA valuation and a Companies Act valuation, they are separate requirements and are not always satisfied by the same person or the same report.
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Accepted methodologies
- Discounted cash flow. The default for a company with revenue and a forecastable business.
- Net asset value. Suited to asset-heavy or holding companies.
- Comparable transaction or market multiples. Where genuine comparables exist in the sector.
The requirement is an internationally accepted pricing methodology applied on an arm's length basis, with the choice justified by the characteristics of the company. A method chosen because it produces a convenient number, and not defended in the report, is the weakness a reviewer looks for.
Valuations go stale
There is no universal statutory shelf life, but a report prepared on figures that are months old, or before a material event such as a large contract win or the loss of a key customer, will be questioned. Practice is to obtain a valuation close to the transaction date and to refresh it if completion slips materially. A dated report is one of the more common reasons an FC-GPR is returned.
Special Cases
When a valuation is needed, and the special cases
| Situation | Valuation required |
|---|---|
| Subscribers to the memorandum at incorporation | No. Shares are taken at face value. |
| Any fresh issue after incorporation, including to the same parent | Yes. This is the one most often missed. |
| Issue of CCPS or CCD | Yes, at issue, and the conversion price or formula must be fixed at the same time. |
| Conversion of a CCPS or CCD into equity | No fresh valuation, because the price or formula was fixed at issue. That is the point of fixing it. |
| Rights issue to existing non-resident shareholders | Priced under the rules applicable to a rights issue, which differ from those for a preferential allotment. Confirm the current position. |
| Bonus issue | No consideration passes, so no pricing question arises. Reporting still applies. |
| Swap of shares | Yes, on both sides. The foreign leg must be valued by an investment banker outside India registered with the appropriate authority. |
| Transfer between two non-residents | No pricing constraint. |
| Transfer by way of gift | Separate rules apply. Do not assume the ordinary pricing guidelines govern. |
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Deferred consideration and earn-outs
A portion of the consideration on a transfer can be deferred, subject to limits on the proportion and the period, and the total including the deferred element must still respect the pricing rule. Indemnity holdbacks and escrow arrangements sit within that framework rather than outside it.
An earn-out structured without regard to those limits can breach the pricing guidelines even though each individual payment looks reasonable.
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Buy-back and capital reduction
Where the company acquires shares from a non-resident, the ceiling applies: it may not pay more than fair value. Both routes carry their own company law procedure and their own tax treatment, and neither is a routine way to return capital to a parent.
For a wholly owned subsidiary, distributing profit as a dividend is usually simpler than reducing capital, even after withholding.
Tax Interaction
The tax interaction
Two provisions sit alongside the FEMA pricing rules and pull in different directions. One has just been removed. The other is the reason a CCD is not the free lunch it appears to be.
The angel tax squeeze, and its removal
| FY 2023-24 and FY 2024-25 | FY 2025-26 onwards | |
|---|---|---|
| FEMA floor | Not below fair market value. | Unchanged. Not below fair market value. |
| Income tax ceiling | Premium above fair market value taxable in the company's hands under Section 56(2)(viib), extended to non-resident investors from April 2023. | Section 56(2)(viib) omitted. No ceiling on a fresh issue. |
| Practical effect | A narrow band, with two valuations under different rules that could produce different numbers. | A floor only. The investor may pay any premium above fair value without a tax consequence for the company. |
Section 56(2)(viib) was extended to non-resident investors with effect from April 2023 and then omitted by the Finance Act 2024 with effect from assessment year 2025-26. Foreign investors were therefore exposed for roughly two financial years and are not now. Transactions completed in those years were governed by the old position, and the exposure sits in those assessment years rather than disappearing because the section was later removed.
Section 94B, and why the CCD deduction is capped
Interest on a compulsorily convertible debenture is deductible for the Indian company, which is the main reason a parent chooses a CCD over equity. The deduction is limited in two ways.
| Limit | How it works |
|---|---|
| Transfer pricing | The coupon must be at arm's length. A rate set to suit the group rather than benchmarked is the first thing an assessing officer will test, and the adjustment applies to every year the instrument is outstanding. |
| Thin capitalisation, Section 94B | Where interest paid to a non-resident associated enterprise exceeds INR 1 crore in a year, the deduction is capped at 30 percent of EBITDA, or the actual interest paid to the associated enterprise, whichever is lower. |
| Guaranteed third-party debt | Section 94B also reaches borrowing from an unrelated lender where the debt is implicitly or explicitly guaranteed by an associated enterprise. Routing the loan through a bank does not remove it from scope. |
| Excluded taxpayers | Banking and insurance companies are outside the section. Non-banking financial companies are not. |
| Disallowed interest | Carried forward for up to eight assessment years, to be set off against future capacity. |
What this means for the instrument choice
A CCD funding a company in its first few years, before it has meaningful EBITDA, produces very little usable deduction, because 30 percent of a small or negative EBITDA is a small or nil number. The interest accrues, the coupon is payable, withholding applies on it, and the deduction is deferred into a carry-forward that may or may not ever be used.
The CCD works fiscally where the Indian company is already profitable at scale. It is frequently chosen where it is not, on the strength of the deduction in principle, and the arithmetic is rarely run first.
Valuation Report
What the valuation report has to contain
The report is filed with the FC-GPR and read by the authorised dealer bank. A report that states a number without showing how it was reached is the most common reason a filing comes back.
- The valuer's identity and standing. SEBI registration number for a merchant banker, or membership and certificate of practice number for a chartered accountant.
- The valuation date, and the date of the financial information relied on.
- The methodology chosen, and why. The justification matters as much as the calculation.
- The workings. Projections, discount rate and terminal value for a discounted cash flow; the asset base and adjustments for net asset value; the comparable set and multiples applied.
- The value per share, stated clearly, on a fully diluted basis where relevant.
- The conversion price or formula, where the instrument is a CCPS or CCD.
- Assumptions and limitations, including anything the valuer was not able to verify.
- A statement that the valuation is on an arm's length basis and complies with the applicable pricing guidelines.
Commission the valuation before the price is agreed
A valuation obtained after the price has been negotiated, from a valuer who has been told the number, is worth less than one obtained before. Reviewers and acquirers can tell the difference, and so can an assessing officer. Where the round price sits well above fair value, which is normal, that is not a problem to be engineered away.
Common Pitfalls
Where structuring and pricing go wrong
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The instrument was optionally convertible
A term sheet drafted to international norms carries an option to convert, a put, or an assured return. It was reported on Form FC-GPR as FDI. Under FEMA it is debt, governed by the external commercial borrowing framework, and the contravention runs from the date of issue and compounds each year the instrument is outstanding.
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The tranche priced like the first one
Face value at incorporation, then the same treatment on a top-up a year later with no valuation. The FC-GPR is returned, the money is already in, and the sixty-day allotment window has run.
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The CCD was chosen for a deduction that never arrives
A loss-making or early-stage subsidiary funded by CCD on the strength of the interest deduction. Section 94B caps it at 30 percent of an EBITDA that is small or negative, the coupon is still payable, withholding still applies, and the deduction sits in a carry-forward.
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The conversion price was left open
Conversion economics to be determined at a later round, as is normal internationally. Under the pricing guidelines the price or formula must be fixed at issue, and it cannot be cured at conversion.
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The direction of the rule was reversed
On a buy-back from a foreign shareholder, or a transfer back to a resident, the constraint is a ceiling rather than a floor. Applying the floor logic produces a price that is too high, which is the contravention the ceiling exists to prevent.
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The report was written to a number
The valuer was given the agreed price and worked backwards. It reads that way, the method is not justified, and the report becomes a diligence finding rather than a defence.
The consequence of getting either one wrong
Issuing to a non-resident below fair value, or reporting a debt instrument as FDI, are both substantive contraventions of FEMA rather than late filings, so the Late Submission Fee route is not available. They are regularised by compounding with the Reserve Bank, with exposure calculated on the amount involved. In practice these are the findings most likely to stop a transaction, because the remedy takes months and the acquirer has no way to price the risk.
Why IMC
How IMC handles structuring, pricing and valuation
What the engagement covers
Capital structuring for the Indian entity, including the choice between equity, CCPS and CCD against the group's tax and exit position, and the authorised capital and tranching plan. Review of the term sheet so that conversion economics are fixed at issue and no feature recharacterises the instrument as debt. Determination of the applicable pricing rule and direction. Coordination of the valuation with a merchant banker or chartered accountant, and review of the report against what the authorised dealer bank will expect. Preparation of the allotment and the FC-GPR or FC-TRS around it.
Where a transaction has already been priced below the floor, or a debt instrument reported as FDI, a compounding application and the supporting valuation work.
What to have ready before the first call
The amount and timing of the funding, whether it is a first subscription or a further tranche, whether the Indian company is profitable today, whether an exit or an external investor is expected, and the draft term sheet if one exists. Those five answers settle the instrument choice and the pricing route.
Meet The Team
Experts behind this service
The people who will actually run your branch or liaison office approval, end to end.
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Shriya Mandal
Director - Compliance
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Deepakshi Sukhwani
Senior Associate - Corporate Services
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Mudita Gehlot
Senior Associate - Corporate Services
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Poornima J
Director - Strategic Partnerships & Business Development
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Ninad Parkar
Director
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Aishwarya Shiva
Director - Strategic Partnerships & Business Development
FAQs
No. Equity instruments issued to a person resident outside India must be priced at or above fair market value. Issuing below the floor is a substantive contravention of FEMA, regularised by compounding rather than by a late submission fee, with exposure calculated on the amount involved.
Yes. Compulsorily convertible preference shares and compulsorily convertible debentures are equity instruments under FEMA, so both are foreign direct investment, both are subject to the pricing guidelines, and both are reported on Form FC-GPR within thirty days of allotment, exactly as equity shares are.
All three are FDI. Equity is simplest and carries full voting rights. CCPS ranks ahead of equity on liquidation and suits investor rounds needing a preference. CCD ranks ahead of both until conversion and its interest coupon is deductible for the Indian company, subject to transfer pricing and the Section 94B cap.
Only where the Indian company is already profitable at scale. Section 94B caps the interest deduction at thirty percent of EBITDA once interest to a non-resident associated enterprise exceeds one crore rupees, so an early-stage subsidiary gets little usable deduction while still paying the coupon and the withholding on it.
It is debt, not an equity instrument, and falls under the external commercial borrowing framework with its own eligibility, maturity, cost and end-use rules. Reporting it on Form FC-GPR as FDI is a contravention running from the date of issue, and it compounds for every year the instrument remains outstanding.
Yes. The price, or the formula for arriving at it, must be determined when the instrument is issued. It cannot be left to be set at conversion by reference to a valuation done then. Term sheets drafted to international norms often leave this open, and that drafting does not survive the pricing guidelines.
No. Subscribers to the memorandum take shares at face value because there is no business to value on the date of incorporation. Every issue after that requires a valuation, including a capital top-up from the same parent, which is the point most often missed.
It is share application money, not paid-up capital, and cannot be treated as the company’s own funds. Shares must be allotted within sixty days of receipt, failing which the money must be refunded within the following fifteen days. Beyond that it attracts interest and is treated as a deposit.
A merchant banker registered with SEBI, or a chartered accountant holding a certificate of practice. A registered valuer may also be required where the transaction separately triggers a Companies Act valuation. On a share swap, the foreign leg must be valued by an investment banker outside India registered with the appropriate authority.
Yes. A transfer from a non-resident to a resident must be at or below fair market value, because the concern is value leaving India rather than entering it. Applying the floor logic to that transaction produces a price that is too high and creates the contravention the ceiling exists to prevent.
Not the FEMA rule itself. Section 56(2)(viib) was omitted by the Finance Act 2024 with effect from assessment year 2025-26, removing the income tax ceiling that had squeezed against the FEMA floor for non-resident investors since April 2023. The floor remains, so a valuation is still required.
Valuation certificates are not open-ended. Under the current RBI Master Direction, a valuation certificate issued by a Chartered Accountant, SEBI-registered Merchant Banker or practising Cost Accountant for FEMA pricing purposes must not be more than 90 days old as on the date of investment. This requirement does not apply where the price is determined in accordance with applicable SEBI guidelines
In practice, the valuation should also be refreshed where there is a material change in the
business or transaction terms, even within the 90-day period.
Get Started
Structure it before you price it, and price it before you sign it
Send the funding amount and timing, whether this is a first subscription or a further tranche, the current profitability of the Indian company, and the draft term sheet if one exists. We will confirm the instrument, the applicable pricing rule and direction, and what the valuation report needs to contain for the filing to clear.
Response within one working day. Initial view at no cost.
IMC