A foreign fund agrees to subscribe for shares in your private company. Before the money can arrive, three different laws will each ask what the shares are worth, and each will accept a different answer from a different signatory. FEMA wants a fair value that the issue price must not fall below. The Companies Act wants a registered valuer's report that the price is based on. Income-tax has its own formula, which no longer taxes the company on a premium but still matters to the people on either side. This article explains which number governs which side, works through a round with simple figures, and shows how to keep the paperwork for all three consistent.
For a fresh issue of unlisted shares to a non-resident, the issue price must be at least the FEMA fair value, certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant under an internationally accepted pricing methodology on an arm's length basis. The price must also be determined on the basis of an IBBI registered valuer's report under the Companies Act. The Rule 57 formula under the Income-tax Rules, 2026 does not tax the company on the premium, but it remains the benchmark for the subscriber under section 92(2)(m) and for any share transfers in the same round.
The three values, side by side
This is the same three-regime map we use in Rule 57 Replaces Rule 11UA, narrowed to a fresh issue to a foreign investor. In practice all three reports for a round like this are issued by one desk; ours is set out on the business valuation services page, signed as an IBBI Registered Valuer for the Companies Act report and as a chartered accountant for the FEMA certificate.
| FEMA: NDI Rules, 2019 | Companies Act, 2013 | Income-tax: Rule 57 | |
|---|---|---|---|
| Triggered by | An issue or transfer of shares between a resident and a non-resident | A preferential allotment under section 62(1)(c), usually by private placement under section 42 | A receipt or transfer of unquoted shares below the formula value |
| Method | Any internationally accepted pricing methodology on an arm's length basis; DCF is usual | Any recognised method chosen and defended by the valuer; DCF is usual for a going concern | The net-asset formula from an audited balance sheet, and nothing else |
| Who signs | A chartered accountant, a SEBI-registered merchant banker or a practising cost accountant | An IBBI Registered Valuer for securities or financial assets, under section 247 | Nobody for the equity formula |
| What it fixes on a fresh issue | The minimum issue price for the non-resident | The basis of the issue price, referred to in the special resolution and the offer letter | Nothing for the company; the benchmark for the subscriber's section 92(2)(m) position |
| Filed with | Form FC-GPR on FIRMS, within 30 days of allotment | Board and shareholder resolutions, PAS-4, PAS-3 | The working papers; produced if the subscriber's return is examined |
Sources: Foreign Exchange Management (Non-debt Instruments) Rules, 2019, Rule 21, and the RBI Master Direction on Foreign Investment in India; Companies Act, 2013, sections 42, 62 and 247, and Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014; Income-tax Rules, 2026, Rules 56 and 57; Income-tax Act, 2025, sections 79 and 92.
Which number governs which side
The mistake behind most problems in a cross-border round is treating "the valuation" as a single number that everyone has to respect. Each value binds a particular person in a particular direction.
| Person | Transaction | Value that binds | Direction |
|---|---|---|---|
| The company | Issues shares to the non-resident | FEMA fair value; the registered valuer's report | Issue price not below the FEMA value, and determined on the basis of the report |
| The foreign investor | Subscribes for the new shares | Rule 57 formula value | If the price is below it, the shortfall is a potential section 92(2)(m) exposure for the subscriber |
| A resident founder | Sells existing shares to the non-resident | FEMA fair value; Rule 57 for the seller's capital gain | Price not below the FEMA value; gain computed on at least the formula value under section 79 |
| The non-resident, later | Sells shares to a resident | FEMA fair value; Rule 57 for the resident buyer | Price not above the FEMA value; the buyer is taxed if the price is below the formula value |
Notice that the company's own income-tax position does not appear. Until 31 March 2025, section 56(2)(viib) taxed a closely held company on a premium above fair market value, and Rule 11UA(2) let it defend the premium with a merchant banker's DCF. That provision was abolished from 1 April 2025 and has no counterpart in the Income-tax Act, 2025, so a company can now issue shares at any premium without an income-tax valuation of its own.
Worked example: one round, three checks
Northwind Analytics Private Limited (an illustrative company) has 10,00,000 equity shares of ₹10 each. A Singapore fund agrees to subscribe for 2,50,000 new equity shares at ₹420 per share, investing ₹10.5 crore. The valuation date is 1 August 2026 and the money is expected on 20 August.
| Value on 1 August 2026 | Per share (₹) | Basis |
|---|---|---|
| DCF value (used for both the FEMA certificate and the Companies Act report) | 400 | Five-year plan tested against two years of actuals; cost of equity from listed peers |
| Rule 57 formula value | 40 | Audited balance sheet as at 1 August 2026; no immovable property; no unquoted investments |
| Agreed issue price | 420 | Negotiated with the fund |
| Check | Test | Result |
|---|---|---|
| FEMA | Issue price ₹420 not less than fair value ₹400; certificate dated within 90 days of the investment | Passes |
| Companies Act | Price determined on the basis of the registered valuer's report at ₹400; report referred to in the special resolution and PAS-4 | Passes |
| Income-tax, company | Premium of ₹410 per share | Not taxable; section 56(2)(viib) abolished |
| Income-tax, subscriber | Price ₹420 against formula value ₹40 | No shortfall; section 92(2)(m) does not arise |
This is the easy case, and it is the common one for a technology company: the DCF and the price are far above the net-asset formula, and the only binding value is the FEMA floor. The difficulties come from the transactions around the round.
Variation 1: the founder's secondary sale
The fund also agrees to buy 50,000 existing shares from a co-founder at ₹350, a discount to the primary price because they are ordinary shares with no new money. Income-tax is satisfied on both sides: the seller's deemed consideration under section 79 is the higher of ₹350 and the formula value of ₹40, and the buyer has paid more than the formula value. FEMA is not. A transfer from a resident to a non-resident cannot be priced below the fair value of ₹400, so ₹350 is a contravention, and it is not cured by the fact that the fund is paying ₹420 for the primary shares on the same day. The price has to be at least ₹400, or the economics have to be restructured.
Variation 2: the exit three years later
In 2029 the fund sells 1,00,000 shares back to the founder, a resident, at ₹900. The FEMA fair value on the transfer date is ₹800. Now the FEMA value is a ceiling: a non-resident cannot sell to a resident above it, so the price has to come down to ₹800 or below. On the income-tax side, if the Rule 57 value at that date is, say, ₹120, the founder has no shortfall as buyer and the fund's capital gain is computed on the actual price.
Variation 3: an asset-rich company
Change the facts. The company owns its factory, carried at ₹3 crore but with a stamp-duty value of ₹15 crore. The DCF gives ₹150 per share, because the business earns modest returns on that property. The Rule 57 formula, which takes the property at stamp-duty value, gives ₹180. The fund subscribes at ₹160. FEMA passes (₹160 is above ₹150) and the Companies Act report supports the price. But the subscriber has received shares at ₹20 below the formula value. Whether a fresh allotment is a "receipt of property" for section 92(2)(m) was litigated under the identical wording of the 1961 Act, with disproportionate allotments at a discount not always held outside it. Pricing at ₹180 or above, or taking a documented position before the board meets, is the safer course.
Keeping one report coherent
Three outputs from one engagement is efficient; three outputs that contradict each other is the opposite. The authorised dealer bank, the ROC, the investor's lawyers and, later, an assessing officer will each read the document that concerns them, and some of them will read all three. These are the rules we follow:
- One valuation date, planned backwards from the money. The FEMA valuation should be not more than 90 days old on the date of investment, and FC-GPR is due within 30 days of allotment. Choose a date that works for both, and use the same date in the Companies Act report.
- One share count, stated. Say whether the per-share value is on outstanding or fully diluted shares, and treat CCPS, convertible notes and the ESOP pool the same way in every output. A mismatch between the certificate and the share subscription agreement is the commonest reason a bank sends FC-GPR back.
- One set of projections. The DCF behind the FEMA certificate and the Companies Act report should be the same model. Two DCFs from the same company on the same date invite the question of which one is wrong.
- Separate conclusions, each naming its regime. The Companies Act section is signed as a registered valuer under section 247; the FEMA certificate states that it uses an internationally accepted pricing methodology on an arm's length basis and is signed in the capacity the NDI Rules recognise. Neither should describe itself as a Rule 57 value.
- The Rule 57 computation as a separate annex. Compute it from a balance sheet audited as at the valuation date, show the reconciliation to the DCF in a short note, and explain why they differ. The difference is expected; leaving it unexplained is what draws questions.
- Consistent documents downstream. The board resolution, the explanatory statement, PAS-4, the share subscription agreement and FC-GPR should all quote the same price, date and report reference.
The methods a valuer uses for the DCF and how a report is structured are covered in Business Valuation in India: Methods, Use Cases and Process. The FEMA filing that follows the allotment is handled through our FEMA compliance service. If the same company is granting options to employees, see ESOP Valuation Cost and Timeline in India.
Frequently Asked Questions
No. The FEMA fair value uses any internationally accepted pricing methodology on an arm's length basis, usually DCF, and is certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant. The Rule 57 value is a prescribed net-asset formula from an audited balance sheet. The two answer different questions and normally give different numbers.
No. For an unlisted company, the price of shares issued to a person resident outside India cannot be less than the fair value worked out under the NDI Rules. The same floor applies when a resident sells to a non-resident. When a non-resident sells to a resident, the fair value is a ceiling instead.
No. Section 56(2)(viib) of the 1961 Act, which taxed a closely held company on a premium above fair market value, was abolished from 1 April 2025 and has no counterpart in the Income-tax Act, 2025. The subscriber's position under section 92(2)(m) is a separate question if the price is below the Rule 57 value.
Usually yes. A preferential allotment under section 62(1)(c) requires the price to be determined on the basis of a registered valuer's report, and an issue to a non-resident needs the FEMA pricing certificate for FC-GPR. Both can be built on the same DCF and issued together, with separate conclusions signed in the capacity each law requires.
The RBI's Master Direction on foreign investment expects the valuation to be not more than 90 days old on the date of the investment. Plan the valuation date around the expected receipt of funds, and remember that FC-GPR is due within 30 days of allotment.
This happens in asset-rich companies, because Rule 57 takes immovable property at stamp-duty value. A price between the two satisfies FEMA and the Companies Act but leaves the subscriber with a potential section 92(2)(m) exposure on the shortfall. Pricing at or above the formula value, or taking advice before allotment, avoids the issue.
Sources
- Authority: Reserve Bank of India and Ministry of Finance. Title: Foreign Exchange Management (Non-debt Instruments) Rules, 2019, Rule 21 (pricing guidelines); Master Direction – Foreign Investment in India, pricing guidelines and validity of the valuation. View Source. Accessed: October 2026.
- Authority: Ministry of Corporate Affairs. Title: Companies Act, 2013, sections 42, 62(1)(c) and 247; Companies (Share Capital and Debentures) Rules, 2014, Rule 13; Companies (Prospectus and Allotment of Securities) Rules, 2014. View Source. Accessed: October 2026.
- Authority: Central Board of Direct Taxes, Ministry of Finance. Title: Income-tax Rules, 2026, Rules 56 and 57; Income-tax Act, 2025, sections 79 and 92; Finance (No. 2) Act, 2024, omission of section 56(2)(viib) of the 1961 Act with effect from 1 April 2025. View Source. Accessed: October 2026.
Closing a round with a non-resident investor?
Tell us the price, the share count and the expected date of funds. We will issue the FEMA certificate, the IBBI registered valuer report and the Rule 57 computation so they agree with each other and with your filings.
Written by CA Karan Shah
Founder of KC Shah & Associates and an IBBI Registered Valuer (Securities or Financial Assets), Reg. No. IBBI/RV/06/2024/15561. Values private companies for share transfers, funding rounds, ESOPs and schemes, and provides outsourced accounting and Virtual CFO services to startups and SMEs across India.