FDI deferred payment: 25% cap, 18‑month rule

When a non-resident acquires shares in an Indian company from an Indian resident—or when a resident buys from a non-resident—FEMA law permits up to 25% of the total consideration to be deferred, placed in escrow, or covered by a seller indemnity. For deferral and escrow, the window is 18 months from the date of the transfer agreement; for a seller indemnity, it is 18 months from the date the full consideration is paid. The total consideration finally paid must comply with the applicable pricing guidelines under the NDI Rules 2019.

Legal basis: FEMA 1999 s.6 read with the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (S.O. 3732(E), 17 Oct 2019, made under s.46(2)(aa) and (ab) of FEMA), Rule 9(6) and Rule 9(7); RBI Master Direction – Reporting under FEMA, 1999 (Form FC-TRS) — Effective: ongoing.

When payment timing becomes a FEMA problem

Every secondary FDI transaction—a promoter selling shares to a foreign strategic investor, a private equity entry, or a buyout of a resident co-founder by an overseas entity—raises a question that deal lawyers sometimes answer from contract practice rather than FEMA: what happens to the portion of the price that is not paid on day one?

Consider a US-based investor acquiring 30% of a Bengaluru technology company for ₹15 crore. The buyer wants to hold back ₹4 crore (about 27%) in escrow for 24 months pending a tax indemnity obligation. The acquisition closes, the share transfer is completed, and FC-TRS is filed. Two years later, the escrow is released. Both sides consider the matter closed.

Two problems existed from signing. The holdback exceeded 25% of total consideration (₹3.75 crore would have been the cap under Rule 9(6)). It also ran for 24 months—6 months beyond the maximum window. Each is a contravention of Rule 9(6) of the NDI Rules, which is dealt with under the FEMA contravention and compounding framework (Foreign Exchange (Compounding Proceedings) Rules, 2024).

This scenario is not unusual. The 25%/18-month limits in Rule 9(6) are under-noticed because the rule is brief and deal teams focus on pricing and filing deadlines rather than payment-structure restrictions.

What NDI Rule 9(6) actually says

Rule 9(6) of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 governs payment arrangements on transfers of equity instruments between a person resident in India and a person resident outside India. It permits three mechanisms for an amount not exceeding 25% of the total consideration:

Mechanism 1 — Deferred payment. The amount "may be paid by the buyer on a deferred basis within a period not exceeding eighteen months from the date of the transfer agreement." The buyer simply owes the seller a future amount, with the deferred portion capped at one-quarter of the total consideration and the payment window capped at 18 months from the transfer agreement.

Mechanism 2 — Escrow. The same 25%/18-month parameters apply when the amount is settled through an escrow arrangement between the buyer and the seller. Under Rule 9(7), the non-resident may open the escrow account in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 (Regulation 5(5) and Schedule 5 cover escrow accounts with Authorised Dealers in India). The escrow may be funded by inward remittance through banking channels and/or by a guarantee issued by an authorised dealer bank, subject to the guarantee regulations (the 2000 Regulations named in Rule 9(7) have been replaced by the Foreign Exchange Management (Guarantees) Regulations, 2026, Notification No. FEMA 8(R)/2026-RB dated 6 January 2026).

Mechanism 3 — Seller indemnity. Where the buyer has already paid the full consideration, the seller may indemnify up to 25% of the total consideration for a period not exceeding 18 months from the date of payment of the full consideration.

The proviso to Rule 9(6) is critical: the total consideration finally paid for the shares must comply with the applicable pricing guidelines. For a transfer from a resident to a non-resident of shares of an unlisted company, the price cannot be less than the valuation done as per any internationally accepted pricing methodology on an arm's length basis, duly certified by a Chartered Accountant, a SEBI-registered Merchant Banker or a practising Cost Accountant. The deferred/escrow/indemnity structure cannot produce a final price that falls below that floor.

The 18-month clock: when does it start?

For deferred payment (Mechanism 1) and escrow (Mechanism 2), the 18-month window runs from "the date of the transfer agreement"—not the FC-TRS filing date, the board approval date, or any other milestone.

Deal structures that tie the escrow release to post-closing events—EBITDA targets, regulatory approvals, post-closing audits—should be drafted so that the contractual outside date for the escrow termination falls within 18 months of the transfer agreement date.

For seller indemnity (Mechanism 3), the 18-month window runs from the date of payment of the full consideration, not from the agreement date.

Land-border note: Under the proviso to Rule 6(a) of the NDI Rules (the rule that gave effect to Press Note 3 of 2020), an entity or citizen of a country that shares a land border with India—or an investment whose beneficial owner is a citizen of, or whose beneficial ownership is vested in, such a country—may invest only under the Government route. The Rule 9(6) payment structure question arises only once that approval is in place.

When the unpaid amount is documented as a loan or note

Documenting the unpaid amount as a loan or note between buyer and seller takes it outside Rule 9(6); depending on who owes whom, it then falls under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 and may need RBI approval. Take advice before signing.

Step-by-step: structuring a compliant deferred payment

FC-TRS filing timing note: The RBI Master Direction on reporting requires FC-TRS within sixty days of transfer of equity instruments or receipt/remittance of funds, whichever is earlier, and states that a transfer with payment on a deferred basis under Rule 9(6) shall be reported in FC-TRS on receipt of every tranche of payment. The onus is on the resident transferor or transferee.

Penalties for non-compliance

A contravention of Rule 9(6)—exceeding the 25% cap, or exceeding the 18-month window—is a contravention of FEMA 1999 read with the NDI Rules.

• Late Submission Fee (LSF): LSF is for reporting delays only (for example, a late FC-TRS). The RBI Master Direction on reporting states that other contraventions of the NDI Rules are proceeded against under sections 13 and 15 of FEMA.
• Compounding under FEMA s.15: For substantive contraventions of Rule 9(6)—such as structuring deferred consideration outside the permitted parameters—LSF is not the route. The contravention may be compounded under FEMA s.15, and the procedure is set out in the Foreign Exchange (Compounding Proceedings) Rules, 2024 and the RBI's directions on compounding.

FAQ

Can we extend the escrow period beyond 18 months by amending the SPA?

In our view, no. Rule 9(6) measures the 18 months from the date of the transfer agreement. An amendment that pushes the escrow termination date beyond 18 months from that date would, on a plain reading, fall outside the permitted window regardless of when the amendment is executed.

Does the 25% cap apply to the deferred amount only, or to the total deal value?

The deferred, escrow, or indemnity amount cannot exceed 25% of the total consideration for the transfer. On a ₹20 crore deal, the maximum that can be deferred or placed in escrow is ₹5 crore—regardless of how large the upfront payment is.

Can a resident seller provide an indemnity after already receiving the full consideration?

Yes. Mechanism 3 under Rule 9(6) permits a seller indemnity for this scenario: the buyer has paid the full consideration, and the seller indemnifies up to 25% of the total consideration. The 18-month window runs from the date of payment of the full consideration. This is separate from escrow: the seller has already received the money and is providing a prospective cash-back obligation.

Is an earnout the same as deferred consideration under FEMA?

An earnout tied to post-closing revenue, EBITDA, or milestone targets is likely to be treated as deferred consideration; to be safe, keep it within the 25%/18-month limits of Rule 9(6). An earnout that runs beyond 18 months from the transfer agreement, or that exceeds 25% of the total consideration, should be reviewed with your adviser before signing.

Sources

• Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, S.O. 3732(E), 17 Oct 2019 (Rules 2(f), 2(k), 6(a), 9(6), 9(7) and pricing guidelines): https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=5083
• Foreign Exchange Management Act, 1999 (s.6, s.15, s.46(2)(aa)/(ab)): https://www.indiacode.nic.in
• RBI Master Direction – Reporting under Foreign Exchange Management Act, 1999 (Form FC-TRS; late submission fee): https://www.rbi.org.in/hindi1/Upload/Returns/PDFs/13MDR2912150330CE9E14C5451A9B40348D64D6978E.PDF
• Foreign Exchange (Compounding Proceedings) Rules, 2024: https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=5082

---

Planning an FDI transaction with a deferred payment or escrow structure? Start with a structure review at makeitlegit.in/tools/india-entry-modes, then read the entity page for a private limited subsidiary at makeitlegit.in/entity/pvt-ltd. For the FDI route and FEMA wizard, see makeitlegit.in/tools/fdi-fema-wizard.

---

See Also

• "A parent-company loan to an India subsidiary needs no FEMA registration": what the ECB rules actually require
• Put options at an assured return in FDI deals: what FEMA's NDI Rules 2019 permit on exit
• Chinese LP in the fund stack: when land-border FDI needs government approval