"We'll just use DCF": What FEMA actually requires for FDI valuation, and the pricing floor that blocks your allotment

A foreign investor agrees a price with an Indian founder over email. The money is wired. Three weeks later the company's AD Category-I bank refuses to acknowledge the FC-GPR because the issue price sits below the certified fair value, and the shares cannot be allotted at the agreed number. Nobody did anything dishonest. They simply treated valuation as a commercial negotiation when, under FEMA, it is a regulatory floor.

This is the single most common reason a cleanly-negotiated India investment stalls at the filing stage. The fix is not complicated, but it has to happen before the money moves, not after.

What the regulation actually says

The operative provision is Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 — the pricing guidelines. It applies to every issue and transfer of equity instruments involving a person resident outside India.

For unlisted Indian companies. Rule 21(2)(a)(ii) states that the price of equity instruments issued to a person resident outside India shall not be less than the valuation done as per any internationally accepted pricing methodology for valuation on an arm's length basis, duly certified by a Chartered Accountant, a SEBI-registered Merchant Banker, or a practising Cost Accountant.

Note what this does not say. It does not say DCF. The mandatory-DCF regime ended in 2014; before that, RBI's pricing guidelines specifically prescribed the discounted free cash flow method for unlisted shares. Since then the standard has been methodology-neutral. DCF, Net Asset Value, earnings capitalisation, comparable company multiples, and comparable transaction analysis are all defensible — provided the method fits the business and the certificate justifies the choice. A pre-revenue company valued on DCF with heroic assumptions is more vulnerable on review than the same company valued on a recent comparable-transaction benchmark.

For listed Indian companies. Rule 21(2)(a)(i) ties the floor to the price worked out in accordance with the relevant SEBI guidelines — in practice, the SEBI (ICDR) Regulations preferential-issue pricing formula.

Who may certify. For a plain issue of equity instruments, a Chartered Accountant, a SEBI-registered Category I Merchant Banker, or a practising Cost Accountant. The exception matters: where consideration is a swap of equity instruments, or in specified cross-border share-exchange cases, the valuation must be by a SEBI-registered Merchant Banker or an investment banker registered with the appropriate regulatory authority in the transferor's or investee's home jurisdiction. A CA certificate will not be accepted for a swap.

Direction of the floor. This is where foreign investors most often get it backwards. Rule 21 protects the Indian resident on both legs:

• Issue of shares to a non-resident — the price must be at or above fair value. The non-resident cannot get in cheap.
• Transfer from resident to non-resident — again, at or above fair value.
• Transfer from non-resident to resident (an exit) — the price must be at or below fair value. The exiting foreign shareholder cannot extract more than fair value from an Indian resident.

So a "pricing floor" on the way in becomes a pricing ceiling on the way out. A foreign investor who negotiates a premium exit price with an Indian buyer, above the certified fair value, has an unfilable FC-TRS.

The parallel requirement people miss. FEMA is not the only gate. Where the Indian company issues shares on a preferential basis, Section 62(1)(c) of the Companies Act, 2013 read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 requires a valuation report from a Registered Valuer registered with IBBI. The Registered Valuer and the Rule 21 certifier are governed by different statutes and different registration regimes — a CA who is not an IBBI-Registered Valuer can sign the FEMA certificate but not the Companies Act report. Many transactions therefore need two documents, not one.

The income-tax angle has become materially simpler. Section 56(2)(viib) — the so-called angel tax, which taxed share premium received above fair market value determined under Rule 11UA — was abolished by the Finance (No. 2) Act, 2024 with effect from Assessment Year 2025-26. For issues made in FY 2025-26 onwards, the third valuation gate that used to sit alongside FEMA and the Companies Act is gone. Section 50CA and the transfer-pricing provisions still apply on transfers and on related-party dealings respectively.

Practical implications: what goes wrong

The allotment is blocked, not merely delayed. The Indian company cannot allot shares below the Rule 21 floor. If the wire has already landed, the company is holding foreign currency it cannot convert into equity at the agreed price. Under Rule 21 read with the reporting framework, inward remittance that is not allotted against within 60 days must be refunded to the remitter through the same banking channel. Refunding a strategic investor's money because of a valuation certificate is a poor way to begin a shareholder relationship.

The FC-GPR sits in limbo. FC-GPR must be filed on the RBI FIRMS portal (SMF module) within 30 days of allotment, and the valuation certificate is a mandatory attachment. The AD Category-I bank reviews it. If the certificate does not support the issue price, the filing is returned for rectification and the 30-day clock has already run.

Late Submission Fee, then compounding. A delayed FC-GPR attracts a Late Submission Fee computed on the amount involved and the period of delay — an administrative charge, payable, and comparatively cheap. But an issue at a price below fair value is not a reporting delay. It is a contravention of Rule 21, which is compoundable before RBI under Section 13 of FEMA, 1999, with the compounding process governed by the Foreign Exchange (Compounding Proceedings) Rules. Compounding means a written application, a personal hearing, an order, and a penalty quantum that scales with the amount and duration of the contravention.

The exit gets harder years later. Due diligence on a Series B, a strategic sale, or an eventual IPO will pull every FC-GPR and its supporting valuation. An unremediated pricing contravention on the first round becomes a disclosed regulatory item in every subsequent transaction document and, frequently, an indemnity or a holdback.

Stale certificates fail. RBI and AD banks expect the valuation to be reasonably contemporaneous with the transaction. A certificate more than roughly 90 days old at the date of allotment invites a query. Where the deal timeline slips — and it usually does — plan for a refreshed or reconfirmed certificate rather than arguing that an old one still holds.

Step-by-step: what to do

• Fix the valuation date before you agree the price. Ask the Indian company for the intended valuation date and confirm the certificate will be dated close to the expected allotment date, not close to the term sheet.
• Choose the certifier by transaction type. Cash subscription for shares: a Chartered Accountant, SEBI-registered Merchant Banker, or practising Cost Accountant. Any share swap or exchange of equity instruments: a SEBI-registered Merchant Banker (or an equivalently registered investment banker abroad) — no substitutes.
• Appoint an IBBI Registered Valuer in parallel if the issue is a preferential allotment under Section 62(1)(c). Confirm early whether your Rule 21 certifier also holds Registered Valuer registration; if not, engage both.
• Select the method to fit the business, and document why. The certificate should state the methodology adopted and the justification for choosing it, the key assumptions (discount rate, terminal growth rate, comparable multiples with sources), the working computations, the certified fair value per share as at the valuation date, and an express statement that the valuation is on an arm's length basis in accordance with Rule 21 of the NDI Rules.
• Compare the certified fair value against your negotiated price before remitting. If the negotiated price is below the floor on a subscription, either the price rises or the share count falls. Decide this at term-sheet stage, not after the wire.
• Remit through normal banking channels to the Indian company's AD Category-I bank and obtain the FIRC and KYC report. Both are FC-GPR attachments.
• Allot within 60 days of receipt of consideration. Board resolution, return of allotment (Form PAS-3) with the MCA, share certificates.
• File FC-GPR on the FIRMS portal within 30 days of allotment, attaching the valuation certificate, the CS certificate, FIRC, KYC report, and board/shareholder resolutions. Track the AD bank's action — a filing "submitted" is not a filing "approved."
• Diarise the annual FLA return (due 15 July each year to RBI) for as long as foreign investment sits on the balance sheet.

FAQ

Is DCF still mandatory for unlisted Indian shares?
No. DCF has not been mandatory since 2014. Rule 21 requires any internationally accepted pricing methodology applied on an arm's length basis. DCF remains the most commonly used method for going concerns with forecastable cash flows, but NAV, earnings capitalisation, and market or transaction comparables are equally valid where they better fit the business.

Can we issue shares to a foreign investor at a premium far above fair value?
Yes. Rule 21 sets a floor for issues to non-residents, not a cap. A price above the certified fair value is fully compliant on the FEMA side. The constraint runs the other way on exits: a transfer from a non-resident to an Indian resident must be at or below fair value.

We already remitted the money and the certificate came in higher than our agreed price. What now?
Two clean routes. Either the investor tops up the remittance so the total consideration supports the agreed share count at the certified fair value, or the company allots fewer shares at the certified price and refunds the balance within the 60-day window. Do not allot below the floor and plan to fix it later — that converts a commercial problem into a compoundable FEMA contravention.

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This article is general information on Indian foreign exchange and corporate law as at September 2026, not advice on any specific transaction. Verify the current text of the NDI Rules and the applicable DPIIT press notes before acting.

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See Also

• Any bank will do for your India subsidiary: What FEMA actually requires of your AD Category-I bank
• "Our structure is already approved, so the new rules don't affect us": What the draft FEMA (Foreign Investment) Rules 2026 actually change for existing FDI structures
• "Government approval takes forever": What the May 2026 DPIIT SOP actually requires