Legal basis: FEMA 1999 s.6 read with Foreign Exchange Management (Non‑Debt Instruments) Rules 2019, Rule 21 — Effective: 17 Oct 2019 (ongoing). Source: https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200 — Last reviewed by CA Harun Raaj: September 2026
When a down‑round meets a foreign investor
A Singapore‑based private‑equity fund invested ₹15 crore in Series A of an Indian private limited company at ₹150 per share, receiving compulsorily convertible preference shares (CCPS) with a broad‑based anti‑dilution clause. Eighteen months later the company plans a Series B at ₹90 per share – a 40 % down‑round.
The board worries that FEMA may forbid issuing shares below the original entry price and wonders whether the anti‑dilution adjustment creates a separate violation.
Key point: Rule 21 requires the issue price to meet a current fair‑value floor, not the price paid in a prior round.
What Rule 21 actually mandates
Rule 21 of the NDI Rules 2019 sets a price floor for any equity instrument issued to a person resident outside India. For an unlisted company the floor is:
“the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm’s‑length basis, duly certified by a Chartered Accountant or a Merchant Banker registered with SEBI or a practising Cost Accountant.”
Key observations:
- The floor is the current fair value, not the previous round price.
- The valuation certificate must be dated within 90 days of the allotment (FED Master Direction No. 11/2017‑18, updated 15 June 2026).
- Accepted methodologies include Discounted Cash Flow (DCF), Net Asset Value (NAV), and market multiples/comparables.
Compliance checklist for a down‑round FDI allotment
| Requirement | When it applies | How to satisfy |
|---|---|---|
| Fresh valuation | Every new equity issue to a foreign investor, including bonus shares issued under anti‑dilution | Obtain a valuation report dated ≤ 90 days before the allotment, signed by a CA, SEBI‑registered merchant banker, or practising cost accountant |
| Issue price | At the time of allotment | Ensure the price per share is ≥ the fair‑value per share certified in the valuation report |
| Anti‑dilution clause | If existing convertible instruments are to be adjusted | Use bonus‑share mechanisms or obtain AD‑bank confirmation for a fresh valuation at conversion; avoid price‑adjustment ratchets that fall below the original issuance fair value |
| Exit pricing language | In subscription agreements | Do not include guaranteed exit price, floor IRR, or put options; Rule 21(2)(c) requires exit at the prevailing market price |
| Reporting | Within 30 days of allotment (or bonus issue) | File Form FC‑GPR on the FIRMS/SMF portal |
The down‑round itself
If a CA‑certified valuation as of the Series B date shows a fair value of ₹90 per share, issuing the new CCPS at ₹90 complies with Rule 21. The earlier ₹150 price is irrelevant for the price‑floor calculation.The anti‑dilution trap
A full‑ratchet clause would reset the conversion price of the existing Series A CCPS from ₹150 to ₹90. The RBI Master Direction states that the conversion price must not be lower than the fair value worked out at the time of issuance. Because the original issuance was certified at ₹150, a lower conversion price breaches Rule 21.#### Two FEMA‑compliant anti‑dilution structures
- Bonus‑share issuance – Instead of lowering the conversion price, the company issues additional bonus shares to the foreign investor at nil consideration. Each bonus issue triggers a fresh Form FC‑GPR filing, but the price‑floor issue is avoided because no consideration is paid.
- Fresh valuation at conversion – Obtain a new valuation at the time of conversion and certify a fair value of ₹90 or lower. This approach is contentious; AD Category‑I banks typically require explicit RBI guidance before accepting it.
Penalties for a Rule 21 pricing breach
- Section 13, FEMA – Penalty up to three times the contravened amount, or up to ₹2 lakh where the amount is not quantifiable, plus a daily continuing penalty until remedied.
- Compounding – Allowed under the Foreign Exchange (Compounding Proceedings) Rules 2024 (G.S.R. 566(E) dated 12 Sept 2024). Application fee ₹10,000; the authority must decide within 180 days.
- Late Submission Fee (LSF) – Applies only to delayed reporting, not to substantive pricing violations. Formula: ₹7,500 + 0.025 % × A × n (A = transaction amount, n = years of delay), capped at 100 % of A, and unavailable after 3 years.
The AD Category‑I bank that processed the original allotment will verify pricing compliance on every subsequent FC‑GPR filing. A discovered breach can block future FEMA filings and remittances until corrected.
Step‑by‑step before any down‑round with foreign participation
- Commission a fresh valuation – Methodology, fair‑value per share, and certifier credentials must be clearly stated; date ≤ 90 days before the allotment.
- Set the issue price – Ensure it meets or exceeds the certified fair value.
- Review shareholder agreements – Remove any assured‑return language; verify anti‑dilution provisions.
- Choose a compliant anti‑dilution mechanism – Prefer bonus shares or obtain AD‑bank confirmation for a fresh‑valuation conversion.
- Check Press Note 3 2020 / Press Note 2 2026 – Confirm the investor’s beneficial ownership does not involve a land‑bordering country; if it does, the government‑approval route applies.
- File Form FC‑GPR – Within 30 days of the allotment (or bonus issue) on the FIRMS portal.
- Maintain records – Keep the valuation report, board and shareholder resolutions, and the FC‑GPR acknowledgment for at least six years.
I’m CA Harun Raaj. If you’re structuring India operations and this affects your setup, reach out.
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See Also
Frequently Asked Questions
Can we issue equity to a foreign investor at a price below the previous FDI round price?+
Yes. Rule 21 of the NDI Rules 2019 sets the price floor at the current fair value certified by a qualified professional, not at any historical round price. If a fresh valuation shows a fair value of ₹90 per share, an allotment at ₹90 complies, provided the valuation is dated within 90 days of the issue.
Does an anti‑dilution ratchet on foreign‑held CCPS violate FEMA in a down‑round?+
A full‑ratchet that lowers the conversion price below the fair value certified at the original issuance breaches Rule 21, because the RBI Master Direction requires the conversion price not to be lower than that original fair value. Using bonus shares or obtaining AD‑bank clearance for a fresh valuation are compliant alternatives.
Is a fresh valuation required for every new allotment in a down‑round?+
Yes. The FED Master Direction (updated 15 June 2026) mandates that the valuation certificate be not more than 90 days old on the date of investment. This applies to each equity issue, including bonus shares issued under an anti‑dilution mechanism.
What penalties apply if the issue price falls below the certified fair value?+
Under Section 13 of FEMA, the penalty can be up to three times the transaction amount or up to ₹2 lakh where the amount is not quantifiable, plus a daily continuing penalty until remedied. The violation can be compounded under the 2024 Compounding Proceedings Rules for a fee of ₹10,000.
Do we need RBI approval if the foreign investor has beneficial ownership linked to a land‑bordering country?+
Yes. Press Note 3 of 2020 and Press Note 2 of 2026 require government approval for investors with direct or indirect beneficial ownership in China, Pakistan, Bangladesh, Nepal, Bhutan, or Myanmar, irrespective of the round. Verify the ownership chain with your AD Category‑I bank before proceeding.
What filing is required after the down‑round allotment?+
Form FC‑GPR must be filed on the FIRMS/SMF portal within 30 days of the allotment date (or bonus‑share issue). The filing should include details of the issue, the valuation certificate, and the foreign investor’s particulars.
Can we include guaranteed exit returns in the subscription agreement?+
No. Rule 21(2)(c) of the NDI Rules states that a foreign investor must exit at the prevailing market price. Any clause guaranteeing a fixed exit price, IRR, or put option creates a compliance breach.
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