FEMA pricing is a one-way ratchet built around a single idea: a non-resident may pay more than fair value, but may never be guaranteed more than fair value on the way out. Money comes in at or above FMV; it leaves at or below FMV; and no contract can promise otherwise. Rule 21 of the NDI Rules sets the floors and caps, Rules 7, 7A and 8 carve the rights-issue and ESOP exceptions, Rule 9(6) governs deferred consideration and Rule 9A the new swap regime. This guide maps all of it with worked numbers – because every foreign-funded startup round in India prices against these rails.
Rule 21: the floor and the cap
| Transaction | Pricing rule |
|---|---|
| Issue of shares to a non-resident (unlisted) | ≥ FMV per any internationally accepted pricing methodology, arm’s length, certified by a CA, SEBI-registered merchant banker, or practising cost accountant |
| Issue to a non-resident (listed) | ≥ the SEBI preferential-issue price |
| Transfer: resident → non-resident | ≥ FMV (floor) |
| Transfer: non-resident → resident | ≤ FMV (cap) |
| Subscription to the Memorandum at incorporation | Face value permitted |
| NRI investing on non-repatriation basis (Schedule IV) | Pricing rules do not apply – treated as domestic capital |
The guiding principle behind the cap is written into the rule: the non-resident “is not guaranteed any assured exit price at the time of making such investment… and shall exit at the price prevailing at the time of exit.” That sentence killed assured-return puts, fixed-IRR exits and capital-protection clauses – the Delhi High Court’s NTT Docomo v Tata Sons saga is the cautionary tale. Only options exercisable at the FMV prevailing on exercise survive. Every SHA a foreign investor signs in India is drafted around this sentence.
The rights-issue fork founders miss (Rules 7 and 7A)
Rights issues have their own, gentler rule: shares offered to an existing non-resident shareholder in a rights issue need only match the price offered to residents – no FMV test at all. A genuinely pro-rata rights issue at ₹100 when FMV is ₹400 is FEMA-compliant for the existing foreign investor. But the moment a resident renounces rights in favour of a non-resident, Rule 7A snaps the Rule 21 floor back: the renouncee must pay full FMV. Worked numbers: FMV ₹400, rights at ₹100 – the existing NR shareholder subscribes 2,500 shares for ₹2.5 lakh; a new NR taking the same 2,500 shares via renunciation pays at least ₹10 lakh, with a fresh certificate and FC-GPR. Bonus shares carry no pricing condition at all (no consideration moves). This fork also interlocks with income-tax: pro-rata rights issues are outside the buyer-side s.92 charge too – see the share-transfer tax guide.
Convertibles: the floor is set on day one
CCPS and CCDs qualify as FDI “equity instruments” only if fully and mandatorily convertible, and their conversion price or formula must be fixed upfront – and cannot deliver shares below the FMV certified at the date of issue. That issue-date floor is what collides with aggressive anti-dilution: a full-ratchet clause that mathematically resets a foreign investor’s conversion price below the original certificate is unenforceable against FEMA, which is a structural reason Indian deals settle on broad-based weighted average. The collision mechanics, with numbers, are in the down-round guide; instrument selection is in the instrument comparison.
Deferred consideration and swaps
Rule 9(6): in a transfer between a resident and a non-resident, up to 25% of the total consideration may be deferred, escrowed or held back as indemnity for up to 18 months from the transfer agreement – with the total still meeting the pricing rule. The January 2025 Master Direction update extended this flexibility to acquisitions by foreign-owned-or-controlled Indian companies (FOCCs), which now also follow FDI-equivalent pricing on the principle that what cannot be done directly cannot be done indirectly. Rule 9A (August 2024) opened cross-border share swaps – Indian equity against Indian or foreign equity – with a stricter signature rule: swap valuations must come from a SEBI-registered merchant banker or an overseas investment banker; a CA certificate is not accepted. Government approval overlays wherever a land-border investor or approval-route sector is involved (Press Note 3).
The certificate itself: what AD banks actually check
“Internationally accepted pricing methodology” is deliberately open – DCF dominates for startups, with comparable multiples, transactions and NAV in support (the methods guide covers each). The certificate must state the methodology and why it was chosen, the key assumptions (discount rate, growth, multiples), the workings, the per-share FMV as at the valuation date, and an arm’s-length statement. There is no statutory validity period, but AD-bank convention treats certificates older than ~90 days as stale (six months is the outer tolerance) – time the certificate against the closing date, not the term sheet. The recurring rejection list: stale certificates, an issue price below the certified FMV, assured-return clauses spotted in the SHA, beneficial-ownership gaps on land-border exposure, certificates silent on methodology – and the deadliest, FC-GPR filed beyond 30 days of allotment (FC-TRS: 60 days for transfers). Late filings run the late-submission-fee meter – size any exposure on the LSF calculator and track every clock on the deadline calculator.
A complete compliant round, end to end
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Talk to an expertFrequently Asked Questions
Can a foreign investor pay more than fair value?
Yes – the floor only works one way on entry. Paying a premium above certified FMV is compliant (and common in competitive rounds). Since angel tax was abolished there is no income-tax penalty on the company for the premium either. The constraint bites on exit: sale to a resident is capped at the FMV prevailing then.
Do these rules apply to NRI investors?
Only on the repatriation route. An NRI investing on a non-repatriation basis under Schedule IV is outside the pricing guidelines entirely – domestic treatment, no certificates, no FC-GPR. That is the single biggest structural simplification available to NRI angels.
Whose certificate do we need – CA, merchant banker or registered valuer?
For the FEMA pricing certificate: any of CA, SEBI-registered merchant banker, or practising cost accountant – except cross-border swaps, where only a merchant banker or overseas investment banker will do. Separately, the Companies Act price for a preferential allotment needs a registered valuer. A foreign-funded round typically carries both documents – the full signatures map is in the valuation rules guide.
What happens if shares were issued below the certified FMV by mistake?
It is a FEMA contravention by the issuing company – regularised through compounding with the RBI, typically after fresh valuation work and AD-bank correspondence. The earlier it is surfaced (ideally before a diligence team finds it), the cheaper it is. Start with the exposure math on the LSF and compounding calculator.
Last reviewed: August 2026. FEM (NDI) Rules 2019 (Rules 2(k), 7, 7A, 8, 9(6), 9A, 21) as amended to the Third Amendment Rules 2026; RBI Master Direction on Foreign Investment (updated 20 January 2025).