Under Rule 21 of the FEM (Non-debt Instruments) Rules, 2019, an unlisted Indian company may issue shares to a non-resident at a price not less than the fair value worked out under any internationally accepted pricing methodology on an arm's length basis, certified by a Chartered Accountant, a SEBI-registered merchant banker or a practising cost accountant. On a transfer, the same fair value is a floor when a resident sells to a non-resident and a ceiling when a non-resident sells to a resident. Transfers between a resident and a non-resident are reported in Form FC-TRS on the FIRMS portal within 60 days of the transfer or of receipt of the consideration, whichever is earlier; transfers between two non-residents need no FC-TRS. Income tax separately tests the price against its own fair-value rules, and a transfer pricing analysis applies where the parties are associated enterprises.
Key facts
| Provision | Old reference (to 31 Mar 2026) | New reference (from 1 Apr 2026) | Rate / threshold | Timing | Form |
|---|---|---|---|---|---|
| Pricing guidelines | Rule 21, FEM (NDI) Rules, 2019; Master Direction on Foreign Investment | Unchanged | Issue / R→NR: not less than FV; NR→R: not more than FV | At issue or transfer | Valuation certificate |
| Who may value (unlisted) | Rule 21 | Unchanged | CA, SEBI merchant banker, practising cost accountant | — | — |
| Listed company price | Rule 21; SEBI ICDR pricing | Unchanged | SEBI preferential-issue price formula | — | — |
| Convertible instruments | Rule 21 | Unchanged | Conversion price/formula fixed upfront; not below FV at issue | At issue | — |
| FC-TRS | FEM (Mode of Payment and Reporting) Regulations, 2019 | Unchanged | Transfer between resident and non-resident (sale or gift) | Within 60 days of transfer or receipt of funds, whichever earlier | Form FC-TRS (SMF) |
| Who files FC-TRS | Master Direction on Reporting | Unchanged | The resident party (transferor or transferee) or the NR via AD in some cases | — | — |
| Deferred consideration / escrow | Rule 9(6) NDI Rules | Unchanged | Up to 25% deferred for up to 18 months | — | — |
| Income-tax fair value tests | s. 56(2)(x), 50CA; Rule 11UA (angel tax s. 56(2)(viib) abolished from AY 2025-26) | Corresponding provisions of 2025 Act and 2026 Rules | Deemed income / deemed consideration where price departs from FMV | — | — |
Why FEMA regulates the price
The guidelines protect against capital leaving India disguised as a cheap share issue or an over-priced buy-out of a foreign investor. Hence the asymmetry: money coming in for shares must be at least fair value; money going out to a non-resident seller must be no more than fair value.
The rules in a table
| Transaction | Price rule | Valuation by |
|---|---|---|
| Fresh issue by unlisted company to non-resident | Not less than fair value (internationally accepted methodology, arm's length) | CA / SEBI merchant banker / practising cost accountant |
| Fresh issue by listed company | SEBI preferential issue pricing | Formula |
| Rights issue to non-resident | Not less than price offered to residents (unlisted); SEBI rules (listed) | — |
| Resident sells to non-resident | Not less than fair value | As above |
| Non-resident sells to resident | Not more than fair value | As above |
| Non-resident sells to non-resident | No FEMA price restriction; no FC-TRS | Tax rules still apply |
| Convertible instruments (CCPS, CCDs) | Conversion price or formula fixed at issue; conversion price not lower than fair value at the time of issue | As above, at issue |
| Swap of shares | Both legs valued; Government approval if either sector requires it | Merchant banker (for swaps) |
| Gift from resident to non-resident | RBI approval and value limits | — |
What "internationally accepted pricing methodology" means in practice
Discounted cash flow, comparable company multiples, net asset value or a combination, chosen to fit the company's stage — DCF for operating businesses with forecasts, NAV for holding or asset-heavy entities, market multiples where comparables exist. The certificate states the method, key assumptions and the resulting fair value per share, and is dated close to the transaction (banks generally expect within 90 days). Because the valuer signs a certificate that the RBI and the bank rely on, the work is held to the standards of the profession; where the company also needs a Registered Valuer report under the Companies Act (for example, for a preferential issue under section 62(1)(c) and Rule 13), the two can be prepared together but serve different statutes.
FC-TRS
Form FC-TRS is filed through the Single Master Form on FIRMS for every transfer of shares or other capital instruments between a person resident in India and a person resident outside India, by sale or gift. The onus is on the resident party — the resident transferor or transferee — and the form must be filed within 60 days of the transfer or the receipt or remittance of the consideration, whichever is earlier. Attachments: the transfer agreement or consent letter, valuation certificate, FIRA or outward remittance evidence, declaration of the non-resident, KYC, and board resolution noting the transfer. The company should not register the transfer in its register of members until the FC-TRS is acknowledged. Deferred consideration is permitted up to 25% of the total, for up to 18 months, with escrow or indemnity arrangements under Rule 9(6).
Income tax runs on parallel tracks
FEMA fair value and income-tax fair market value are computed under different rules and can differ. Income tax tests: for the buyer, whether shares were received for less than fair market value (deemed income under the section corresponding to old 56(2)(x), with FMV under the rules corresponding to old Rule 11UA); for the seller, whether unlisted shares were transferred below FMV (deemed consideration, old section 50CA); and, where the parties are associated enterprises, the transfer pricing arm's length price under section 161 of the 2025 Act. The "angel tax" on issue of shares above FMV to investors (old section 56(2)(viib)) was abolished for issues from financial year 2024-25. Capital gains for the non-resident seller follow the treaty capital gains article, with withholding by the buyer under section 393(2) — a section 395 certificate is routinely obtained to fix the amount.
Worked example
A resident founder sells 10% of an unlisted Indian company to a Singapore investor for ₹6 crore. A Chartered Accountant's DCF valuation puts fair value at ₹5.4 crore for the stake.
- FEMA: resident → non-resident; price must be ≥ fair value. ₹6 crore ≥ ₹5.4 crore — compliant. Consideration received 3 March; FC-TRS filed by the founder's bank by 2 May (60 days). Transfer registered after acknowledgement.
- Income tax — seller: capital gains on ₹6 crore less indexed cost; no deemed-consideration issue since the price exceeds FMV.
- Income tax — buyer: paying above FMV creates no deemed income for the buyer.
- Reverse case: had the Singapore investor later sold the stake back to the founder for ₹9 crore when fair value was ₹8 crore, FEMA would cap the price at ₹8 crore (non-resident → resident, not more than fair value), and the founder would withhold tax on the investor's capital gain under section 393(2), ideally against a section 395 certificate.
Common mistakes we see
- Issuing shares to the parent at par in a funding round years after incorporation without a valuation certificate.
- Filing FC-TRS from the date of the share transfer form when the consideration was received earlier — the 60 days run from the earlier event.
- Registering the transfer in the register of members before the FC-TRS is acknowledged.
- Using a Companies Act Registered Valuer report alone when the bank needs a FEMA pricing certificate from a CA, merchant banker or cost accountant (often the same professional, but a separate certificate).
- Assuming FEMA compliance means income-tax compliance; the two fair values and the two sets of consequences are separate.
- Structuring deferred consideration beyond 25% or 18 months without RBI approval.
Frequently asked questions
Who can issue the valuation certificate for FDI pricing?
For unlisted companies, a Chartered Accountant, a SEBI-registered merchant banker or a practising cost accountant, using an internationally accepted pricing methodology on an arm's length basis (Rule 21, NDI Rules, 2019).
Can shares be issued to a foreign parent at face value?
Only if face value is not less than fair value — true at incorporation, rarely true later. Subsequent issues need a fair valuation and a price at or above it.
What is the time limit for FC-TRS?
Within 60 days of the transfer of shares or the receipt/remittance of consideration, whichever is earlier, filed on the FIRMS portal by the resident party.
Is FC-TRS needed for a transfer between two foreign shareholders?
No. FC-TRS applies to transfers between a resident and a non-resident. Transfers between non-residents are not reported in FC-TRS, though the company records the change and income-tax consequences may still arise.
Does the valuation have to be a Registered Valuer under the Companies Act?
Not for FEMA. FEMA accepts a CA, merchant banker or cost accountant. A Companies Act Registered Valuer report is a separate requirement for certain corporate actions such as preferential issues.
Is angel tax still applicable on share premium received from foreign investors?
No. The provision taxing share premium above fair market value in the issuing company's hands (old section 56(2)(viib)) was abolished for issues from financial year 2024-25.
Sources
Primary sources only. Statutory text is read from the official publication; where a provision has been renumbered, the pre-2026 reference is given alongside so older material can be reconciled.
- FEMA notifications — Reserve Bank of India
- RBI Master Directions — Reporting under FEMA; External Commercial Borrowings; Overseas Investment; Export of Goods and Services; LRS
- FIRMS portal — Single Master Form (FC-GPR, FC-TRS, LLP, CN, ESOP, DI)
- Income-tax Act, 2025 and Income-tax Rules, 2026 — Income Tax Department, Tax Laws & Rules
- Companies Act, 2013 and rules — Ministry of Corporate Affairs
Last reviewed on 1 November 2026 by Suchit Jhunjhunwala, FCA, VMS Jhunjhunwala & Co. Law stated as at that date; the Income-tax Act, 2025 and Income-tax Rules, 2026 apply from 1 April 2026.
