The number in the term sheet is a negotiation. The reports behind it are three separate compliance exercises
Founders talk about their valuation as though it were one thing. In a round that involves a foreign investor, a convertible instrument and an option pool, it is at least three: a registered valuer's report because shares are being issued under company law, a pricing certificate from a different professional because exchange control says so, and a fair value for the accounts because the option pool has to be charged to profit. Add a United States parent and there is a fourth. They use different methods, they answer to different rules, and none of them is the number in the term sheet.
- Pre-money, post-money, and why the reports do not validate the negotiated price
- The two separate pricing tests a foreign-funded round has to pass
- Convertible instruments, and the conversion formula that has to be fixed at the outset
- What the abolition of angel tax changed, and the three tax provisions that survived it
- Employee stock options, sweat equity, and section 409A
Pre-money, post-money, and what a valuation report is not doing
The arithmetic is simple and worth restating because it is regularly got wrong in term sheets. Post-money equals pre-money plus the amount invested. The investor's percentage is the amount invested divided by the post-money value. Where an option pool is created as part of the round, the question that matters is whether the pool is inside the pre-money figure, in which case the founders bear its dilution, or outside it, in which case everybody does. That single sentence is worth more in a negotiation than any refinement of methodology.
A priced round's valuation is a negotiated outcome. It reflects the investor's view of the opportunity, the competitive dynamics of the round, the terms attached to the money and how much the founders need to close. A valuation report prepared for a compliance purpose does not validate that number and is not trying to. Its job is to demonstrate that the price at which shares are issued satisfies whatever floor or method the relevant rule prescribes.
The practical consequence is that a compliance valuation supporting a round is rarely a problem when the round is up, and is frequently a problem in a down round, a bridge, or an internal issue to a promoter, because those are the situations where the negotiated price sits below what a methodical valuation would produce.
Two pricing tests, two different certifiers
Company law
An issue of shares to a person other than existing shareholders in proportion, on a preferential basis or by private placement, requires the price to be determined by a registered valuer's report under section 62(1)(c) of the Companies Act 2013, read with the Companies (Share Capital and Debentures) Rules 2014. That report has to exist before the offer is made, and it is one of the documents a subsequent investor's diligence will ask for.
Exchange control
If any of the money is coming from a person resident outside India, a second and separate test applies. The price must be worked out using an internationally accepted pricing methodology on an arm's length basis, and certified by a chartered accountant, a SEBI registered merchant banker, or a practising cost accountant. As set out in Guide 1, a registered valuer is not on that list. The certificate supports the filing that follows the allotment.
These are two reports for one issue of shares. In practice a firm holding the right qualifications will produce both, but they are prepared to different requirements and a single document that does not address both is not sufficient for both.
Listed companies
For a listed company the floor price for a preferential issue sits in two different regulations depending on how the shares trade.
- Regulation 164, frequently traded shares: not less than the higher of the volume weighted average price over the ninety trading days and over the ten trading days preceding the relevant date.
- Regulation 165, infrequently traded shares: determined by valuation, having regard to book value, comparable trading multiples and other parameters customary for valuing shares of such companies, by an independent registered valuer under the current framework.
The ninety and ten trading day windows were introduced by amendment with effect from 14 January 2022, replacing an earlier formula based on the average of the weekly high and low over twenty six weeks and two weeks. A checklist or precedent that still refers to twenty six weeks is describing a regime that ended more than four years ago.
Convertible instruments, and the formula that has to be fixed on day one
Compulsorily convertible preference shares and compulsorily convertible debentures are treated as equity instruments for foreign investment purposes, which is what makes them useful. The price at issue is subject to the same pricing test as ordinary shares. The condition that catches people is what happens at conversion.
The price, or the conversion formula that determines it, must be fixed upfront at the time the instrument is issued, and the price on conversion cannot be lower than the minimum price determined under the applicable pricing guidelines as at the date of issue. A formula may provide for a future mathematical determination, but the formula itself has to exist on day one. The purpose is to stop the pricing decision being deferred to the conversion date in a way that would sidestep the pricing rules.
A conversion ratio left to be fixed by reference to a future round's valuation, which is exactly how a good deal of standard venture documentation is drafted, sits uncomfortably with that requirement. Anti-dilution mechanics need the same attention: a broad-based weighted average adjustment operating within a formula fixed at issue is a different thing from a ratchet that resets the price by reference to a later event.
Optionality and exit
Put and call arrangements between a resident and a non-resident are permitted, subject to a minimum lock-in and, critically, subject to there being no assured return. The investor exits at the price prevailing at the time of exit, worked out on the same arm's length basis. A drafted exit price, an internal rate of return floor or a guaranteed buyback converts what was intended as equity into something the exchange control framework does not permit as equity.
This is a place where a valuation adviser earns their fee before the instrument is issued rather than after. Redrafting a conversion mechanic at term sheet stage costs nothing. Discovering at exit that the agreed mechanism cannot be performed is a different conversation entirely.
Angel tax is gone. Three things that were not angel tax are not gone
This section corrects the largest single body of stale content in Indian valuation writing. A great deal of material published as recently as 2026 still treats angel tax as a live compliance item, including material that correctly describes the 2023 changes and then fails to record what happened afterwards.
What actually happened
Section 56(2)(viib) of the Income-tax Act 1961 taxed a closely held company on share premium received above fair market value. The Finance Act 2023 extended it to consideration received from non-residents, which is what prompted the elaborate amendments to the valuation rules later that year. The Finance (No. 2) Act 2024 then inserted a proviso providing that the clause shall not apply on or after 1 April 2025, abolishing the charge from assessment year 2025-26.
The Income-tax Act 2025, which replaced the 1961 Act with effect from 1 April 2026, carries no equivalent provision at all. The chapter dealing with income from other sources contains the recipient-side charge described below and nothing resembling the old angel tax clause.
The correct statement is therefore that angel tax has been abolished, not that it does not apply to recognised start-ups. Exemption certificates and start-up recognition were the pre-2024 workaround for a charge that no longer exists.
Three provisions that survived
| What it does | Who it hits | Where it now sits |
|---|---|---|
| Taxes the receipt of property, including shares, for no consideration or for less than fair market value, above a threshold | The recipient, whether or not a company | Section 92(2)(m) of the Income-tax Act 2025, the successor to section 56(2)(x) |
| Deems the consideration on a transfer of unquoted shares to be their fair market value where the actual consideration is lower | The transferor | Section 79 of the Income-tax Act 2025, the successor to section 50CA |
| Taxes the reconstitution of a firm or limited liability partnership where a partner receives assets, and disregards revaluation gains and self-generated goodwill | The entity and the partner | Sections 8 and 67(10) of the Income-tax Act 2025, the successors to sections 9B and 45(4) |
Between them, these three mean that fair market value still has to be established in a great many transactions that have nothing to do with a start-up raising money. A share transfer between promoters, a family settlement, a partner retiring from a firm holding appreciated assets: all of them turn on a valuation, and none of them were affected by the abolition of angel tax.
The valuation machinery moved rather than disappeared
The Income-tax Rules 1962 were replaced by the Income-tax Rules 2026, notified by CBDT Notification No. 22/2026 dated 20 March 2026, with effect from 1 April 2026. Fair market value determination now sits in Rule 57, which is the successor to the former Rules 11UA, 11UAA and 11UAB.
This is the point most easily got wrong, so it is worth stating plainly. Rule 57 is not a stripped-down replacement. It carries the existing fair market value machinery forward under new numbering, including the net asset value method for unquoted equity shares, the discounted free cash flow method, the additional merchant banker methodologies introduced in September 2023 for eligible cases, the ten per cent tolerance, and the provision allowing a merchant banker's report issued up to ninety days before the issue date to be used where the prescribed conditions are met.
The reason the methods survived the abolition of the angel tax charge is that they never existed only for that charge. They support several provisions of the Income-tax Act 2025, including the successors to sections 50CA, 56(2)(x), 9B and 45(4) set out above. Remove one charging provision and the valuation rules still have work to do.
What does change is the citation. A report prepared after 1 April 2026 that cites Rule 11UA is citing a rule that no longer exists, even though the method it applied is still the right one.
An option pool generates two valuations that are not the same number
This is a distinction worth being pedantic about, because using one number for both purposes is a common finding in a diligence review.
The perquisite valuation
When an employee exercises an option, the difference between the fair market value of the share on the exercise date and the price paid is a perquisite taxed as salary. For an unlisted company, the fair market value for this purpose is determined under the income tax rules by a merchant banker. It is a tax computation on a specific date, driven by prescribed rules, and the employer has a withholding obligation attached to it.
The accounting fair value
Separately, the company recognises an expense for the options it has granted, measured at the fair value of the option at grant date under the share based payment standard, and spread over the vesting period. This is an option pricing exercise, not a share pricing one, and it produces a materially different number because it values the option rather than the underlying share.
The accounting exercise usually means Black Scholes for a plain vanilla option, a lattice or binomial model where early exercise behaviour or performance conditions matter, and a simulation where vesting depends on a market condition such as a share price target. For an unlisted company the hard input is expected volatility, since there is no share price history: the standard approach is to derive it from listed peer companies chosen for comparable industry, size, leverage and stage. That choice is the most challengeable assumption in the whole calculation and should be documented rather than asserted.
Deferred withholding for eligible start-ups
Employees of an eligible start-up continue to benefit from a statutory deferral of the tax and the related withholding on the ESOP perquisite. The deferred liability becomes payable on the earliest of three events: the sale of the shares, the employee ceasing employment, or forty eight months from the end of the relevant assessment year in which the shares are allotted.
The relief applies only where the employer is an eligible start-up. It does not extend to employee stock options generally, and it is a deferral rather than an exemption.
We have deliberately not cited section numbers for this relief. The tax department's own published guidance still explains it using the Income-tax Act 1961 numbering, and we would rather describe the relief accurately than attach a renumbered reference we have not seen in the enacted text.
Sweat equity
Sweat equity issued against know-how, intellectual property or value addition rather than cash requires that contribution to be valued. For a listed company the securities regulations require an independent registered valuer, a change effective 2 January 2026 replacing a merchant banker requirement, as covered in Guide 1.
For an unlisted company, sweat equity is issued under section 54 of the Companies Act 2013 read with Rule 8 of the Companies (Share Capital and Debentures) Rules 2014, and the Rules require two separate valuations by a registered valuer:
- Rule 8(6): the sweat equity shares must be valued at a fair price determined by a registered valuer, with the justification for that valuation.
- Rule 8(7): where the sweat equity is issued for intellectual property rights, know-how or value additions, that contribution must itself be valued by a registered valuer, who submits a reasoned report to the board justifying the valuation.
These are two distinct exercises serving different statutory purposes: one values what is being issued, the other values what is being received. They will influence each other commercially, but there is no requirement that they produce the same figure, and a single report addressing only one of them does not discharge the rule.
Section 409A, for a company with a United States parent or United States option holders
Section 409A of the United States Internal Revenue Code governs non-qualified deferred compensation, and a stock option granted with an exercise price below the fair market value of the underlying share on the grant date falls within it. The consequences for the option holder are severe: immediate income inclusion, an additional tax, and an interest charge. This is why a company with United States option holders, or a United States parent granting options over its own stock to an Indian team, obtains a 409A valuation before each grant cycle.
The regulations provide a presumption of reasonableness. A valuation is presumed reasonable, rebuttable by the tax authority only by showing that the method or its application was grossly unreasonable, if it was determined by an independent appraisal as of a date no more than twelve months before the relevant transaction, or by a prescribed formula, or, for an illiquid start-up, by a reasonable good faith written valuation prepared by a person with significant relevant knowledge and experience.
Two practical points follow. The twelve month window is why 409A valuations are routinely refreshed annually, and why a material event such as a financing round or a significant change in the business resets the clock regardless of the calendar. And the presumption is what is being bought: a 409A valuation does not make a price correct, it shifts the burden of showing it was wrong onto the tax authority.
The professional guidance is in transition. The law is not. The AICPA accounting and valuation guide that practitioners rely on for valuing privately held company equity issued as compensation, commonly called the cheap stock guide, is being updated: a working draft was released in January 2026 and, as at the date of this page, has not been finalised, so the 2013 edition remains the operative reference. The underlying section 409A safe harbour framework has undergone no comparable change and continues to operate under the existing Treasury Regulations.
The practical consequence is small but worth knowing: a report citing chapter and verse of the older edition is not wrong, and it is still worth asking the valuer which edition they worked to.
A 409A valuation is a United States tax compliance document. It does not satisfy the Indian company law or exchange control requirements described above, and those do not satisfy 409A. A company with both exposures needs both.
Five things that surface in diligence a round or two later
1. One report doing two jobs
A registered valuer's report used as the exchange control pricing certificate, or the reverse. It works until somebody checks who signed it.
2. A report that had expired
Several of these requirements fix an outer limit on how old a valuation may be when the shares are actually allotted. A round that slips by two months can invalidate the report it was priced on.
3. A conversion formula that was never fixed
Convertible instruments issued to a non-resident with the conversion left to a future valuation. Discovered at conversion, when it is expensive.
4. Option grants with no valuation behind them
Grants made at a nominal exercise price with neither a perquisite basis nor a fair value for the accounts. It becomes a restatement question and, where United States holders are involved, a section 409A question.
5. A down round priced without regard to the floor
A rescue round agreed at a price below what the applicable method produces. This is the situation where compliance valuation genuinely constrains a commercial outcome, and it is far better identified at term sheet stage than at allotment.
Where to go next
1. Who Can Sign a Valuation Report in India, and When You Need One
The registered valuer regime, the three certifier lists that apply to the same transaction, and what changed between December 2025 and April 2026.
2. Valuation for Mergers, Acquisitions and Business Transfers
Share exchange ratios, business transfer pricing, open offer and delisting floor prices, and where control premium and marketability discount belong.
4. Valuation for Financial Reporting: Purchase Price Allocation, Fair Value and Impairment
Fair value and the three level hierarchy, purchase price allocation, contingent consideration, goodwill impairment and hard-to-value instruments.
5. Valuing Intangible Assets, Brands and Intellectual Property
Separating an intangible from goodwill, the four methods that do most of the work, and the settings outside an acquisition where the question arises.
Valuation Services
Back to the main page: which valuation you need, who can sign it, and how an engagement is put together.
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This page is general information, not professional advice. Company law, exchange control, securities regulation, tax law and the accounting standards that sit behind a valuation all change frequently, and several of them changed materially in 2025 and 2026. How any of it applies depends on your own facts. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.