Raising money in India without breaking your cap table
Rounds are rarely lost on compliance. They are frequently delayed by it, and occasionally they leave behind a problem that only appears two years later, in diligence, when it is expensive. This guide covers the instruments that work in India, the valuations you actually need, the filings foreign money triggers, and what a round does to your losses and your employees’ options.
Last checked 3 August 2026.
General information, not advice. Take professional advice before acting.
What you can actually issue, and to whom
India’s list of permissible instruments for foreign investment is exhaustive. If an instrument is not on it, it is not a lighter-touch version of something that is: it is outside the rules entirely.
| Instrument | Works for a foreign investor? | What to know |
|---|---|---|
| Equity shares | Yes | The straightforward case. Price must be not less than fair value |
| Compulsorily convertible preference shares | Yes | Must be fully, compulsorily and mandatorily convertible. This is the workhorse instrument for Indian venture rounds |
| Compulsorily convertible debentures | Yes | Same condition |
| Optionally convertible or redeemable instruments | No, treated as borrowing | These fall outside the equity definition and are treated as external commercial borrowing, with the whole of that framework applying, retrospectively |
| Convertible note | Yes, conditionally | Only if the issuer is DPIIT-recognised at the time of issue, and only at ₹25 lakh or more in a single tranche. Maximum ten years before conversion or repayment. Form CN within 30 days of issue |
| SAFE | No | Not an equity instrument and not a recognised debt instrument. See below |
One more trap on convertible notes. The equity issued on conversion must be priced at not less than the fair value determined when the note was issued, not the value at conversion. A discount-to-next-round mechanic imported from a US note can breach the pricing rules on the day it converts.
One round, up to three valuations
These are three separate requirements under three separate laws. They permit different valuers and different methods, they can produce different numbers, and satisfying one does not satisfy the others.
| Law | When it applies | Who may certify |
|---|---|---|
| Companies Act | Every preferential allotment by a private or unlisted company | A registered valuer. There is no exemption for private companies or for startups |
| Foreign exchange rules | Any issue to, or transfer to or from, a person resident outside India | A chartered accountant in practice, a SEBI-registered merchant banker, or a practising cost accountant. Any internationally accepted methodology on an arm’s length basis |
| Income tax | Any issue or transfer of unquoted shares below fair market value | A prescribed computation, not a certificate. The net asset value formula sets the statutory floor; a merchant-banker-supported discounted cash flow is available where the provision allows it. Which applies depends on whether the transaction is an issue, a transfer or consideration below fair market value |
Direction matters and founders invert it. On an issue to a non-resident, the price must be not less than fair value. On a transfer from a non-resident to a resident, the price must be not more than fair value. Getting that backwards on a secondary sale is a live contravention rather than a paperwork point.
Angel tax is gone. The risk moved rather than disappeared.
The charge on share premium above fair market value was withdrawn, and the whole apparatus that grew up around it (the ₹25 crore cap, the DPIIT exemption from it, the safe harbours) is spent. There is no equivalent provision in the Income-tax Act 2025. Two caveats. Earlier years remain fully assessable and appealable under the old Act, so a founder with an open assessment is not helped by the withdrawal. And the published departmental position on which year the withdrawal starts is capable of a later reading on the statutory wording, so any round closed in that transition year should be checked rather than assumed.
What survives is the mirror-image provision, and it is the one that now matters. Where a person receives unquoted shares for less than fair market value, the shortfall is taxable in the recipient’s hands, at their ordinary rate. It applies to a fresh issue and not merely to transfers of existing shares. So the risk has flipped direction: post-withdrawal, the exposure is pricing too low, not too high.
The clock starts when the money arrives
Four deadlines, running in sequence, and the first one is a registration most founders discover only when they try to file something else.
- Register on the FIRMS portal first. Your company needs a one-time Entity Master registration before it can file anything at all. It sits upstream of every deadline below, it is filed by a different registered user from the one who files the return itself, and companies routinely find out on day 28 that they cannot proceed.
- Allot within 60 days of receiving the money. If you do not, it must be refunded within a further 15 days. Money sitting in the account while a valuation report is pending is already burning that clock.
- File Form FC-GPR within 30 days of allotment. The clock runs from allotment, not from receipt of funds and not from the board resolution.
- File the annual Foreign Liabilities and Assets return, every year thereafter. It falls on any entity with outstanding inward foreign investment as at the end of March, in every year a non-resident remains on the cap table, including a year with no new investment and no activity. Founders treat it as event-driven; it is an annual census. The standing date is 15 July and the portal has announced extensions in each of the last two years.
The land-border rule, and why it reaches funds that look nothing like it
Investment where the investor, or its beneficial owner, is from a country sharing a land border with India requires prior government approval. That rule was amended with effect from 2 May 2026, and the amendment replaced an effectively zero-tolerance reading with objective thresholds: beneficial ownership is now tested against the money-laundering rules, broadly more than 10% for a company or a partnership firm and more than 15% for an unincorporated body. Below the threshold, and without control, an investment now proceeds on the automatic route.
Three things make this bite on cap tables that look entirely unconnected to it. Ownership is tested individually or collectively, so three unrelated limited partners at 4% each breach a 10% threshold together. Control has no percentage floor: a small investor with a board seat or a veto right can trigger approval on its own. And the test for individuals is citizenship, not residence. Separately, the easing introduced a reporting obligation attaching to any land-border ownership, however small, so a fund with a 0.5% exposure needs no approval and is still caught by it. No format for that report has been issued yet, so treat it as a live requirement to track rather than a form you can file today.
The practical consequence for a founder is unglamorous: you need look-through beneficial ownership representations from each foreign investor, and you need to refresh them on transfers, because a later transfer that brings ownership within the restriction requires approval before it happens rather than after.
What a round does to your carried-forward losses
A closely held company loses its carried-forward business losses if beneficial shareholding changes by more than 49%. An eligible startup has an alternative test for losses incurred in its first ten years: they survive if all the shareholders who held voting shares in the loss year still hold those shares.
Read that carefully, because it is stricter than it sounds, not looser. Its only virtue is that it ignores dilution by newly issued shares. It breaks the moment any founder exits, any angel sells out at Series A, any original holding is bought back, or an option pool is created out of existing holdings. In practice most funded companies are back on the ordinary 51% test by Series B, which is usually fine, and is worth knowing in advance rather than discovering at assessment.
Unabsorbed depreciation is treated differently from business loss and has been held not to fall within the restriction at all, which usually works in a startup’s favour after a change of control. The position under the new Act is untested: it is four months old and there is no guidance on it yet.
ESOPs, and the deferral most companies cannot use
Employees are taxed twice on an option, at two different moments. At exercise, on the difference between fair market value and the exercise price, as a perquisite, even though no cash has changed hands and the shares may be unsaleable. Then again on sale, as capital gains, with the holding period running from allotment rather than from grant or exercise.
There is a deferral of that first payment, and it is the single most misstated benefit in Indian startup advisory. It is available only to a startup holding the Inter-Ministerial Board certificate, not to any DPIIT-recognised startup. Around 3,700 such certificates had been granted in total up to May 2025. If you tell your employees their option tax is deferred and you do not hold it, you have also defaulted on your own withholding obligation, and that liability is the company’s before it is the employee’s.
The cheapest time to fix a cap table is before it exists.
Bring us in at term sheet, not at closing, and most of this becomes a checklist rather than a delay.
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This page is general information, not professional advice. Indian tax, exchange control and company law positions change frequently, and how any of them applies depends on your specific facts. Take professional advice before acting on anything on this page. We are happy to be that adviser, but do not act on a web page, ours or anyone else’s, without one.