Raising Capital: Instruments, Valuation and the Filings That Follow
The decisions taken in the two weeks around a funding round have consequences for years, and they are usually taken quickly by people who will not have to live with the administrative half of them. The instrument, the valuation basis and the filing calendar are all fixed at that point.
- Convertible instruments and what each one is under Indian law
- Valuation: what has to be certified, by whom, and for whom
- The share premium charge that was abolished and the one that survives
- The filings after a round, and the penalty myth
Three things that all convert, and are not the same
| Instrument | What it is under Indian law | Points to watch |
|---|---|---|
| Compulsorily convertible preference shares and compulsorily convertible debentures | Equity instruments under the foreign exchange non-debt instruments rules, and, on a qualifying subscription into an unlisted Indian company under the foreign direct investment route, treated as foreign direct investment from issuance. What makes them equity is that conversion is full and mandatory. Separately, rule 21(2)(a) requires the conversion price or the formula to be determined upfront, and the price on conversion to be not below the fair value at issue. | A formula is enough; the final number need not be known at issue. Leaving the price to later agreement is not enough, and a pricing defect is a compliance failure rather than an automatic recharacterisation as debt, just as fixing a price upfront does not turn an optionally convertible instrument into equity. For a resident investor a convertible debenture is a debenture under the Companies Act and escapes the deposit rules only if it is compulsorily convertible within ten years. Section 62(3) special resolution and the related filing apply. |
| Convertible notes | A separate instrument, available only where the issuer is a recognised start-up that is a private company, with a minimum of ₹25 lakh from each investor in a single tranche, convertible into equity shares or repayable within ten years of issue. | Recognition of a limited liability partnership or a firm does not open this route. The ten years is a ceiling, so a shorter contractual maturity still binds, and the ₹25 lakh is a floor per investor rather than a target for the round. The recognition definition itself was replaced in February 2026, so check status before assuming the instrument is available. |
| Ordinary equity | The simplest instrument and the one most often avoided for the wrong reason, which is a reluctance to agree a valuation. | Where a round is small and the parties are aligned, the administrative saving is real. |
Who certifies what, and why there are two answers
There are two separate valuation regimes and a round frequently engages both, with different methodologies and different qualified valuers.
On the exchange control side, equity instruments of an unlisted Indian company issued to a person resident outside India must be priced at 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 merchant banker registered with the Securities and Exchange Board of India, or a practising cost accountant. Registration as a valuer is not by itself a qualification under this rule.
That is a floor on an issue, and it is not a single rule for every transaction. A transfer from a resident to a non-resident has the same floor; a transfer the other way has a ceiling instead; and a share swap carries its own certifier requirement. Getting the direction wrong is the common error, because the protection runs in favour of the resident in both cases.
On the income tax side, the position changed materially and in the taxpayer's favour. The charge on share premium received above fair market value, section 56(2)(viib) of the 1961 Act, ceased to apply from assessment year 2025-26, and the Income-tax Act 2025 contains no equivalent. That discontinuance is general: it does not depend on start-up recognition, and no separate exemption application is needed to secure it. Assessment year 2024-25 and earlier are a different matter, because the repeal and savings provision in section 536 does not extinguish a liability or a proceeding already on foot.
What survives is the charge in the other direction, on a person who receives property below fair market value, formerly section 56(2)(x) and now section 92(2)(m)(iii) of the 2025 Act, with shares and securities brought inside the word property by section 92(5)(f)(ii) and the valuation method prescribed under section 92(5)(c). So an over-priced round is now a valuation and exchange control question. An under-priced allotment to an investor is still a tax question.
The calendar, and the penalty myth
| Filing | Deadline |
|---|---|
| Share allotment return to non-resident investors (FC-GPR) | Within 30 days of allotment |
| Transfer between resident and non-resident (FC-TRS) | Within 60 days of receipt of consideration or of transfer |
| Employee share option grant or allotment to a non-resident | Within 30 days |
| Convertible note filing | Within 30 days |
| Annual return on foreign liabilities and assets | 15 July each year |
| Annual performance report on overseas investment | 31 December each year |
The three times myth
The widely repeated claim that a late share allotment return attracts a penalty of three times the investment is wrong for routine late filings. The Reserve Bank operates a late submission fee. For a periodic return, such as the annual return on foreign liabilities and assets or the annual performance report, it is a flat ₹7,500. For a transactional return, such as FC-GPR, it is ₹7,500 plus 0.025 per cent of the amount involved for each year of delay, the delay counted in years rounded up to the nearest month, and the whole fee rounded up to the nearest ₹100. It is capped at 100 per cent of the amount involved in the delayed reporting, can be opted for up to three years from the due date, and is payable within thirty days of the advice. Miss those thirty days and the advice lapses; a fresh application recalculates the delay to its own date. Compounding is the fallback where the late submission fee route is not available. Being late is not free, but it is not catastrophic, and fear of a penalty that does not exist causes worse decisions than the delay does.
If any investor has land-border exposure
Investment from an entity of a country sharing a land border with India, or where the beneficial owner is situated in or is a citizen of such a country, requires government approval. This is Press Note 3 of the 2020 series, and it is still the base rule.
It was recalibrated by Press Note 2 of the 2026 series, which took effect only when the amending foreign exchange rules were made: the Foreign Exchange Management (Non-debt Instruments) (Amendment) Rules 2026, S.O. 2174(E), dated 1 May 2026 and operative on publication on 2 May 2026, substituting rule 6(a). Prior approval still applies to an entity incorporated in, or a citizen of, a land-border country whatever the stake, and land-border exposure carries a reporting obligation even where the investment is on the automatic route and needs no approval.
What the recalibration changed is how beneficial ownership is tested. It is now anchored to the anti-money-laundering rules, which do not use one percentage: more than ten per cent of shares, capital or profits for a company or a firm, more than fifteen per cent for an unincorporated association or body of individuals, and a separate test for a trust that also reaches the author, the trustee and anyone exercising ultimate effective control. Indirect holdings aggregate, and control over the foreign investor or over the Indian company is caught whatever the percentage.
Relief is not confined to listed entities and globally diversified funds. The rule turns on the investor entity being incorporated or registered outside a land-border country, so a private equity or venture fund can qualify, provided those ownership and control conditions are met. Describing it as a flat ten per cent safe harbour is the mistake to avoid, because the applicable threshold depends on the investor's legal form.
Note also that there is a separate Press Note 3 of the 2026 series, issued in July 2026, dealing with inventory-based electronic commerce confined to the export of goods made in India. Two different instruments share a number. Always say which series.
Where to go next
Virtual CFO
Back to the main page: how the engagement is structured, who it suits, and how to reach us.
When You Need a CFO, and When You Need a Virtual One
What a finance lead actually does that a good accountant does not, the point in a business's life when the gap starts to cost money, and the statutory officer question that is often confused with this one.
Planning, Forecasting and the Numbers a Board Actually Reads
Building a forecast that survives contact with reality, the difference between a management pack and a report, the handful of measures worth putting in front of a board, and why cash is the only one that cannot be argued with.
Tax and Structuring Decisions a Finance Lead Owns
Corporate rates and concessional regimes under both Acts, minimum alternate tax after the 2026 reduction, buybacks after two changes in eighteen months, employee share options, and the transfer pricing obligations that arrive with a foreign parent.
Restructuring and Growth: Mergers, Reorganisation and What Replaced Fast-track Insolvency
The fast-track merger route as widened in September 2025, the tax trap inside it, the reverse flip home, and the creditor-initiated process that replaced fast-track insolvency for start-ups in May 2026.
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The cheapest hour of advice in a funding round is the one before the term sheet is signed. If you are at that point, that is when to call.
This page is general information, not professional advice. Almost every rule a finance lead relies on in India moved between October 2024 and April 2026. The Income-tax Act 2025 renumbered every section from 1 April 2026, the treatment of share buybacks changed twice in eighteen months, the fast-track merger route was widened, the fast-track insolvency route for start-ups was abolished, and the recognition definition for start-ups was replaced. Nothing on this page is advice on your 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.