Under FEMA, fair value is a floor when shares go to a non-resident and a ceiling when they come back from one, and the number that satisfies FEMA may not be the number the Income-tax Act uses.
Last verified: 5 September 2026 · Applies to: transactions on or after 1 April 2026
Contents
- What Rule 21 actually requires
- What counts as an internationally accepted pricing methodology
- The floor and ceiling asymmetry
- Who may sign, and how current the certificate must be
- The two-valuation problem most founders miss
- Overseas direct investment
- What changed for portfolio investment in June 2026
- Frequently asked questions
- How BVACA can help
What Rule 21 actually requires
Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 sets the pricing guidelines for cross-border equity. It applies to three families of transaction:
- Issue of equity instruments by an Indian company to a person resident outside India, which is most inbound FDI
- Transfer of equity instruments from a resident to a non-resident, and from a non-resident to a resident
- Overseas direct investment by Indian parties
For an unlisted Indian company, the price must be worked out using an "internationally accepted pricing methodology on an arm's length basis", certified by a permitted professional. For a listed company the market provides the reference; the certificate route matters most for unlisted shares, which is where almost all founder-stage transactions sit.
The rule is not a valuation method. It is a price constraint. It does not tell you what the shares are worth; it tells you the side of a line your transaction price has to be on.
What counts as an internationally accepted pricing methodology
The standard is deliberately open. In practice, four families of method are used and accepted:
| Method | When it is the right choice | What a reviewer looks at |
|---|---|---|
| Discounted cash flow | Operating companies with a defensible forecast; the default for a priced venture round | The forecast's link to historical performance, the discount rate build-up, and the terminal value as a proportion of total value |
| Market multiples | Companies with genuinely comparable listed or transacted peers | Whether the peer set is comparable in size, geography and margin profile, and the discounts applied for size and illiquidity |
| Comparable arm's-length transactions | A recent, genuinely third-party round or secondary sale in the same company | How recent, whether truly arm's length, and whether the instrument was identical |
| Asset-based | Holding companies, property-heavy companies, loss-making or pre-revenue balance-sheet businesses | Whether assets have been revalued or simply carried at book |
DCF is by far the most common in FDI work, and it is worth noting the contrast with income tax: DCF is fully available for FEMA pricing, while it is not among the permitted methods for unquoted equity shares under the Rule 57 formula that replaced Rule 11UA. If you want the mechanics of the models themselves, our primer covers how DCF and market multiples are built.
What a certificate must show, whatever method is chosen: the valuation date, the method and why it was selected, the inputs, the arithmetic, and the resulting price per share expressed as the floor or ceiling that applies to the transaction in question. Authorised dealer banks reject certificates for missing the last of those far more often than for the method itself.
The floor and ceiling asymmetry
This is the part that catches people out, and the logic behind it is simple once stated: India must not sell its equity to non-residents too cheaply, and must not buy it back from them too dearly.
| Transaction | Fair value operates as | So the price must be |
|---|---|---|
| Indian company issues shares to a non-resident | Floor | At or above fair value |
| Resident transfers shares to a non-resident | Floor | At or above fair value |
| Non-resident transfers shares to a resident | Ceiling | At or below fair value |
Illustrative example, going out. An unlisted Indian company obtains a Rule 21 certificate showing a fair value of ₹500 per share. It proposes to issue 2,00,000 shares to a Dubai-based investor at ₹450 because that was the price informally agreed months earlier. That issue is not permitted: ₹450 is below the floor. Issuing at ₹500, or at ₹620 if the parties agree a premium, is unobjectionable. The rule sets a minimum, never a maximum, on the way out. Figures are invented for illustration.
Illustrative example, coming back. The same investor exits two years later and sells its holding to an Indian resident co-founder. A fresh certificate puts fair value at ₹900 per share. A transfer at ₹960 breaches the ceiling, because a resident may not pay a non-resident more than fair value. A transfer at ₹900, or at ₹700 if the parties agree a discount, is fine.
The asymmetry means that a single certificate does different work depending on direction, and that the same price can be compliant in one direction and a contravention in the other. When a share purchase agreement is drafted before the certificate is obtained, this is the clause that has to be renegotiated.
Who may sign, and how current the certificate must be
Rule 21 accepts a wider list of signatories than the Companies Act does:
- a chartered accountant
- a SEBI Category I Merchant Banker
- a practising cost accountant
An IBBI Registered Valuer is not the specified signatory here, which surprises companies that have just paid for a section 247 report. The two mandates are separate, and a transaction can need both: the Companies Act report for the preferential allotment, the Rule 21 certificate for the foreign investor. Our note on who is allowed to sign which valuation report sets out the full map.
On currency: the commonly cited 90-day validity of a Rule 21 certificate is an authorised-dealer-bank convention rather than a Rule 21 statutory line — most AD banks refuse a certificate older than 90 days at the date of the transaction. In practice, some banks accept up to 180 days for a straightforward transfer where nothing has changed on the company's side. What is safe to say is that a certificate that predates a material change in the company's financial position — a completed funding round, a large acquisition, a write-off — will be questioned regardless of the date on it. Build the certificate into the transaction timetable rather than obtaining it early and hoping it holds.
The two-valuation problem most founders miss
Here is the practical point that costs the most money when it is missed.
FEMA and the Income-tax Act ask different questions and permit different methods, so the same transaction can produce two different fair values, and both must be satisfied.
FEMA asks: is the price on the right side of the line drawn by an internationally accepted pricing methodology? Income tax asks, for unquoted equity shares: how does the price compare with the Rule 57 formula, for the purposes of section 92(2)(m) (receipt of property below FMV, charged on the recipient) and section 79 read with section 72 (transfer of unquoted shares below FMV, charged on the transferor)?
The two answers can diverge in either direction.
Illustrative example. A company obtains a Rule 21 DCF certificate at ₹500 per share and issues to a foreign fund at ₹500. Its balance sheet is asset-rich, and a Rule 57 working on the same date produces ₹700 per share. FEMA is satisfied: ₹500 is at the floor. But the investor has received unquoted equity shares at ₹200 per share below the Rule 57 fair market value, which is precisely the shortfall section 92(2)(m) is drafted to catch. Figures are invented for illustration.
Reverse the facts, with Rule 57 at ₹400 and the FEMA DCF at ₹500, and the exposure disappears: issuing at ₹500 clears both the FEMA floor and the income-tax benchmark.
The workflow that avoids the problem is unglamorous: run the Rule 57 formula before you fix the price, not after you have signed. It is an arithmetic exercise off the audited balance sheet and takes a fraction of the time a DCF does. Knowing both numbers before the term sheet is finalised means the price can be set to clear both tests, which is almost always possible and almost never possible to fix retrospectively.
Overseas direct investment
Rule 21 also reaches outbound investment. Where an Indian party acquires or transfers equity in a foreign entity, pricing must likewise be supported on an arm's-length basis, certified by the same class of professional: a chartered accountant, a SEBI Category I Merchant Banker or a practising cost accountant.
On ODI specifically: a fresh valuation is required for acquisitions or transfers of equity in a foreign entity above USD 5 million and for any subsequent capital contribution above that threshold — plus, as a matter of AD-bank practice, for any inter-group restructuring that materially changes the share price. Small-ticket ODI below USD 5 million typically clears on the acquirer's book values, subject to AD comfort.
The recurring practical issue on outbound deals is not the certificate but the evidence behind it. Valuing a foreign operating subsidiary requires local financial statements on a comparable basis, and where the target's accounts are prepared under a different framework, the reconciliation work is usually the long pole in the timetable.
What changed for portfolio investment in June 2026
The FEMA (Non-Debt Instruments) (Third Amendment) Rules, 2026, notified on 15 June 2026 and implemented through RBI Notification FEMA 395(4)/2026-RB, materially widened portfolio investment in listed Indian companies:
| Item | Before | After the Third Amendment |
|---|---|---|
| Individual holding cap | 5% | Below 10% |
| Aggregate cap | 10% | 24% |
| Who is eligible | NRIs and OCIs | Any individual resident outside India |
| Repatriation plumbing | Multiple account structures | A designated repatriable rupee account is permitted, so post-tax sale proceeds can be repatriated without layered accounts |
A breach of the individual cap triggers a five-day divestment window, failing which the holding is liable to reclassification as FDI, with the compliance consequences that follow from that reclassification.
Why this sits in a valuation article: it changes where the pricing-certificate burden falls. Listed portfolio investment is priced by the market and does not need a Rule 21 certificate in the way an unlisted share issue does. As the portfolio route widens, more foreign individual money can reach Indian listed equity without valuation machinery, while unlisted transactions remain certificate-driven. If you are structuring foreign participation, the listed or unlisted character of the target now drives materially different compliance work.
Frequently asked questions
Who can issue a FEMA valuation certificate?
A chartered accountant, a SEBI Category I Merchant Banker or a practising cost accountant, under Rule 21 of the FEMA NDI Rules, 2019. An IBBI Registered Valuer is the signatory the Companies Act requires under section 247, which is a separate mandate. A transaction involving both a preferential allotment and a foreign investor typically needs both documents.
Can I issue shares to a foreign investor below fair value?
No. For an issue or a transfer to a non-resident, fair value determined on an internationally accepted pricing methodology is a floor. Pricing above fair value is permitted, pricing below it is not. The constraint reverses when a non-resident transfers shares to a resident, where fair value becomes a ceiling.
Does a share transfer between two NRIs need a valuation certificate?
The pricing guidelines in Rule 21 are framed around transactions that cross the resident and non-resident boundary, which is where the floor and ceiling operate. A transfer that does not cross that boundary raises different reporting questions rather than pricing ones. Confirm the specific route before relying on this, as the answer turns on the instrument and the parties.
Which valuation method should we use for an FDI round?
Discounted cash flow is the most common for an operating company with a defensible forecast, but market multiples, comparable arm's-length transactions and asset-based approaches are all acceptable. Choose the method the company's facts support, and state on the certificate why it was chosen. A DCF built on a forecast nobody can tie to history is the most frequently challenged.
Do I need a separate valuation for income tax?
Usually yes, if unquoted equity shares are involved. FEMA and the Income-tax Act permit different methods, so the Rule 21 fair value and the Rule 57 formula can produce different numbers, and the transaction has to clear both. Run the Rule 57 arithmetic before fixing the price.
How long does a FEMA valuation certificate remain valid?
In practice, most authorised dealer banks apply a 90-day freshness expectation on Rule 21 certificates, though it is a practice convention rather than a rule-level requirement. Any material change in the company's financial position between the valuation date and the transaction date will prompt a fresh certificate whatever the nominal shelf life.
How BVACA can help
Bachhal Vijender & Associates prepares Rule 21 pricing certificates for inbound share issues, resident to non-resident and non-resident to resident transfers, and runs the income-tax Rule 57 working alongside so a client sees both numbers before the price is fixed rather than after the agreement is signed. We hold IBBI Registered Valuer credentials in the practice, so where the same transaction also needs a section 247 report we can scope both together and sequence them against the board meeting and the authorised dealer bank's timetable. For cross-border rounds we work with the company's counsel on the sequence of certificate, board approval, allotment and filing. See our valuation certificates for FEMA and FDI transactions and corporate finance and transaction support.
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Author box: CA Vijender Singh Bachhal, Managing Partner, Bachhal Vijender & Associates (FRN 028355N), Panchkula. About the firm
Disclaimer: This article is general information current as at 5 September 2026, not advice for a specific situation. Tax and corporate law in India changed materially on 1 April 2026; verify the position before acting. Illustrative examples are not client matters.
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