FEMA Pricing Guidelines for Valuation
Money coming in cannot pay less than fair value; money going out cannot take more.
When shares of an Indian company pass between a resident and a non-resident, foreign exchange law fixes which side of fair value the price must sit. The aim is simple: money coming into India should not buy shares too cheaply, and money going out should not take too much.
The rules sit in the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 and are explained in RBI's Master Direction on Foreign Investment in India, last updated on 15 June 2026. The SFA syllabus still names the 2017 regulations that the 2019 Rules replaced, so expect older wording in study material.
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The Pricing Rule at a Glance
Equity instruments of an Indian company. RBI Master Direction, paragraph 8.
Fresh issue to a non-resident
Price must be
Not less than fair value
Benchmark for an unlisted company
Internationally accepted pricing methodology, on an arm's length basis
Transfer from a resident to a non-resident
Price must be
Not less than fair value
Benchmark for an unlisted company
Same
Transfer from a non-resident to a resident
Price must be
Not more than fair value
Benchmark for an unlisted company
Same
Swap of equity instruments
Price must be
Valued irrespective of amount
Benchmark for an unlisted company
SEBI-registered merchant banker, or an investment banker registered abroad
Subscription to the memorandum at incorporation
Price must be
Face value
Benchmark for an unlisted company
No valuation needed
| Transaction | Price must be | Benchmark for an unlisted company |
|---|---|---|
| Fresh issue to a non-resident | Not less than fair value | Internationally accepted pricing methodology, on an arm's length basis |
| Transfer from a resident to a non-resident | Not less than fair value | Same |
| Transfer from a non-resident to a resident | Not more than fair value | Same |
| Swap of equity instruments | Valued irrespective of amount | SEBI-registered merchant banker, or an investment banker registered abroad |
| Subscription to the memorandum at incorporation | Face value | No valuation needed |
Who Can Certify the Fair Value
- Unlisted company
- A chartered accountant, a SEBI-registered merchant banker or a practising cost accountant. FEMA does not require an IBBI registered valuer for this certificate.
- Listed company
- The price worked out under the relevant SEBI guidelines. For transfers, the preferential allotment price under SEBI's guidelines is also an accepted benchmark.
- Swap of shares
- A SEBI-registered merchant banker, or an investment banker outside India registered with the host country's regulator.
- LLP capital contribution
- A chartered accountant, a practising cost accountant or an approved valuer from the Central Government's panel.
A Worked Example
Illustration only. A Bengaluru software company, unlisted, has a certified DCF fair value of ₹480 per share.
- 1
Issue to a US fund
The company can issue at ₹480 or more. Issuing at ₹450 breaches the floor.
- 2
Indian promoter sells to the fund
The promoter can sell at ₹480 or more. Selling at ₹450 to a non-resident breaches the floor.
- 3
The fund later sells to an Indian buyer
The price can be ₹480 or less. A higher price would take more than fair value out of India.
- 4
Check income tax too
Where an Indian buyer pays less than fair market value by more than ₹50,000, section 92(2)(m) of the Income-tax Act, 2025 taxes the shortfall as the buyer's income, using the tax method of fair market value, not the FEMA one.
Quick practice on loss assessment and valuation basics. No signup.
Other Points the Exam Likes
- check_circleConvertible instruments: the price or conversion formula is fixed upfront, and the conversion price cannot be lower than fair value at the time of issue.
- check_circleShare warrants: at least 25% of the consideration upfront and the balance within 18 months.
- check_circleDeferred consideration on a transfer: up to 25% of the total can be deferred, held in escrow or indemnified for up to 18 months.
- check_circleA non-resident cannot be guaranteed an assured exit price; the exit is at the price prevailing at the time.
How the Valuation Examination Tests This
Most questions are direction questions: is fair value a floor or a ceiling for this transaction? Work it out from who is paying in which direction. The other common trap is the certifier: candidates pick "registered valuer" by reflex, but for an unlisted company FEMA names a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant.
FAQs
What are the FEMA pricing guidelines for issue of shares to a foreign investor?expand_more
For an unlisted company, the issue price cannot be less than fair value worked out by an internationally accepted pricing methodology on an arm's length basis and certified by a chartered accountant, SEBI-registered merchant banker or practising cost accountant. For a listed company, the SEBI guideline price applies.
Can a non-resident sell Indian shares to a resident above fair value?expand_more
No. When a non-resident transfers to a resident, the price cannot exceed fair value, so that more than fair value does not leave India.
Does FEMA prescribe DCF for valuing unlisted shares?expand_more
No method is named. The requirement is an internationally accepted pricing methodology on an arm's length basis; DCF is common in practice, but the valuer chooses and justifies the method.
Who values shares in a share swap with a foreign company?expand_more
A SEBI-registered merchant banker, or an investment banker outside India registered with the appropriate regulator in its home country, whatever the size of the swap.
Next steps
- DCF valuationarrow_forward
- Start-up Valuationarrow_forward
- Rule 11UAarrow_forward
- SFA mock testarrow_forward
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