The Legal Side of Funding Compliance: Allotment, Valuation, FEMA and Angel Tax

01Agreed Terms Are the Start, Not the Finish

Many founders relax once the term sheet is signed and the valuation is agreed. In reality that is when the legal closing begins. An Indian round is issued through specific company-law and, where foreign money is involved, FEMA steps, each with a deadline. Done well, the closing is quick and clean; done carelessly, it leaves gaps that an acquirer or the next investor finds years later.

The same theme runs through this whole series: preparation pays. A company that already has its registers, ISIN and advisers in place closes in days, while one that improvises loses weeks. The detail of the instrument you are issuing, usually CCPS, is covered in SAFE vs CCPS vs convertible notes; this guide is about turning that into legally issued shares.

02Agreements and Approvals

First, the contracts. Once the term sheet is agreed, the lawyers prepare and the parties sign the Share Subscription Agreement (SSA), which governs the investment, and the Shareholders Agreement (SHA), which governs the rights between shareholders going forward. These are the documents whose clauses you negotiated; the detail of those clauses is in our shareholders agreement and term sheet coverage.

Then, the corporate approvals. Issuing shares to investors is normally done through the private placement route under Section 42 of the Companies Act, which needs a board resolution and a shareholder special resolution, along with a PAS-4 offer letter to the identified investors. The money must be received into a separate company bank account and used only after allotment. Get the approvals and paperwork in the right order, because a defect here is hard to cure later.

03The Valuation Report

You cannot simply pick a price; the law wants it supported. There are two valuation contexts, and a round with foreign money triggers both.

• Companies Act: a registered valuer provides a valuation report supporting the price at which shares are issued under the private placement.
• FEMA (foreign investors): a SEBI-registered merchant banker values the shares using an internationally accepted methodology, and the price to a non-resident must be at or above that fair value (you cannot issue to a foreign investor below fair value).

There is also the income-tax angle. The fair-market-value rules under Rule 11UA still exist, but with angel tax abolished (covered below), the old pressure of being taxed on premium raised above fair value has eased considerably. The valuation report remains essential for company-law and FEMA compliance regardless. Get it from a qualified professional and keep it in your data room; how valuation is set commercially is in how much to raise and at what valuation.

04Allotment, PAS-3 and Demat

With approvals and valuation in hand and the money received, the board allots the shares by resolution within the time the private placement rules allow. Two things follow immediately.

• File Form PAS-3, the return of allotment, with the Registrar of Companies. For a private placement under Section 42 this is filed within 15 days of allotment. It records who got how many shares at what price, and a late or missed PAS-3 is a classic red flag in the next due diligence.
• Issue the shares in dematerialised form. For most private companies that are not small companies, shares must now be issued in demat under Rule 9B, so the allotment is credited to the investor’s demat account through your RTA and depository, not as a paper certificate. Set up your ISIN and demat process before the round so allotment is not held up.

Update your statutory registers and pay any applicable stamp duty. Only after PAS-3 and the credit of shares is the investor truly on your cap table.

05FEMA and FC-GPR for Foreign Money

If any investor is a non-resident, an extra layer applies under FEMA. When shares are allotted to a foreign investor, the company must report it to the RBI by filing FC-GPR on the FIRMS portal within 30 days of allotment. The filing is supported by the valuation report, the FIRC and KYC from the bank confirming the inward remittance, and a company secretary certificate and declarations.

This deadline is missed surprisingly often, and it has consequences: a Late Submission Fee applies, and an unreported foreign investment is a serious flag in due diligence and at exit. If you are taking foreign money, build the FC-GPR into your closing plan from day one and use advisers who know FEMA well. The cross-border angle on holding those shares in demat is covered in our dematerialisation guide.

06Angel Tax: Now Abolished

For years, angel tax under Section 56(2)(viib) was a real headache: it taxed the share premium an unlisted company raised above the fair market value of its shares, which could hit startups that raised at a high valuation. That is now history.

The Finance Act 2024 abolished angel tax, and Section 56(2)(viib) does not apply from 1 April 2025 (Financial Year 2024-25 onwards), for all classes of investors, resident and non-resident alike. In practice this removes a major source of friction and fear from Indian fundraising, and the worry about pricing a round above fair value for tax reasons is largely gone.

One caveat: the abolition is prospective. Assessments for earlier years can still be raised within the applicable time limits, so if you raised at a premium in a prior year and receive a notice, you still need to respond. For current and future rounds, though, angel tax is no longer a constraint.

07The Closing Checklist

Here is the legal close in order. Treat each row as a task with an owner and a date.

08Frequently Asked Questions