Startup Valuation Reports in India: When You Need One and Who Signs

Almost every founder I work with meets the valuation report for the first time a week before the money is due. The term sheet is signed, and the closing checklist has a line that says “valuation certificate”. The founder assumes it is a formality. Often it is several documents, signed by different kinds of professionals, for different laws. This note explains when a report is actually required, who is allowed to sign which one, how the number is built, and how to prepare so that the report holds up years later.

If you are still deciding what instrument to raise on, read my comparison of SAFEs, CCDs and priced rounds first. The instrument you choose changes which reports you need and when.

Three laws, three reasons to value the same shares

A valuation report is not one requirement. It is the answer to three separate questions asked by three separate laws.

Company law cares about existing shareholders. When a private company issues shares to a select group of investors rather than to all existing shareholders in proportion, the Companies Act, 2013 treats it as a preferential allotment. Section 62(1)(c), read with the Companies (Share Capital and Debentures) Rules, 2014, requires a special resolution and requires the price to be determined by the valuation report of a registered valuer. The point is to stop a board from issuing shares cheaply to friends and diluting everyone else. Most startup rounds are done by way of private placement under Section 42 together with these preferential allotment rules, so this report comes up in almost every priced round.

Foreign exchange law cares about money leaving India cheaply. When an unlisted Indian company issues shares to a person resident outside India, the pricing guidelines under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 say the issue price cannot be less than the fair value of the shares, worked out under an internationally accepted pricing methodology on an arm’s length basis. The same logic runs on transfers: a resident selling to a non-resident cannot sell below fair value, and a non-resident selling to a resident cannot sell above it. For convertible instruments such as CCPS and CCDs, the price or conversion formula has to be fixed upfront, and the conversion price cannot be lower than the fair value at the time the instrument was issued. The valuation certificate is then filed with the RBI reporting, which I cover in my guide to the FC-GPR filing.

Tax law cares about value moving without tax. This is the part most founders have heard of, usually as “angel tax”, and it is the part that has changed. More on that next.

Where income tax stands after angel tax

For years, Section 56(2)(viib) of the Income-tax Act, 1961 taxed a closely held company on the premium it received above the fair market value of its shares. Rule 11UA told you how to compute that fair market value, and a DCF under that rule had to come from a merchant banker. That is why every founder of my generation learned to fear the phrase. The Finance (No. 2) Act, 2024 omitted Section 56(2)(viib), with effect from assessment year 2025-26. For share issues on or after 1 April 2024, the company is no longer taxed on premium in excess of fair value under that provision. I explain the history and the older disputes in my note on angel tax under Section 56.

Two things did not go away with it.

Rule 11UA still decides fair market value for other provisions. When someone buys unquoted shares for less than their fair market value, Section 56(2)(x) can tax the buyer on the difference beyond a small threshold, and Section 50CA treats the seller as having sold at fair market value instead of the lower price actually received. Both use Rule 11UA. For unquoted equity shares, the rule used for these sections is largely a formula built on the balance sheet, with certain assets such as immovable property and investments taken at their own values. It is not a DCF, and for a young startup it will often give a number far below the last round price. That matters every time a founder buys out a co-founder, gifts shares within the family, or an early employee sells to a new investor on a secondary. Whether 56(2)(x) reaches a fresh allotment of shares, as opposed to a transfer of existing ones, has been argued both ways over the years, so take advice on your own facts before you assume either answer.

The tax officer can still ask where the money came from. Section 68 allows a tax officer to question credits in a company’s books, and for closely held companies it specifically covers share capital and share premium. A sound valuation report does not answer the source question, but it does answer the obvious follow-up: why did an investor pay this much for these shares?

One more point for anything you read, including this piece. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and renumbered its provisions. I use the familiar 1961 section and rule numbers here because that is how every existing report, notice and judgement refers to them. Check the corresponding provision under the new Act and the current rules before you quote a section number in a board note or a report.

Who can sign which report

This is where rounds get delayed, because each law names its own signatory and they do not fully overlap.

Companies Act preferential allotment: a registered valuer. Section 247 of the Companies Act and the Companies (Registered Valuers and Valuation) Rules, 2017 require valuations under the Act to be done by a valuer registered with the Insolvency and Bankruptcy Board of India for the relevant asset class. For shares, that is the securities or financial assets class. A CA who is not a registered valuer cannot sign this report, however experienced.

FEMA pricing: a CA, a SEBI-registered merchant banker or a practising cost accountant. The foreign exchange rules give a wider choice for unlisted companies. In practice, the FEMA certificate and the Companies Act report are often signed by the same person when that person is both a chartered accountant and a registered valuer, which keeps the two numbers consistent.

ESOP perquisite value: a merchant banker. When an employee exercises options in an unlisted company, the perquisite is valued on the fair market value of the shares, and the rules require that value to be determined by a SEBI-registered Category I merchant banker. This is a separate report from your fundraising report and it serves a different purpose, which I discuss in my piece on ESOP taxation from grant to sale.

A single foreign-funded round can therefore need a registered valuer’s report for the Companies Act and a FEMA-compliant certificate, with the merchant banker’s ESOP valuation running on its own cycle. Plan the engagements together so the valuation dates, the financial data and the underlying assumptions line up.

The methods, and which one fits a startup

No method is correct in the abstract. The valuer’s job is to pick the ones that fit the company’s stage and the evidence available, explain why, and reconcile the results.

Discounted cash flow (DCF). Project the free cash flows the business will generate, discount them at a rate that reflects the risk, and add a terminal value for everything beyond the projection period. For a startup, the terminal value is often most of the answer, and the discount rate carries a large company-specific risk premium. DCF is the method most sensitive to the founder’s projections, which is both its strength and the reason it attracts scrutiny.

Net asset value (NAV). Assets less liabilities, divided by the shares. Useful for holding companies and asset-heavy businesses. For a technology startup, NAV understates value badly, because the value sits in future earnings that the balance sheet does not record.

Market multiples. Apply a multiple observed in comparable listed companies or comparable transactions, usually on revenue for early-stage companies and on EBITDA once the business is profitable. The work is in choosing comparables honestly and adjusting for size, growth and the fact that unlisted shares cannot be sold on an exchange tomorrow.

Backsolve from a priced round. Where a genuine third-party investor has recently paid a price for a class of shares, the valuer can work backwards from that price to an equity value for the whole company, and then allocate value between share classes. For early-stage companies this is often the most defensible evidence available, because it is an actual arm’s length price rather than a model. It only works if the round really was arm’s length and recent, and it needs care where the investor’s shares carry rights that the common shares do not.

A good report usually runs more than one method, shows where they land, and explains the weight given to each. A report that runs one method and lands exactly on the term sheet price, to the rupee, invites exactly the question you do not want.

Why the report number and the round price differ

Founders are often unsettled when the valuation report shows a number different from the price in the term sheet. That is normal, and there are good reasons for it.

The round price buys more than shares. A Series A investor paying for CCPS is paying for a liquidation preference, anti-dilution protection, board seats, information rights and veto rights, all of which I walk through in my note on term sheet clauses that matter. A report valuing ordinary equity shares on the same date should come out lower than the preferred price, because the common share does not carry those rights.

The round price includes negotiation. Competition between investors, a strategic reason to own the company, or a fund’s need to deploy capital all push the negotiated price up. A fair value report is not meant to capture that premium.

The law asks a specific question. Under FEMA, the question is whether the price paid by the foreign investor is at least fair value. So the report needs to show a fair value at or below the issue price, not a number that matches it. Under the Companies Act, the report supports the price at which shares are issued to the select investors. Under the Rule 11UA formula for secondary transfers, the answer is driven by the balance sheet and can bear no resemblance to the round price at all.

What should not happen is a report commissioned to hit a number. If the valuer is working backwards from the answer you want, with projections stretched until the DCF fits, the report is weakest exactly where it will be tested.

How to prepare projections that survive scrutiny

The report is only as good as the inputs, and most of the inputs come from you. These are the points I ask founders to get right before we start.

1. One set of projections. The plan in your pitch deck, the plan in the board pack and the plan given to the valuer should be the same plan, or the differences should be explained in writing. Three versions of the future, each written for a different audience, is the fastest way to lose credibility with a tax officer or a future acquirer’s diligence team.

2. Build from drivers, not from a growth rate. Revenue should come from customers, pricing, conversion and churn, and costs should come from a hiring plan and unit economics. A line that says revenue grows at a fixed high percentage every year for five years is not a projection; it is a hope.

3. Tie the first year to actuals. The first projected year should connect to your latest management accounts. If you did Rs 2 crore last year, a plan showing Rs 20 crore next year needs the evidence to be in the room, such as signed contracts or a pipeline with real names.

4. Board approval and a paper trail. Have the board take the projections on record. Keep the assumptions note, the data behind it and the valuer’s working papers in a single folder. Years later, when someone asks why the report looked the way it did, this folder is your answer.

5. Share the legal documents early. The valuer needs the term sheet, the share subscription and shareholders agreement drafts, the cap table, and the terms of every convertible outstanding. The rights attached to each class of shares change the allocation of value, and discovering a participating preference on the last day forces a rewrite.

Common pitfalls

Using one report for every purpose. A FEMA certificate signed by a CA who is not a registered valuer does not satisfy the Companies Act. A fundraising report does not satisfy the ESOP perquisite rule. Map every requirement before you appoint anyone.

Stale reports. A report dated long before the allotment is an easy target. Keep the valuation date close to the issue and refresh it if the round slips.

Ignoring the secondary. Founders focus on the primary issue and forget that the same round often includes an angel or early employee selling some shares. That transfer has its own FEMA pricing test if a non-resident is involved, and its own Rule 11UA exposure for buyer and seller.

For the wider sequence of a round, from first conversation to allotment, see my founder’s guide to fundraising in India.

Questions founders ask me

Now that angel tax is gone, do I still need a valuation report for a domestic round? In most priced rounds, yes. If you are issuing shares to a select group of investors by private placement, the Companies Act requires the price to be supported by a registered valuer’s report, whether the investor is Indian or foreign. The abolition of Section 56(2)(viib) removed a tax on the company; it did not remove the company law requirement.

Can my own CA sign the report? For the FEMA certificate, a chartered accountant is one of the permitted signatories. For the Companies Act report, only an IBBI registered valuer can sign. For the ESOP perquisite value, it has to be a Category I merchant banker. Your CA can do all of it only if they hold the right registration for each piece.

Does a SAFE or a convertible avoid all this? It moves the question rather than removing it. Under FEMA, the conversion price or formula for a convertible has to be fixed at the time of issue and cannot be below fair value at that time, so a valuation is needed when the instrument is issued, not only when it converts.

Bottom line

A valuation report is three compliance answers dressed as one document. The Companies Act wants a registered valuer to support the price on a preferential issue. FEMA wants proof that a foreign investor paid at least fair value, from a CA, merchant banker or cost accountant. Income tax no longer taxes the company on premium after the omission of Section 56(2)(viib), but Rule 11UA still decides value for secondary transfers, Section 68 still lets the tax officer ask where the money came from, and ESOP valuations still need a merchant banker. The report number will usually differ from the round price, and that is fine when the reasons are written down. What protects you is one honest set of projections, built from drivers and tied to actuals, and a file that explains every assumption. Rules and section numbers have changed recently, so check the current position under the Income-tax Act, 2025 and the latest RBI directions before you close. If you are preparing a round and want the reports planned together, the first call is usually 45 minutes.