Summary: A foreign VC investment in an Indian startup may involve both a primary subscription to fresh CCPS and a secondary purchase of existing equity shares, even where both transactions are covered by the same term sheet and closing date. The two legs attract distinct compliance requirements under the Companies Act, 2013 and FEMA, including different issuance or transfer mechanics, valuation requirements, forms and filing timelines. The primary investment involves Sections 42 and 62(1)(c), valuation and allotment compliances, PAS-3 and FC-GPR filings, while the secondary investment involves share-transfer requirements, SH-4 and FC-TRS. Additional FEMA considerations include sectoral caps, beneficial ownership, pricing and late submission fees. Where the investor is an FVCI, the applicable SEBI framework must also be considered, including the FVCI registration and DDP framework and the SWAGAT-FI provisions. The article highlights the importance of separately tracking the compliance clocks for primary and secondary transactions rather than treating the entire funding round as one compliance exercise.
Introduction
Imagine a scenario where a foreign VC investor is investing in an Indian startup through a company based in Mauritius or Singapore at Series A/B. This investment has two separate parts. First, in the primary investment, the investor has subscribed to fresh Compulsorily Convertible Preference Shares (CCPS) issued by the company. Second, the same investor buys a smaller portion of existing equity shares directly from the founder or from an ESOP holder in the secondary investment to provide partial liquidity to either a departing employee or a founder with concentrated ownership.
Now, even though both investments occur under the same term sheet and closing date, they trigger different provisions under different statutes because of their distinct nature. The primary investment involves a foreign investor and the company’s issuance of new shares. Therefore, this investment attracts Sections 42 and 62(1)(c) of the Companies Act, 2013 and an FC-GPR filing under the Foreign Exchange Management Act (FEMA), 1999.
Whereas, the secondary investment involves the transfer of existing equity shares rather than issuing new shares, thereby making it a case of share transfer. Thus, this investment attracts different provisions of the Companies Act, such as Section 56 on transfer mechanics and a different FEMA filing of FC-TRS, which has a different deadline than that of the primary transaction.
Additionally, if the investor is FVCI-registered rather than an FPI or offshore corporate, an additional framework of SEBI’s FVCI framework will be applicable. Hence, to avoid a compliance breakdown, it must be ensured that these investments are not treated as one undifferentiated round since they are legally different transactions. Thus, this article examines all three regulatory frameworks, highlights the key differences in valuation requirements and timelines, and ends with a compliance checklist.
Companies Act Checklist
Primary Investment
The Route
Generally, when a company issues new CCPS directly to a VC fund, it is treated as a preferential allotment under Section 62(1)(c) of the Companies Act, 2013, read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.i Moreover, Section 42 of the Companies Act, 2013, dealing with private placement, read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, should be satisfied as well, since the allotment is made to a specifically identified investor rather than the general body of shareholders.ii
In practice, virtually every VC round follows these provisions together, where Section 62(1)(c) governs the company’s ability to issue shares to a specific investor, while the procedure of such a private placement is governed by Section 42.
For further context on Section 42 private placement requirements, the TaxGuru article Private Placement under Section 42: Process, Provisions, Forms and Rules is relevant.
Valuation Report
The price of CCPS is a matter that cannot be fixed arbitrarily, but rather, it must be backed by a proper valuation report. This report must be from a registered valuer under Section 247, where such valuer is registered with the IBBI under the Companies (Registered Valuers and Valuation) Rules, 2017.iii Additionally, a separate valuation report under Rule 12(5) of the PAS Rules is required when any part of the consideration is non-cash.iv
Approvals
The process involves:
1. The board resolution approves the offer and identifies the investor.
2. The company sends a notice of general meeting with a Section 102 explanatory statement, with at least 21 clear days’ notice to its shareholders. This notice must disclose the purpose of the issue, pricing basis, allottee identities, and the pre/post-issue shareholding pattern.
3. A special resolution, requiring a 75% majority, is passed by the shareholders.
4. The company files Form MGT-14 with the ROC within 30 days of passing the resolution.
5. A PAS-4 (offer letter) and PAS-5 (record of investors) are prepared by the company, which are to be maintained but no longer need to be filed with the ROC since the 2018 amendment.vi
Timelines
I. The allotment must be completed within:
- 12 months from the special resolution, and
- 60 days from receipt of application money,
- In case the 60-day window is missed, the company must refund the money within 15 days, and 12% per annum interest runs from the 76th day.
II. Form PAS-3 (Return of Allotment):
- The form must be filed within 15 days of allotment under Section 42(8)viii.
- This 15-day period was introduced by the Companies (Amendment) Act, 2017, and the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018.ix
III. Use of subscription money:
- As per Section 42(4), the subscription money cannot be utilised by the company until the allotment is made and the PAS-3 has been filed.x
- Delay in filing PAS-3 leads to a penalty of Rs.1000 per day per defaulting party, with a maximum limit of Rs. 25 lakh as per Section 42(9).xi
IV. Share Certificates:
- These must be issued within 2 months of allotment under Section 56(4).xii
Secondary Investment
This differs from the primary investment since no new shares are issued here. Instead, a portion of the shares is transferred by an existing shareholder, such as a founder or ESOP holder, to the investor. Therefore, this is not a Section 62(1)(c) preferential allotment and does not require any special resolution or a Rule 13 registered valuer requirement. Rather, the transfer is governed by the ordinary share transfer process, which involves:xiii
1. Board approval as per the AOA/SHA and execution of the statutory instrument of transfer, i.e., Form SH-4 under Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014.
2. Form SH-4 must be duly stamped before the transfer can be registered by the company. Also, a registration on an unstamped instrument cannot be approved by the Board.
3. Within 60 days of execution, the transfer deed must be lodged with the company, and a fresh share certificate must be issued within 1 month from the date of receipt of the instrument of transfer by the company.
FEMA/NDI Rules Checklist
Apart from Company Law, a separate layer of regulatory requirements must be taken into consideration since a foreign investor is involved in the given scenario. These requirements work alongside those of the Companies Act and vary according to the nature of the investment, whether primary or secondary. Thus, the following portion examines the FEMA framework separately for both primary and secondary investments.
i. Route and Sectoral Cap
There can be two situations. First, there is no requirement for government approval if the sector permits 100% FDI under the automatic route, and the fund’s ownership structure does not have any land-border country beneficial owner.xiv However, it is not exempt from the sectoral caps and conditions under Schedule 1 of the Foreign Exchange Management (Non-debt Instrument) Rules, 2019.
Second, the situation where government approval may be required is where a land-border country person satisfies the beneficial ownership test introduced by the 2026 amendment.xv Earlier, the government route was mandatory in case the investor was an entity of a country sharing a land border with India, or if the beneficial owner behind such investment was from or situated in a land-border country.xvi However, this rule was replaced with a new beneficial ownership and control test.
Under this test, beneficial ownership is determined using the 10% threshold under Rule 9(3) of the PML Rules, 2005.xvii The change was codified through the FEMA (Non-Debt Instruments) (Amendment) Rules, 2026, which substituted Rule 6(a) of the NDI Rules.
Under this new three-part test, government approval is required only if a land-border country person:
1. Exceeds the PMLA beneficial-ownership threshold, i.e., more than 10% of shares, capital, or profits in the investor entity.
2. Can otherwise control the entity; or
3. Can exercise effective control over the Indian investee in any manner.
However, the test excludes multilateral development banks/funds from being attributed to any particular country. Additionally, government approval remains mandatory for Pakistan-linked investment subject to prohibited-sector exclusions.
ii. Pricing (Rule 21)
For the primary investment, it must be ensured that the pricing is:xviii
- Not less than fair value
- Determined through any internationally accepted method like DCF, NAV, etc on an arm’s length basis
- Certified by a Chartered Accountant, SEBI-registered Category 1 Merchant Banker, or practicing Cost Accountant.
These requirements arise under Rule 21 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
Next, for the secondary investment, the pricing rule is dependent on the transferor of their existing shares:xix
- If a resident transfers shares to a non-resident fund, the price cannot be less than the fair value
- If a non-resident transfers shares to a resident, the price cannot exceed the fair value
- If a company is buying back shares from a non-resident, the applicable rule here, working alongside Rule 21, is Section 68 of the Companies Act, 2013, and not FC-TRS transfer pricing
- Assured-exit or guaranteed-return pricing for the non-resident investor is prohibited.
iii. Reporting
Finally, once the structuring and pricing of the transaction is completed, the same must be duly reported to the RBI within the prescribed timelines. The primary issue must be reported through Form FC-GPR within 30 days of allotment on the RBI FIRMS portal,xx whereas the secondary transfer is reported through Form FC-TRS within 60 days of the transfer date/receipt of consideration (whichever is earlier).xxi
These reporting requirements are governed by the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.
A Late Submission Fee of Rs.7500 + (0.025% *amount involved *years of delay) is charged if the filing of both forms is delayed.xxii
SEBI Angle- only if the investor is FVCI Registered
SEBI becomes relevant at this stage only if the foreign fund is investing in India through an FVCI (Foreign Venture Capital Investor) rather than as an offshore corporate or an ordinary FPI. Two recent developments are applicable here.
First, much like the Foreign Portfolio Investment (FPI) regime, the registration, KYC, and ongoing compliance are now handled through a Designated Depository Participant (DDP) rather than requiring direct registration with SEBI.xxiii This framework is reflected in the Securities and Exchange Board of India (Foreign Venture Capital Investors) (Amendment) Regulations, 2024.
Second, eligible foreign investors now have a simpler single-window onboarding and renewal process through the new SWAGAT-FI framework, provided they use the same custodian and DDP across both registrations.xxiv
However, the scope of this framework is deliberately narrow since it is only applicable to low-risk, highly regulated institutional investors like mutual funds, insurance companies, pension funds, etc. Therefore, even if the current VC fund is registered as an FVCI, it does not qualify for the SWAGAT-FI framework. Hence, it is important to remember that FVCI registration does not automatically guarantee the use of SWAGAT-FI.
Finally, since the current situation involves an unlisted private company, the SEBI LODR Regulations are not applicable here, since LODR governs only the listed companies’ continuous disclosure obligations. Thus, even if SEBI is relevant in this transaction, the applicable rules are strictly limited to the FVCI regulations and do not extend beyond them.
For related TaxGuru coverage, see SEBI releases Operational Guidelines for FVCIs and DDPs and SWAGAT-FI Framework Simplifies FVCI Registration and Compliance: SEBI.
Conclusion
The main lesson derived from this entire transaction is that one should not treat a foreign-investment round as a single compliance exercise when it involves both primary and secondary investors. Different laws work alongside each other in a single transaction, having different deadlines, pricing, and valuation standards.
For example, for the primary investment, one needs to file the FC-GPR, which has a deadline of 30 days from the allotment of shares, and the PAS-3, where the deadline is 15 days from the allotment. The company cannot assume that it has a total of 30 days from the date of allotment of shares to file both these forms. Instead, the clocks run separately, and if considered as a single timeline, the company may attract a penalty for delay in filing the PAS-3.
Accordingly, the best approach is not to restrict the compliance of such a transaction to only FEMA or the Companies Act, but rather the requirements of each applicable regime should be traced against every step of the transaction. This means that a Series A/B investment that is structured through an offshore vehicle requires a separate checking of its primary allotment, secondary transfer, valuation, filing timelines, investor eligibility, and beneficial ownership, before closing the deal.
References
i Team Corplaw, ‘FAQs on Preferential Issue of Equity Shares and Convertible Securities under SEBI ICDR – Vinod Kothari Consultants’, accessed 24 August 2026.
ii CS Darshana Ravikiran Prasade, ‘Private Placement under Section 42: Process, Provisions, Forms and Rules’ (TaxGuru, 28 January 2024), accessed 24 August 2026.
iii The Companies Act, 2013, s 247.
iv Companies (Prospectus and Allotment of Securities) Rules, 2014, r 12(5).
v The Companies Act, 2013, ss 42, 101, 102, 114, 117; Companies (Prospectus and Allotment of Securities) Rules, 2014, r 14.
vi Ministry of Corporate Affairs Notification G.S.R. 752(E) (7 August 2018), r 14(3) & (4).
vii The Companies Act, 2013, ss 42(6), 62(1)(c); Companies (Prospectus and Allotment of Securities) Rules, 2014, r 14(2)(a); Companies (Share Capital and Debentures) Rules, 2014, r 13(2)(e).
viii The Companies Act, 2013, s 42(8).
ix The Companies (Amendment) Act, 2017, s 10; Ministry of Corporate Affairs Notification G.S.R. 752(E) (7 August 2018), r 14(6).
x The Companies Act, 2013, s 42(4).
xi The Companies Act, 2013, s 42(9).
xii The Companies Act, 2013, s 56(4).
xiii The Companies Act, 2013, ss 56(1), 56(4)(c), 62(1)(c); Companies (Share Capital and Debentures) Rules, 2014, rr 11(1), 13.
xiv Reserve Bank of India, ‘Master Circular on Foreign Investment in India’ (RBI/2011-12/15, Master Circular No. 15/2011-12, 1 July 2011), Part 1, Section 1, Para 2.
xvi Foreign Exchange Management (Non-debt Instruments) Rules, 2019, r 6(a).
xvii The Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, r 9(3).
xviii Foreign Exchange Management (Non-debt Instruments) Rules, 2019, r 21(1).
xix Foreign Exchange Management (Non-debt Instruments) Rules, 2019, r 21(2)(b), 21(2)(c).
xx Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, reg 4(1).
xxi Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, reg 4(3).
xxiv Securities and Exchange Board of India, ‘Framework for Single Window Clearance and Onboarding for Eligible Foreign Investors (SWAGAT-FI)’ (SEBI Circular, HO/19/34/14(5)2025-AFD-POD2/I/2703/2026).
