Foreign investors and NRIs usually invest in Indian startups through equity shares or compulsorily convertible preference shares, which count as FDI and are allowed under the automatic route in most sectors. Shares must be issued at not less than fair value and reported in Form FC-GPR within 30 days. DPIIT-recognised startups can also issue convertible notes of ₹25 lakh or more to foreign investors. Angel tax on share premiums has been abolished from 1 April 2025, and investors from land-border countries need government approval under Press Note 3.
- Typical instrument
- CCPS with investor rights
- Reporting
- FC-GPR in 30 days; Form CN for notes
- Angel tax
- Abolished from 1 April 2025
- Exit reporting
- FC-TRS within 60 days
Choosing the investment instrument
| Instrument | FEMA treatment | When it is used |
|---|---|---|
| Equity shares | FDI; priced at not less than fair value | Simple rounds, founders and early angels |
| Compulsorily convertible preference shares (CCPS) | FDI; conversion price or formula fixed at issue | Most venture rounds: liquidation preference and anti-dilution sit in the terms |
| Compulsorily convertible debentures (CCDs) | FDI | Bridge rounds and some structured deals |
| Convertible notes | Permitted only for DPIIT-recognised startups; ₹25 lakh or more in a single tranche; convertible or repayable within 10 years | Pre-seed and bridge funding where valuation is deferred |
| Optionally convertible or redeemable instruments | Debt under the external commercial borrowing rules | Rarely suitable for startup equity |
Investors familiar with the US SAFE should note that it has no direct equivalent under FEMA. Indian versions are typically documented as CCPS with a conversion formula, or as convertible notes if the startup has DPIIT recognition.
Due diligence before you sign
Diligence on an early-stage Indian company is usually short but should cover the points that most often block later rounds or exits:
- Corporate records: incorporation documents, share capital history, board and shareholder resolutions, statutory registers and Registrar filings.
- FEMA history: whether earlier foreign investment was priced correctly and reported in FC-GPR and FC-TRS, and whether FLA returns were filed. Gaps here must be fixed before your money comes in; see FDI and FEMA compliance.
- Cap table and ESOPs: fully diluted holdings, ESOP pool approvals, promised but undocumented equity.
- Intellectual property: assignments from founders, employees and contractors, trademark filings and open-source use.
- Founders: employment terms, vesting, any obligations to former employers.
- Regulatory: sector licences, data protection, consumer law and the sector's FDI conditions.
- Tax and disputes: notices, pending litigation and GST compliance.
Term sheet, subscription agreement and SHA
A term sheet records valuation, the instrument and the investor's rights. Key terms in Indian deals are liquidation preference (usually one times, non-participating at early stage), anti-dilution protection (broad-based weighted average is market practice), board or observer seat, affirmative voting matters, information rights, founder vesting and lock-in, pre-emptive rights on new issues, right of first refusal, tag-along and drag-along rights.
The binding documents are a share subscription agreement covering the investment, conditions and warranties, and a shareholders' agreement covering governance and transfers. Under Indian company law, transfer restrictions and special rights must also be written into the articles of association to bind the company and future shareholders, so the articles are amended at closing. Founders' warranties, indemnity caps and the dispute clause deserve attention; an arbitration seat that leads to an award enforceable in India is usually the right choice for a foreign investor. See commercial contracts for the drafting points that change under Indian law.
FEMA pricing, reporting and Press Note 3
- Sector and route: most startup sectors are open to 100% FDI under the automatic route. Some, such as inventory-based B2C e-commerce, are restricted.
- Press Note 3: if the investor or any beneficial owner is from a country sharing a land border with India, including China, government approval is needed first, whatever the amount.
- Pricing: shares and conversion prices must be at not less than fair value, backed by a valuation from a chartered accountant, SEBI-registered merchant banker or practising cost accountant.
- Timing: money comes through banking channels; shares are allotted within 60 days of receipt.
- Reporting: FC-GPR within 30 days of allotment; Form CN within 30 days for convertible notes; FC-TRS within 60 days for secondary purchases; and the startup's annual FLA return by 15 July.
NRIs and OCI cardholders can choose to invest on a non-repatriation basis, which avoids FDI pricing and reporting but limits how sale proceeds leave India.
Tax points for overseas investors
Indian tax on share premiums received by unlisted companies above fair value, known as angel tax, was abolished by the Finance (No. 2) Act 2024 with effect from 1 April 2025, for all classes of investors. This removed a long-running obstacle to foreign and domestic angel rounds. Valuation still matters for FEMA, which sets a floor on the issue price.
On exit, gains on unlisted Indian shares are generally taxable in India, subject to relief under the tax treaty with your country of residence. Claiming treaty relief needs a tax residency certificate and Form 10F, and the buyer or the company may withhold tax at source. Since 1 October 2024, proceeds of a buyback are taxed in the shareholder's hands as dividend, which changes the economics of buyback exits. The Income-tax Act 2025, in force from 1 April 2026, carries these rules forward under new section numbers; we coordinate with your tax adviser on the current provisions.
Exit routes and getting your money home
- Secondary sale to a new investor or a founder. A sale by a non-resident to a resident must be at not more than fair value; FC-TRS is filed within 60 days.
- Strategic sale or merger of the company, often triggered through drag-along rights.
- Buyback by the company under the Companies Act, within its limits on free reserves and frequency.
- IPO on the main board or the SME platform, subject to SEBI lock-in rules.
- Put options are permitted under the NDI Rules after a minimum lock-in, usually one year, but cannot guarantee an assured return; the exit price is capped at fair value at the time of exit.
Proceeds of FDI investments are freely repatriable after tax. Investments made on a non-repatriation basis are credited to an NRO account; see repatriation of funds for the limits and forms.
Documents you need
Before signing, we ask the startup and the investor for:
- Term sheet or deal summary
- Startup's incorporation documents, articles and fully diluted cap table
- Previous rounds' agreements and FEMA filings (FC-GPR, FC-TRS, FLA)
- DPIIT recognition certificate, if convertible notes are proposed
- IP assignment agreements and key employment contracts
- Valuation report for the proposed issue
- Investor KYC and beneficial ownership details down to individuals
- Investor's tax residency certificate and Form 10F, for treaty purposes
How we handle it for you
Deal call
We review the term sheet and FEMA route with you in your time zone.
Due diligence
Focused legal and FEMA diligence with a short red-flag report.
Documents
Subscription agreement, SHA and amended articles negotiated with the startup's counsel.
Closing
Remittance, allotment, board approvals and share certificates or demat credit.
Reporting
FC-GPR or Form CN filed and a post-closing compliance checklist for the company.
Why clients choose ProudLegal
Built for clients abroadVideo calls in your time zone and documents signed where you live.
Advocates who appear in Indian courtsYour case is drafted and argued by enrolled advocates in India.
Written fee quote firstScope and fees confirmed in writing before any work starts.
Updates after every stepScans of every filing and order on WhatsApp and email.
Frequently asked questions
Can a foreign individual invest directly in an Indian startup?
Yes. Individuals and entities outside India can subscribe to shares or CCPS of an Indian startup under the automatic route in most sectors, subject to pricing and reporting rules.
Is angel tax still a concern for startup investments?
No. The tax on share premiums above fair value was abolished by the Finance (No. 2) Act 2024 with effect from 1 April 2025. FEMA pricing rules still apply to foreign investors.
Can an Indian startup issue a SAFE to a US investor?
Not as a SAFE. Under FEMA, the equivalent is usually CCPS with a conversion formula, or a convertible note if the startup is DPIIT-recognised and the amount is ₹25 lakh or more.
Who files the FEMA reports for my investment?
The startup files FC-GPR or Form CN within 30 days. For secondary purchases, the resident seller files FC-TRS within 60 days. Investors should ask for the acknowledgements.
Can I invest if my fund has Chinese limited partners?
Possibly, but if any beneficial owner is situated in or is a citizen of China or another land-border country, Press Note 3 requires government approval before the investment.
Can I have a guaranteed exit price?
No. Put options are allowed after a minimum lock-in, but FEMA does not permit an assured return, and the exit price cannot exceed fair value at the time.
Should NRIs invest on a repatriation or non-repatriation basis?
Repatriation-basis investment is FDI with full reporting but free repatriation. Non-repatriation investment is simpler but proceeds go to an NRO account with annual limits. The choice depends on your plans.
Do I need to travel to India to complete the investment?
No. Documents are signed electronically or in counterparts, funds are remitted through your bank, and shares can be credited to a demat account opened remotely.