Rule 11UA and registered valuers: how startup share prices are certified

Rule 11UA sat in the Income-tax Rules 1962 and told taxpayers how to compute the fair market value (FMV) of shares that are not listed on a stock exchange. It mattered because the tax department compared the price at which shares were issued or sold with that FMV, and treated any gap as a taxable item in some cases.

The Income-tax Act 2025 and new Income-tax Rules apply from 1 April 2026. Commentary reports that the rule has been renumbered, with some sources calling the new version Rule 57, while a government document from May 2026 still refers to Rule 11UA. The idea of a prescribed FMV method continues, but the reader should check the notified rules for current numbering.

Several laws look at the price of private shares, and each asks for evidence. A valuation report protects the company and its directors from the argument that shares were sold too cheap or too dear.

The common moments are a new share issue to investors, a transfer of shares between residents and non-residents, the grant and exercise of ESOPs, a buyback, and a merger. Each one can need a report, and the same report is sometimes accepted under more than one law, but not always.

• Companies Act 2013: a preferential allotment of shares needs a valuation by a registered valuer (Section 62(1)(c) with Rule 13).
• Income tax: FMV of unlisted shares, used for transfers and for some issues, and for the ESOP perquisite.
• FEMA: price floors when a non-resident buys or sells shares of an Indian company.
• Accounting and audit: fair value of shares for disclosures.

A valuer usually picks one or more of three approaches. The net asset value (NAV) method adds up what the company owns, subtracts what it owes and divides by the number of shares. It suits asset-heavy or very early companies. The discounted cash flow (DCF) method forecasts future cash, then converts it to today's value using a discount rate that reflects risk. The comparables method looks at what similar listed companies or recent deals are worth.

Early-stage startups often have little in assets and uncertain cash flows. Valuers therefore lean on DCF with careful assumptions, and cross-check against the price investors recently paid. Because the answer swings with the forecast, two valuers can reach different values, and the report states its assumptions in writing.

It depends on the law. Under the Companies Act, a registered valuer is a person registered with the Insolvency and Bankruptcy Board of India (IBBI) for a defined asset class, and such valuations fall under Section 247. For many tax and FEMA reports, the signer can be a chartered accountant or a SEBI-registered merchant banker, and under FEMA a practising cost accountant is also listed in the commentary reviewed. Whether a registered valuer is accepted for the tax-side report changed between older and newer rules, so ask the adviser which signer each purpose needs.

A startup that needs one report for several purposes should confirm that the signer qualifies under every law, to avoid paying for two reports.

When a non-resident invests in an unlisted Indian company, the Foreign Exchange Management (Non-debt Instruments) Rules 2019 set a minimum price for new shares, and a maximum for a non-resident selling to a resident. Rule 21 refers to a fair value worked out by an internationally accepted pricing method, on an arm's length basis, certified by a qualified professional. In plain terms, a foreign investor cannot be issued shares below fair value, and cannot be paid more than fair value on exit, with exceptions that the rules list.

This is why a startup raising money from an overseas fund asks for a FEMA-compliant report, even when the investor's own term sheet gives a higher price.

The angel tax in Section 56(2)(viib) was abolished from assessment year 2025-26, covering money raised from 1 April 2024, by the Finance (No. 2) Act 2024. Before that, a startup issuing shares above FMV to residents could face tax on the excess, which made Rule 11UA a daily concern.

A valuation report still matters after the angel tax ended, because of the Companies Act, FEMA and ESOP uses above, and because investors and auditors expect one.

Reports are tied to a date. A common rule of thumb is that a report is relied on for about six months, but the legal position depends on the law, so the signer's advice matters. A new funding round, a big change in revenue or a fresh forecast usually means a new report. For ESOPs, a fresh report before each exercise window keeps the perquisite calculation clean.

A good report names the purpose, the valuation date, the number and class of shares, the method or methods used, the assumptions behind the forecast, the discount rate and how it was chosen, and the documents the valuer relied on. It states the resulting value per share, and often a range. It also states what the valuer was not asked to check, such as legal title.

Founders help by sharing a clean cap table, financial statements, a budget for the next few years and the latest term sheet. A valuer who has weak inputs will use cautious assumptions, which can lower the value. Giving complete information early usually shortens the work and avoids questions from auditors later.

Common problems include using a report that has expired, using a report prepared for one purpose in another where the law needs a different signer, and issuing shares below the minimum price when a foreign investor is involved. Another is a valuation that ignores a recent round at a much higher price without explaining why. Each can lead to questions from the tax department or the RBI authorised dealer bank, so it pays to plan the report before the term sheet is signed.

A headline valuation, such as a company being valued at a large amount in a funding round, is a negotiated figure for the investor's class of shares. A registered valuer's report is a fair value for a specific legal purpose and is often lower. The two are not meant to match. This page is a general explainer and not legal or tax advice, so check the details with a chartered accountant or company secretary.