In the high-stakes world of cross-border business, valuations aren’t just numbers—they’re the currency of trust, compliance, and investor confidence. Whether it’s a foreign investor buying into an Indian startup or an Indian company acquiring assets overseas, the valuation process under India’s regulatory framework is anything but casual. It’s forensic, formula-driven, and, above all, auditable.
Enter FEMA, the Foreign Exchange Management Act, India’s gatekeeper for international monetary flows. FEMA governs how money crosses borders and how shares, assets, and capital instruments are priced in such transactions. Central to FEMA’s architecture is one non-negotiable element: the need for fair, defensible, and often independently certified valuations.
But here’s the burning question: When is a Merchant Banker, not just any valuer, required? Is it every time foreign capital enters or exits? Or only in specific methods and transaction types? This blog breaks it all down, pinpointing the moments when a SEBI-registered Merchant Banker steps from optional to mandatory.
For startups and SMEs navigating this terrain, working with experienced valuation experts who understand FEMA’s nuances is no longer a luxury; it’s survival.
2.What Are FEMA Valuations?
FEMA valuations are not just financial exercises—they are regulatory checkpoints. Under the Foreign Exchange Management Act, any transaction involving foreign investment, repatriation, or share transfer between resident and non-resident parties must be priced fairly and transparently. The purpose? To prevent manipulation, ensure market-equivalent pricing, and promote cross-border economic integrity.
These valuations apply across a range of scenarios: Foreign Direct Investment (FDI) into Indian companies, Overseas Direct Investment (ODI) by Indian entities, capital swaps, exit events, and even preferential allotments involving foreign investors. Whether you’re raising your first cheque or expanding globally, FEMA wants your numbers to be clean, auditable, and justifiable.
The Reserve Bank of India (RBI) provides the broad regulatory canvas, while the Securities and Exchange Board of India (SEBI) defines who is authorized to conduct these valuations. In many cases, the pricing methodology—especially if you’re using something as nuanced as the Discounted Cash Flow (DCF) method- determines whether a SEBI-registered Merchant Banker must sign off on the report.
To understand how these guidelines translate into real-world requirements, check out this FEMA valuation and compliance breakdown we’ve compiled at Marcken Consulting.
3.Key Transactions That Trigger FEMA Valuation Requirements
When foreign money meets Indian equity, FEMA steps in—and demands answers. Not just how much, but why that much? The valuation requirement under FEMA isn’t blanket, but it’s triggered across a defined set of transactions involving cross-border movement of capital or ownership.
Here are the major deal types where valuations are not only expected but often mandated:
1. Issue of Shares to or from Non-Residents
Whenever an Indian company issues shares or convertible instruments to a non-resident (or vice versa), FEMA rules require that the transaction happen at a fair market value. The pricing must be justified with a certified valuation report, which, in certain methods like DCF, must come from a SEBI-registered Merchant Banker.
These reports help ensure that capital inflows are not disguised debt or overvalued investments—a key concern for both FEMA and the Income Tax Department.
2. Foreign Direct Investment (FDI)
FDI inflows into Indian entities are among the most common triggers for FEMA valuations. Whether it’s an early-stage foreign angel investing in a startup or a global fund entering via Series A, the entry price must reflect the fair market value as per FEMA guidelines. Under certain conditions, especially when equity shares or convertible debentures are involved, the valuation must be independently certified.
Our experts have compiled a detailed guide on FEMA and FDI-related valuation checkpoints to help startups and investors navigate this terrain.
3. Overseas Direct Investment (ODI)
When Indian businesses look outward—acquiring assets, incorporating subsidiaries, or funding joint ventures overseas—FEMA demands that the outbound investment is priced at arm’s length. In many such cases, especially when the deal involves a related foreign entity or a share swap, the valuation must be supported by a professional report. AD banks may recommend using a Merchant Banker or a Registered Valuer to safeguard the transaction.
4. Capital Instrument Swaps and Cross-Border Mergers
In cases where Indian and foreign companies exchange shares—often during M&A deals or strategic partnerships—FEMA treats it as a hybrid transaction. Both parties must receive capital instruments of equivalent value. To prove parity, a Merchant Banker’s valuation becomes critical, especially when large sums, strategic stakes, or IP-heavy businesses are involved.
This requirement also applies under the Cross-Border Merger Regulations notified by the Ministry of Corporate Affairs and approved by the the RBI.
5. Preferential Allotments and IPOs Involving Foreign Parties
When companies issue new shares to foreign investors outside a public offer, or when IPO pricing involves non-resident investors, FEMA compliance adds a valuation layer. These aren’t just SEBI’s headaches—FEMA wants to ensure fair pricing and avoid backdoor exits or disguised premium transactions. Here too, Merchant Banker valuations are the gold standard, especially if the issuance isn’t pegged to market price or follows a DCF model.
In essence, any transaction where foreign exchange, equity, and cross-border dynamics collide is a red flag for FEMA compliance—and that means valuation is your first line of defense.
4.When Is a Merchant Banker Mandatory in FEMA Valuations?
FEMA valuation requirements vary in rigor depending on the nature of the cross-border transaction. While Chartered Accountants or Cost Accountants may be allowed in certain scenarios, there are specific cases where a valuation certified by a SEBI-registered Merchant Banker is not just recommended—it is mandatory. These cases typically involve higher scrutiny, regulatory thresholds, or reliance on complex valuation models like DCF.
Below is a breakdown of the most common scenarios where the involvement of a Merchant Banker is essential:
4.1 Share Issuance to Non-Residents
When an Indian company issues equity shares, compulsorily convertible debentures (CCDs), or other capital instruments to a non-resident investor, FEMA regulations require the issuance price to be based on fair market value.
If the Discounted Cash Flow (DCF) method is used to determine this value, the valuation must be certified by a SEBI-registered Merchant Banker. While simpler methods (like the Net Asset Value method) may be certified by a Chartered Accountant or Cost Accountant, any forward-looking valuation approach triggers this higher certification requirement.
This mandate ensures that the pricing reflects future cash flow potential and mitigates the risk of undervaluation or capital mispricing in foreign investments.
4.2 Transfer of Shares Between Resident and Non-Resident
In transactions involving the transfer of shares between a resident and a non-resident, FEMA requires that the price be equal to or above the fair market value in case of sale by a resident to a non-resident, and equal to or below the fair market value in case of a sale by a non-resident to a resident.
To comply with RBI’s pricing guidelines, companies often need a robust valuation report. When DCF is used, or when the transaction is under scrutiny (e.g., involving related parties or significant stakes), a Merchant Banker’s certification is the preferred route to ensure regulatory comfort.
4.3 Overseas Direct Investment (ODI)
In ODI transactions, Indian entities investing in or acquiring foreign businesses must demonstrate that the investment value is fair and justified. While there is no blanket mandate for Merchant Banker certification, many Authorised Dealer (AD) Banks insist on valuations performed by a Merchant Banker or a Registered Valuer depending on the size and structure of the investment.
Especially in cases where unlisted foreign companies are acquired, or when share swaps are involved, Merchant Banker reports provide credibility and are often essential for remittance approval.
For detailed ODI structuring and valuation support, Marcken Consulting offers strategic assistance tailored to RBI guidelines.
4.4 Swap of Capital Instruments
A swap of capital instruments—such as Indian equity shares exchanged for shares in a foreign company—is considered a complex cross-border transaction under FEMA. In such cases, FEMA regulations require that both legs of the swap be valued appropriately and certified.
Here, valuation by a SEBI-registered Merchant Banker (for the Indian leg) or an equivalent Investment Banker abroad (for the foreign leg) becomes mandatory, regardless of the transaction size or whether the companies involved are listed or unlisted.
This requirement ensures that the share exchange ratio is fair, transparent, and consistent with market standards.
5.Why the DCF Method Makes Merchant Bankers Unavoidable
When it comes to valuing unlisted companies for cross-border transactions, the Discounted Cash Flow (DCF) method often takes center stage. This forward-looking approach estimates the present value of a business based on projected cash flows—making it both powerful and technically demanding.
That’s why the Reserve Bank of India (RBI) insists on having a SEBI-registered Merchant Banker conduct or validate DCF-based valuations, particularly in FEMA-regulated scenarios. Whether it’s for issuing shares to a non-resident or engaging in a capital instrument swap, the use of the DCF method introduces a compliance layer that only a Merchant Banker can officially satisfy.
In essence, where DCF enters the picture, so must a Merchant Banker.
6.Validity of Valuation Certificates: Timelines Matter
A common oversight in FEMA transactions is assuming that a valuation report holds indefinitely. In reality, valuation certificates—especially those issued by Merchant Bankers—come with a strict validity window.
The RBI stipulates that the valuation must be not more than 90 days old at the time of the transaction. This rule ensures that the valuation reflects current market conditions, exchange rates, and financial projections.
Failing to comply with this timeline can lead to the rejection of forms filed with AD Banks, queries from the RBI, or even penalties for non-compliance. For businesses, this means timing the valuation process carefully with the actual execution of the deal.
At Marcken Consulting, we not only provide FEMA-compliant valuation reports but also work closely with your legal and financial teams to ensure timely execution.
7.Merchant Banker vs. Other Valuers: Who Is Eligible and When?
In FEMA-related transactions, the type of valuer you engage isn’t just a matter of preference—it’s a compliance-critical decision. Different transactions demand different levels of regulatory recognition, and engaging the right professional can determine whether your deal proceeds smoothly or faces regulatory delays. Comparison of Valuer Eligibility Across Key Transactions
Transaction Type | Permitted Valuers | Remarks |
Issue of shares to non-residents | Merchant Banker, CA, Cost Accountant | DCF method mandates Merchant Banker involvement |
Transfer of shares between resident and non-resident | Merchant Banker, CA, Cost Accountant | Valuation must follow internationally accepted pricing methodologies |
Swap of capital instruments or cross-border mergers | SEBI-registered Merchant Banker, Foreign Investment Banker | Required irrespective of valuation method |
Overseas Direct Investment (ODI) | Merchant Banker, Registered Valuer (case-specific) | Preferred for complex or high-value outbound investments |
Inbound mergers (Companies Act provisions) | Merchant Banker, Registered Valuer | Depends on transaction structure and regulatory overlap |
Listed entity transactions involving foreign parties | Merchant Banker (SEBI-registered) | Required where DCF or fairness opinion is involved |
Role-Based Overview:
Merchant Banker (SEBI-Registered)
- Recognized under FEMA, SEBI, and RBI frameworks
- Mandatory for DCF, swaps, and capital instrument valuation
- Offers the highest regulatory acceptance
- Typically more expensive due to the depth of responsibility
Chartered Accountant (CA) or Cost Accountant
- Suitable for simpler share transactions under FEMA
- Cost-effective and easily accessible
- Not valid where DCF or cross-border structures are involved
- Limited acceptance in high-stakes regulatory reviews
Registered Valuer (under Companies Act, 2013)
- Primarily used for domestic transactions like mergers and internal structuring
- Not permitted under FEMA unless specifically required or accepted by AD Bank
- Useful in compliance filings with MCA, not RBI
8.Why Merchant Banker Valuations Carry Greater Weight
In the eyes of regulators, not all valuation reports are equal. A valuation issued by a SEBI-registered Merchant Banker often holds significantly more authority and legal standing, particularly in cross-border and high-value transactions.
Regulatory and Strategic Advantages
- Mandatory for DCF and Complex Transactions The Reserve Bank of India mandates the use of a Merchant Banker where valuation is done using the Discounted Cash Flow (DCF) method or where a capital instrument swap is involved. Their involvement is not optional—it’s regulatory.
- Preferred by RBI, SEBI, and AD Banks Merchant Banker certificates are widely accepted without additional verification. Their independence and regulatory oversight under SEBI ensure a higher level of compliance and due diligence.
- Stronger Position in Audits and Tax Assessments In case of scrutiny by tax authorities or during FEMA audits, a valuation from a Merchant Banker is significantly more defensible. Their methodologies and professional standing provide a clear audit trail and legal justification.
- Essential for Cross-Border Transactions When dealing with foreign investors, overseas regulators, or international filings, a valuation from a Merchant Banker provides legal and procedural validity. It aligns with expectations under global standards and reduces friction during due diligence or capital inflows.
Marcken Consulting ensures that all Merchant Banker-led valuations are not only technically sound but also strategically aligned with both regulatory expectations and transaction objectives.
9.Real-World Scenarios Where Merchant Banker Valuation Is a Must
In many cross-border and regulated transactions, valuation by a SEBI-registered Merchant Banker is not just recommended—it is a regulatory necessity. Below are three common, high-stakes scenarios where their involvement is mandatory to ensure compliance and credibility:
1. Foreign VC Investment in an Indian Startup Using DCF-Based Pricing
When a foreign venture capital fund invests in an Indian startup and the valuation is based on projected cash flows (DCF method), the Reserve Bank of India requires the valuation to be certified by a SEBI-registered Merchant Banker. This ensures the pricing is fair, compliant with FEMA norms, and defensible during audits or future funding rounds.
2. Outbound Investment (ODI) in a Related-Party Acquisition
If an Indian company is making an overseas direct investment (ODI) to acquire a related-party entity abroad, especially where the transaction is non-cash or strategically sensitive, a Merchant Banker’s valuation becomes crucial. It validates the arm’s length nature of the deal and satisfies both RBI and international compliance requirements.
3. Share Swap in a Cross-Border Merger
In cross-border mergers or amalgamations involving an exchange of shares between Indian and foreign entities, Merchant Banker valuation ensures the pricing complies with FEMA and Companies Act provisions. The swap ratio must be fair, technically sound, and aligned with regulatory expectations in both jurisdictions. In each of these cases, the stakes are high and regulatory scrutiny is intense. A valuation from a SEBI-registered Merchant Banker protects your transaction from future disputes and compliance risks.
10.Conclusion: Navigating FEMA with the Right Valuation Expert
In India’s increasingly globalised financial landscape, the role of a Merchant Banker in cross-border transactions has become critical. Whether you’re issuing shares to a non-resident, engaging in an outbound investment, or structuring a share swap, there are clear instances where Merchant Banker involvement is not optional—it is mandated by law.
Engaging the right valuation expert early in the transaction lifecycle is not just a matter of good practice—it is essential for avoiding regulatory delays, penalties, or deal cancellations. The cost of getting it wrong far outweighs the investment in a credible, compliant valuation report.
Need clarity on whether your transaction requires a Merchant Banker valuation? Consult the experts at Marcken Consulting. We work closely with SEBI-registered Merchant Bankers to ensure your valuation meets the highest regulatory standards—on time, every time.
Frequently Asked Questions (FAQs)
It is required for share issuances or transfers involving non-residents (especially under DCF), ODI transactions, and share swaps in cross-border deals.
Only for certain domestic transactions. For DCF-based and cross-border transactions, a SEBI-registered Merchant Banker is mandatory.
Generally valid for 90 days. Using expired reports may lead to compliance issues or rejections by RBI or AD Banks.
DCF reflects future earnings, making it ideal for startups. Due to its complexity, regulators require Merchant Bankers to certify it.
They offer higher credibility with RBI and tax authorities, ensuring better defensibility in audits and assessments.
