Rule 11UA, DCF and the Valuation Your Round Actually NeedsRule11UA,DCFandtheValuationYourRoundActuallyNeeds

By the time a term sheet arrives, most founders have a number in mind. What they often don’t have is a defensible basis for that number — and in India, the basis matters as much as the price. The same funding round is examined by three different frameworks: the Companies Act, the Income-tax Act and FEMA. Each has its own idea of what a fair valuation looks like.

Rule 11UA of the Income-tax Rules prescribes how unquoted shares are valued for tax purposes. It becomes relevant whenever shares are issued or transferred at a price the tax authorities may test — which, for a startup raising capital, is essentially every time. Depending on the situation, the prescribed approaches include net asset value and discounted cash flow, with certain reports required from a merchant banker.

A discounted cash flow valuation prices the business on its projected cash flows rather than its historical balance sheet. For early-stage companies — little history, lots of plan — DCF is usually the method that best captures value, which is also why it is the method most closely examined. The projections behind it should reconcile with your MIS, your pitch deck and your investor model; a DCF that contradicts your own data room is worse than no DCF at all.

Preferential allotments under the Companies Act require a report from an IBBI Registered Valuer. Income-tax provisions look to Rule 11UA and, in specified cases, merchant-banker reports. FEMA requires that shares issued to non-resident investors be priced at or above a fair value determined by an internationally accepted methodology.

Run these exercises separately and you can end up with three different numbers for one transaction — a red flag that surfaces in every subsequent diligence. The goal is a single valuation position, documented once, defensible everywhere.

Commission the valuation work before the term sheet is signed, not after. Brief one team to produce a number that is consistent across all three frameworks, keep the underlying assumptions documented, and store the reports with your secretarial records — the next round’s diligence team will ask for them on day one.