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Wealth & Treasury Management

Startups, VC & Investment Banking

Startups & Investment Banking

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Regulatory Framework

Startups raising capital from investors in India need to manage exposure under the 'angel tax' provision — Section 56(2)(viib) of the Income-tax Act, 1961 — which taxes, as income in the issuing company's hands, any share-issue consideration received in excess of the fair market value of the shares issued. The Finance (No. 2) Act, 2024 amended the scope of Section 56(2)(viib) through its Section 28, changing how the provision applies going forward; every funding round's valuation and structuring needs to be checked against the version of the provision in force at the time of allotment, since angel-tax exposure is assessed share-issue by share-issue.

The fair market value benchmark itself is computed under Rule 11UA of the Income-tax Rules, 1962. Following a 2023 amendment, Rule 11UA now prescribes five additional valuation methods — beyond the long-standing Net Asset Value and Discounted Cash Flow methods — specifically available where the investor is a non-resident, giving founders and their valuers more flexibility in supporting a round's pricing. Separately, Central Board of Direct Taxes Notification No. 81/2023 fixed a 90-day validity period for the valuation report supporting a share issue: where a funding round closes more than 90 days after the valuation report's date, a fresh valuation is required before the allotment can rely on it.

Our engagement covers valuation-methodology selection under Rule 11UA for a funding round, angel-tax exposure assessment under Section 56(2)(viib) as most recently amended, and tracking the 90-day valuation-report validity window across the fundraise timeline.

Overview

Startups and investment banking services cover the financial and the transactional work of the startup life — the fundraising support through the pitch, the financial model and the diligence, the valuation and the term sheet analysis, the ESOP and the cap table management, the structuring under the Companies Act 2013 and the Income-tax Act 1961, and the M&A and the exits. The engagement is the startup's finance and transaction partner through the fundraising, the growth and the exit.

The startup's journey runs through the transactions — the seed round with its valuation and the instruments, the growth rounds with the diligence and the term sheets, the ESOPs with the pricing and the cap table, and the exit with the structuring and the negotiation — and each transaction is built on the financials, the model and the documents. The investment banking engagement is the coordination of the numbers, the documents and the negotiations across the life of the company.

The cost of an unmanaged startup transaction is the round that fails or misprices: the model that the investor does not trust, the term sheet that the founder does not understand, the ESOPs that dilute the cap table wrong, the exit that pays the tax it did not plan.

This service is for startups at every stage. We prepare the company for the rounds — the financials, the model, the pitch and the data room — support the valuation and the term sheet negotiations, structure the instruments and the ESOPs under the Companies Act, manage the cap table and the compliance, and support the exits and the M&A so the startup's transactions run on the prepared numbers.

How It Works

  1. 1

    Round & Transaction Planning

    We plan the fundraising and the transaction milestones.

    Harun Raaj & Associates does this1-2 weeks
  2. 2

    Financials & Model

    We build the financials, the model and the data room.

    Harun Raaj & Associates does this2-4 weeks
  3. 3

    Valuation & Term Sheets

    We support the valuation and the term sheet negotiations.

    Harun Raaj & Associates does thisAs required
  4. 4

    Instruments & ESOPs

    We structure the instruments and the ESOPs and manage the cap table.

    Harun Raaj & Associates does thisAs required
  5. 5

    Exits & M&A

    We support the exits and the M&A with the structuring and the negotiation.

    Harun Raaj & Associates does thisAs required

Frequently Asked Questions

How should a startup structure a convertible note from a foreign investor to stay FEMA-compliant?
Convertible notes issued to non-resident investors are permissible under Schedule I of FEMA Notification No. 20(R) — Foreign Exchange Management (Non-debt Instruments) Rules, 2019 — for startups that are DPIIT-recognised and receive a minimum investment of ₹25 lakh per investor in a single tranche. The note must be repayable or convertible into equity within 5 years from the date of issue. An FC-GPR filing is not required at the time of issuing the convertible note; however, once conversion happens, an FC-GPR must be filed with the RBI within 30 days of allotment of shares via the FIRMS portal using Form FC-GPR under FEMA Notification No. 20(R). All FEMA filings require a CA or CS certification, and any breach of the 5-year conversion timeline requires an RBI compounding application under the Foreign Exchange Management (Compounding Proceedings) Rules 2000.
What are the tax implications for founders when they transfer shares to a VC fund — STCG, LTCG, or something else?
Gains on transfer of unlisted shares by a founder to a VC fund are taxable as capital gains under Chapter IV-E of the Income Tax Act 1961. If the shares are held for more than 24 months, the gain is long-term and taxed at 12.5% under Section 112 of the Income Tax Act 1961 (as amended by Finance Act 2024, applicable from AY 2025-26); indexation benefit is no longer available for unlisted shares transferred on or after July 23, 2024. If held for 24 months or less, short-term capital gains apply at slab rates under Section 111A or the general provisions. Where the consideration received is less than the fair market value determined under Rule 11UA of the Income Tax Rules 1962, Section 50CA deems the FMV to be the full value of consideration for the seller, potentially creating a tax liability even on a below-FMV transfer. A CA valuation report prepared under the Discounted Cash Flow or Net Asset Value method per Rule 11UA is therefore essential before any secondary transfer.
What is a Section 9A fund and how does it help a VC manager avoid PE exposure in India?
Section 9A of the Income Tax Act 1961 provides a safe harbour for an eligible investment fund managed by an eligible fund manager in India, such that the mere presence or activity of the fund manager does not constitute a business connection of the fund in India under Section 9(1)(i). To qualify, the fund must be a resident of a country with which India has a tax treaty, have at least 25 members (with diversification conditions), not invest more than 20% of its corpus in a single entity, and have a corpus of at least ₹100 crore, as specified in Section 9A(3). The fund manager must not be entitled to more than 20% of profits as carried interest from that fund and must be registered with SEBI as a fund manager. Compliance certification from a CA is required annually along with Form 3CEJ under Rule 10V of the Income Tax Rules 1962, which must be filed by November 30 of the relevant assessment year.
Can a startup issue ESOPs to its employees and what is the tax treatment at vesting and exercise?
ESOPs issued by a private limited company are governed by Section 62(1)(b) of the Companies Act 2013 read with Rule 12 of the Companies (Share Capital and Debentures) Rules 2014, which require a special resolution and an ESOP scheme document approved by shareholders. For tax purposes, the perquisite value — being the fair market value of the shares on the date of exercise less the exercise price — is taxable as salary income under Section 17(2)(vi) of the Income Tax Act 1961, with TDS applicable under Sec 192, IT Act 1961 (≡ §392, IT Act 2025). For DPIIT-recognised startups, Sec 192(1C), IT Act 1961 (≡ §392, IT Act 2025) of the Income Tax Act 1961 allows deferral of TDS on ESOP perquisites to the earlier of: 5 years from exercise, date of sale of shares, or date of cessation of employment, providing significant cash flow relief to employees. When shares are subsequently sold, capital gains arise and are taxed under Section 45 of the Income Tax Act 1961 with the holding period computed from the date of allotment.
What due diligence does a VC typically require from the target startup and how does a CA support this?
A VC's financial and legal due diligence for a Series A or later round typically covers audited financial statements for the last 3 financial years, a cap-table with all share allotments traced to Board and shareholder resolutions, FEMA compliance records including all FC-GPR and FLA filings under the Foreign Exchange Management Act 1999, all direct and indirect tax returns including GST returns and transfer pricing documentation if applicable under Section 92 to 92F of the Income Tax Act 1961, and a review of related-party transactions under Section 188 of the Companies Act 2013. A CA prepares a financial due diligence report that reconciles management accounts to statutory accounts, quantifies contingent tax liabilities, and highlights any open assessment notices from the Income Tax Department. Unresolved demands under Section 156 of the Income Tax Act 1961 or pending TDS defaults under Section 201 are common deal-breakers that must be disclosed and quantified before term-sheet execution.

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