Before the Raise: what an Indian founder should put in order before the first investor meeting

The round is a share issue, and the Companies Act sets the procedure

When a private company issues shares to a new investor for money, it makes a private placement under section 42 of the Companies Act, 2013 [1]. Because the shares go to an outsider instead of to existing shareholders in proportion, the issue is usually also a preferential allotment under section 62(1)(c) [2], and the rules require it to meet the section 42 conditions as well [3].

Section 42 allows an offer only to persons the board has identified [1]. The rules cap the number at two hundred in a financial year, leaving out qualified institutional buyers and employees under a stock option scheme [4]. Shareholders approve each offer by special resolution, and the offer letter can be issued only after that resolution is filed with the Registrar [4]. The letter is serially numbered, addressed to one person, and cannot be passed on [1][4]. Subscription money comes through a bank, never in cash, into a separate account with a scheduled bank [1].

Money raised by private placement cannot be used until the shares are allotted and the return of allotment is filed with the Registrar. [1]

The section also bars public advertisements and the use of media, marketing channels or agents to tell the public at large about the issue [1], so a founder should ask a company secretary before announcing an open round on social media. For an offer or a receipt of money in breach of the section, the company, its promoters and its directors face a penalty of up to the amount raised or ₹2 crore, whichever is lower, and the company must refund the money with interest [1].

Section 62(1)(c) adds the price. The issue needs a special resolution and a price determined by the valuation report of a registered valuer [2], meaning a person registered with the Insolvency and Bankruptcy Board of India [5][6]. For an unlisted company the articles must also authorise the issue, and the shares must be fully paid when allotted [3]. The price in the term sheet has to be one the report can support, so brief the valuer before the number is fixed.

When the investor is outside India

Under the Foreign Exchange Management Act (FEMA) and the Reserve Bank's Master Direction, an unlisted company cannot issue shares to a person resident outside India below fair value, worked out by an internationally accepted pricing method and certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant [7]. The certificate must be no more than ninety days old on the date of the investment [7]. This is separate from the registered valuer's report under the Companies Act, so one round can need two valuation documents.

The money arrives as an inward remittance through banking channels or from a permitted non-resident account [8]. Shares are issued within sixty days of receipt; failing that, the money is refunded within fifteen days after [8]. The company reports the issue in Form FC-GPR within thirty days, through its authorised dealer bank, and a late report attracts a late submission fee [8].

Ask where each investor, and each investor's beneficial owner, is based. An entity or citizen of a country sharing a land border with India can invest only with Government approval, and the same applies where the beneficial owner of the investment is from such a country [7]. The Companies Act rules bar a private placement offer to a company or national of such a country without that approval [4]. Amendment rules published in the Gazette on 2 May 2026 eased one case: where the land-border interest in an overseas investing entity is under 10 per cent and carries no control, the investment can come in under the automatic route, with reporting to the Reserve Bank [7][9]. Direct investment from those countries still needs approval whatever its size [9].

A foreign investor may also take a convertible note from an Indian startup company: ₹25 lakh or more in a single tranche, convertible or repayable within ten years [7], reported in Form CN within thirty days [8]. A startup LLP cannot issue one [7][10].

Angel tax and startup recognition as they stand

The provision founders know as angel tax was section 56(2)(viib) of the Income-tax Act, 1961. Its abolition for all classes of investors was announced on 23 July 2024 [11], and the Finance (No. 2) Act, 2024 made it inapplicable from assessment year 2025-26 [12][13]. The 1961 Act was itself replaced by the Income-tax Act, 2025 from 1 April 2026 [14], and a practitioner's note of June 2026 records that the new Act does not carry the provision forward [13]. The same note adds that assessments for earlier years remain open, and that a tax officer can still ask where share money came from under the separate rules on unexplained credits [13]. Keep each investor's identity papers and the bank trail for every remittance.

Startup recognition changed on 4 February 2026, when a new notification replaced the 2019 framework [15]. A startup is now a private limited company, limited liability partnership, registered partnership firm or cooperative society that is within ten years of incorporation, has not crossed ₹200 crore of turnover in any financial year (the earlier ceiling was ₹100 crore [10]), and is working on innovation or has a scalable business model with high potential for jobs or wealth creation [15]. A new Deep Tech Startup category gets twenty years and a ₹300 crore ceiling [15].

Recognition alone gives no tax deduction; that needs a separate certificate from the Inter-Ministerial Board, which only a company or an LLP can apply for [15]. Recognition also carries conditions for as long as it lasts. Outside the ordinary course of its business, and subject to exceptions the notification spells out, a recognised startup must not put money into land or buildings it does not use, loans and advances, shares and securities, other entities' capital, high-value vehicles, or jewellery and other luxury assets [10][15].

What the data room holds

A data room is an indexed folder of the company's papers, opened to the investor's lawyers and accountants once terms are agreed. Checklists published by Indian law and advisory firms cover much the same ground [16][17]:

• Corporate records: certificate of incorporation, memorandum and articles as amended, board and shareholder resolutions, statutory registers, annual returns.
• Capital: the cap table, share certificates, a return of allotment for every past issue, earlier investment agreements, the stock option scheme and each grant.
• Contracts: the founders' agreement, main customer and supplier contracts, leases, loans, dealings with related parties.
• Intellectual property: registrations in the company's name and a written assignment from everyone whose work is in the product.
• People: employment contracts, labour-law registrations, the internal committee under the law on sexual harassment at work.
• Licences, tax registrations and returns, audit reports, insurance, notices and disputes.
• Foreign investment filings, if foreign money has come in before.

The deck and the financial model go in too. The deck should say which entity is raising and on what instrument, and every number in it should carry a date and a source. The model should keep its assumptions on one sheet with their sources, run best, base and worst cases, and be reviewed by the company's chartered accountant before an investor sees it. A valuation figure in a deck is an indication for planning and has no standing as a registered valuer's report.

Four findings that can stall a round

Intellectual property the company does not own

Under the Copyright Act, 1957 the author of a work is its first owner. An employer becomes the first owner only of work made in the course of employment under a contract of service, and only if no agreement says otherwise [18]. Code, copy and design made by a freelancer, an agency, or a founder before incorporation fall outside that exception and stay with the author until they are assigned. Commissioned photographs, portraits and films have a rule of their own [18].

An assignment must be in writing and signed. If it is silent on duration it is deemed to run for five years, and if silent on territory it is presumed to cover India only. Rights not exercised within a year are deemed to lapse unless the document says otherwise [18]. A one-line clause saying all work belongs to the company can fall short on each count, and one advisory firm's checklist lists core technology held in a founder's personal name among its five red flags [16].

Founder money with no paper

When a director puts personal money into the company, it stays outside the definition of a deposit only if the director declares in writing, at the time, that the money is not borrowed, and the company discloses the amount in its Board's report [19]. Share application money has its own trap: if shares are not allotted within sixty days and the money is not refunded within fifteen days after that, it is treated as a deposit [19].

Filings that were never made

The investor's lawyers reconcile the cap table against the returns of allotment on the Registrar's file, the share certificates, the resolutions and the register of members, and by one advisory firm's account the round cannot close until they agree [16]. A missing FC-GPR for an earlier foreign investment is on that firm's list of red flags [16]. A director of a company that has not filed financial statements or annual returns for three financial years in a row is disqualified for five years from reappointment there or appointment elsewhere [20].

A private company that is not a small company at the end of a financial year has eighteen months from that date to move to dematerialised securities. From then on it issues securities only in that form, and before any new offer the entire holdings of promoters, directors and key managerial personnel must be dematerialised [21]. Since 1 December 2025 a small company is one with paid-up capital of no more than ₹10 crore and turnover of no more than ₹100 crore, and a holding or subsidiary company is excluded whatever its size [22].

Equity promised in conversation

A promise of one per cent to an adviser, or of options to an early employee in an offer email, is absent from the cap table and can still be raised as a claim against it. An unlisted company can offer stock options only under a scheme its shareholders have approved by resolution. The rules require at least one year between grant and vesting and a register of options, and they keep promoters out of such schemes, with a time-limited exception for startup companies [23]. One advisory firm's checklist treats a pool created by board resolution alone as a red flag, because its grants are unauthorised until shareholders ratify them [16].

What may change

The Corporate Laws (Amendment) Bill, 2026 was introduced in the Lok Sabha on 23 March 2026, and a joint committee reported on it on 3 August 2026 [24][25]. As introduced, it would recognise restricted stock units and stock appreciation rights alongside stock options, and raise the ceilings up to which the small-company thresholds can be prescribed to ₹20 crore of capital and ₹200 crore of turnover [24]. On 4 October 2026 the PRS bill tracker showed no stage after the committee's report [25]. Until the Bill is passed and brought into force, the present rules apply.

Who does the regulated part

ARKA's business advisory desk, The Cabinet, prepares a company to be examined: the deck, the model, the data-room index and the questions an investor will ask. It does not sell securities, arrange or promise funding, issue valuations, or give legal, tax or investment advice. Each regulated step above is delivered only through licensed or registered professionals, engaged by the company for that step.

What to do with this

• Match every past allotment to a filed return, and rebuild the cap table from the register of members.
• List every promise of equity that is not on the cap table, then put each into an approved scheme or a written agreement, or close it out in writing.
• Get a signed assignment from each founder, employee and contractor whose work is in the product.
• Record each transfer from a founder on the day as a loan or as share money, with the director's declaration for a loan.
• Ask every prospective investor where the money and its beneficial owners are based.
• Brief the valuer before the price is fixed, and count the ninety days on a foreign investor's certificate.
• Build the data-room index now, and put a name and a date against every gap.