Parth Shah
on
Parth Shah
Registered Valuer | CA | CPA | 15+ Years of Experience
Parth Shah is the Founder and Team Leader of the company, bringing extensive expertise in business valuation and financial advisory.
An iSAFE note is issued as compulsorily convertible preference shares (CCPS), so the valuation rules for shares apply to it. For an unlisted company, that means an iSAFE valuation in India is needed at issue under the Companies Act, and again under FEMA if the investor is non-resident.
Many founders treat an iSAFE as a simple agreement with no paperwork until the next round. At MyValuation, we often fix iSAFE rounds where nobody priced the conversion correctly on day one.
This guide covers when a valuation is required, who must sign it, and how the instrument is taxed.
Key Takeaways
- An iSAFE valuation in India is required at issue for unlisted companies, because an iSAFE is a CCPS and preferential issues need a registered valuer’s report.
- Rule 13(2)(g) lets the company fix the conversion price upfront, or at conversion using a report not older than 60 days. The choice must be made and disclosed at the time of offer.
- For non-resident investors, Rule 21 of the FEMA NDI Rules requires the conversion price or formula to be fixed at issue, and conversion cannot happen below the fair value at issue.
- FEMA pricing can be certified by a Chartered Accountant, SEBI-registered Merchant Banker or practising Cost Accountant.
- Angel tax no longer applies from 1 April 2025, so the company no longer faces it on iSAFE money.
- Conversion of preference shares into equity is not a transfer under Section 70(1)(zb) of the Income-tax Act, 2025, so no capital gains arise at conversion.
What Is an iSAFE Note, Legally?
An iSAFE (India Simple Agreement for Future Equity) is an Indian version of the US SAFE. Unlike a US SAFE, it is structured as CCPS, so it is a real share issued under Sections 42, 55 and 62 of the Companies Act, 2013.
That legal form matters. A US SAFE is a contract, so it sits outside most share rules. An iSAFE is a share from day one, so every rule that applies to a preferential issue of shares applies to it.
If you are still choosing between instruments, our comparison of iSAFE vs convertible notes for Indian startups covers the commercial differences. This post focuses only on valuation and tax.
When Does an iSAFE Need a Valuation Report?
An iSAFE can need a valuation at two points: when it is issued and when it converts. Which reports you need depends on whether the investor is resident or non-resident.
| Event | Law | Who signs |
| Issue to any investor (unlisted company) | Companies Act, Rule 13 | IBBI Registered Valuer |
| Issue to a non-resident | FEMA NDI Rules, Rule 21 | CA, SEBI Merchant Banker or Cost Accountant |
| Conversion, if price not fixed upfront | Companies Act, Rule 13(2)(g) | IBBI Registered Valuer |
| Conversion for a non-resident | FEMA NDI Rules, Rule 21 | Test against issue-time fair value |
How Does Rule 13 Handle the iSAFE Conversion Price?
Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 requires an unlisted company’s preferential issue to be priced on the basis of a registered valuer’s report. It also needs a special resolution of shareholders, and allotment must be completed within 12 months of that resolution.
For convertible securities like an iSAFE, Rule 13(2)(g) gives two ways to set the price of the shares received on conversion:
- Option A, upfront: the conversion price is fixed at the time of offer, based on a registered valuer’s report given at that stage.
- Option B, at conversion: the price is fixed later, no earlier than 30 days before the holder becomes entitled to apply for shares, based on a report given not earlier than 60 days of that date.
The company must pick one option when it makes the offer, and disclose it. You cannot keep both open and decide later.
Which option suits an iSAFE?
Most iSAFEs convert at the next priced round, using a valuation cap or discount. That makes Option B the natural fit, because the conversion price is not known on day one. But Option B means a second valuation report at conversion.
Option A suits a fixed conversion ratio. It needs only one report, but the price is locked even if the company’s value moves a lot before conversion.
What Does FEMA Require When the Investor Is Non-Resident?
When a foreign investor subscribes to an iSAFE, the FEMA rules for convertible equity instruments apply on top of the Companies Act. CCPS that are fully paid and mandatorily convertible count as equity instruments under the NDI Rules.
Rule 21 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 sets two conditions for convertible instruments:
- The price or conversion formula must be fixed upfront, at the time the instrument is issued.
- The price at conversion cannot be lower than the fair value worked out at the time of issue.
This is where many iSAFE terms break. An uncapped discount to a future round can produce a conversion price below the issue-time fair value if the next round comes in low. For a non-resident investor, that conversion is not permitted.
The fair value can be certified by a Chartered Accountant, a SEBI-registered Merchant Banker or a practising Cost Accountant, using an internationally accepted pricing method. Our guide to FEMA valuation for foreign investors explains the pricing rules in more depth.
How Do Valuation Caps and Discounts Affect the Valuation?
A valuation cap is the maximum company value at which the iSAFE converts. A discount gives the iSAFE holder a lower price than new investors in the next round. Both change how many shares the holder finally gets.
For valuation, the key test is simple: the lowest price your terms can produce must still be defensible. For a foreign investor, that floor is the fair value at issue. For a resident investor under Option B, it is the registered valuer’s report at conversion.
A good valuation report at issue does three things:
- Sets the fair value of the equity on the issue date.
- Tests whether the cap and discount can push conversion below that value.
- Records the formula so the conversion can be checked later without argument.
Raising through an iSAFE and need the Rule 13 report before the Board meeting?
MyValuation issues registered valuer reports for CCPS and iSAFE rounds, including a check of your cap and discount terms against the conversion rules. Reports are signed by an IBBI Registered Valuer and usually delivered within 5 to 7 business days of receiving complete data.
Get a Companies Act valuation reportHow Is an iSAFE Taxed in India?
For the company
Angel tax under Section 56(2)(viib) of the old Income-tax Act was made inapplicable from 1 April 2025 by the Finance (No. 2) Act, 2024. Companies no longer face tax on share premium above fair value from resident investors. Our post on when startups still need a valuation report after angel tax covers what remains.
Angel tax going away does not remove the Rule 13 or FEMA valuation requirements. Those come from company law and exchange control, not income tax.
At conversion
Conversion of preference shares into equity shares of the same company is not treated as a transfer under Section 70(1)(zb) of the Income-tax Act, 2025. So the iSAFE holder pays no capital gains tax when the CCPS convert.
For the investor
Investors who receive shares for less than their fair market value can still face tax under Section 92(2)(m) of the Income-tax Act, 2025, subject to its thresholds and exclusions. The method for that fair market value comes from Rule 57 of the Income-tax Rules, 2026. Our Rule 57 share valuation guide explains how it works.
What Are the Common iSAFE Valuation Mistakes?
- Treating the iSAFE as a contract. It is a share, so Rule 13 applies at issue.
- Skipping the report at issue. The registered valuer’s report should be dated before the Board approves the offer.
- Not choosing a Rule 13(2)(g) option. The offer must state whether conversion is priced upfront or at conversion.
- Uncapped discounts for foreign investors. They can breach the FEMA floor if the next round prices low.
- Using a stale report at conversion. Under Option B, the report cannot be older than 60 days.
- Assuming angel tax relief covers everything. Company law and FEMA still need their own valuations.
Taking iSAFE money from a foreign investor and unsure your terms pass FEMA?
We review your iSAFE terms against Rule 21 of the NDI Rules, value the shares at issue, and flag any cap or discount that could push conversion below the permitted floor. You get a clear report your AD bank and auditor can rely on.
Explore FEMA and FDI valuation servicesConclusion: Getting Your iSAFE Valuation in India Right
An iSAFE valuation in India is not optional. Because the instrument is a CCPS, an unlisted company needs a registered valuer’s report at issue, a clear Rule 13(2)(g) choice on conversion pricing, and FEMA-compliant terms if the investor is non-resident.
- Get the registered valuer’s report before the Board approves the iSAFE offer.
- Choose and disclose upfront or at-conversion pricing in the offer itself.
- Test your cap and discount against the FEMA floor before a foreign investor signs.
- Plan a fresh report for conversion if you chose at-conversion pricing.
Get these right on day one and the conversion becomes a filing, not a fix.
Planning an iSAFE round and want the valuation sorted before you sign?
MyValuation handles the Companies Act report, the FEMA check and the conversion terms review together, so your iSAFE round closes cleanly. Share your term sheet and latest financials and we will send a scope and quote.
Getting Your iSAFE ValuationFrequently Asked Questions
1. Does an iSAFE need a valuation report in India?
Yes, for unlisted companies. An iSAFE is a CCPS, and Rule 13 requires a preferential issue of shares to be priced on the basis of a registered valuer’s report.
2. Who can sign an iSAFE valuation report?
An IBBI Registered Valuer signs the Companies Act report. For FEMA, a Chartered Accountant, SEBI-registered Merchant Banker or practising Cost Accountant can certify the fair value.
3. Is an iSAFE the same as a US SAFE?
No. A US SAFE is a contract that is not a share. An iSAFE is issued as CCPS, so it is a share under Indian company law from the day it is issued.
4. Is a new valuation needed when an iSAFE converts?
Only if the company chose to fix the conversion price at conversion under Rule 13(2)(g). In that case, the report must be given not earlier than 60 days of the relevant date.
5. Can foreign investors invest through an iSAFE?
Yes, because fully paid, mandatorily convertible preference shares are equity instruments under the NDI Rules. The conversion formula must be fixed upfront and conversion cannot fall below the issue-time fair value.
6. Is iSAFE conversion taxable in India?
No. Conversion of preference shares into equity shares of the same company is not a transfer under Section 70(1)(zb) of the Income-tax Act, 2025, so no capital gains arise at conversion.
7. Does angel tax apply to iSAFE funding?
No. Angel tax was made inapplicable from 1 April 2025. Valuation is still needed for Rule 13 and, for foreign investors, FEMA.
