Indian fundraising rounds don't fail at term sheet. They fail at close. The most common cause is paperwork the founder didn't plan for: SEBI 2026, FEMA pricing, ROC filings, the PAS-3 deadline, ESOP perquisite tax mechanics, and GST timing. None of these are individually fatal; together they routinely add 2-4 weeks to a close.

This article is the compliance picture every Indian founder should understand before signing the term sheet, distilled from primary regulatory sources and what we see across Phase 1 and Phase 2 founders.

1. Companies Act 2013. Sections 42, 55, 62

The three sections that govern most Indian private placement rounds [1]:

Section 42: Private placement procedure

PAS-3 form filing: Must be filed with the ROC within 30 days of allotment. Late filing carries penalties and can trigger dispute with regulator.
PAS-4 (Private Placement Offer Letter): Required offer document.
PAS-5 (Record of private placement): Internal record-keeping document.
200-person limit per financial year (excluding QIBs and ESOP employees).
Subscription money to a separate bank account until allotment is complete.

Section 55: Preference shares

Governs preference shares (CCPS. Compulsorily Convertible Preference Shares being the most common at venture rounds). The “compulsorily convertible” feature exempts CCPS from the 20-year redemption rule and keeps the instrument inside the equity bucket for FEMA compliance.

Section 62: Rights issue and preferential allotment

Most Indian rounds run as preferential allotments under section 62(1)(c). This requires:

A special resolution.
A registered-valuer report.
A 12-month cooling-off period before resale (relevant for secondary transactions).

2. FEMA. The foreign-investor compliance layer

If any investor in the round is foreign (non-resident Indian, US fund, etc.), FEMA rules kick in.

RBI-aligned valuation certificate from a registered valuer or merchant banker. Required for FEMA pricing compliance. Typical timeline: 1-2 weeks. Typical fee: ₹25,000-₹1,00,000 [1].
FC-GPR filing within 30 days of allotment if foreign investors participate. Filed with RBI through the AD bank.
Pricing rules. The price per share can't be lower than the fair value determined by the registered valuer.
FDI route. Most sectors are on the automatic route; some (defense, broadcasting, certain financial services) are on the approval route. Check before you sign.

If your round mixes Indian and foreign investors, build 2 extra weeks into the close timeline for FEMA compliance alone.

3. SEBI (Stock Brokers) Regulations, 2026

Notified Jan 7, 2026. Replaces the 1992 regulations. The provisions that matter for founders [2]:

Advisory beyond what is truly incidental to broking must sit in a separately registered investment adviser entity. Translation: if you're paying a “fundraising consultant” and they're also advising you on terms, they need an investment adviser registration. Most don't have it.
Informal pooling of money is prohibited. The grey zone many DSAs operated in has narrowed.
Quasi-lending activities are prohibited. If your “consultant” is fronting capital and getting paid back from your raise, that's now explicitly prohibited.

We covered the practical implications in our long take on why most founders should skip placement agents.

4. The instrument choice. CCPS, CCD, convertible note, or iSAFE

Round instrument depends on stage, DPIIT recognition, and investor mix [1]:

CCPS (Compulsorily Convertible Preference Shares): The standard for Series A and beyond. Provides preference rights, anti-dilution, etc.
CCD (Compulsorily Convertible Debentures): Used in some structured rounds.
Convertible note: Available only if the startup is DPIIT-recognized and the cheque is at least ₹25 lakh.
iSAFE: The Indian SAFE. Template-driven, used for angel rounds where speed matters. Does not provide preference rights of CCPS.

Pick the instrument before you negotiate the term sheet. Switching later costs time.

5. The ESOP perquisite tax mechanics

One of the most under-discussed Indian compliance items. ESOPs in India have a two-stage tax treatment:

At exercise: Difference between exercise price and fair market value is taxed as a perquisite (“perq tax”) at the employee's slab rate. This can be 30%+.
At sale: Difference between sale price and FMV at exercise is taxed as capital gains.

Implications:

Employees often can't afford to exercise because they don't have the cash for the perq tax.
This depresses ESOP exercise rates and the value employees actually realize.
DPIIT-recognized startups have a 5-year deferral on the perq tax. Significant benefit.

Plan ESOP communication and exercise structure with this tax mechanic in mind. Consider cashless-exercise programs at exit. Surfacing this to employees early avoids attrition surprises later.

6. GST on advisor fees and round-related services

Indian GST applies to most round-related services:

Lawyer fees: 18% GST.
Fundraising consultant fees: 18% GST. So a ₹10 lakh advisor invoice is actually ₹11.8 lakh out the door.
Valuer fees: 18% GST.
CA / CS retainers: 18% GST.

These fees are typically input GST credits if you're GST-registered, which most institutional-stage startups are. But the cash outlay during the close is what matters for runway calculation.

7. The PAS-3 30-day deadline

The single most common cause of post-close compliance pain. PAS-3 (return of allotment) must be filed with the ROC within 30 days of allotment.

Common failure modes:

Founder forgets. CS doesn't remind because the relationship is loose.
Filing is delayed because the cap table reconciliation isn't finished.
Penalties: ₹100/day for first 30 days, escalating after.

Build the PAS-3 filing into the close checklist. If your CS isn't proactive, fire them and get one who is.

8. The DPIIT recognition advantage

If you're not DPIIT-recognized, get recognized. The benefits relevant to fundraising:

Convertible note instrument unlocked. Only DPIIT-recognized startups can use convertible notes.
Tax exemption on certain incomes for first 3 years.
5-year ESOP perquisite tax deferral for employees.
Faster IP applications with reduced fees.
SIDBI Fund of Funds eligibility if you're raising debt.

The DPIIT application is online and typically takes 2-4 weeks. There's no reason not to have it.

9. The close checklist

Before signing the term sheet, ensure:

Cap table is reconciled and clean.
DPIIT recognition is in place (or applied for).
Existing SAFEs / convertibles have a clear conversion mechanic.
Foreign investor identified, FDI route confirmed.
Lawyer engaged and aligned on instrument choice.
CS engaged and aligned on PAS-3 filing timeline.

During the close (post-term-sheet to wire):

Special resolution passed for preferential allotment under section 62(1)(c).
Registered-valuer report obtained.
PAS-4 issued, PAS-5 maintained.
Subscription money in separate bank account.
Allotment completed.
PAS-3 filed within 30 days.
FC-GPR filed if foreign investor (within 30 days).
Amended Articles of Association filed.

10. The total compliance cost

For a typical Indian seed at $3-5M:

Lawyer fees: ₹3-8 lakh + 18% GST.
Registered valuer: ₹25K-₹1L + 18% GST.
CA / CS for filings: ₹50K-₹1.5L + 18% GST.
ROC filing fees: ₹5K-₹15K.
Total compliance and legal: typically ₹5-12 lakh inclusive.

For a Series A at ₹40+ Cr, expect ₹15-30 lakh inclusive of the same line items, plus more complex structuring work.

11. What to do in the next 14 days if you're raising

Apply for DPIIT recognition if you don't have it.
Engage a startup-focused lawyer (SAM, Cyril, Khaitan, Burgeon, IndusLaw).
Engage a CS who has done at least 5 venture rounds.
Reconcile your cap table. Use Carta, LetsVenture, or a clean spreadsheet maintained by your CA.
Map your existing SAFEs / convertibles for conversion math.

If you want a partner who'll help you sequence the compliance work alongside the raise itself, book a discovery call. We don't do legal or compliance work directly; we coordinate the players who do, so the round closes on time.

GST, ROC, and FEMA: the Indian fundraising paperwork that delays your close