Business, Compliance

Your founders' agreement has a buyback clause. FEMA has an opinion on the price

The reverse-vesting and exit clauses every founders' agreement uses were written assuming everyone on the cap table is a resident. The moment one founder isn't, the number the clause names can be the wrong one, in more than one direction.

Multiple founders set up an Indian company together, one of them NRI, and sign the usual founders' agreement: shares vest over time, and anyone who leaves early sells their unvested shares back at a nominal price, often just the face value. Some agreements also promise a floor, if the company hasn't exited by a certain point, the departing or investor founder gets bought out at a guaranteed minimum return. Standard boilerplate, borrowed from a template that assumed every signatory was a resident Indian.

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Last reviewed: 5 September 20266 min readReviewed by Preetesh Maloo, CA

The short answer

Buying out a departing NRI founder's shares at a nominal price doesn't breach FEMA's pricing rules, a resident is allowed to pay a non-resident less than fair value. But it doesn't avoid tax either: Section 50CA still taxes the NRI's capital gains as if they'd received fair value, while Section 56(2)(x) separately taxes the resident who bought the shares cheap, on the same shortfall. Run the buyback the other way, a resident founder bought out by NRI co-founders at that same nominal price, and it's now a real FEMA violation: a resident-to-non-resident transfer has to be priced at least at fair value. And any clause promising an NRI shareholder a guaranteed floor or fixed return on exit is unenforceable as written; RBI only allows an exit at the fair value determined when the option is actually used, never a number agreed upfront.

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Related situations

The clause was written for an all-resident cap table

Reverse vesting and buyback-on-exit clauses are contractual, not statutory, so nothing in the Companies Act stops founders from agreeing to buy back unvested shares at a nominal price. That's exactly why the clause clears legal review internally: it's genuinely fine, between two residents. FEMA only engages the moment either side of the transfer is a non-resident, and it doesn't ask what the founders' agreement calls the number, only what actually changed hands and in which direction.

Buying out a departing NRI founder cheap: no FEMA problem, but a real tax one

When the departing founder is the NRI and the buyer is a resident co-founder, FEMA's rule only sets a ceiling, the resident can't pay more than fair value, but there's no floor stopping them paying less. A nominal buyback clears that test easily.

The tax rules don't let it go that easily. Section 50CA deems the transfer to have happened at fair value regardless of what was actually paid, so the NRI still owes capital gains tax on a value they never received. Separately, Section 56(2)(x) taxes the resident buyer on the gap between what they paid and fair value, as income from other sources, once that gap crosses Rs 50,000. Both sides assumed a nominal price meant a quiet, low-tax exit. Neither gets that.

Run it the other way, and the price itself breaches FEMA

If it's a resident founder leaving and the buyers are the NRI co-founders, the same nominal price now fails the floor test directly, a resident-to-non-resident transfer has to be priced at not less than fair value. This isn't a tax surprise anymore, it's a FEMA contravention on the transfer itself, the kind that needs RBI compounding to fix after the fact.

A guaranteed-return exit clause fails for a different reason, in either direction it's drafted. If it promises an NRI shareholder a fixed price or minimum IRR on a future exit, RBI's optionality rules don't allow it: the only exit price a non-resident's option can specify is the fair value determined when it's actually exercised, with at least a 1-year lock-in first. The clause isn't just risky, it's unenforceable as written.

What's involved

What the CA actually does

1
We review your founders' agreement for the non-resident angle
We go through the buyback, reverse-vesting and exit-price clauses in your founders' or shareholders' agreement and flag every one that assumes an all-resident cap table, before a departure or exit actually tests it.
2
We get a defensible fair-value certification in place
We arrange the DCF or NAV valuation from a chartered accountant or merchant banker, so any founder transfer, in either direction, is priced compliantly and holds up if RBI or the tax department looks at it later.
3
We model the real tax bill before the transfer happens
We work out the Section 50CA impact on the seller and the Section 56(2)(x) impact on the buyer ahead of time, so the price the founders' agreement names doesn't produce a tax bill nobody planned for.

What to have ready

Documents you'll typically need

The founders' or shareholders' agreement, including the buyback, vesting, and exit-price clauses
The company's cap table, showing which founders are resident and which are non-resident
Any existing share valuation or DCF report
Details of the specific event triggering the clause, a founder departure or an exit

References on this page

Rule 21(2)(a), FEMA (Non-Debt Instruments) Rules 2019: a resident-to-non-resident share transfer must be priced at not less than fair value; a non-resident-to-resident transfer must be priced at not more than fair value
RBI's optionality-clause framework (carried into the NDI Rules 2019 from the 2013-14 A.P. (DIR Series) circulars): a non-resident's put or call option can only be exercised at the fair value determined at that time, never a pre-agreed guaranteed return or price, and needs a minimum 1-year lock-in
Section 56(2)(x), Income-tax Act: shares (or other property) received for consideration below fair market value by more than Rs 50,000 are taxed in the recipient's hands as income from other sources, on the full shortfall
Section 50CA, Income-tax Act: fair market value, not the price actually paid, is deemed the sale consideration when computing the seller's capital gains on an unquoted share transfer priced below fair value
Fair value for both the FEMA and tax rules is generally a DCF or NAV valuation certified by a chartered accountant or a SEBI-registered merchant banker

Frequently asked questions

Common questions

It depends on direction. If the leaving founder is the non-resident and the buyer is resident, it clears FEMA's pricing test, though Section 50CA and Section 56(2)(x) tax exposure still applies as if it happened at fair value. If the leaving founder is resident and the buyer is non-resident, that same face-value price breaches FEMA's floor rule directly.

Not as an enforceable clause. RBI's optionality rules block any assured return or fixed exit price for a non-resident's option. The exit has to be priced at fair value when it's actually exercised, with a minimum 1-year lock-in first.

No. It applies to any Indian private company with a founders' agreement and at least one non-resident founder or shareholder, whether or not any outside investor is involved.

Fix the language and get a fair-value certification in place before it's triggered. Recasting an unenforceable guaranteed-return clause, or documenting a defensible valuation, is far simpler before a founder actually leaves or an exit actually happens.

The exceptions that change the answer

Where the general rule stops applying to you

Every rule below has a carve-out, a cut-off date or a condition that flips the answer. These are the ones that decide real cases.

Penalty for a FEMA contravention (s.13)

Right now: Up to three times the sum involved where it can be quantified; up to Rs 2 lakh where it cannot; and up to Rs 5,000 a day for a continuing contravention

Where it works differently

An NRI has an inadvertent contravention, such as running a resident savings account after becoming non-resident: These are civil, compoundable penalties, normally settled with the RBI for a modest fraction, not the three-times ceiling.; s.13 sets maximums; compounding under the FEMA rules resolves most inadvertent breaches.

Commonly got wrong

Any FEMA breach means a three-times penalty and confiscation. The 3x / Rs 2 lakh / Rs 5,000-a-day figures are the general s.13(1) maximums. The heavier confiscation limb sits in s.13(1A) to (1C) for undisclosed foreign assets.Treat the general s.13(1) penalty as a compoundable maximum; the undisclosed-foreign-asset limb is a separate, heavier sub-section.

If this matched your situation, these go further

Setting up an Indian private limited company as an NRI founder Taking money out as a buyback: the rule changed again in 2026 You built the product before the company existed. Does the company actually own it?Your foreign buyer's escrow clause looks standard. FEMA caps how much of it is allowed

Does your founders' agreement have a buyback or exit clause and an NRI on the cap table?

Tell us what the clause says and who it applies to. A practising CA will confirm whether the pricing is FEMA-compliant, work out the real tax exposure on both sides, and fix the language before it's ever triggered, on a free call, no obligation.

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