FEMA: Transfer of Shares under FDI

In terms of Section 2 (ze) of Foreign Exchange Management Act, 1999 "Transfer" includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.

Mr. Pankaj Singla
Sr. Associate
+919971508320
pankaj@indiacp.com

Transfer of shares by a person resident in India to person resident outside India, as well as the transfer of shares by a person resident outside India to a person resident in India is a capital account transaction. In terms of Section 6(3) of the Foreign Exchange Management Act, 1999, RBI has the power to make regulations to prohibit, restrict or regulate the transfer of shares.

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Prior to the enactment of FEMA, the transfer of shares of an Indian company by a non-resident person to another non-resident person did not require confirmation from Reserve Bank of India. However the transfer of shares of an Indian company by a non-resident person to a resident person required confirmation from the Reserve Bank of India. The transfer of shares of an Indian company by a person resident in India to a person resident outside India required the permission of the Government followed by the approval of Reserve Bank of India.

The above provisions of transfer of shares from non-resident to non-resident, from non-resident to resident, and from resident to non-resident continued upto 29.09.2004, when the Ministry of Finance simplified foreign investment procedures. As per the Press Release dated 29.05.2004 issued by Ministry of Finance, permission of Government was not required for transfer of shares from a resident to a non-resident. In other words, from 29.09.2004, only RBI approval was required for transfer of shares by resident to non-resident. After this simplification, RBI approval was still required in two cases of transfer of shares, first for transfer of shares by a non-resident to a resident, and second for transfer of shares by resident to non-resident. This means that for any transfer of shares between a resident and a non resident, only RBI approval was required.

Within a few days of the above Press Release of Ministry of Finance simplifying the investment procedures, Reserve Bank of India came out with an A.P. (DIR Series) Circular No. 16 dated 04.10.2004, further simplifying the procedure of transfer of shares. In terms of the above Circular, Reserve Bank of India granted general permission for transfer of shares/convertible debentures by way of sale under private arrangement, both from residents to non-residents, as well as from non-residents to residents, subject to pricing, documentation, payment/receipt and remittance in respect of the shares/convertible debentures and reporting requirements. This general permission however was not granted for transfer of shares from resident to non-resident in financial service sector (i.e. banks, NBFCs and insurance).

After the simplification of procedure in 2004, prior permission of Reserve Bank of India is required for transfer of shares by way of gift from a resident to a non-resident. Further, in case of transfer of shares of an Indian company engaged in financial sector (i.e. banks, NBFCs and insurance), and transactions which attract the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, etc., by way of sale from a resident to a non-resident, the transferor is required to obtain prior approval of FIPB, Ministry of Finance & Company Affairs, Government of India followed by permission from RBI. The above two stage approvals are applicable even when the transfer is made on non-repatriation basis.

Present guidelines for transfer of shares are contained in the Consolidated FDI policy of the Government of India

1. A non-resident (other than NRI and erstwhile OCB) may transfer shares to any other no-resident (including NRIs), by way of sale or gift,
2. NRIs may transfer the shares to another NRI, by way of sale or gift.
3. A non-resident can transfer any security to a person resident in India by way of gift.
4. A non-resident can sell the shares on a recognized Stock Exchange in India through a stock broker or a merchant banker registered with SEBI.
5. A non-resident can sell shares by private arrangement to a resident. Price for transfer of existing shares by non-resident to resident shall not be more than the minimum price at which the transfer of shares can be made from a resident to a non-resident.
6. A resident can sell shares (including transfer of subscriber‘s shares), of an Indian company under private arrangement to a non-resident,
7. The above General Permission also covers transfer by a resident to a non-resident of shares/convertible debentures of an Indian company, engaged in an activity earlier covered under the Government Route but now falling under Automatic Route, as well as transfer of shares by a non-resident to an Indian company under buyback and/or capital reduction scheme of the company.
8. The Form FC-TRS has to be submitted to the AD Category-I Bank, within 60 days from the date of receipt of the amount of consideration. The onus of submission of the Form FC-TRS within the given timeframe would be on the transferor/transferee, resident in India.

The sale consideration of the shares purchased by a non-resident, remitted into India through normal banking channels, shall be subjected to a Know Your Customer (KYC) check, and the KYC report has to be submitted by the customer to the AD Category-I bank carrying out the transaction along with the Form FC-TRS.

The following cases require prior approval of RBI

(i) Transfer of shares from resident to non-residents by way of sale where :

• Transfer is at a price which falls outside the pricing guidelines specified by the Reserve Bank from time to time.
• Transfer of shares where the non-resident acquirer proposes deferment of payment of the amount of consideration. Further, in case approval is granted for a transaction, the same should be reported in Form FC-TRS, to an AD Category-I bank for necessary due diligence, within 60 days from the date of receipt of the full and final amount of consideration.

(ii) Transfer of shares by way of gift by a resident to a non-resident. Reserve Bank considers the following factors while processing such applications:

• The proposed transferee (donee) is eligible to hold such capital instruments under Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time,
• The gift does not exceed 5 per cent of the paid-up capital of the Indian company/each series of debentures/each mutual fund scheme.
• The applicable sectoral cap limit in the Indian company is not breached.
• The transferor (donor) and the proposed transferee (donee) are close relatives as defined in Section 6 of the Companies Act, 1956, as amended from time to time.
• The value of shares to be transferred together with any shares already transferred by the transferor, as gift, to any person residing outside India does not exceed the rupee equivalent of USD 50,000 during the financial year.
• such other conditions as stipulated by Reserve Bank in public interest from time to time.

(iii) Transfer of shares from NRI to non-resident.

(iv) Transfer of shares from or by erstwhile OCBs would require prior approval of the Reserve Bank of India.

In the following cases, approval of RBI is not required:

A. Transfer of shares from a Non-Resident to Resident under the FDI scheme where the pricing guidelines under FEMA, 1999 are not met provided that :-

i. The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionality (such as minimum capitalization, etc.), reporting requirements, documentation, etc.;

ii. The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST, buy back); and

iii. Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

B. Transfer of shares from Resident to Non Resident:

i) where the transfer of shares requires the prior approval of the FIPB as per the extant FDI policy provided that :

• the requisite approval of the FIPB has been obtained; and
• the transfer of share adheres with the pricing guidelines and documentation requirements as specified by the Reserve Bank of India from time to time.

ii) where the transfer of shares attract SEBI (SAST) guidelines subject to the adherence with the pricing guidelines and documentation requirements as specified by Reserve Bank of India from time to time.

iii) where the transfer of shares does not meet the pricing guidelines under the FEMA, 1999 provided that:-

• The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, etc.), reporting requirements, documentation etc.;
• The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations / guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/ substantial acquisition / SEBI SAST); and
• Chartered Accountants Certificate to the effect that compliance with the relevant SEBI regulations / guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.

iv) where the investee company is in the financial sector provided that:

• NOCs are obtained from the respective financial sector regulators/ regulators of the investee company as well as transferor and transferee entities and such NOCs are filed along with the form FC-TRS with the AD bank; and
• The FDI policy and FEMA regulations in terms of sectoral caps, conditionalities (such as minimum capitalization, pricing, etc.), reporting requirements, documentation etc., are complied with.

All the parties involved in the transaction would have the responsibility to ensure that the relevant regulations under FEMA are complied with.

Settlement of transactions will be subject to payment of applicable taxes, if any.

Transfer of shares acquired under PIS under private arrangement

Shares purchased by NRIs and FIIs on the stock exchange under PIS cannot be transferred by way of sale under private arrangement or by way of gift to a person resident in India or outside India without prior approval of the Reserve Bank. However, NRIs can transfer shares acquired under PIS to their relatives as defined in Section 6 of Companies Act, 1956 or to a charitable trust duly registered under the laws in India.