Compliance for Transfer of Shares under FEMA

Transfer of Share under FEMA

A company transfers shares to a shareholder on application. Similarly, the transfer of shares can happen between a person resident outside India and a resident Indian. This process is applicable when the resident Indian transfers share to a Non-Resident Indian (NRI).

Regulation of Transfer of Shares under FEMA

Transfer of Shares from a resident Indian to a Non-Resident Indian is regulated by the Foreign Exchange Management Act, 1999 (FEMA). The main regulatory authority for transactions related to FEMA is the Reserve Bank of India (RBI). With the foreign exchange management act, the main regulations that govern the transfer of security from a resident Indian to a non resident Indian is theForeign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017.

The powers conferred on the RBI allow it to issue directions to Authorized Dealers (Category-I)/ Authorized Person to deal with foreign exchange transactions on a day to day basis. Authorized Dealers have to follow the rules issued by the RBI from time to time.

Under the foreign exchange regulations, transfer of shares or security is allowed by a Resident Indian to a Non Resident Indian. According to section 5 of the regulations, a person resident outside India should take prior permission from the RBI for making an investment. The investment made by the Non Resident must be according to the sector caps.

Under section 7 of the regulation, the transfer of shares is allowed through the system of ESOP (Employee Stock Options). ESOPs are a form of transfer of shares, where the shares are given to employees of the company as incentives. ESOPs are issued by Indian companies to employees of the Indian subsidiary or wholly owned subsidiary or the Joint Venture Company.

There are specific conditions which have to be followed for issue of ESOPs or Sweat Equity Shares:

  • Transfer of Shares under the ESOP is provided to employees/ shareholders/ directors.
  • The Scheme of Transfer of shares must be in accordance to the rules under the SEBI Regulations, 1992.
  • Apart from this, ESOPs must be in accordance to the rules of the Companies (Share Capital and Debenture) Rules, 2014 as per the Central Government.
  • The shares issued must also follow the norms of the Companies Act, 2013.
  • When the company is issuing shares under this system, prescribed sector caps have to be followed by the transferor company.

Pricing Guidelines for Shares transfer from Person Resident in India to NRI

The transfer of shares has to be in accordance with the pricing guidelines prescribed from time to time. This would also be applicable where there is a preferential allotment of shares by the company. ESOPs or Sweat Equity shares issued to the employee or the whole time director have to follow the pricing guidelines.

Companies that follow the pricing guidelines for issue of shares would be allowed to retain the share subscription amount. This share subscription amount is maintained by the company in a Foreign Currency. Prior approval is required from the RBI for maintaining share subscription money.

The principles related to share transfer acts as a two-way process. It is applicable when a person resident in India is allowed to transfer shares to a person resident outside India (NRI). Apart from this, it is also applicable where a Non-Resident Indian is allowed to transfer shares to a resident Indian.

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Who can invest in an Indian Company?

Persons resident outside India (Non resident Indians) are allowed to invest in an Indian company.

Investing in an Indian company can happen through the following ways:

  • Acquiring existing shares from an existing shareholder; and
  • Acquiring shares from a Non resident shareholder.

Prior permission is required from the RBI for purchasing shares by the Non Resident Indian.

Transfer of Shares from an NRI to another Non Resident

A Person resident outside India other than an erstwhile OCB can transfer shares through the way of sale or gift of shares. Apart from securities such as shares, convertible debentures can also be transferred to the NRI.

Routes for Transfer of Shares

There are two routes for transfer of shares. The following are the routes below:

Routes for Transfer of Shares
  • Automatic route – Under the Automatic Route, no prior permission is required from the Government of India. An investment can be made without seeking any form of approval from the Government.
  • Government route/ Approval Route – Under the Approval Route, prior permission are required from the Government of India. Investment under these sectors would generally include sensitive matters.

Transfer of shares can occur through the sale or gift of shares. An NRI can transfer the shares through these modes to another non-resident Indian. A person resident outside India can transfer shares to a person resident in India by way of a gift.  A Non-resident can sell shares and convertible debentures of an Indian company on a registered stock exchange in India.

This sale can be carried out through a registered stock broker. This stock broker must be registered with a reputed stock exchange in India. Sale of shares of the Indian company can also happen through a Securities and Exchange Board of India (SEBI) registered merchant banker.

Transfer of Shares from a resident of India to a NRI

Shares can be transferred from a resident to a non resident.  A share certificate would also be required for the valid transfer of property

The following modes can be used for transfer of shares:

  • Through the sale of shares; and
  • Transfer by way of a gift.

Transfer of shares and convertible debentures also includes the transfer of subscriber shares issued by the Indian company. The terms of the transfer have to be mutually decided between the transferor and the transferee. For this, the parties have to enter into a private agreement. The share transfer guidelines have to be in accordance with the relevant regulations of foreign exchange.

General permission is required from the RBI. This permission is required when shares are transferred to a Non Resident by an Indian company engaged previously in activities requiring government approval. This will also include a share transfer from a Non Resident to an Indian company through a buy back.

Mode of Payment

Payment for the shares or securities received by the Non-resident Indian would be according to the normal modes of bank transfer. Payment received would be subjected to the Know Your Client (KYC Norms). The KYC has to be carried out by the authorized bank when funds are received by the bank. If the money is transferred through different banks, then the KYC must be carried out by the bank where money is finally received. A report has to be submitted by the customer to the authorized bank category I in form FC TRS.

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Procedure for Share Transfer

Share transfers from a resident of India to a non resident have some specific terms and conditions to be adhered.

Parties involved in the Share transfer

The following parties are involved in the share transfer:

  • Transferor- Resident of India.
  • Transferee- Non Resident Indian.
  • Authorized agents- Agents appointed on behalf of the authorized dealer.
  • Authorized Dealer/ Authorized Bank- The agency carrying out the foreign exchange transactions.
  • RBI- The main regulatory body for FEMA.

Pricing Structure

Share transfer from a resident to a non resident Indian is subjected to the guidelines of pricing.  The prices are determined based on the entity.

The following are the entities for which prices are determined:

  • Listed Entity– An entity that has its shares listed in a stock exchange is regulated by securities law. The main regulator for companies listed in stock exchange is the SEBI. When a listed entity provides shares to a non resident Indian, then the price should be no less than the predetermined price. The price is determined based on the perpetual allotment of shares under the SEBI guidelines. Therefore for sale of shares, the price is determined according to the guidelines issued by the SEBI.
  • Non Listed Entity– An entity that is not listed in a stock exchange is called a non listed entity. The price for a non listed entity would be determined based on the fair value by a SEBI registered merchant banker. The price can also be determined by a Chartered Accountant. The price has to be according to the international standards of pricing.

The parties in the transaction have to make sure that regulations related to FEMA are complied with. Apart from this, the transferor has to also make sure that the transfer is made according to the sector guidelines which are prescribed by the RBI. For any settlement of transactions, the parties have to make sure appropriate taxes have been paid by the parties.

Mode of Payment

The following modes of payment can be carried out:

  • For a Non Resident- Payment can be made for the transfer of shares through an inward remittance to the concerned authorized bank category I. This is the normal mode of making a payment for share transfer.
  • For Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI) – The payment for share transfer can be through the process of debiting the NRE or the FCNR Account.
  • For a Non Resident Indian- Payment can be made by debiting the NRE or FCNR account.

This would be applicable for shares that are got through a repatriation basis. For shares received on a Non repatriable basis, they can be credited through normal banking channels as prescribed by the bank.

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Documents Required

The following documents are required to be submitted:

  • Form FC TRS- This form must be submitted to the authorized bank category -I. This must be submitted in quadruplet within 60 days of receiving the consideration or payment for the transfer of shares.
  • Evidence of Submission- Apart from Form FC TRS, the submission proof must be present. This would be required to be submitted by the transferor.
  • In case of shares that are taken by the non-resident through the stock exchange under the FDI route, the investee would have to submit form FC TRS.

There are certain documents which have to be maintained for record by the authorized bank.

  • Consent Letter- The letter of consent must be signed by the transferor and the transferee. The letter must contain details of the transfer. This will include, the amount of shares transferred, the investee company name and the price of the shares transferred.
  • Exchange Letter- This must include the agreement of sale between the parties. Records of the same must be maintained by the parties.
  • Power of Attorney- If a duly authorized agent has acted on behalf of the parties, then a power of attorney is required to be executed by the buyer and the seller.
  • Share Holding Pattern- The transferee company must submit the share holding pattern showing the equity participation of residents and non-residents category-wise.
  • Valuation Certificate- The Valuation certificate is a crucial document which states the price at which shares are transferred. The valuation must be carried out by a SEBI registered merchant banker or a chartered accountant.
  • Undertaking by the Buyer- An undertaking must be submitted by the buyer that the shares can be acquired according to the pricing guidelines and the sector limit prescribed by the RBI.
  • Broker Certificate- If the shares are acquired from a stock exchange, the broker certificate must be provided.
  • Undertaking from the Foreign Institutional Investor- If there is a foreign institutional investor, an undertaking must be provided by the FII that sector limits have been followed.

Reporting Compliances

If the transfer of shares occurs through a private arrangement then the transferor should approach the investee company to record the transfer in the books. These transactions have to be recorded on the FC TRS certificate. Record of the remittances received by the transferor must also be recorded.


Under the system of share transfer a non resident can receive shares from the resident. Shares can be acquired from the resident by way of acquisition or gift. Shares can also be provided by a listed or unlisted entity. A listed entity has to determine the valuation according to the pricing guidelines of SEBI.  An Unlisted entity must determine the pricing according to the fair value by a SEBI Registered merchant banker. The parties have to follow compliances to effectuate the transfer of shares.

Also, read: A Complete Overview of Foreign Direct Investment Compliance under FEMA

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