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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).
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:
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.
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:
Prior permission is required from the RBI for purchasing shares by the Non Resident Indian.
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.
There are two routes for transfer of shares. The following are the routes below:
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.
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:
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.
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.
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:
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:
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.
The following modes of payment can be carried out:
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.
The following documents are required to be submitted:
There are certain documents which have to be maintained for record by the authorized bank.
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.