What are Exit Options by Foreign Investors?

Exit Options by Foreign Investors

There are certain instances when a foreign investor in India would want to exit. If there is no particular rate of return on their investment, then a foreign investor can exit the country. Another reason for exit options is when there are demand and supply fluctuations in the market; then the exit options can be used by a foreign investor.

If there is an adequate rate of return on the investment, then the investor will continue to pursue business in the country. In such instances, exit options by foreign investors would not take place. There are several restrictions imposed by the RBI and FEMA before they exit.

However, specific requirements have to be met by the foreign investor before proceeding with the exit option. These exit options are available to investors who invest in equity and capital instruments. Before proceeding with the exit, an investor has an opportunity to sell the capital instrument or equity. Investors cannot do this immediately after investing in the country. There is a minimum period of lock-in for business operations for a foreign investor before they may choose the exit.

Are Exit Options by Foreign Investors Required? 

The RBI has taken steps to relax the options available for investors to exit from the country. However, exit options are necessary for the following reasons:

  • Serves as a mode of investment in the country.
  • Improves the economy and adds employment opportunities.
  • Helps to secure more investment in the country from foreign investors.
  • Serves as a model for ease of doing business for foreign investors.
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Apart from the above points, exit options are required by a country as this would open doors to new investment opportunities in the country. Exit options by investors can be used after the lock-in period.

Who Regulates Exit Options by Foreign Investors?

The following are regulatory authorities regarding exit options by foreign investors: 

  • Reserve Bank of India
  • Laws Related to Exit options:
  • Foreign Exchange Management Act 1999
  • Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) 2019 Regulations.

Eligibility criteria for Exit Options by Foreign Investors 

In order to be eligible, the foreign investor should be present in India and have the following:

  • Investment in a Business
  • Sufficed the Minimum Lock-in Period as per the requirements by the RBI
  • Investment should be in Capital Instrument or Equity
  • The instrument or equity must be sold

Procedure for Exit Options by Foreign Investors

  • If the venture or investment is not profitable, the foreign investor or the person resident outside India can exit subject to the minimum lock-in period of one year or according to the FEMA 20(R) clause. The lock-in period can be different according to different types of investment and what the investment is used for.
  • ‘Capital Instruments’ are equity shares, debentures, preference shares and share warrants issued by an Indian company.
  • The valuation of capital instruments is done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company.
  • A capital instrument of an Indian company held by another Indian company which has received foreign investment and is not owned and not controlled by resident Indian citizens or is owned or controlled by persons resident outside India may be transferred to:
    1. A person resident outside India, subject to reporting requirements in Form FC-TRS. However, pricing guidelines will not apply for such a transfer.2. A person resident in India subject to adherence to pricing guidelines.3. An Indian company with foreign investment and not owned and not controlled by resident Indian citizens or owned or controlled by a person resident outside India. Pricing and reporting guidelines will not apply.
  • Form FC-TRS has to be submitted to the Reserve Bank of India. It is a form used by shareholder resident outside India resident Indian or vice versa when they transfer their shares.
  • The Form FC-TRS along with the Form FC-GPR will be submitted to its authorized dealer bank, who will submit the same to the RBI.
  • The Form FC-TRS shall be filed with the Authorized Dealer bank within sixty days of the transfer of capital instruments of receipt/remittance of funds whichever is earlier. 
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Submission of Form FC- TRS (Exit Options by Foreign Investors)

Step 1- Registration for Business User: 

  • The applicant reporting for the transaction in Single Master Form at FIRMS website. A business user can use his login credentials for only the entity that has authorized him/her to report the transactions. If the person wants to act as a business user for another entity, he must register himself separately.
  • For registering as a business user go to the FIRMS website at https://firms.rbi.org.in
  • On the site open the Registration or for New Business User.
  • Now fill up the details in the form such as name, email, user mail, phone no, address, IFSC code of the Bank Branch to whom the reporting would be made, Authority letter as an attachment, Company CIN/LLPIN, PAN Name, Entity Name and Phone no.

Step 2- Logging into FORMS website.

Step 3- Logging into Single Master Form (SMF).

Step 4- Select the Return type- Form FC-TRS.

Step 5- Common Investment Details in the Form.

Step 6- Fill the Common Details on the Website.

Step 7- Fill in the information regarding particulars of transfer, such as the type of capital instrument that is going to be transferred.

Step 8- Fill in the remittance details- however; this will not be applicable if this is a gift. Remittance details- Mode of payment, name of AD Bank, Address of AD bank, Amount remitted/received, whether the remitter is different from the foreign investor.

Step 9- Shareholding Pattern

  • Value of equity shares (on a fully diluted basis) other than Foreign Portfolio Investment and indirect foreign investment or Value of Capital contribution/profit shares, Foreign Portfolio Investment, and Indirect foreign investment- Value of equity shares (on a fully diluted basis).
  • Pre transaction values are auto-populated from the Entity Master.
  • Post-transaction values are auto-calculated based upon the details provided in the Form. Post transaction=Pre transaction value of shares plus Value of shares reported in the Form.
  • The Business user shall ensure that the details are correctly filled in the Form so that the shareholding pattern, which is auto- calculated is correct.
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Step 10- Submitting the Form

Documents required for Exit Options by Foreign Investors

For transfer by way of Gift: 

  • Relevant regulatory approvals where every applicable.
  • Consent letter: Consent letter between donor and donee for the transfer to be attached as other attachment.
  • Non-resident declaration as per the format specified by the RBI.

For transfer by way of sale:

  • Transfer agreement: Relevant extracts of the transfer agreement along with the consent letter between buyer and seller. For sale/ purchase on the stock exchange, the contract note may be attached, at “Transfer agreement/ Valuation certificate.”
  • Valuation Certificate: valuation certificate as per FEMA 20 (R) to be attached at “Transfer agreement/ Valuation certificate”.
  • Non-resident declaration as per the format specified by the RBI.
  • In case of sale by a non-resident, acknowledgement of FC-GPR/ FC-TRS.
  • FIRC /Outward remittance certificate and KYC details. 

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