Gift of Shares from Resident to NRI

Narendra Kumar

08 Dec, 2020

The gift is nothing but a thing given willingly to someone without payment. Gift of shares to Non-Resident Indian (NRI) by Resident is regulated by the Foreign Exchange Management Act, 1999 under the transfer of securities.

Does gift from Resident to NRI is allowed?

As per the FEMA regulation and FDI policy, the Non-resident are allowed to invest in India. Subject to the FDI sectoral Cap and non-resident investors can invest in Indian Companies by purchasing/acquiring existing shares from resident shareholders. Which can be in the form of the gift as well.

Under FEMA act, the gift is considered as one of the types of transfer of Security.

A person resident in India can transfer shares by way of sale or gift to a person resident outside India subject to the FDI guidelines issued in this regard.

What are the FEMA obligations in a case of transfer of shares between resident and non-resident by way of Gift?

Prior approval of RBI:

A person resident in India, who intends to transfer any security, by way of gift to a person resident outside India, has to obtain prior approval from the Reserve Bank of India.

The following documents shall be enclosed while forwarding the application to the Reserve Bank of India for approval for the transfer of shares by way of gift:

• Name and address of the transferor (donor) and the transferee (done).
• The relationship between the transferor and the transferee.
• Reasons for making the gift.
• In the event of Government dated securities and treasury bills and bonds, a certificate issued by a Chartered Accountant on the market value of such security.
• In case of units of domestic mutual funds and units of Money Market Mutual Funds, a certificate from the issuer on the Net Asset Value of such security.
• In case of shares and convertible debentures, a certificate from a Chartered Accountant on the value of such securities according to the guidelines issued by Securities & Exchange Board of India or fair value worked out as per any internationally accepted pricing methodology for valuation of shares for listed companies and unlisted companies, respectively.
• Certificate issued by the concerned Indian company certifying that the proposed transfer of shares/ convertible debentures by way of gift from resident to the non-resident shall not breach the applicable sectoral cap/ FDI limit in the company and that the proposed number of shares/convertible debentures to be held by the non-resident transferee shall not exceed 5 percent of the paid-up capital of the company.
• An undertaking from the transferor (resident) that the value of the security to be transferred together with any security already transferred by the transferor, as a gift, to any person residing outside India does not exceed the rupee equivalent of USD 50,000 during a financial year.

Approval of RBI for Transfer of shares by way of Gift:

The Reserve Bank of India shall consider the following factors while processing applications:

• The proposed transferee shall be eligible to hold security which is being gifted to NRI under Schedules 1, 4 and 5 of Notification No. FEMA 20/2000-RB issued on May 3, 2000, as amended from time to time.
• The gift shall not exceed 5 percent 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 shall not be breached.
• The transferor (donor) and the proposed transferee (done) are close relatives as defined in Section 6 of the Companies Act, 2013, as amended from time to time.
• The value of securities being transferred along with other security already transferred by the transferor as a gift, to any person who is residing outside India shall not exceed the rupee equivalent of USD 50,000 per financial year.
• Such other conditions as stipulated by the Reserve Bank in public interest from time to time.

Other Compliances:

The Form FC-TRS should be submitted to the AD Category-I Bank, within 60 days from the date of transfer of shares by way of gift.

The onus of submission of the Form FC-TRS within the given timeframe would be on the transferor/transferee, resident in India.

The provisions of Companies Act 2013 and Income tax shall also comply in addition to above compliances.