Transfer of shares to or from non resident

By | August 14, 2015

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TRANSFER OF SHARES AND CONVERTIBLE DEBENTURES OF AN INDIAN COMPANY

1.1 Background

General policy regarding transfer of shares to or from non resident are summarised in para 3.4.4 of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I

Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 also contains provisions relating to transfer of shares and convertible debentures.

1.1-1 General Permission for Transfer of shares and convertible debentures in certain cases

Subject to FDI sectoral policy (relating to sectoral caps and entry routes), applicable laws and other conditionalities including security conditions, non-resident investors can invest in Indian companies by purchasing/acquiring existing shares from Indian shareholders or from other non-resident shareholders.

General permission has been granted to non-residents/NRIs for acquisition of shares by way of transfer subject to the following:

Transferability in case of listed securities – In case of sectors with caps on foreign investment, if by acquisition of shares of Indian company, ownership or control of Indian company is getting transferred from resident Indian citizens and Indian companies to a non-resident entity or Indian company owned/controlled by non-resident entity, Government/FIPB approval will be required. Such approval is not required where there is no sectoral cap – Press Note No. 3 dated 13-2-2009.

Where such control is not getting transferred, a person resident outside India may transfer any Indian security held by him, to a person resident in India by way of gift. He can also sale these securities on a recognised stock exchange in India through a registered broker [Regulation 9(2)(iii)(b) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations]. This is as good as free convertibility in case of listed companies where control is not getting transferred – para 8.B of RBI Master Circular No. 15/2013-14 dated 1-7-2013 [earlier Master Circular No. 15/2012-13 dated 2-7-2012].

Further, SEBI Regulations will have to be followed. Takeover Regulations will also apply. Further, transfer in case of unlisted company will continue to be restricted.

Transfer from non-resident by way of gift – A person resident outside India (other than NRI and erstwhile OCB) may transfer by way of sale or gift, the shares or convertible debentures to any person resident outside India (including NRIs) – Para 3.4.4(i)(a) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

Transfer by NRI as gift – NRIs may transfer by way of sale or gift the shares or convertible debentures held by them to another NRI – Para 3.4.4(i)(b) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

Gift from person resident outside India to person resident in India – A person resident outside India can transfer any security to a person resident in India by way of gift – Para 3.4.4(i)(c) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

See also Regulation 9(2)(iii)(a) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations and para 8.B1(c) of RBI Master Circular No. 15/2013-14 dated 1-7-2013 [earlier Master Circular No. 15/2012-13 dated 2-7-2012].

Sale on recognised stock exchange – A person resident outside India can sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a stock broker registered with stock exchange or a merchant banker registered with SEBI – Para 3.4.4(i)(d) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

Transfer to person resident outside India – A person resident in India can transfer by way of sale, shares/convertible debentures (including transfer of subscriber‘s shares), of an Indian company under private arrangement to a person resident outside India, subject to the guidelines given in para 3.4.5.2 and Annex 2 of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I – Para 3.4.4(i)(e) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

Transfer by person resident outside India – General permission is available for transfer of shares/convertible debentures, by way of sale under private arrangement by a person resident outside India to a person resident in India, subject to the guidelines given in para 3.4.5.2 and Annex 2 of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I – Para 3.4.4(i)(f) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

The transfer from non-resident to resident under FDI scheme is allowed even if pricing guidelines are not met, if original as well as resultant investment is as per FDI policy, pricing is as per SEBI regulations/guidelines and CA certificate in respect of compliance is submitted – Para 3.4.5.2(A) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

Transfer by resident to non-resident under buyback and/or capital reduction – General Permission is available for 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 – Para 3.4.4(i)(g) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

The transfer from resident to non-resident under FDI scheme is allowed even if pricing guidelines are not met, if FIPB approval has been obtained or transfer is as per SEBI guidelines/regulations and CA certificate in respect of compliance is submitted – Para 3.4.5.2(B) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

Transfer of shares by non-resident to an Indian company under buy-back or capital reduction scheme is freely permitted, even when Indian entity (whose shares are transferred) is engaged in financial service sector – para 8.BII(d) of RBI Master Circular No. 15/2013-14 dated 1-7-2013 [earlier Master Circular No. 15/2012-13 dated 2-7-2012]- see also Para 3.4.4(g) of FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I

[Earlier, till 10-4-2012, such transfer was not covered under general permission in case of financial sector].

Transfer when investee company is in financial sector – Transfer to non-resident is permitted without approval of RBI, NOC of respective financial sector regulator/s of the investee company (like IRDA, RBI, PFRDC etc.) is not required to be filed with RBI, but fit and proper/due diligence requirement as regards non-resident investor as stipulated by the respective financial regulator shall be complied with – RBI circular No. 72 dated 11-11-2013. Regulation 10A(v) Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 omitted w.e.f. 4-10-2013.

Earlier, such transfer was restricted. Now such transfer is treated as any other transfer, and subject to restrictions as applicable to transfer of other securities – Para 3.4.5 of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

Acquisition of shares on stock exchange by non-resident/NRI if he has acquired shares under Takeover Regulations – If a non-resident/NRI has acquired shares under SEBI Takeover Regulations, he can acquire further shares of that company through broker on stock exchange under FDI scheme. The payment should be through inward remittance or from NRI/FCNR or Escrow account or dividend payable by Indian investee company in which non-resident has acquired control. The acquisition should be within limits of FDI policy – RBI circular No. 38 dated 6-9-2013 – Regulation 10D of FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations inserted w.e.f. 10-7-2013.

Transfer of securities with optionality clause – As per proviso to Regulation 5(1) of FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations inserted w.e.f. 12-11-2013, Shares or convertible debentures containing optionality clause but without any option/right to exit at an assured price can be issued to a person resident outside India by an Indian company subject to conditions specified in Schedule I.

Such securities can be transferred after lock in period of one year or minimum lock in period prescribed, subject to conditions specified in respect of pricing – Regulation 9(1) of FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations inserted w.e.f. 12-11-2013 – RBI circular No. 86 dated 9-1-2014.

1.1-2 Procedure for receipt of sale consideration from outside India

The sale consideration in respect of equity instruments purchased by a person resident outside India, remitted into India through normal banking channels, shall be subjected to a Know Your Customer (KYC) check by the remittance receiving AD Category-I bank at the time of receipt of funds. In case, the remittance receiving AD Category-I bank is different from the AD Category-I bank handling the transfer transaction, the KYC check should be carried out by the remittance receiving bank and the KYC report be submitted by the customer to the AD Category-I bank carrying out the transaction along with the Form FC-TRS – Para 3.4.4(ii) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

Further acquisition of person who is already in control – A person resident outside India including a Non-Resident Indian investor who has already acquired and continues to hold the control in accordance with the SEBI (Substantial Acquisition of Shares and Takeover) Regulations can acquire shares of a listed Indian company on the stock exchange through a registered broker under FDI scheme provided that the original and resultant investments are in line with the extant FDI policy and FEMA regulations in respect of sectoral cap, entry route, mode of payment, reporting requirement, documentation, etc. – para 3.4.4(iii) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014.

Escrow account of non-resident in case of open offer AD Category-I banks have been given general permission to open Escrow account and Special account of non-resident corporate for open offers/exit offers and delisting of shares. The relevant SEBI (SAST) Regulations or any other applicable SEBI Regulations/provisions of the Companies Act, 1956 will be applicable. Conditions are prescribed in para 3.4.4(iv) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I – Regulation 10C of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 inserted w.e.f. 5-3-2013.

1.1-3 Permission of RBI in certain cases for transfer of securities

In many cases, RBI permission is not required for transfer of securities. In few cases permission of RBI is required.

Transfer not as per guidelines of pricing as per RBI – Transfer is at a price which falls outside the pricing guidelines specified by RBI requires approval, except cases falling in para 3.4.5.2 of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 – Para 3.4.5.1(i) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I. – regulation 10 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

Transfer involving deferred payment – Transfer of capital instruments by the non-resident acquirer involving deferment of payment of the amount of consideration will require RBI approval. 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 – Para 3.4.5.1(b) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I. – – regulation 10 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

Transfer by NRI to non-resident – Transfer from NRI to non-resident requires RBI approval except cases covered under para 3.4.5.2 of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 – Para 3.4.5.1(iii) of Consolidated FDI Policy Circular No. 1 para 3.4.4(iv) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I

Gift by resident to person resident outside India – Transfer of any capital instrument, by way of gift by a person resident in India to a person resident outside India will require RBI approval. While forwarding applications to Reserve Bank for approval for transfer of capital instruments by way of gift, the documents mentioned in Annex 3 should be enclosed.

Reserve Bank considers the factors while processing such applications:

Conditions for approval of gift are given in regulation 10A(a) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 .

Gift should be to close relatives and should not exceed 5% of paid up capital of company. Value of security should not exceed US $ 50,000. It should be within sectoral cap/FDI limits. Application should be made to RBI giving details as specified in Regulation 10(a)(iii) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations – Part I Section I para 8.B of RBI Master Circular No. 15/2013-14 dated 1-7-2013 [earlier Master Circular No. 15/2012-13 dated 2-7-2012] – Para 3.4.5.1(ii) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

[The limit of USD 25,000 has been increased to USD 50,000 vide RBI circular No. 14 dated 15-9-2011].

Transactions attracting takeover regulations – If transfer from resident to non-resident attracts SEBI takeover regulations, RBI approval is required – Part I Section I para 8.B of RBI Master Circular No. 15/2013-14 dated 1-7-2013 [earlier Master Circular No. 15/2012-13 dated 2-7-2012] – regulation 10A(c)(iii) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

However, if SEBI Regulations are complied with, RBI approval is not required, but reporting to RBI and documentation is required – RBI circular No. 43 dated 4-11-2011 and Regulation 10A(b)(iii) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

Transfer in breach of sectoral cap or sectors where Govt. approval is required – Transfer from resident to non-resident or from one non-resident to other will require Government approval if (a) the company is engaged in sector where Government approval is required for FDI i.e. it is not under automatic route or (b) transfer would result in breach of sectoral cap of FDI – Para 3.4.5 of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I – Part I Section I para 8.B of RBI Master Circular No. 15/2013-14 dated 1-7-2013 [earlier Master Circular No. 15/2012-13 dated 2-7-2012] – regulation 10A(c)(i) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

No permission is required in sectors where 100% FDI is permitted under automatic route.

Further, where FIPB approval is required for transfer from resident to non-resident, RBI approval is not required if such FIPB approval is obtained and the pricing is as per guidelines of RBI. Reporting to RBI and documentation is required – RBI circular No. 43 dated 4-11-2011 – Para 3.4.5.2(B) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I – Regulation 10A(b)(ii) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

Transfer by way of sale by person resident in India – Transfer by way of sale by person resident in India to a person outside India will require approval of RBI in following cases – (i) activity of Indian company whose securities are being transferred falls outside the automatic route and approval of FIPB has been obtained for the transfer (ii) activities of Indian company fall in financial sector (iii) transfer falls within SEBI Takeover Regulations (iv) transfer is at a price outside pricing guidelines issued by RBI [regulation 10A(c) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, inserted w.e.f. 10-2-2006] – Part I Section I para 8.B of Master Circular No. 15/2013-14 dated 1-7-2013 [earlier RBI Master Circular No. 15/2012-13 dated 2-7-2012].

However, even if pricing is not as per FEMA guidelines, if (i) FIPB approval has been obtained wherever required (ii) Pricing is compliant with SEBI Regulations/guidelines. Reporting to RBI and proper documentation is required – RBI circular No.43 dated 4-11-2011 – Regulation 10A(b)(iv) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, w.e.f. 9-8-2011.

Transfer by person resident outside India – Transfer by way of sale by person resident outside India to Resident will require approval of RBI. Application should be made in form TS-1. RBI will consider request considering the price quoted in stock exchange. In case of thinly trades or unlisted shares, valuation should be done by auditors.

However, in following case, RBI approval is not required in case of transfer from non-resident to resident – (i) The original and resultant investments are in line with FDI policy and FEMA Regulations in terms of sectoral caps, conditionalites (such as minimum capitalisation etc.), reporting requirements, documentation etc. are complied with (ii) Pricing is compliant with SEBI regulations/guidelines (such as IPO, Book Building, block deals, delisting, exit, open offer/substantial acquisition, SEBI SAST, buy back and (iii) CA certificate about compliance is attached to form FC-TRS – RBI Circular No. 43 dated 4-11-2011. – Regulation 10A of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.

Transfer in case of buy back – If a company makes offer for buy back of its securities, permission from RBI will be required, if company intends to buy back shares from a non-resident. Application should be made to RBI giving all details, including details of valuation of shares. Remittance can be made only after receiving permission from RBI.

1.1-4 Transmission by inheritance without permission

As per section 6(5) of FEMA, a person resident outside India may hold, transfer or invest in Indian security inherited from a person who was resident in India. Thus, transmission by inheritance to NRI or non-resident is permissible without permission of RBI.

In Geeta Reinboth v. Mrs. J Clairs Brohier (2005) 63 SCL 411 (MP HC DB), it has been held that restriction on acquisition, holding etc. of immovable property cannot be stretched so as to include prohibition to right of inheritance.

1.1-5 Transfer of participating interest/rights in oil fields

Issue and transfer of participating interest/rights in oil fields to non-resident is treated as FDI and reporting should be done in form FC-TRS – RBI Circular No. 45 dated 16-11-2011.

1.2 Remittance of sale proceeds of security

Remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India is permitted, subject to following [Regulation 11(2) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations] – Part I Section I para 8.B of Master Circular No. 15/2013-14 dated 1-7-2013 [earlier RBI Master Circular No. 15/2012-13 dated 2-7-2012].

(a) if the security was held by the seller on repatriation basis :

(b) either the security has been sold on a recognised stock exchange in India through a stock broker at the ruling market price as determined on the floor of the exchange, or the Reserve Bank’s approval has been obtained in other cases; and

(c) a no objection/tax clearance certificate from the Income tax authority has been produced.

1.3 Pledge of securities of company incorporated in India by non-resident investors

A non-resident investor can pledge securities of Indian company held by him for following purposes.

Pledge of securities for extending credit facilities to Indian Bank A non-resident investor of an Indian company can pledge his securities to Bank in India for securing credit facilities extended to that company for bona fide purposes – Regulation 12(iii) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, inserted w.e.f. 2-5-2011.

Pledge of securities to an overseas bank – A non-resident investor of an Indian company can pledge his securities to an overseas Bank for securing credit facilities extended to non-resident investor or non-resident promoter of resident investee company or its overseas group company – – Regulation 12(iv) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, inserted w.e.f. 2-5-2011.

Pledge of shares where ECB has been raised by the company A promoter of company registered in India can pledge the shares of borrowing company as security, if the company has raised ECB, subject to prescribed conditions [Regulation 12(i) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations] – para 3.5.7(A) of Consolidated FDI Policy Circular No. 1 of 2014 dated 17-4-2014 issued by DIPP of MC&I.

NOC should be obtained from Bank which is authorised dealer, before pledging of shares. NOC may be granted if ECB is as per guidelines, loan agreement has been signed which requires such security and borrower has obtained LRN (Loan Registration Number) from RBI. The AD may grant NOC with prescribed conditions.

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