18. Share Transfer Between Resident & Non-Resident — FEMA View
Transfer of shares between a resident and a non-resident is not merely a corporate action — it is a capital account transaction under FEMA. Such transfers are subject to pricing guidelines, reporting requirements, sectoral restrictions, and regulatory timelines. Most FEMA non-compliances in corporate transactions arise at the stage of share transfer rather than fresh issue.
1. Introduction
Whenever shares of an Indian company are transferred:
from a resident to a non-resident, or
from a non-resident to a resident,
FEMA regulations apply.
This includes:
sale of shares,
gift of shares (subject to conditions),
secondary transfers during investor exits.
In cross-border share transfer, Companies Act compliance is insufficient without FEMA compliance.
2. Nature of Transaction Under FEMA
Share transfer between resident and non-resident is treated as:
capital account transaction,
governed by FEMA regulations and RBI directions.
Even if company itself is not issuing shares, transfer between shareholders triggers compliance.
3. Pricing Guidelines — Core Requirement
Pricing compliance depends on direction of transfer:
(A) Resident → Non-Resident
Sale price cannot be less than fair valuation.
(B) Non-Resident → Resident
Sale price cannot be more than fair valuation.
Valuation must follow internationally accepted methodology and be certified as prescribed.
Violation of pricing rules is a common contravention.
FEMA regulates both undervaluation and overvaluation.
4. Sectoral Caps & Entry Route
Before transfer, confirm:
whether sector permits foreign investment,
whether sectoral cap will be breached post-transfer,
whether government approval is required.
Transfer cannot indirectly violate sector restrictions.
5. Gift of Shares
Gift of shares from resident to non-resident (or vice versa):
is permitted subject to prescribed limits and conditions,
may require approval depending on value and relationship.
Gift transactions are scrutinised closely.
6. Reporting Requirement — FC-TRS
Share transfer between resident and non-resident requires:
filing of Form FC-TRS through authorised dealer bank.
Filing must be completed within prescribed timeline from date of transfer.
Delay requires compounding.
7. Documentation Required
Typical documentation includes:
share transfer agreement,
valuation certificate,
KYC of non-resident,
declaration and compliance certificate,
proof of consideration receipt/payment.
Incomplete documentation leads to rejection.
8. Mode of Payment
Consideration must be:
received or paid through normal banking channels,
traceable and documented.
Cash settlement is prohibited.
9. Tax vs FEMA — Separate Compliance
Capital gains taxation may arise under Income-tax Act.However:
tax compliance does not validate FEMA compliance.
Both frameworks operate independently.
10. Impact on Downstream Investment
If transfer results in:
change in ownership or control,
downstream investment rules may apply.
Indirect foreign investment must be evaluated.
11. Common Compliance Errors
Frequent mistakes include:
ignoring pricing norms during exit transactions,
failure to file FC-TRS within timeline,
assuming small transfers are exempt,
non-alignment between ROC and FEMA records.
Such issues are often discovered during next funding round.