Monday, January 23, 2017

FORMALITIES FOR THE TRANSFER OF SHARES OF A PRIVATE / UNLISTED COMPANY FROM RESIDENT TO NON-RESIDENT

FORMALITIES FOR THE TRANSFER OF SHARES OF A PRIVATE / UNLISTED COMPANY FROM RESIDENT TO NON-RESIDENT

a) Is the transfer of shares allowed to non-residents?
·         Subject to the FDI Sectoral Cap policy, non-resident investors can invest in Indian Companies by purchasing/acquiring existing shares from resident shareholders.
·         A person resident in India can transfer shares by way of sale under private arrangement to a person resident outside India subject to the FDI guidelines issued in this regard.
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b) What are the RBI reporting obligations under FEMA in a case of transfer of shares between resident and non-resident?
·         The transaction of transfer of shares between resident and non-resident should be reported by submission of form FC-TRS to the AD Category – I bank, within 60 days from the date of receipt/remittance of the amount of consideration. The onus of submission of the form FC-TRS within the given timeframe would be on the person resident in India, i.e. the transferor in the case of sale of shares by a resident to non-resident.


c) What are guidelines for valuation of shares in case of transfer of shares of existing companies?
·         In case of unlisted companies/Private Companies, the valuation of shares shall not be less than the fair value of shares arrived at as per the internationally accepted pricing methodology on arm’s length basis to be determined by a SEBI registered Category-I Merchant Banker/Chartered Accountant.
·         The most common methodology used for the valuation of shares is Direct Cash flows method.
·         A certificate from a practising Chartered Accountant/SEBI registered Category-I Merchant Banker for determining the value of shares is required in this regard.

d) What is the method of payment or remittance/credit of sale proceeds in case of transfer of shares between resident and non-resident?
·         The sales consideration in respect of the shares purchased by a person resident outside India shall be remitted to India through normal banking channels.
·         The sales consideration so remitted into India shall be subject to the Know Your Customer (KYC) check by the AD-I Category Bank receiving the remittance.
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e) What are the documents required for transfer of shares from resident to non-resident under the existing RBI/FEMA Guidelines?
·         The documents required for transfer of shares from resident to non-resident will be as follows:

1) Share Valuation certificate by a SEBI registered Category-I Merchant Banker/Chartered Accountant.
2) (Share Purchase agreement between the buyer and the seller of shares.
3) KYC documents of non-resident making the remittance of sales consideration.
4) Foreign Inward remittance certificate (FIRC) issued by the recipient bank.
5) Consent Letter duly signed by the seller and buyer or their duly appointed agent and in the latter case the Power of Attorney Document.
6) The shareholding pattern of the investee company after the acquisition of shares by a person resident outside India.
7) Declaration from the buyer to the effect that he is eligible to acquire shares / compulsorily and mandatorily convertible preference shares/debentures/others under FDI policy and the existing sectoral limits and Pricing Guidelines have been complied with.
8) No Objection/Tax Clearance Certificate from Income Tax Authority/ Chartered Account.
f) What are the compliances to be done under the Companies Act’2013 in respect of the transfer of shares?
·         Once the transaction is settled, the transferee or his duly appointed agent shall approach the investee company to record the transfer in their books/registers along with the certificate in Form FC-TRS from the AD Bank branch.
·         The transfer of shares shall be done through form SH-4 (instrument of transfer) duly stamped, dated and executed as prescribed under section 56 of The Companies Act’ 2013 within 2 months from the date of transfer of shares.
·         On receipt of the certificate from the AD Bank (FC-TRS) and duly signed, stamped and dated Form SH-4, the company may record the transfer in its books/registers by delivering the share certificates of all securities transferred within a period of one month from the date of receipt by the company of the instrument of transfer.
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g) What is tax implication of transfer of shares from resident to non-resident?
·         The transfer of shares of an unlisted company from resident to non-resident will attract capital gains for the seller.
·         Here the fair market value of shares has to be determined by the prescribed methods.
·         Any sale of shares above the fair market value will be subject to capital gains tax.
·         Capital gains will be calculated as follows:
Capital gains= Price at which shares are sold Less Fair market value
·         The gains will be taxed @ 20% or 30% depending on the whether it is Long term capital gain or short term. Long terms gains are taxed at 20% while short term at 30% (or at the slab rates in case of an Individual transferor).

·         Since, here we are analysing the sale of shares of an unlisted/private company therefore period of holding to determine whether the gains are long term or short term will be 24 months. So, if the transferor held the shares for more than 24 months before transfer, the capital gains will be long term and will be subjected to 20% tax otherwise it will be short term.


Article Courtesy: CA Pratik Anand

1 comment:

  1. Is the process same for transfer from Non Resident to Resident?

    ReplyDelete