The transfer of shares between residents and non-residents in India involves navigating through a complex web of regulations and acts. This article aims to provide a comprehensive guide on the procedures, requirements, and implications of such transfers.
Understanding Resident and Non-Resident Status
Resident
A resident, as defined by Indian tax laws, refers to an individual or entity whose primary center of economic activity is located within India. This classification is based on specific criteria outlined under Section 6 of the Income Tax Act, 1961. In simpler terms, a resident is someone who lives in India for most of the year or has significant financial interests tied to the country.
For an individual to qualify as a resident in any given fiscal year, they must meet one of the following conditions:
- They must have been physically present in India for at least 182 days during the previous year; or,
- They must have spent at least 60 days in India in the previous year and a cumulative total of 365 days over the last four preceding years.
Entities, such as companies or organizations, are considered residents if they are incorporated in India or have their principal place of business within the country.
Non-Resident
A non-resident is someone who does not meet the residency requirements under Indian tax law. In simpler terms, this refers to individuals or entities that are not considered to have a sufficient physical or economic presence in India to be classified as residents.
For tax purposes, an individual is considered a non-resident if they fail to meet both of the conditions stated above regarding their physical presence in India.
However, there are special provisions for Indian citizens or persons of Indian origin (PIO) who visit India. For these individuals, the threshold for physical presence in India is relaxed. Instead of 60 days, they must be present in India for 182 days or more during the previous year to qualify as residents. This concession also applies to Indian citizens who leave the country for employment purposes or as crew members of Indian ships.
The residency status of individuals or entities is crucial when transferring shares between residents and non-residents. Section 6 of the Income Tax Act not only affects tax obligations but also impacts the regulatory procedures involved in share transfers. Non-resident investors may face additional restrictions or requirements when acquiring or transferring shares in Indian companies, including adherence to guidelines set by the Foreign Exchange Management Act (FEMA) and other relevant regulations under the Companies Act, 2013.
Applicable Acts and Regulations
Various acts and regulations ensure compliance with the country’s corporate, tax, and foreign exchange laws. Below is an overview of the key statutes that apply to such transactions:
Foreign Exchange Management Act, 1999 (FEMA)
The Foreign Exchange Management Act (FEMA), 1999, governs all cross-border transactions involving foreign exchange and sets the framework for foreign investment in India. Specifically, it regulates capital flows and ensures that share transfers comply with foreign exchange rules, safeguarding India's external financial stability.
Section 56 of the Companies Act, 2013, and Rule 11 of the Companies (Share Capital & Debentures) Rules, 2014
Under Section 56 of the Companies Act, 2013, mandates that share transfers be registered with the company and supported by valid transfer deeds. Additionally, Rule 11 of the Companies (Share Capital & Debentures) Rules, 2014, outlines the detailed compliance requirements for companies when issuing or transferring shares, including due diligence for foreign shareholders.
Master Circular on Foreign Investment in India
The Master Circular on Foreign Investment in India, issued by the Reserve Bank of India (RBI), consolidates all rules and guidelines related to foreign investment in the country. It provides clarity on procedures, eligibility, and reporting obligations for non-residents investing in Indian companies. This circular is vital for ensuring that all share transfers between residents and non-residents adhere to the regulatory framework set forth by the RBI.
FDI Policy, 2016
India's Foreign Direct Investment (FDI) Policy, 2016 outlines sectors where foreign investment is permitted and provides sectoral limits on ownership by non-residents. This policy determines the permissible routes for share transfers, such as the automatic route or government approval route, depending on the nature and amount of investment.
Stamp Act, 1899
The Indian Stamp Act, 1899, governs the imposition of stamp duty on legal documents, including share transfer deeds. Stamp duty must be paid on the transfer of shares to authenticate the transaction, and failure to do so can result in legal complications. The amount of stamp duty depends on the value of the shares being transferred, and proper stamping ensures the legality and enforceability of the share transfer.
Income Tax Act, 1961
The Income Tax Act, 1961 determines the tax implications of share transfers. Capital gains tax applies to profits made from the transfer of shares, and both residents and non-residents must adhere to the provisions laid out under the Act. The taxation of non-residents is subject to additional scrutiny under international tax treaties, ensuring that cross-border share transfers align with India’s tax framework.
Valuation Rules
Valuation rules ensure that share transactions between residents and non-residents occur at an appropriate value, thereby preventing undervaluation or overvaluation that could result in tax evasion or foreign exchange violations. Share transfers must be conducted based on fair market value to avoid legal and financial penalties.
Procedure overview
Pre-transaction agreement
Before initiating the share transfer, the transferor and transferee often formalize a Letter of Intent (LoI). This document outlines the essential terms and conditions of the transaction, including the price, timeline, and other critical details. While the LoI is non-binding, it sets the stage for the actual transfer process.
Required documents
A successful transfer of shares involves submitting several key documents to the company:
- The most crucial document is the share transfer deed, executed by both parties and submitted to the company along with the original share certificates. This must be done within 60 days of the execution of the deed.
- In cases where the transfer involves foreign entities, the Foreign Currency-Transfer of Shares (FC-TRS) form must be filed on the RBI's FIRMS portal.
- Both the buyer and seller must submit consent letters stating their agreement on the receipt or payment of the transaction consideration.
- A board resolution approving the share transfer is required from the company. This ensures that the company formally acknowledges the transfer, thus completing the internal approval process.
Once the above steps are completed, the company will record the transfer in its register of members, formalizing the change in ownership. In some cases, valuation of shares is required to comply with FDI norms, ensuring that the shares are transferred at fair market value.
Procedure for transfer of shares under the Companies Act, 2013
- The transfer deed needs to be in Form SH-4, which must be endorsed by the prescribed authority.
- Exemptions:
- Transfers made by a director or nominee on behalf of another body corporate under section 187 of the Act.
- Transfers made by a director or nominee on behalf of a government-controlled corporation.
- Transfers by way of security for a loan or advance if made with specific institutions (e.g., State Bank of India, scheduled banks, central/state government, etc.).
- According to the Indian Stamp Act, stamp duty is 25 paise per ₹100 of share value (e.g., for shares valued at ₹1,050, the stamp duty is ₹2.75). The stamp affixed on the transfer deed should be cancelled at the time of signing.
- A person providing approval must witness the transferor and transferee signing the transfer deed in person.
- The share/debenture certificate or allotment letter must be attached with the transfer deed and sent to the company.
- If the transferor applies for partly paid shares, the company should notify the transferee about the outstanding amount, and a no-objection certificate from the transferee is required within two weeks.
- If the signed deed is lost, a written application with a similar value stamp can be affixed. The board may then register the transfer on terms it deems fit.
- If the company’s shares are listed, no fee can be charged for registering the transfer.
Time limits for transfer registration
Transfer must be registered within 60 days from the date of execution. The company must notify the transferor, and a no-objection certificate must be obtained from the transferee within two weeks.
Specific requirements for Transfer of Shares
Transfer from Resident to Non-Resident
When shares are transferred from a resident individual or entity to a non-resident, several legal and regulatory requirements must be met. This process is governed by the Foreign Exchange Management Act (FEMA), the Companies Act, 2013, and other relevant rules issued by the Reserve Bank of India (RBI) and the Ministry of Corporate Affairs (MCA). Below is a detailed breakdown of the steps and specific requirements for such transfers:
Valuation of Shares
The price at which the shares are transferred must be based on a fair and accurate valuation. The rationale for this is to prevent undervaluation or overvaluation of assets, ensuring that the transfer reflects the fair market value of the shares.
The valuation of the shares must be performed using any internationally accepted pricing methodology on an arm’s length basis. The valuation must be certified by one of the following:
- A Chartered Accountant (CA);
- A SEBI-registered Merchant Banker; or,
- A practicing Cost Accountant.
The objective is to ensure that the price is fair, especially since the transaction involves a cross-border transfer of ownership.
Execution of Transfer Deed (Form SH-4)
The transfer of shares must be documented using Form SH-4, the instrument of transfer prescribed under the Companies Act, 2013.
- The form must be duly filled out with the details of the transferor (resident) and the transferee (non-resident), including the number of shares being transferred and the consideration amount.
- The form must be signed by both the transferor and the transferee.
- This form ensures the legal transfer of ownership between the resident and non-resident entities.
Payment of Stamp Duty
The transfer of shares is subject to stamp duty, which must be paid to validate the transfer deed. Stamp duty is charged at a rate of 0.25 percent of the consideration (sale) amount.
- Share transfer stamps must be purchased equivalent to 0.25 percent of the value of the shares being transferred.
- These stamps must then be affixed to Form SH-4, after which they should be "crossed" or cancelled (to prevent re-use).
- For example, if shares worth ₹1,00,000 (US$1,194) are being transferred, the stamp duty payable will be ₹250 (US$2.98).
Regulatory approvals
The transfer of shares from a resident to a non-resident typically falls under the purview of FDI regulations. If the sector in which the company operates is under the automatic route (i.e., no prior approval from the government is required), the transfer can proceed without additional clearance. If the sector falls under the approval route, prior approval from the Government of India or the concerned ministry may be required before proceeding with the transfer.
The company must report the transfer of shares to the RBI by filing the FC-TRS form (Foreign Currency-Transfer of Shares). This filing is mandatory and must be completed within 60 days of the transfer of shares. The report must be filed online through the RBI’s FIRMS portal. The FC-TRS form includes details about the nature of the transfer, the parties involved, the valuation, and the foreign exchange inflows.
Compliance with sectoral caps
Each sector has specific limits or caps on foreign investment (FDI caps). Before the transfer is completed, it is essential to ensure that the acquisition of shares by the non-resident does not violate these sectoral caps.
If the company operates in a sector where FDI is allowed up to 100 percent, the entire shareholding can be transferred without restrictions. However, if FDI is restricted to, say, 49 percent, only a portion of the shares can be transferred.
Documentation requirements
The following documents are typically required to complete the share transfer:
- Form SH-4 (Instrument of Transfer): Duly executed and stamped transfer deed.
- Valuation Report: Certified valuation report determining the fair market value of the shares.
- Board Resolution: A resolution from the board of directors approving the transfer of shares.
- Shareholder Agreement (if applicable): If there is a shareholder agreement between the parties, a copy of this agreement may be required.
- Form FC-TRS: This form must be filed with the RBI to report the transfer.
- Proof of Consideration Payment: Bank receipts or other evidence of the payment made by the non-resident for the shares.
Post-transfer formalities
Once the transfer is completed, the company must update its register of members to reflect the new shareholding structure. The non-resident’s name must be entered as the owner of the shares. The company must issue a new share certificate in the name of the non-resident transferee, signifying their ownership of the shares.
Transfer from Non-Resident to Resident
The transfer of shares from a non-resident to a resident in India is governed by several legal and regulatory frameworks, including the Foreign Exchange Management Act (FEMA), the Companies Act, 2013, and guidelines issued by the Reserve Bank of India (RBI). Below is a comprehensive breakdown of the key requirements, procedures, and considerations involved in such a transfer.
Valuation of Shares
The transfer price of the shares must be determined based on a fair market valuation. This ensures that the transaction adheres to regulatory norms and reflects the true value of the shares. The valuation should be done according to internationally accepted pricing methodologies on an arm’s length basis. The valuation report must be certified by one of the following:
- A Chartered Accountant (CA),
- A SEBI-registered Merchant Banker, or
- A practicing Cost Accountant.
The price of the shares must not exceed the price determined in the valuation report. This restriction prevents the non-resident seller from charging an inflated price.
Execution of Transfer Deed (Form SH-4)
The transfer of shares must be documented using Form SH-4, which is the prescribed instrument of transfer under the Companies Act, 2013. The form must be duly filled out with details of the non-resident transferor and the resident transferee, including the number of shares being transferred and the consideration amount.
Both parties (the transferor and transferee) must sign the form. This legally formalizes the transfer of ownership from the non-resident to the resident.
Stamp Duty
Stamp duty must be paid on the consideration amount of the transfer to validate the transaction. The rate of stamp duty is 0.25 percent of the consideration (sale) amount.
- Process:
- The share transfer stamps, equivalent to 0.25% of the value of the shares, must be purchased.
- These stamps are affixed to Form SH-4 and crossed or cancelled to mark them as used.
- For example, if shares worth ₹1,00,000 (US$1,194) are being transferred, the stamp duty payable will be ₹250 (US$2.98).
- This step is critical for legally enforcing the transfer document and making the transfer effective.
Reporting and compliance
The company or the resident transferee is required to report the share transfer to the RBI by filing Form FC-TRS (Foreign Currency-Transfer of Shares). This filing must be completed within 60 days of the transfer and is done online through the FIRMS (Foreign Investment Reporting and Management System) portal.
The form includes details about the parties involved, the nature of the transaction, the number of shares transferred, the consideration amount, and the valuation report. For sectors where there are restrictions on foreign ownership, this transfer could help the company comply with sectoral caps or bring the foreign ownership below prescribed limits.
Restrictions on the price (Upper Cap)
The price at which shares are transferred from a non-resident to a resident cannot exceed the price determined in the valuation report.
This restriction ensures that the resident buyer is not overcharged and that the transaction adheres to India’s foreign exchange and pricing regulations. It also helps to maintain a fair market environment and avoids manipulation of share prices in cross-border transactions.
Documentation
The following documents are essential for completing the transfer:
- Form SH-4 (Instrument of Transfer): The legal document for transferring shares between the non-resident and resident.
- Valuation Report: A certified report determining the fair market value of the shares.
- Form FC-TRS: Filed with the RBI for reporting the transfer of shares.
- Board Resolution: A resolution from the board of directors of the company approving the share transfer.
- Proof of Payment: Evidence showing the consideration amount was paid by the resident transferee to the non-resident transferor.
- Shareholder Agreement (if applicable): Any agreements between the parties that outline the terms of the share transfer.
Post-transfer formalities
After the transfer is complete, the company must update its Register of Members to reflect the new shareholding structure. The name of the resident transferee must be entered in place of the non-resident. The company must issue a new share certificate in the name of the resident transferee, marking the completion of the transfer.
Sector-specific considerations
Certain sectors in India have restrictions on foreign investment. A transfer of shares from a non-resident to a resident may be undertaken to reduce the foreign shareholding in compliance with sectoral FDI caps.
Before proceeding with the transfer, it is important to check the FDI policy applicable to the industry in which the company operates. If there is an upper cap on foreign ownership, the transfer helps bring the shareholding structure in line with the regulations.
Regulatory approvals
In certain sectors where foreign investment is subject to government approval, the share transfer may require prior clearance from the relevant authorities.
Although this is more relevant for the transfer of shares from a resident to a non-resident, it is still advisable to check if the sector mandates specific approvals for non-residents.
Tax implications
The transfer of shares in India, especially involving foreign entities and non-residents, comes with various tax implications. These taxes vary depending on whether the transferor is a foreign company or a non-resident individual.
Tax on foreign companies
Foreign companies in India are subject to tax only on income earned or deemed to be accrued within India. This includes income generated through business operations, capital gains, and other Indian-based sources.
The corporate tax rate applicable to foreign companies is 40 percent of the taxable income, excluding any surcharge and cess. If a foreign company transfers shares of an Indian company, the capital gains arising from such a transaction will be taxable in India. The gain is calculated as the difference between the sale price of the shares and their acquisition cost, as per Indian tax rules.
Tax on non-resident individuals
A non-resident individual earning rental income from a property located in India is liable to pay tax on such income in India. The tax treatment is similar to that of a resident individual, where the income is taxed based on the slab rates applicable to individual taxpayers.
Though not directly related to share transfers, non-resident individuals holding investments in property or shares in Indian companies must be aware of their tax obligations. Any rental income earned from real estate within India will be taxed under Indian laws, regardless of the individual’s country of residence.
Capital gains on transfer of shares
When a non-resident individual transfers shares of an Indian company, the capital gains arising from such a transaction are taxable in India. This applies to both short-term and long-term capital gains, depending on the holding period of the shares.
If the shares are held for less than 24 months, the gains are categorized as short-term and taxed at 15 percent (for listed shares sold on the stock exchange) or 30 percent (for unlisted shares).
If the shares are held for 24 months or more, the gains qualify as long-term capital gains. For listed shares, long-term capital gains exceeding ₹1 lakh are taxed at 10 percent, while unlisted shares are taxed at 20 percent after indexation benefits.
Non-resident individuals may benefit from DTAA provisions between India and their country of residence, which can lower the tax liability or provide credit for taxes paid in India.
Other considerations for foreign companies and non-residents
- Withholding Tax: In many cases, tax is deducted at source (TDS) on payments made to non-resident individuals or foreign companies. For example, if a non-resident sells shares to an Indian resident, the resident buyer may be required to withhold a portion of the sale consideration as TDS and remit it to the Indian government.
- Both foreign companies and non-resident individuals must file tax returns in India to report any capital gains or other taxable income. Even if taxes are withheld at source, filing a tax return ensures compliance and allows the entity or individual to claim any applicable refunds or tax credits.
The transfer of shares between residents and non-residents in India involves adherence to specific procedures and regulations. Understanding these requirements ensures seamless share transfer for investment purposes. It is advisable to consult legal experts to determine the applicability of stamp duty and other specific regulations on a particular document.
