Member Article

Kochhar & Co- India- The Reserve Bank of India Simplifies Procedures in respect of Transfer of Shares/ Convertible Debentures by way of sale by a resident to a non-resident Under Indian exchange control laws, the transfer of shares, by way of sale, by a resident to a non-resident (i.e. to incorporated non-resident entity other than erstwhile Overseas Corporate Body (OCB), foreign nationals, Non Resident Indians (NRI), Foreign Institutional Investor (FII),) require prior permission of the Foreign Investment Promotion Board (“FIPB”) followed by approval from Reserve Bank of India (“RBI”). The RBI ensures that the price of the transfer is not above a maximum price, which is based on the Net Asset Value (NAV) of a private company and the price on the stock exchange for a listed company. The RBI has vide its circular vide its circular No. 16 dated October 4, 2004, has significantly simplified the procedure for foreign investment into India by doing away with the requirement of obtaining prior governmental approval for the transfer of shares / convertible debentures of Indian companies. Subject to the compliance with the conditions contained in the said notification, henceforth, no approval of the FIPB and the RBI will be required for the transfer of shares /convertible debentures, by way of sale, from residents to non-residents (including transfer of subscriber's shares) of an Indian company in sectors other than financial service sector (i.e. Banks, Non-Banking Financial Company (s) and Insurance). Thus, the sale of shares / convertible debentures, by: 1. a person resident in India to a person resident outside India (including foreign national, non-resident Indian and a Foreign Institutional Investor, but excludes the Overseas Corporate Bodies); and 2. a person resident outside India to a person resident in India, which previously required prior approval of the FIPB and / or the RBI, as the case may be, have now been brought under the automatic route, subject to certain conditions including pricing norms, sectoral cap, etc. However, this benefit has not been extended to transfer of shares from a resident to non-resident relating to Indian Companies in the financial services sector (i.e. banks, non banking financial companies and insurance). Further, non-resident Indians, who have purchased shares under the Portfolio Investment Scheme, have been restricted from transferring the shares by way of sale under private arrangement. In lieu of the approval of FIPB and RBI, an application for the transfer now needs to be made to the Authorized Dealer (the Bank), with the necessary documents, through whom the seller (i.e. Indian Resident Shareholders) wishes to receive the sale consideration in respect of the shares. Conditions The following conditions need to be satisfied in order to avail the exemption of seeking approvals from the RBI and the FIPB: 1. The activities of the investee company are under the automatic route under the FDI policy and transfer of shares do not attract the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997; 2. The non-resident shareholding after the transfer, complies with sectoral limits under the FDI policy; and 3. The price at which the transfer takes place is in accordance with the pricing guidelines prescribed by RBI. The onus of complying with the sectoral cap/limits prescribed under FDI policy as well as other guidelines/regulations would rest with the buyer and seller. Documentation Authorised Dealer have been given general permission to receive payment of amount on account of transfer of shares, provided that the conditions aforesaid are met and that the necessary documents as below are submitted to the satisfaction of the Authorised Dealer: (1) Consent letter from the seller and the buyer agreeing to the transfer of shares. The consent letters should give the details of the transfer. (2) Shareholding pattern of the investee company after the acquisition of the shares. (3) Certificate indicating fair value of shares from a Chartered Accountant. (4) Undertaking from the buyer to the effect that he is eligible to acquire shares under the FDI policy and the existing sectoral limits and Pricing guidelines gave been complied with. (5) Form FC-TRS in quadruplicate Procedure As a measure of simplification of procedure it has been decided that the Authorised Dealer (Bank) will be responsible to consider requests in respect of transfer of shares/convertible debentures. The Authorised Dealer shall ensure that the transactions have been carried out in accordance with the prescribed conditions. Authorised Dealers have power to call for any other information or clarification or to ask for any other documents that it may consider necessary for being satisfied that the provisions contained in the Foreign Exchange Management Act, 1999 and the regulations and the notifications made/issued thereunder have been complied with. Conclusion The move by the RBI demonstrates their commitment to de-bureaucratize the foreign investment regime and smoothen the process by cutting down on the time delays that are part and parcel of transactions involving transfer between residents and non-residents. 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