The Share transfers involving residents and non-residents in India are strictly governed by the Foreign Exchange Management Act, 1999 (FEMA) and the rules, regulations and directions issued by the Reserve Bank of India, making RBI compliance for foreign companies in India a critical requirement. Any transfer of shares or other securities of an Indian company between a resident and a non-resident is treated as a foreign investment transaction and is subject to pricing guidelines, sectoral caps, reporting requirements and compliance conditions under India’s foreign exchange laws in line with RBI compliance for foreign companies in India.
The filing of Form FC-TRS on the RBI’s FIRMS Portal is one of the most important regulatory steps in completing such transactions to ensure RBI compliance for foreign companies in India.
A share transfer may occur in the following situations:
- Resident to Non-Resident (sale of shares by an Indian resident to a foreign buyer)
- Non-Resident to Resident (sale of shares by foreign investor to Indian resident buyer)
- Non-Resident to Non-Resident (sale of shares by foreign seller to foreign buyer)
1. Applicable Legal Framework
Any share transfer involving a non-resident, whether from resident to non-resident, non-resident to resident, or between two non-residents, is governed by the foreign exchange regulations in India and forms part of RBI compliance for foreign companies in India. Such transactions must comply with the provisions of the Foreign Exchange Management Act, 1999 (FEMA) and the rules, regulations and directions issued by the Reserve Bank of India.
In particular, the following legal and regulatory instruments apply to cross-border share transfers under RBI compliance for foreign companies in India:
- FEMA (Non-Debt Instruments) Rules, 2019
- FDI Policy
- RBI Master Directions on Reporting under FEMA
- Sectoral caps, entry routes (automatic / government), and prohibited sectors
- Pricing guidelines
- Documentation and KYC requirements
- Reporting through the FIRMS-SMF portal in Form FC-TRS
- Processing by the Authorised Dealer (AD) Bank
- Income Tax Act, 1961
2. Types of Share Transfers Covered Under FC-TRS
The Form FC-TRS is required to be filed when there is a transfer of capital instruments, such as equity shares, compulsorily convertible preference shares, compulsorily convertible debentures, or share warrants, between a resident and a non-resident, as part of RBI compliance for foreign companies in India. These transactions are regulated as either foreign investment into India or foreign disinvestment from India, depending on the direction of transfer.
A transfer from a resident to a non-resident is treated as an FDI inflow, and the FC-TRS filing is generally required to be made by the resident transferor, a compliance step often reviewed during India market entry consulting engagements. Similarly, when a non-resident transfers shares to a resident, the transaction is considered a disinvestment by the foreign shareholder, and the filing obligation typically lies with the resident transferee. In brief, the reporting of share transfer transactions in Form FC-TRS to RBI is required in the following cases to maintain RBI Compliance for Foreign Companies in India:
Resident to Non-Resident
- Treated as FDI inflow
- Requires Form FC-TRS filing by the resident transferor
Non-Resident to Resident
- Treated as an FDI disinvestment
- Requires Form FC-TRS filing by resident transferee
Non-Resident to Non-Resident
- No filing of Form FC-TRS is required.
- Only valuation, sectoral rules and pricing guidelines must be complied with
3. Pricing Guidelines Under FEMA
The pricing of shares transferred between a resident and a non-resident must comply with the fair valuation norms prescribed under FEMA to ensure RBI compliance for foreign companies in India. The transfer price is determined based on who is buying and who is selling:
Resident to Non-Resident (Sale to Foreign Investor)
The transfer price cannot be lower than the fair value of the shares.
Non-Resident to Resident (Purchase by Indian Resident)
The transfer price cannot be higher than the fair value of the shares.
Valuation Must Be Conducted By
- A SEBI-registered Merchant Banker, or
- A Chartered Accountant (CA)
Accepted Valuation Methodologies:
- Discounted Cash Flow (DCF)
- Comparable Company or Comparable Transaction valuation
- Any internationally accepted pricing methodology
4. Documentation Required for Share Transfer between a Resident and a Non-resident and filing of Form FC-TRS
The documentation requirements for a share transfer involving a resident and a non-resident may vary slightly depending on the Authorised Dealer (AD) Bank, while adhering to RBI Compliance for Foreign Companies in India. However, the following set of documents is generally required in all cases, and these are typically reviewed under FDI & fema advisory services:
Share Transfer Agreement / Share Purchase Agreement (SPA): A duly executed agreement outlining key terms such as the number of shares being transferred, consideration payable, payment terms, and representations of both parties is advisable to be in place.
Board Resolution Approving Transfer: A board resolution approving the transfer of shares shall be required. For private limited companies, this must be in accordance with the Articles of Association, which may impose restrictions on transferability
Form SH-4 (Securities Transfer Form): A physical transfer form signed by both parties, unless the shares are held in dematerialised form, shall be required. In case of a demat transfer, the DIS slip (Delivery Instruction Slip) is required instead of SH-4.
Valuation Certificate: A certificate issued by a SEBI-registered Merchant Banker or a Chartered Accountant, confirming that the transfer price adheres to the FEMA pricing guidelines.
Consent Letters and NR Declaration: A consent letter from both buyer and seller shall be required for filing FC-TRS. An NR declaration shall be required from the Non-resident (Transferor/ Transferee).
KYC Documents of Non-Resident: Depending on whether the investor is an individual or an entity, KYC documents may include:
- Passport
- Tax residency proof
- Certificate of incorporation (if corporate investor)
- Proof of address
- Bank Advice / Proof of Consideration: The proof of payment of consideration is mandatory for filing of Form FC-TRS. Depending on the direction of share transfer, the documents such as FIRC, KYC, SWIFT copy, Bank Debit Advice, etc., are required.
5. Filing of Form FC-TRS on the FIRMS Portal of RBI
Who Files?
Under RBI guidelines governing RBI compliance for foreign companies in India:
- The resident transferee files Form FC-TRS when purchasing shares from a non-resident.
- The resident transferor files Form FC-TRS when selling shares to a non-resident.
6. Timelines for Compliance under FEMA
The Compliance timelines under FEMA are strict and must be followed carefully to avoid violations of RBI compliance for foreign companies in India:
FC-TRS Filing Deadline:
The form must be filed within 60 days from the date of the share transfer or the date of receipt/remittance of consideration, whichever occurs earlier.
Delay Consequence:
Any delay attracts a Late Submission Fee (LSF), which must be paid to the RBI for condonation.
7. Consequences of Non-Compliance under FEMA
The failure to comply with FEMA requirements related to share transfer and Form FC-TRS filing under RBI compliance for foreign companies in India may result in several regulatory and practical difficulties, including:
- Liability to pay Late Submission Fee (LSF)
- Restrictions imposed by AD Banks on future foreign remittances
- FEMA penalty proceedings, which may lead to compounding
- Issues during due diligence, statutory audits, investor rounds, or corporate restructuring
- In extreme cases, RBI may direct the reversal of the transaction if found to be non-compliant
8. Compliance under Income Tax Act, 1961
The taxation applicability on share transfer between non-resident to resident and vice versa in India is governed by the Income-tax Act, 1961, and depends upon the nature of income (capital gains) and the residential status of the transferor, which is often reviewed alongside RBI compliance for foreign companies in India.
Resident to Non-Resident (Sale to Foreign Investor)
In this case, the Capital Gain Tax on the sale of shares applies in the hands of the resident transferor. The non-resident buyer of shares does not pay any tax. The taxation rate depends on the holding period (short-term vs. long-term) and the nature of shares (listed/ unlisted).
Non-Resident to Resident (Purchase by Indian Resident)
For a non-resident selling shares of an Indian company, the gains are taxable in India. The resident buyer is required to deduct Tax Deducted at Source (withholding tax) at the applicable rate before making the payment under Section 195 of the Income-tax Act, 1961. Non-residents may claim benefits under the Double Tax Avoidance Agreement (DTAA), provided they furnish the necessary documentation, such as a Tax Residency Certificate (TRC).
The non-resident individual/ entity shall report the said transaction in the appropriate Income Tax Return (ITR) form (typically ITR-3/ ITR-6).
Conclusion
The share transfers between residents and non-residents are governed by a highly structured regulatory framework under FEMA, the Non-Debt Instruments Rules, and the RBI’s reporting system, ensuring RBI compliance for foreign companies in India at every stage of the transaction. These regulations ensure that all cross-border share transactions align with India’s foreign investment policy, sectoral caps, pricing norms, and transparency standards.
A central aspect of the process is the timely filing of Form FC-TRS on the FIRMS portal. This filing must be submitted within 60 days of the transfer or the receipt/remittance of consideration, whichever occurs earlier. The Authorised Dealer (AD) Bank plays a crucial role by reviewing the transaction, verifying compliance with KYC and pricing rules, and approving the filing before it is acknowledged by the RBI.
Non-compliance can lead to Late Submission Fees (LSF), delays in future remittances, challenges during statutory audits or due diligence, and, in serious cases, FEMA enforcement actions that may require reversal of the transaction. Therefore, a proactive and well-planned approach is essential, and Corporate legit supports businesses in navigating these regulatory requirements effectively.
Frequently Asked Questions (FAQs)
1. What is Form FC-TRS, and when is it required?
Form FC-TRS is a mandatory filing on the RBI’s FIRMS portal for reporting transfer of shares or capital instruments between a resident and a non-resident. It is required for resident-to-non-resident and non-resident-to-resident share transfers under FEMA.
2. Who is responsible for filing Form FC-TRS with the RBI?
If shares are purchased by a resident from a non-resident, the resident transferee must file Form FC-TRS. If shares are sold by a resident to a non-resident, the resident transferor is responsible for the filing.
3. What are the pricing guidelines for share transfers under FEMA?
For resident-to-non-resident transfers, the share price cannot be lower than fair value. For non-resident-to-resident transfers, the price cannot exceed fair value. Valuation must be certified by a SEBI-registered Merchant Banker or a Chartered Accountant.
4. What is the timeline for FC-TRS filing, and what happens in case of delay?
Form FC-TRS must be filed within 60 days from the date of share transfer or receipt/remittance of consideration, whichever is earlier. Delays attract a Late Submission Fee (LSF) payable to the RBI.
5. What are the consequences of non-compliance with RBI and FEMA regulations?
Non-compliance may lead to late submission fees, restrictions on foreign remittances, FEMA penalty proceedings, complications during audits or due diligence, and, in serious cases, reversal of the share transfer transaction by the RBI.