What is Transfer of Shares?

Transfer of shares means the voluntary handing over of the rights and possibly, the duties of a company member (as represented in a share of the company). The rights and duties of the share transfer happen from a shareholder who wishes to not be a member of the company any more to a person who wishes of becoming a member.

Governing Law:

1.  Resident to Non-Resident
• Foreign Exchange Management Act, 1999 (FEMA)
• FEMA (Non-Debt Instruments) Rules, 2019 – specifically:
• Rule 21(2)(a)(ii): Price must be not less than the Fair Market Value (FMV)
• Rule 8: Valuation must be certified by a Chartered Accountant or SEBI-registered Merchant Banker
• Companies Act, 2013: Governs the procedural aspects of share transfer, including execution of Form SH-4, stamping, witness attestation, board approval, register update, and timely issuance of share certificates.
• Indian Stamp Act: Mandates payment of applicable stamp duty (typically 0.25% of the consideration or value), which must be affixed on the transfer instrument and duly cancelled at the time of execution.
2.  Non-Resident to Resident
• Foreign Exchange Management Act, 1999 (FEMA)
• FEMA (Non-Debt Instruments) Rules, 2019 – specifically:
• Rule 21(2)(a)(iii): Price must be not more than the Fair Market Value (FMV)
• Rule 8: Valuation norms and certification requirements
• Companies Act, 2013 – procedural requirements remain the same
• Indian Stamp Act – applicable stamp duty to be paid and cancelled at execution

Share transfer from Non- Resident to Resident:

Transfer where a non- resident sells equity to a resident requires inward remittance compliance under FEMA

• Approval Requirement: For sectors under the automatic route, no prior approval is required from the RBI or the government for share transfers.
• Valuation of Unlisted Shares: The fair value of unlisted shares must be determined as per Rule 8 of the FEMA (Non-Debt Instruments) Rules. Valuation can be done using the Discounted Cash Flow (DCF) method, Net Asset Value (NAV) method, or the Comparable Transaction method, and must be certified by a Chartered Accountant or a SEBI-registered Merchant Banker.
• Valuation of Listed Shares: For listed shares, the transfer price must not be lower than the SEBI-prescribed floor price, typically calculated as the volume-weighted average price (VWAP) over a specified period.
• Reporting Requirement: Form FC-TRS must be filed with an Authorised Dealer Category I Bank within 60 days of either the transfer of shares or receipt/remittance of consideration, whichever occurs earlier.

Share Transfer from Resident to Non-Resident

Transfer where a non- resident sells equity to a resident requires inward remittance compliance under FEMA

• Approval Requirement: For sectors under the automatic route, no prior approval is required from the RBI or the Central Government for share transfers.
• Unlisted Shares – Valuation: Fair valuation must be carried out in accordance with Rule 8 of the FEMA (Non-Debt Instruments) Rules by a Chartered Accountant or a SEBI-registered Merchant Banker, using methods such as Discounted Cash Flow (DCF), Net Asset Value (NAV), or Comparable Transaction Method.
• Listed Shares – Pricing: The transfer price of listed shares must not be lower than the SEBI-prescribed floor price, generally determined as the volume-weighted average price (VWAP) over the past 60 trading days.
• Form FC-TRS – Reporting Requirement: The Form FC-TRS must be filed with an Authorised Dealer Category I Bank (RBI-authorised) within 60 days from either the date of share transfer or receipt/remittance of consideration, whichever is earlier.

Pricing Guidelines:

• NON-RESIDENT to Resident : As per rule 21(2)(a)(iii) of the FEMA (Non-Debt Instruments) Rules, 2019, the transfer price must not exceed the fair market value of shares ensuring resident doesn’t pay more than the FMV of the shares
• Resident to NON-RESIDENT: : As per rule 21(2)(a)(ii) of the FEMA (Non-Debt Instruments) Rules, 2019, the transfer price must not be less than the FMV of shares to prevent undervaluation.

Conclusion:

The transfer of shares between non-resident and r requires the strict compliance with FEMA regulation, valuation norms, and reporting obligation like filing the form FC TRS within 60 days, and follow the companies act’s procedures for share transfer ensuring the transfer price align with the FMV adhering to sectoral caps (as prescribed ) and completing necessary filing within prescribed timelines are critical for  a smooth and legally compliant transfer.