A non-resident individual or entity, holding an investment in an Indian entity by way of equity instruments on repatriation basis may choose to divest its holding by transferring its shares to another person. A transfer of equity instrument can be effectuated by way of sale or by way of gift. In this note, we shall specifically discuss about the important aspects w.r.t transfer of Equity shares by way of sale, from a non-resident to another non-resident, individual or entity, under the provisions of Companies Act, 2013, and the relevant FEMA Regulations.
The governing law for aforesaid transfer of shares of an Indian Company is enshrined under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘hereinafter to be termed as NDI Rules 2019’) read with the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (‘hereinafter to be termed as NDI Reporting Regulation). Notably, in this respect, the provisions of the Companies Act 2013 and the relevant rules made thereunder should also to be taken care of.
A transaction pertaining to transfer of shares of an Indian Company by a person resident outside India shall fall under the following two categories of investment routes:
In a nutshell, following are the prominent checkpoints to analyse the compliances governing the transfer of shares of an Indian Entity between Non Residents:
Within the purview of the framework of the Companies Act 2013 (‘the Act’), transaction pertaining to transfer of shares of an Indian Company, shall be subjected to section 56 of the Act read with the Companies (Share Capital and Debenture) Rules, 2014.
To summarise the requirements involved in a share transfer under the ambit of the Act, we have reproduced herein, the following flow of events and the documentation required:
The transfer of shares held in dematerialised form is quite similar to transfer of shares in physical form. The major difference is that at the time of settlement, instead of delivery/receipt of shares in the physical form, the same is affected through account transfers.
The same can be accomplished by getting in touch with your stock broker.
*The procurement or execution of a valuation report or share purchase agreement is not required by law, and the parties are free to decide whether to execute such documents based on the specifics of particular transaction.
Within the ambit of provisions under the Companies Act 2013, no separate reporting by filing any e-form is required to be made to the Registrar of Companies (ROC) as the same is reported while filing Annual Return of the Company (e-form MGT-7) providing details of the shares transferred during the financial year.
Notably, where shares are transferred from a Non Resident to another Non Resident, the profit arising out of sale or transfer of shares are neither accrued nor earned in India, therefore the same is left out of the ambit of provisions of the Income Tax Act, 1961 and hence shall be regulated as the legal framework prevalent in the laws of the home country of the parties involved.
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Please share under which section of Income Tax the said transfer is exempted.
This article deals with the transfer of shares between two non residents. We assume that you are asking for the taxation aspects of this transaction.
Your kind attention is drawn to the concluding para of this article wherein it is mentioned that where shares are transferred from a Non Resident to another Non Resident, the profit arising out of sale or transfer of shares are neither accrued nor earned in India. Therefore the same is left out of the ambit of provisions of the Income Tax Act, 1961.
Hope we have addressed your concerns. If you have any specific query that still needs a resolution, you are requested to contact us for professional assistance.