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Transfer Through Sale
August 24 , 2012

Terms & Conditions for transfer of Shares/ Convertible Debentures by way of sale

In order to address the concerns relating to pricing documentation, payment/receipt and remittance in respect of the shares/convertible debentures of an Indian company, other than a company engaged in financial service sector, transferred by way of sale; the parties involved in the transactions must comply with the guidelines detailed below:

  1. Parties involved in the transaction are: (a) seller (resident/non-resident), (b) buyer (resident/non-resident), (c) duly authorized agents of the seller and/or buyer, (d) Authorized Dealer (AD) branch and (e) Indian company, for recording the transfer of ownership in its books.
  2. Pricing Guidelines: The under noted pricing guidelines are applicable to the following types of transactions: (a) Transfer of shares, by way of sale under private arrangement by a person resident in India to a person resident outside India. (b) Transfer of shares, by way of sale under private arrangement by a person resident outside India to a person resident in India.
  3. Transfer by Resident to Non-Resident (i.e., to incorporated non-resident entity other than erstwhile OCB, foreign national, NRI, FII):

Price of shares transferred by way of sale by a resident to a non-resident shall not be less than: (a) The ruling market price, in the case the shares are listed on the stock exchange, (b) Fair valuation of shares done by a Chartered Accountant, as per the guidelines issued by the erstwhile Controller of Capital Issues, in case of unlisted shares, and (c) The price per share arrived at should be certified by a Chartered Accountant.

  1. Transfer by Non-Resident (i.e., by incorporated non-resident entity erstwhile OCB, foreign national, NRI, FII) to Resident: Sales of shares by a non-resident to resident shall be in accordance with Regulation 10 (B) (2) of the Notification No. FEMA 20/2000 – RB dated May 3, 2000, which is as below:

(a) Where the shares of an Indian company are traded on stock exchange; (i) The sale is at the prevailing market price on stock exchange and is effected through a merchant banker registered with SEBI or through a stock broker registered with the stock exchange; (ii) If the transfer is other than that referred to in clause (i), the price shall be arrived at by taking the average quotations (average of daily high and low) for one week preceding the date of application with 5%. Where, however the shares are being sold by the foreign collaborator or the foreign promoter of the Indian company to the existing promoters in India with the objective of passing management control in favour of the resident promoters the proposal for sale will be considered at a price which may be higher by up to a ceiling of 25% over the price arrived at as above.

(b) Where the shares of an Indian company are not listed on the stock exchange or are thinly traded, (i) If the consideration payable for the transfer does not exceed Rs. 20 lakh per seller per company, at a price mutually agreed to between the seller and the buyer, based on any valuation methodology currently in vogue, on submission of a certificate from the statutory auditors of the Indian company whose shares are proposed to be transferred, regarding the valuation of the shares, and (ii) If the amount of considerations payable for the transfer exceeds Rs. 20 lakh per seller per company at a price arrived at, at the sellers option in any of the following manner, namely: (A) a price based on earning per share (EPS linked to the Price-Earning (P/E) multiple, or a price based on the Net Asset Value (NAV) linked to book value multiple whichever is higher, or (B) the prevailing market price in small lots as may be laid down by the Reserve Bank so that the entire shareholding is sold in not less than 5 trading days through screen based trading system, or (C) where the shares are not listed on any stock exchange at a price which is lower of the two independent valuations of share, one by statutory auditors of the company and the other by a Chartered Accountant or by a Merchant Banker registered with SEBI.

  1. Responsibilities/Obligations of the parties: All the parties involved in the transactions would have the responsibility to ensure that the relevant regulations under FEMA are complied with and consequent on transfer of shares, the relevant individual limit/ sectoral caps/ foreign equity participation ceilings, as fixed by Government are not breached. Settlement of transactions will be subject to payment of applicable taxes if any.
  2. Method of payment and remittance/credit of sale proceeds: The sale consideration in respect of the shares purchased by a person resident outside India shall be remitted to India through normal banking channels. In case the buyer is a Foreign Institutional Investor (FII), payment should be made by debit to its Special Non-Resident Rupee Account. In case the buyer is a NRI, the payment may be made by way of debit to his NRE/FCNR (B) accounts. However, if the shares are acquired on non-repatriation basis by NRI, the consideration shall be remitted to India through normal banking channel or paid out of funds held in NRE/ FCNR (B)/ NRO accounts.

The sale proceeds of shares (net of taxes) sold by a person (resident outside India) may be remitted outside India. In case of FII the sale proceeds may be credited to its special Non-Resident Rupee Account. In case of NRI, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE/FCNR (B) accounts and if the shares sold were held on non-repatriation basis, the sale proceeds may be credited to his NRO account subject to payment of taxes.

The sale proceeds of shares (net of taxes) sold by an OCB may be remitted outside India directly, if the shares were held on repatriation basis and if the shares sold were held on non-repatriation basis, the sale proceeds may be credited to its NRO Account subject to payment of taxes, except in the case of OCBs whose accounts have been blocked by Reserve Bank.

  1. Documentation: Besides obtaining a declaration in the enclosed form FC-TRS (in quadruplicate), the AD branch should arrange to obtain and keep on record the following documents:

(A) For sale of shares by a person resident in India: (i) Consent Letter duly signed by the seller and buyer or their duly appointed agent indicating the details of transfer i.e., number of shares to be transferred, the name of the investee company whose shares are being transferred and the price at which shares are being transferred. In case there is no formal Sale Agreement, (ii) Where Consent Letter has been signed by their duly appointed agent, the Power of Attorney Document executed by the seller/buyer authorizing the agent to purchase/sell shares. (iii) The shareholding pattern of the investee company after the acquisition of shares by a person resident outside India showing equity participation of residents and non-residents category-wise (i.e., NRIs/OCBs/foreign nationals/incorporated non-resident entities/FIIs) and its percentage of paid up capital obtained by the seller/buyer or their duly appointed agent from the company, where the sectoral cap/limits have been prescribed. (iv) Certificate indicating fair value of shares from a Chartered Accountant. (v) Copy of Brokers note if sale is made on Stock Exchange. (vi) Undertaking from the buyer to the effect that he is eligible to acquire shares/ convertible debentures under FDI policy and the existing sectoral limits and Pricing Guidelines have been complied with. (vii) Undertaking from the FII/sub account to the effect that the individual FII/sub account ceiling as prescribed by SEBI has not been breached.

(B) For sale of shares by a person resident outside India: (i) Consent Letter duly signed by the seller and buyer or their duly appointed agent indicating the details of transfer i.e. number of shares to be transferred, the name of the investee company whose shares are being transferred and the price at which shares are being transferred. (ii) Where the Consent Letter has been signed by their duly appointed agent the Power of Attorney Document authorizing the agent to purchase/sell shares by the seller/buyer. In case there is no formal Sale Agreement, letters exchanged to this effect may be kept on record. (iii) If the sellers are NRIs/OCBs, the copies of RBI approvals evidencing the shares held by them on repatriation/non-repatriation basis. The sale proceeds shall be credited NRE/NRO account as applicable. (iv) Certificate indicating fair value of shares from a Chartered Accountant. (v) No Objection/ Tax Clearance Certificate from Income Tax Authority/Chartered Account. (vi) Undertaking from the buyer to the effect that the Pricing Guidelines have been adhered to.

Reporting Requirements

For the purpose the Authorized Dealers may designate branches to specifically handle such transactions. These branches could be staffed with adequately trained staff for this purpose to ensure that the transactions are put through smoothly. The ADs may also designate a nodal office the coordinate the work at these branches and also ensure the reporting of these transactions to the Reserve Bank.

When the transfer is on private arrangements basis, on settlement of the transactions, the transferee/his duly appointed agent should approach the investee company to record the transfer in their books along with the certificate in the form FC-TRS from the AD branch that the remittances have been received by the transferor/payment has been made by the transferee. On receipt of the certificate from the AD the company may record the transfer in its books.

The actual inflows and outflows on account of such transfer of shares shall be reported by the AD branch in the R-returns in the normal course.

In addition, the AD branch should submit2 copies of the Form FC-TRS received from their constituents/customers together with the statement of inflows/outflows on account of remittances received/made in connection with transfer of shares, by way of sale, to IBD/FED/or the nodal office designated for the purpose by the bank in the enclosed proforma (which is to be prepared in MS-Excel format). The IBD/FED or the nodal office of the bank will in turn submit consolidated monthly statements in respect of all the transactions reported by their branches together with copies of the FC-TRS forms received from their branches.

Shares purchased /sold by FIIs under private arrangement will be by debit/credit to their Special Non-Resident Rupee Account. Therefore, the transaction should also be reported in (LEC,FII) by the designated bank of the FII concerned.

Shares/convertible debentures of Indian companies purchased under Portfolio Investment Scheme by NRIs, OCBs cannot be transferred by way of sale under private arrangement.

On receipt of statements from the AD, the Reserve Bank may call for such additional details or give such directions as required from the transferor/transferee on their agents, if need be.

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