• Invest in India
  • Corporate Legal Services

Transfer of Shares by way of Gift- Reporting under FEMA

July 10, 2020     by Kavita Agrawal

Shares are considered as moveable property and are included in the definition of “Goods” as given in the Sale of Goods Act, 1930. Hence, shares are freely transferable. Though this is true for public and listed companies, transfer of shares is restricted (not prohibited) in case of private companies by its Articles of Association. Nevertheless, the shares of a private company can be transferred after complying with the restrictions given in its Articles. The restrictive clauses relating to transfer of shares is to keep the ownership of the entity within the closed group of promoters and investors. A very common restriction in case of a private limited company would be that the shareholder intending to sell his shares shall first offer them to other existing shareholders.

For transfer of shares within India, the provisions of Companies Act, 2013 have to be complied with. But in case of transfer outside India, FEMA guidelines are also to be adhered to. Transfer of shares can be by way of sale or gift. While it is clear that transfer of shares between a resident and a non-resident is reported under FEMA by way of filing FC-TRS, there has been a lot of confusion w.r.t reporting under FEMA in case of transfers by way of gift. Let us try to understand the prescribed provisions together.

Share transfer by gift- Law in India

As per Foreign Exchange Management (Non-debt Instruments) Rules, 2019, a person resident in India can transfer the equity instruments of an Indian company or units held by him to any person resident outside India by way of sale and vice-versa, provided sectoral caps and other attendant conditions are adhered to. Further, a person resident outside India can transfer the equity instruments to a person resident in India by way of gift. But in case the transfer by gift is from a resident to a non-resident, prior RBI approval is required.

Similarly, a NRI or an OCI holding equity instruments of an Indian company or units on repatriation basis may transfer the same, by way of sale or gift, to any person resident outside India (prior Government approval shall be required depending on the sector in which the company is engaged).

However, if the equity instruments are held on non-repatriation basis, either by a NRI or an OCI or an eligible investor under Schedule IV of these rules, they require prior approval of the Reserve Bank of India for transferring the same to a person resident outside India by way of gift.

When shares are transferred by way of gift, the consideration involved is zero. It means there is no outflow or inflow of funds in such a transaction. However, ownership of shares is transferred involving a resident and a non-resident, so ideally there should be a mechanism to report such transactions under FEMA regulations.

When is FC-TRS required to be filed?

Form FC-TRS is required to be filed for reporting the transfer of equity instruments (which includes equity shares, convertible debentures, preference shares and share warrants) of an Indian Company in the following cases {Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019}:

  1. When the transfer is made between a person resident outside India (repatriable basis) and a person resident outside India (non-repatriable basis) or vice versa.

  2. When the transfer is made between a person resident outside India (repatriable basis) and a person resident in India or vice versa.

Basic tenets of FEMA in case of issue or transfer of shares involving non-residents

For any issue or transfer of shares involving cross border transaction, FEMA requires adherence to sectoral caps, pricing guidelines and reporting requirements. When we analyse the abovementioned regulations read with rule 9 of Foreign Exchange Management (Non-debt Instruments) Rules, 2019, we find that the term “subject to adherence to sectoral caps, pricing guidelines, reporting requirement etc.” is only used in case the transfer is being done by way of sale. There is no mention of reporting in case of transfer by way of gift.

Is filing of FC-TRS required in case of transfer by way of gift?

In the FAQs posted by the RBI, it is clearly mentioned that FC-TRS is not required to be filed in case of transfer effected in the form of gift. However, the said FAQs were last updated in May, 2018 i.e. before the launch of FIRMS portal. Nonetheless, with FIRMS, there has been a change only in reporting system and not the legal principles per se.

It is pertinent to mention that when the reporting was done via erstwhile e-biz portal, the shares transferred by gift could not be reported because the form FC-TRS did not accept zero as a valid value in the “consideration” field.  Therefore, though RBI had not mentioned anything in the Regulations about such transactions specifically, it was practically not possible to file the form in cases of gift.

Launch of FIRMS Portal

After the launch of FIRMS portal (w.e.f. September 1, 2018), in form FC-TRS (under SMF), a separate tab for reporting of transfer by way of gift was added. However, the regulations still did not mention anything about reporting in cases of transfer by way of gift.

RBI also issued a revised user manual detailing the procedure to be followed while reporting under SMF. In the said user manual, it was clearly specified that only the transfers done in accordance with regulation 10(5) of FEMA 20(R)*, i.e., Gift of capital instruments from a person resident in India, including NRI/OCI or eligible investor under Schedule 4 to FEMA 20(R) to a person resident outside India, are required to be reported by filing form FC-TRS on FIRMS portal. In such cases, relevant RBI approval is also required to be mandatorily attached in the form.

*Now superseded by rule 9(4) and 13(3) of Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

Answer to the question at hand

In the light of the above, it can be safely assumed that barring the transaction in accordance with regulation 10(5)*, transfer by way of gift is not required to be reported to the RBI. It may be because of the fact that there is no movement of funds in such cases, only the ownership is changed. Such change in ownership is in any case reported by the companies to their respective Registrar of Companies in their annual filings.

We decided to write on this topic because we had been receiving frequent queries from fellow professionals on whether FC-TRS is required to be filed in case of gift of shares between resident and a non-resident. We are not particularly happy in bringing out this note as we believe this as a simple procedural requirement which could have been clearly laid down by the Regulator and facilitated ease of understanding and therefore, compliance. Regularly updating the FAQs will also be a great help to the cause.

Leave a Reply

Your email address will not be published. Required fields are marked *


[recaptcha]

Please Fill All Field