Transfer of Shares: Is a Valuation Report Required for Resident & Cross-Border Transfers?

Brief: A company registering an ordinary transfer of existing shares is not generally required by the Companies Act, 2013 to obtain a valuation report merely because ownership is changing. Valuation may nevertheless matter under income-tax law where unquoted shares are transferred below their prescribed fair market value. For transfers in tax year 2026–27, the relevant provisions are sections 79 and 92(2)(m) of the Income-tax Act, 2025, read with the Income-tax Rules, 2026. Where a transfer involves a person resident outside India, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 may additionally impose a pricing floor or ceiling. For unlisted Indian companies, the applicable FEMA price is supported by a valuation certified by an eligible professional. These rules have exceptions: the presence of a non-resident party does not, by itself, make a valuation certificate or Form FC-TRS compulsory for every transaction. The parties should identify their status under FEMA, the nature of the shares, the transfer route and the applicable reporting requirement before fixing the price.

Transfer of Shares – Is a Valuation Report Required? A Comparison Between a Transfer Among Residents and a Transfer Involving a Non-Resident

1. Short answer

Transfer between persons resident in India: Section 56 of the Companies Act, 2013 does not generally require a valuation report as a condition for registering an ordinary transfer of existing shares. An income-tax fair market value calculation may still be necessary to assess the consequences of transferring unquoted shares below their prescribed value. It is a tax question, not a general Companies Act precondition to transfer.

Transfer between a resident and a person resident outside India: First determine whether the pricing guidelines in Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 apply. Where they apply to unlisted equity instruments of an Indian company, the prescribed floor or ceiling is based on an arm’s-length valuation certified by a Chartered Accountant, a SEBI-registered Merchant Banker or a practising Cost Accountant. Listed securities and certain exempt transactions follow different pricing rules. Form FC-TRS reporting must also be checked separately; it is not required for every transaction involving a non-resident.

Residence is the starting point: FEMA residence is determined under the Foreign Exchange Management Act, 1999. Citizenship or the passport held is not, by itself, conclusive.

2. Three distinct legal questions

The expression “valuation required for a share transfer” can refer to three different matters:

• Company law: Does the company need a valuation report to register the transfer of its existing shares?
• Income-tax: Does a prescribed fair market value affect the transferor’s capital gains or create taxable income for the recipient?
• FEMA: If the transfer is covered by cross-border investment rules, does the agreed price satisfy a regulatory floor or ceiling?

A report prepared for one purpose should not automatically be assumed to satisfy another. The applicable valuation date, method, scope and permitted certifier must each be checked.

3. Does the Companies Act require a valuation report?

For a permitted transfer of securities held in physical form, section 56 of the Companies Act, 2013, read with Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014, governs the transfer instrument in Form SH-4. The company must check the statutory transfer requirements, including execution, stamping, delivery of the instrument within the prescribed period and the accompanying certificate or letter of allotment, as applicable. These provisions do not make a valuation report a general condition for registering an ordinary transfer of existing shares.

Section 247 of the Companies Act governs valuations required under provisions of that Act or the rules made under it. It does not mean that every private share transfer must be valued by a Registered Valuer. Particular transactions or corporate actions may, however, have separate valuation requirements.

Check the transfer route first: The dematerialisation requirements applicable to certain companies and security holders may prevent a proposed physical transfer through SH-4. Whether a physical transfer is available should be verified before preparing the instrument. A demat transfer follows the relevant depository process.

4. Income-tax valuation for transfers in tax year 2026–27

The Income-tax Act, 2025 applies from 1 April 2026. For a transfer in tax year 2026–27, references to sections 50CA and 56(2)(x) of the repealed Income-tax Act, 1961 should therefore be replaced with the corresponding provisions of the 2025 Act. The 1961 Act and its rules remain relevant when examining earlier years, subject to the transition provisions.

4.1 Transferor: Section 79

Section 79 of the Income-tax Act, 2025 addresses the transfer of a capital asset consisting of a share of a company other than a quoted share. If the consideration received or accruing is below the fair market value determined in the prescribed manner, that fair market value is deemed to be the full value of consideration for the relevant capital gains computation, subject to the provision’s terms and applicable exclusions.

This does not prohibit the parties from agreeing on a lower price or stop the company from registering an otherwise valid transfer. It may, however, result in the transferor being taxed by reference to a value higher than the actual sale proceeds.

4.2 Recipient: Section 92(2)(m)

Section 92(2)(m) of the Income-tax Act, 2025 addresses receipt of specified money or property, including shares and securities, without consideration or for inadequate consideration. For a receipt of shares at a price below their prescribed fair market value, the difference can be chargeable in the recipient’s hands if the statutory threshold and other conditions are met. The exceptions in section 92(3), including the relevant exception for receipts from specified relatives, must be checked on the facts.

The seller’s and buyer’s positions are separate. In particular, an exception available to a recipient who receives shares from a specified relative should not be assumed to remove every possible capital gains issue for the transferor.

4.3 Which valuation rules apply?

For tax year 2026–27, the fair market value must be determined under the Income-tax Rules, 2026, including the applicable definitions and valuation method. The earlier references to Rules 11UA and 11UAA of the Income-tax Rules, 1962 describe the framework for years governed by the 1961 Act; they should not be presented as the governing rules for a new transfer in tax year 2026–27.

A formal valuation report is not automatically required as an attachment to every domestic transfer. A properly documented calculation of prescribed fair market value is nevertheless useful when the shares are unquoted, the parties are related, or the agreed price differs materially from the tax value.

5. FEMA pricing where a non-resident is involved

Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 sets out pricing guidelines for specified transactions in equity instruments of Indian companies. Whether those guidelines apply depends on the nature of the transaction, the status of the parties and the basis on which the non-resident holds or acquires the instruments.

5.1 Resident seller to non-resident buyer

Where the Rule 21 pricing guidelines apply, the transfer price must not be lower than the applicable benchmark. For equity instruments of an unlisted Indian company, that benchmark is a valuation using an internationally accepted pricing methodology on an arm’s-length basis, duly certified by a Chartered Accountant, a SEBI-registered Merchant Banker or a practising Cost Accountant. For listed securities, the relevant SEBI-based pricing rule must be applied.

5.2 Non-resident seller to resident buyer

Where the Rule 21 pricing guidelines apply, the transfer price must not exceed the applicable benchmark. The unlisted-company valuation and permitted certifiers are specified in the rule. This ceiling protects against an excessive payment to a non-resident seller; it is distinct from the income-tax fair market value calculation.

5.3 Exceptions and special cases

It would be incorrect to say that every transfer involving a non-resident requires the same FEMA valuation. Rule 21 contains qualifications, including for certain sales carried out under SEBI regulations where SEBI specifies the price and for investments held or acquired on a non-repatriation basis. Other transaction-specific rules may also apply. Gifts, swaps, transfers between non-residents and transactions involving particular investor categories should be analysed separately rather than placed under a general resident-to-non-resident sale rule.

The draft’s reference to DCF as the usual required method is also too narrow. For an unlisted company, Rule 21 permits any internationally accepted pricing methodology for valuation on an arm’s-length basis, subject to certification by an eligible professional.

6. Is Form FC-TRS always required?

No. The applicable RBI reporting regulations specify the transfers that must be reported in Form FC-TRS, the person responsible for filing and the deadline. For a reportable transfer, the general filing period is 60 days from the transfer of equity instruments or receipt or remittance of funds, whichever is earlier.

There are express reporting exceptions. For example, a sale between a person resident in India and a person resident outside India who holds the equity instruments on a non-repatriation basis is not required to be reported in Form FC-TRS under the stated RBI reporting provision. Accordingly, “a non-resident is a party” is not a sufficient test for requiring the form.

For a reportable transaction, the parties should confirm the supporting documents and valuation requirements on the RBI reporting portal and with the Authorised Dealer bank. A categorical statement that a valuation certificate must accompany every FC-TRS filing would be inaccurate.

7. FEMA residence is different from citizenship

The terms “person resident in India” and “person resident outside India” must be applied using FEMA’s statutory definitions, including the relevant period of stay and the purpose and circumstances of moving into or out of India. An Indian citizen may be a person resident outside India under FEMA; a foreign citizen may be a person resident in India. Neither conclusion follows from the passport alone.

Before applying Rule 21 or deciding whether FC-TRS is required, document the status of both parties and, where relevant, whether the investment is held on a repatriation or non-repatriation basis.

8. Comparison at a glance

9. Practical approach before signing

1. Identify the transaction: Record whether it is a sale, gift, swap or another arrangement; whether the instruments are quoted or unquoted; and whether they are held in physical or demat form.
2. Confirm the parties’ FEMA status: Document residence and the repatriation status of any non-resident holding.
3. Check company law requirements: Establish whether a physical transfer is permitted and comply with the applicable transfer instrument or depository process.
4. Determine the tax fair market value: For a 2026–27 transfer, examine sections 79 and 92(2)(m) of the 2025 Act and the relevant 2026 Rules. Assess both the transferor and the recipient separately.
5. Apply FEMA pricing, if relevant: For a covered unlisted-company transfer, obtain a valuation from a professional permitted by Rule 21 before finalising the price. Check the listed-company rule and exceptions where applicable.
6. Check reporting separately: Determine whether FC-TRS is required, who must file it and when. Retain the agreement, payment evidence, valuation workings and filing acknowledgement.

10. Examples

Example A — transfer between resident brothers: A and B are persons resident in India. A sells unquoted shares of an Indian company to B at an agreed price. The Companies Act does not generally require a valuation report merely to register this ordinary transfer. If the price is below the prescribed fair market value, section 79 may affect A’s capital gains computation. Any exception available to B under section 92(3) must be checked independently; the relationship between the brothers does not automatically settle A’s position.

Example B — resident seller and non-resident buyer: A, resident in India, proposes to sell unlisted equity instruments of an Indian company to C, a person resident outside India acquiring them on a repatriation basis. If Rule 21’s pricing guidelines apply, the agreed price must not be below the value determined using an internationally accepted arm’s-length methodology and certified by a permitted professional. The parties must also examine the income-tax fair market value and the applicable FC-TRS reporting requirement.

11. Frequently asked questions

Q1. Must every transfer of existing shares have a Registered Valuer’s report under section 247 of the Companies Act?

No. Section 247 does not impose a general Registered Valuer requirement on every ordinary transfer of existing shares. A specific transaction may have its own valuation requirement under another provision.

Q2. Does a sale between relatives eliminate the need to examine fair market value?

No. The recipient may qualify for a specific exception under section 92(3), but the transferor’s position under section 79 must be considered separately where unquoted shares are sold below prescribed fair market value.

Q3. Are the income-tax and FEMA valuations interchangeable?

Not automatically. They serve different legal purposes and may use different prescribed methods, dates and certification requirements. One report should be used for both only after checking that it satisfies each applicable provision.

Q4. Is FC-TRS required whenever one party lives outside India?

No. First determine the person’s residence under FEMA, the investment’s repatriation status, the type of transfer and the relevant RBI reporting provision.

Conclusion

A valuation report is not a general Companies Act condition for registering an ordinary transfer of existing shares. Tax valuation may nevertheless determine the consequences of transferring unquoted shares below prescribed fair market value. For tax year 2026–27, the relevant framework is the Income-tax Act, 2025 and the Income-tax Rules, 2026. Where a non-resident is involved, Rule 21 of the FEMA Non-Debt Instruments Rules may impose a certified pricing benchmark, but its exceptions and the separate FC-TRS reporting rules must be checked before describing a valuation or filing as mandatory.

Author: CS Divesh Goyal, Goyal Divesh & Associates, Company Secretary in Practice, Delhi. Email: [email protected]