The transfer of equity shares between two non-resident shareholders in a small company must comply with the Companies Act, 2013, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and applicable RBI guidelines. Since both parties are non-residents, no FC-TRS filing is required provided pricing norms and sectoral caps are followed. The process begins with the transferor issuing a letter of intent to the company, followed by a Right of First Refusal check if required under the Articles of Association. A valuation report from a SEBI-registered Merchant Banker or Chartered Accountant must confirm that the price meets FEMA’s fair market value requirements. The parties then execute Form SH-4 and submit it along with original share certificates within 60 days. After board approval, payment must be routed through authorised banking channels. The company then endorses the new share certificate and updates statutory registers, completing the non-resident share transfer.
Background
The regulatory and procedural framework for the transfer of equity shares from Non-Resident Shareholder (NR) (“Transferor”) to another Non-Resident Shareholder (NR) (“Transferee”) in a Small Company
The process is governed under:
- Companies Act, 2013 and rules made thereunder read with,
- Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, and
- Applicable RBI guidelines related to pricing, valuation, documentation, and reporting.
Considering both the Transferor and Transferee are non-residents, hence, no RBI reporting (Form FC-TRS) is required, provided the transaction adheres to the pricing guidelines and sectoral caps under FEMA.
Detailed Process for transfer is as under:
Step 1: Intimation of Intention to Transfer
- The Transferor shall provide a letter of intent to the Company expressing the desire to transfer a number of shares to the Transferee including the following details number of shares, proposed buyer, and consideration.
Step 2: Offer to Existing Shareholders / Company (Right of First Refusal – If applicable)
- If the Articles of Association (“AOA”) prescribe Right of First Refusal, the shares must first be offered to the existing shareholders
If AOA does not restrict the transfer, the Company simply acknowledges the transfer request.
Step 3: Valuation Report by Merchant Banker
- In accordance with the FEMA Guidelines, valuation must be obtained from a SEBI Registered Merchant Banker or Chartered Accountant to ensures that the transfer price is not less than the fair market value (FMV).
Step 4: Preparation and Execution of Share Transfer Form (Form SH-4)
- Form SH-4 is required to be prepared containing the following information:.
- Full details of Transferor and Transferee,
- Distinctive share numbers,
- Details of Share certificate,
- Amount of Consideration.
- The form is required to be executed by both parties, stamped, and witnessed.
- The duly executed Form SH-4 along with original share certificates shall be submitted to the Company within 60 days from the date of execution.
Step 5: Board Approval
- A meeting of the board of Directors is required for taking note the transfer of share.
Step 6: Submission of Executed Documents to the Company
- Failure to submit within the prescribed period may invalidate the transaction.
Step 7: Payment of Share Transfer Consideration
- The Transferee must pay the consideration to the Transferor through a authorised banking channel and the proof of payment shall be shared with the company.
Step 8: Endorsement of Share Certificates
- Upon satisfaction of documents, the Company must Endorse the share certificate in the name of the Transferee.
Step 9: Updating Statutory Registers
The Company must update its statutory records:
✓ Register of Members (Form MGT-1)
✓ Share Transfer Register
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