Transferring shares in India requires careful compliance with the Companies Act 2013, FEMA/RBI rules, and tax laws. Whether a transfer is between two residents (R2R) or involves a non-resident (R2NR, NR2R, NR2NR), specific steps apply. For example, every transfer under the Companies Act must use Form SH-4 (a share transfer deed) and be submitted to the company within 60 days of execution. Cross-border transfers also require filing RBI’s Form FC-TRS (on the FIRMS portal) within 60 days of the transfer or receipt/remittance of funds. The summary table below highlights key formalities by transfer type:
| Transfer Type | Applicable Laws | Key Filings/Forms | Approvals / Notes |
|---|---|---|---|
| R2R (Resident→Resident) | Companies Act 2013 | – Form SH-4 (transfer deed) – Company board approval | No FEMA/RBI filing (domestic transaction). Share certificate endorsement and statutory register update required |
| R2NR (Resident→Non‑Resident) | Companies Act 2013, FEMA 20(R), RBI FDI policy | – Form SH-4 (same as R2R) – Form FC-TRS to RBI. | Must comply with FEMA pricing and sectoral caps. If sale price or cap is outside automatic route, RBI approval may be needed. AD bank will require FIRC/KYC for the remittance. |
| NR2R (Non‑Resident→Resident) | Companies Act 2013, FEMA 20(R) | – Form SH-4 (transfer deed) – Form FC-TRS | If shares were held on a repatriable basis, AD banks will allow sale proceeds remittance only after a tax‑clearance certificate (NOC) from Income Tax Dept. Buyer (resident) must deduct TDS under Sec.195 when making payment to the NRI. |
| NR2NR (Non‑Resident→Non‑Resident) | FEMA 20(R) general permission | – (Form SH-4 may not be filed in India if transfer occurs entirely overseas) – Form FC-TRS if applicable (e.g. if shareholding registers in India are updated) | RBI allows most NR→NR transfers under general permission. However, an NRI to NRI sale does require RBI approval. Tax/treatment depends on residency and DTAA. |
1. Resident-to-Resident (R2R) Transfers
Between two Indian residents, share transfers follow Companies Act, 2013 formalities. The seller (transferor) and buyer (transferee) must execute a share transfer deed (Form SH-4), duly stamped under the Indian Stamp Act. This deed is submitted to the company along with the existing share certificate (or letter of allotment) within 60 days of execution. The company then holds a board meeting to record the transfer, endorses the share certificate, and delivers it to the transferee – typically within one month of receiving the transfer documents. Finally, the transfer is recorded in the company’s statutory register. There are no FEMA or RBI filings for purely domestic (R2R) transfers, but capital gains tax applies to the seller. Listed shares held >12 months attract 12.5% LTCG (above ₹1.25L exemption) and 20% STCG; for unlisted shares, LTCG is 20% (indexation) and STCG taxed at slab rates.
2. Resident-to-Non-Resident (R2NR) Transfers
When a resident sells shares to a non-resident (NRI/FII/foreign entity), both Companies Act and FEMA rules apply. The procedural steps (form SH-4, board approval, etc.) under Companies Act are identical to R2R. In addition:
- Pricing & Caps: The transfer must respect FEMA pricing rules and foreign investment caps. Sale price cannot be below fair market value certified by a CA/merchant banker. If the company’s sector has a foreign investment cap, ensure the post-transfer foreign holding remains within limits. If the transfer breaches automatic-route conditions (e.g. exceeds sectoral cap or is in a prohibited sector), prior RBI approval is required.
- Reporting (Form FC-TRS): The resident seller or company must file RBI Form FC-TRS on the FIRMS portal within 60 days of the share transfer or receipt/remittance of funds. The AD Category‑I bank certifies the form upon verifying KYC and foreign inward remittance certificate (FIRC). On submission, the bank issues a certificate which the company attaches before updating its registers.
- Remittance: The purchaser (NR) must pay consideration by normal banking channels. If the buyer is an NRI, funds often come from an NRE/FCNR account or as inward remittance. The AD bank will require an FIRC and KYC of the remitting NR. The resident company can then transfer funds to the seller NR only after obtaining an NOC (tax clearance) from the Income Tax Department.
- Tax: The resident seller will incur capital gains tax on the sale as above (LTCG/STCG). The non-resident buyer has no immediate tax liability on purchase, but proper documentation (Form 15CA/15CB, etc.) should be done before payment. If the buyer is an NRI, no TDS is deducted (since the seller is resident), but the seller must declare gains as usual.
3. Non-Resident-to-Resident (NR2R) Transfers
When a non-resident (NRI/FII) sells shares to an Indian resident, compliance is similar in reverse. Companies Act procedures (Form SH-4, board meeting, certificate) still apply. Additional FEMA/RBI points:
- Form FC-TRS: Again, Form FC-TRS must be filed with the AD bank within 60 days. The resident buyer or company does the filing, even though the funds come into India.
- Repatriation Basis: If the NRI sold shares held on repatriable basis, the resident buyer must instruct its AD bank to receive funds in India and furnish the NRI seller’s tax NOC. If shares were non-repatriable, the sale proceeds cannot be freely remitted abroad.
- Tax and TDS: When paying an NRI seller, the buyer (resident) must deduct TDS under Section 195. For listed equity shares, short-term gains are taxed at 20% and long-term gains at 12.5% (after ₹1.25L exemption). Practically, the buyer withholds 20% on the gross payment for STCG or 10% on LTCG. The NRI seller must file an Indian tax return (Form 67) to claim any credit or refund. Double Taxation Avoidance Agreements (DTAA) may reduce withholding: e.g. a US NRI may apply the India‑US treaty to lower tax.
- NOC and TCS: For remitting payment to the NRI, the resident buyer must obtain a Tax Clearance Certificate (Form 16B/IFC) from the IT Dept and file Form 15CA/CB, certifying the rate of tax was applied correctly, before releasing funds.
4. Non-Resident-to-Non-Resident (NR2NR) Transfers
Transfers of Indian-company shares between two non-residents are relatively rare but do occur (e.g. an FII selling to another FII). FEMA generally permits NR→NR transfers under the automatic route, since no fresh foreign investment into India occurs. In fact, RBI explicitly grants “general permission … for transfer of shares between non-residents and Indian residents”. However:
- If both parties are non-resident (and the transaction is structured entirely offshore), Indian authorities typically have no direct role. Neither Companies Act SH‑4 nor FC-TRS need apply when both buyer and seller are abroad.
- Caveat: RBI clarifies that an NRI selling to another NRI does need RBI permission. In practice, such transfers are uncommon; most NR2NR trades involve a non‑NRI entity.
- Tax: Capital gains on the sale of Indian shares still arise in India. If the seller is an NRI, Section 195 withholding and capital gains tax (12.5%/20% as above) apply even if the buyer is also non-resident. The buyer typically arranges payment via a bank with required tax documentation.
5. Compliance Deadlines and Checklist
- Share Transfer Deed (Form SH-4): Deliver to company within 60 days of execution. (Stamp duty must be paid before execution.)
- Company Registration: Board meeting to approve transfer should be held as soon as possible after receipt. Endorse share certificate and issue to transferee within 1 month. Update statutory registers immediately.
- FC-TRS Filing: File RBI Form FC-TRS within 60 days of transfer or remittance. Delays can attract RBI penalties under FEMA.
- Payment/Remittance: Arrange remittance through normal banking channel. If paying a non-resident, ensure Tax Withholding (TDS) is done at the time of payment (Sec.195). For NR sellers, secure an Income Tax NOC before outbound remittance.
- Documentation: Keep copies of the Share Transfer Deed, Board resolution approving the transfer, Form FC-TRS acknowledgement, FIRC/KYC certificates, and any tax forms (15CA/15CB, tax certificate) as proof of compliance.
| Requirement | Deadline | Penalty |
|---|---|---|
| SH-4 to company | Within 60 days | Transfer may be invalid |
| FC-TRS filing (RBI) | Within 60 days | 0.05% per day (late fee) |
| Update register | Within 7 days of board | ₹1,000/day (delay) |
| TDS payment | 7th of next month | 1.5% interest/month |
6. Tax Implications (Capital Gains & TDS)
Under the Income Tax Act, 1961, sale of shares triggers capital gains. For listed Indian shares sold on a recognized exchange (STT-paid):
- Short-Term Capital Gains (STCG): Gains on shares held ≤12 months are taxed at 20% (post-2024 budget).
- Long-Term Capital Gains (LTCG): Gains on shares held >12 months are taxed at 12.5% above ₹1.25 lakh per year (Before Budget 2024 these rates were 15% and 10% respectively.)
- Unlisted shares: Short-term gains taxed at the seller’s slab rate (up to 30%); long-term gains at 20% (with indexation).
For non-resident sellers, buyers must deduct TDS at source when paying the sale consideration (Sec.195). Typically 20% for STCG or 10% for LTCG (with no indexation benefit). NRIs should furnish their PAN and DTAA claim (Form 10F, treaty application) to the buyer to reduce withholding. After the sale, the NRI seller must file an Indian income tax return (Form 67) by July 31 (or applicable due date) to claim any refunds.
7. Practical Tips to Avoid Pitfalls
- Plan Valuation Carefully: Always get a proper valuation to justify the sale price (especially for R2NR transfers), as FEMA pricing norms are strict. A Chartered Accountant or SEBI-registered merchant banker certificate is recommended.
- Use Official Forms: Use the official Form SH-4 (Annexure III of Companies Rules) for the transfer deed, and RBI’s FIRMS portal for Form FC-TRS.
- Timely Filings: The 60-day deadlines (for delivery of SH-4 and FC-TRS) are mandatory. File early to avoid compounding notices from RBI.
- Check AoA/Shareholder Agreements: Private companies may have pre-emption or transfer restrictions. Obtain any required board/shareholder approvals before sale.
- Tax Compliance: Ensure correct TDS is deducted/collected. File Form 15CA/15CB when paying to NRIs, and Form 67 to claim DTAA benefits. A small tax error can delay remittances.
- Maintain Records: Keep all documents (share transfer deed, board minutes, FC-TRS certificate, FIRC, tax NOC, etc.) organized. These are needed for audits and future returns.
Share Transfer Compliance Checklist
✔️ Share Transfer Deed (Form SH-4) signed and stamped
✔️ Board Resolution (if required)
✔️ Updated Register of Members
✔️ Valuation Report (R2NR, NR2R)
✔️ FC-TRS filed within 60 days (cross-border)
✔️ FIRC and KYC of Non-Resident
✔️ TDS deducted (if NR seller) + Form 15CA/CB (for remittance)
✔️ Tax return for capital gains (R or NR)
✔️ RBI Approval (if sectoral caps breached)
Conclusion:
Transfer of shares in India—especially involving residents and non-residents—can trigger complex FEMA, RBI, and tax compliance requirements. From preparing the SH‑4 deed and filing Form FC‑TRS, to managing TDS, capital gains tax, and company secretarial formalities, every step demands precision.
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