Coupon Accepted Successfully!


Pricing, documentation, filing and other compliance requirements

1. Instruments that can be issued to a non-resident under the FDI Route

A non-resident can subscribe to equity shares, or fully and mandatorily convertible preference shares and debentures. Note that optionally convertible or redeemable preference shares or debentures (Optionally Convertible or Redeemable Securities) are considered as debt and cannot be issued to non-residents under the FDI route. For example, a debenture issued to an investor which the investor has the option to either repay or convert into an equity share is an optionally convertible instrument. However, if the same was to compulsorily convert into equity after span of a particular time frame, then it would be covered within the FDI route. Optionally Convertible or Redeemable Securities can be issued under the External Commercial Borrowings (ECB) policy, which is very restrictive.

Note that even in case of mandatorily convertible instruments (debentures or preference shares), the investor may have a choice as to when to convert the instrument into equity, subject to a maximum outer limit. For example, a compulsorily convertible preference share that converts in 5 years into an equity share, may have a clause allowing the investor to convert it even before such time period. There may also be a ‘put option’ which the investor has. That means upon happening of a certain event the investor can exercise its right to sell the shares to the promoters and compel them to buy its shares. This is an optionalityclause, and it is valid as long as there is a minimum lock-in period. 


2.  Pricing for investment and sale of securities

1.A foreigner may purchase securities of an Indian company i) from a resident, or ii) from a non-resident, or iii) subscribe to fresh shares issued by the company. The price at which he can acquire shares of an Indian company is governed by the Foreign Exchange Management Act (FEMA).

  1. Transfer from a resident to a non-resident
A non-resident (including foreign entities, NRI, FIIs) can purchase securities of an Indian company from a resident[1] under a private arrangement. In such a case, as money is coming into India, the FDI Policy imposes a floor price. The minimum permissible price at which shares can be sold to a non-resident must be determined by a Chartered Accountant or SEBI Registered Category I Merchant Banker (in case of an unlisted company) as per any internationally accepted pricing methodology on arm’s length basis. In case of a listed company, the floor price is computed by looking at the volume weighted average of historical market prices for 26 weeks (detailed methodology is explained in Regulation 76 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (as on 1 May 2015).   
  1. Transfer from a non-resident to a resident
In this case a ceiling is applied by the FDI policy. Transfer of existing shares by any non-resident to a resident shall not be more than the minimum price at which the transfer of shares can be made from a resident to a non-resident as described above.

Filing requirements: Form FC-TRS is required to be submitted to the AD Category-I Bank in case of a transfer from a resident to a non-resident or vice versa, within 60 days from the date of receipt of the amount of consideration.  The resident has the responsibility of submission of the form. The form is then submitted by the AD-Category I Bank to the RBI.

Pricing issues also emerge with respect to non-residents holding put options – they have the right to compel the Indian promoters to purchase their shares on exercise of the put option by the foreigner. As per the Master Circular on Foreign Investment in India dated1 July 2015, the promoters will have to purchase securities from the investor at the price prevailing or value determined at the time of exercise of the optionality so as to enable the investor to exit without any assured return. Two other conditions need to be complied with:

(a) A minimum lock-in period of one year or a minimum lock-in period as prescribed under FDI Regulations, whichever is higher (e.g. defence sector, where the lock-in period of three years has been prescribed). The lock-in period shall be effective from the date of allotment of such shares or convertible debentures.

(b) After the lock-in period, as applicable above, the non-resident investor exercising option/right can exit (without any assured return) at the following price:
(i) In case of a listed company, the market price prevailing at the recognised stock exchanges;
(ii) In case of an unlisted company, at a price as determined as per any internationally accepted pricing methodology on arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.
  1. Transfer from a non-resident to a non- resident
Government approval is not required for transfer of shares in an investee company from one non-resident to another non-resident, only in sectors which are under automatic route.
FIPB approvalis required for transfer of stake from one non-resident to another non-resident in sectors in which the investment fell under approval route. Approval is required presumably because the government has an interest in being informed of the identity and background of the investor. This can be helpful in ensuring that the purpose / conditions of the initial approvalis complied with and that the subsequent transfer is not against India’s economic policy interests. 
  1. Subscription to a company’s shares
As per the FDI Policy, price of shares issued to persons resident outside India under the FDI Policy, shall not be less than -
  • in case of a listed company - the price worked out in accordance with the SEBI guidelines, as applicable;
  • in case of an unlisted company - fair valuation of shares done by a SEBI registered Category - I Merchant Banker or a Chartered Accountant as per as per any internationally accepted pricing methodology on arm’s length basis.

2.Manner of transfer of consideration

The consideration for instruments purchased by a non-resident must be remitted into India through normal banking channels and shall be subjected to a Know Your Customer (KYC) check by the receiving bank (Authorised Dealer Category-I bank). If the receiving bank is different from the AD Category-I bank handling the transfer transaction, the KYC check should be carried out by the remittance receiving bank and the KYC report be submitted by the customer to the AD Category-I bank carrying out the transaction along with the Form FC-TRS.     

3.Documentation - Sale from resident to non-resident

  1. Consent letter 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, letters exchanged to this effect may be kept on record.
Note: If the 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 is also required.
  1. 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 and its percentage of paid up capital obtained by the seller/buyer or their duly appointed agent from the company, where any sectoral cap or limits have been prescribed.
  2. Certificate indicating fair value of shares from a Chartered Accountant.
  3. Undertaking from the foreigner that he is eligible to acquire securities under the FDI policy and that the sectoral limits and pricing guidelines have been complied with.
  4. Copy of Broker‘s note (if sale is made on Stock Exchange)
  5. If the purchaser is a foreign institutional investor or its sub-account purchasing under the FDI route, an undertaking from the FII or the sub account that the ceilings for investment as prescribed by SEBI have not been breached.

4. Process of money transfer and reporting

The Authorized Dealer Bank (AD) which receives the foreign investment issues a Foreign Inward Remittance Certificate (FIRC) to the Indian Company. An Indian company receiving investment from outside India for issuing shares / convertible debentures / preference shares under the FDI Scheme, should report the details of the amount of consideration to the Regional Office of the Reserve Bank, through the AD in the prescribed format for advance reporting (Advance Reporting Form) (Annex 5 of the FDI Policy), along with the following documents:
  • Copies of the FIRC
  • A Know Your Customer report in the prescribed format
The report would be acknowledged by the Regional Office concerned, which will allot a Unique Identification Number (UIN) for the amount reported.

5. Process for issue of instruments

If a foreigner has subscribed to fresh securities of the Indian company, it may issue shares within a maximum period of 6 months from receiving investment. The Indian company must file Form FC-GPR (as per the format in Annex 1 of the FDI Policy) through its authorized dealer, with the RBI, within 30 days from the date of issue of shares. Form FC-GPR must be signed by the Managing Director or a Director or Secretary of the company.
In addition, the following documents must be filed with the Form FC-GPR:
  • A certificate from the Company Secretary of the company certifying, inter-alia, that the requirements of the Companies Act, 1956, conditions of any Government approval are complied with.
Note: For companies which do not have a full time Company Secretary(i.e, companies with paid up capital with less than INR 5 crore), the certificate can be given by a practicing company secretary.
  • A certificate from Statutory Auditor or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
  • The report of receipt of consideration as well as Form FC-GPR have to be submitted by the AD Category-I bank to the Regional Office concerned of the Reserve Bank under whose jurisdiction the registered office of the company is situated.

6. Annual reporting of shareholding to RBI

An annual return on Foreign Liabilities and Assets (Annex 7) should be filed on an annual basis by the Indian company directly with the Reserve Bank in electronic format by 15th of July every year. The return pertains to investments by way of direct or portfolio investments, reinvested earnings, other capital investment in the Indian company made from 1st April to 31st March of the previous year.
For reference, the Consolidated FDI Policy of 12May 2015 can be accessed at the following link: http://dipp.nic.in/English/Policies/FDI_Circular_2015.pdf

[1] Resident means any of the following, under Indian foreign exchange regulations:
  • an individual residing in India for more than one hundred and eighty-two days during the course of the preceding financial year excluding individuals who have gone out of India or who stays outside India, for taking up employment or carrying out business outside India, or for any other purpose which indicates that he would stay outside India for an uncertain period;
  • a person who has come to or stays in India, in either case, otherwise than for taking up employment or carrying out business in India or for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
  • any person or body corporate registered or incorporated in India; an office, branch or agency in India owned or controlled by a person resident outside India;
  • or an office, branch or agency outside India owned or controlled by a person resident in India).

Test Your Skills Now!
Take a Quiz now
Reviewer Name