CERTAIN CROSS BORDER TRANSFER OF SHARES EXCLUDED FROM PURVIEW OF RBI -NITISH GOEL The Reserve Bank of India

(RBI), with the view to maintain robust foreign exchange reserves, has made certain amendments in the foreign direct investment (FDI) procedures and policies with regard to transfer of shares vide its circular dated November 4, 2011. This has come at a time when there have been constant FDI outflows due to volatility in the stock market. This Circular simplifies the FDI policy regarding transfer of shares and does away with the requirement of seeking approvals from multiple regulators. Prior to this Circular, under regulations 9 and 10 of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, the following transfers required prior approval of the RBI among other regulatorsi) ii) iii) iv)

Where the transfer does not conform to the pricing guidelines as stipulated by the Reserve Bank from time to time; or Where the transfer of shares requires the prior approval of the FIPB as per the extant Foreign Direct Investment (FDI) policy; or Where the Indian company whose shares are being transferred is engaged in rendering any financial service; or Where the transfer falls under the purview of the provisions of SEBI Takeover Regulations

Due to the amendments in this circular, RBI approval will not be required for transfer of shares from a non-resident to a resident even though it does not conform to the pricing guidelines under FEMA Act, 1999 provided that the original and resultant investments follow the extant FDI policy and FEMA regulations in terms of sectoral caps, reporting requirements documentation and other conditions like minimum capitalisation etc., Also, the pricing for the transaction has to comply with the extant SEBI regulations/guidelines on IPO, Book building, block deals, delisting, exit, open offer/substantial acquisition/SEBI Takeover Regulations, buy back etc. and Chartered Accountants Certificate along with form FC-TRS is to be filed with the AD bank to the effect that the investment is in compliance with the relevant SEBI regulations/guidelines as indicated above. RBI approval is also not required in following cases of transfer of shares from Resident to Non-Resident (i) Where the transfer of shares requires the prior approval of the FIPB as per the extant FDI policy and such approval has been obtained from the FIPB and the transfer of

(ii) (iii)

(iv)

share adheres with the pricing guidelines and documentation requirements as specified by the RBI. Where SEBI Takeover Regulations are attracted, subject to the adherence with the pricing guidelines and documentation requirements as specified by RBI. where the pricing guidelines under the Foreign Exchange Management Act (FEMA), 1999 are not met with the same conditions as mentioned above in case of transfer of shares from Non-Resident to Resident. where the investee company is in the financial sector provided that NOCs are obtained from the respective financial sector regulators/ regulators of the investee company as well as transferor and transferee entities and such NOCs are filed along with the form FC-TRS with the AD bank and the FDI policy and FEMA regulations in terms of sectoral caps, reporting requirements documentation and other conditions like minimum capitalisation etc. are complied with.

One should be quick to clarify here that although the RBI has relaxed the regulatory structure for certain kinds of investment between resident and non-resident and vice versa, it has made certain conditions as a pre-requisite for escaping the net of RBI. Therefore, there is ample scope of curtailing any vexed transaction without putting an additional burden on the investors. This Circular is in line with a spate of regulatory reforms carried out by Ministry of Finance and Reserve Bank of India from time to time to liberalise the FDI policy and attract more foreign investment in the country. This will immensely benefit the foreign and domestic players especially in the financial services sector. We can hope for more relaxations in FDI policy to come in the future leading to robust growth in foreign investment in the country.