Transfer of Unquoted Equity Shares(3 of 3) – FEMA Perspective, Process & Requirements
With India emerging as a preferred destination for foreign investment, startups and private companies frequently engage in cross-border transfers of unquoted equity shares. These transactions—whether resident to non-resident or vice versa—are governed under the Foreign Exchange Management Act (FEMA), 1999.
Non-compliance with FEMA regulations can result in penalties, compounding proceedings, and transaction reversals, significantly impacting fundraising and shareholder confidence. For Founders, CFOs, Company Secretaries, and Chartered Accountants, ensuring end-to-end FEMA compliance is crucial.
FEMA Laws Governing Share Transfers
The primary regulation under FEMA for equity transfers is:
FEMA 20(R) – Foreign Exchange Management (Non-Debt Instruments) Rules, 2019
It governs all equity-related transactions involving non-residents, including:
Transfer of shares from resident to non-resident
Transfer of shares from non-resident to resident
Inbound foreign direct investment (FDI) and exit transactions
FEMA Pricing Guidelines
Proper valuation and pricing are critical to comply with FEMA norms
| Transfer Type | Pricing Condition |
|---|---|
| Resident to Non-Resident | Minimum price must be ≥ FMV |
| Non-Resident to Resident | Maximum price must be ≤ FMV |
FMV Valuation Method
The valuation must be certified by one of the following:
Chartered Accountant (CA)
SEBI-registered Merchant Banker
Practicing Cost Accountant
The method used must align with internationally accepted pricing methodologies on an arm’s length basis.
FEMA Forms – FC-GPR vs FC-TRS
| Form | Purpose | Applicable When |
|---|---|---|
| FC-GPR | Reporting issue of shares to a non-resident | When a company receives FDI and allots new shares |
| FC-TRS | Reporting transfer between resident and non-resident | When shares are bought/sold across resident–non-resident boundary |
All forms are submitted through the FIRMS portal of RBI.
Step-by-Step FEMA Reporting Process
A. Resident to Non-Resident (e.g., Founder exits to a foreign investor)
Obtain FMV Valuation Report
Execute Share Purchase Agreement (SPA)
Fill and sign Form SH-4 (Securities Transfer Form)
Collect KYC documents and FIRC from the AD Bank
File Form FC-TRS on FIRMS portal
Update share certificates and statutory registers
B. Non-Resident to Resident (e.g., foreign exit or ESOP buyback)
All steps above apply
Ensure purchase price ≤ FMV
FC-TRS must be filed by the resident transferee
FEMA Timelines, Errors, and RBI Scrutiny Triggers
| Compliance Element | Timeline / Details |
|---|---|
| FC-TRS Filing | Within 60 days of share transfer |
| Valuation Report Validity | Must be valid as of transfer date |
| Stamp Duty on Form SH-4 | 0.25% of total consideration |
| Share Certificate Update | Within 30 days from SH-4 execution |
Common Mistakes to Avoid:
Using book value instead of FMV
Missing FC-TRS filing deadline
Submitting incomplete KYC documents
Incorrect tagging of transactions on FIRMS
Failing to report intragroup transactions
Scrutiny Triggers by RBI:
Significant valuation fluctuations
History of repeat non-compliance
No trace of inward remittance for share purchase
Backdated or unsigned SPA documents
FEMA Compliance Checklist
A quick visual reference for end-to-end compliance:
FMV valuation report obtained
SPA and Form SH-4 executed
KYC and FIRC documents collected
FC-TRS filed within 60 days
Board resolution and share certificates updated
Statutory registers updated and maintained
Practical FAQs on FEMA Share Transfers
1. Who is responsible for FC-TRS filing?
The resident party (buyer or seller) is responsible for filing Form FC-TRS on the FIRMS portal.
2. What happens if FC-TRS is filed late?
Late filings attract compounding under FEMA and may delay future funding rounds.
3. Can FMV be less than the actual transfer price?
Resident to Non-Resident: Price cannot be less than FMV
Non-Resident to Resident: Price cannot exceed FMV
4. Is valuation required even for gifts?
Yes, FMV valuation is mandatory even in case of gift transfers for reporting purposes.
5. Are ESOP buybacks from non-residents covered?
Yes, ESOP buybacks involving non-residents require FC-TRS filing and FEMA compliance.
How Nexpective Advisors Can Help
We provide end-to-end FEMA advisory and documentation support, including:
Valuation Reports (Certified by CA / Merchant Banker)
FC-TRS / FC-GPR Filing on RBI’s FIRMS Portal
RBI Representation and Compounding Support
SPA, SH-4 Drafting, and KYC Coordination
Cross-Border Structuring Advisory for Startups and VCs
Ensure your international share transfers are FEMA-compliant, timely, and litigation-proof.
Conclusion
FEMA compliance in the transfer of unquoted equity shares is a non-negotiable aspect of cross-border transactions. With tighter scrutiny by the RBI and digital filings on the FIRMS portal, the margin for error is narrow.
Startups, founders, CFOs, and legal advisors must adopt a proactive, structured process backed by professional guidance to ensure smooth, penalty-free transactions.
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