18 February 2021
We are having a listed entity having investment of 9.5% of its paid up capital from B (a Foreign Corporate Body).
Now, B wants to sell the half of its investments i.e. about 4.75% to Mr. A an Indian resident who is also a director of the same listed entity.
Now my query is : a) Prior approval of RBI is required to sell the investment? At the time of investment 10 years ago, approval of FIPB was granted to the listed entity.
07 July 2024
Given the scenario where a listed entity has investments from a Foreign Corporate Body (B) and intends to sell a portion of these investments to an Indian resident (Mr. A), who is also a director of the listed entity, here are the considerations for compliance:
### a) RBI Approval Requirement:
1. **Initial Investment Approval**: Since the investment from the Foreign Corporate Body (B) was approved by the Foreign Investment Promotion Board (FIPB) 10 years ago, it's crucial to check the conditions under which the approval was granted. Typically, FIPB approval covers the initial investment and may specify conditions regarding subsequent transfer or sale of these shares.
2. **Transfer of Shares to Indian Resident**: In the case where shares held by a Foreign Corporate Body are being transferred to an Indian resident (Mr. A), who is also a director of the listed entity, RBI approval may be required depending on the terms of the original FIPB approval.
3. **RBI Guidelines**: According to RBI regulations, transfers of shares involving foreign investment into a listed entity often require prior approval from the RBI. This is to ensure compliance with sectoral caps, pricing guidelines, and other regulatory norms governing foreign investments in listed companies.
4. **Consult with RBI**: It's advisable for the listed entity to consult with the RBI or a professional familiar with foreign investment regulations to determine if specific approval is required for this transfer. They can provide guidance based on the current regulations and the conditions specified in the original FIPB approval.
### b) Compliance Requirements:
1. **Disclosure Requirements**: Ensure that all disclosures are made to the stock exchanges where the listed entity is traded regarding the proposed transfer of shares from the Foreign Corporate Body (B) to Mr. A. This includes disclosure of the transaction details, parties involved, and any approvals obtained.
2. **Approval from Board of Directors**: Obtain approval from the Board of Directors of the listed entity for the transfer of shares. This should include approval from independent directors, if applicable, and consideration of any conflict of interest involving Mr. A being a director and the proposed buyer.
3. **Compliance with SEBI Regulations**: Comply with Securities and Exchange Board of India (SEBI) regulations applicable to listed entities regarding related-party transactions, disclosures, and corporate governance norms.
4. **Filing with Registrar of Companies**: File necessary forms and disclosures with the Registrar of Companies (RoC) regarding the transfer of shares as per Companies Act requirements.
5. **Tax Implications**: Consider tax implications for the seller (Foreign Corporate Body B) and the buyer (Mr. A) concerning capital gains tax, transfer pricing regulations, and other tax laws applicable to such transactions.
### Conclusion:
To ensure compliance and legality in the transfer of shares from a Foreign Corporate Body to an Indian resident director of a listed entity, thorough review and adherence to RBI regulations, FIPB approval conditions, SEBI guidelines, and other regulatory requirements are essential. Consulting with legal and financial advisors specialized in corporate law and foreign investments can provide specific guidance tailored to the situation, ensuring smooth execution of the transaction within the regulatory framework.
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