FDI – Transfer of Shares

The Reserve Bank of India (RBI), through a circular issued last week, curtailed its own approval powers involving transfers of shares of Indian companies between residents and non-residents.

Previously, certain specific transactions required the prior approval of the RBI, and these included (i) transfers not compliant with RBI’s pricing norms, (ii) those that required prior approval of the Foreign Investment Promotion Board (FIPB), (iii) where the investee company was in the financial services sector and (iv) where the transfer was within the purview of the SEBI Takeover Regulations.

In the recent circular, the requirement for approval of the RBI in these cases has been done away with so long as the transfer is otherwise in accordance with the FDI policy. Where the pricing is not in accordance with the RBI regulations for transfer, transactions will nevertheless be permitted if the pricing follows the norms of other relevant regulators such as SEBI (for takeovers, public offerings, buybacks, etc.). As regards companies in the financial sector, no prior approval of the RBI is required if no-objection certificates are obtained from the sector regulators.

The effect of the new regime is that it not only liberalizes the procedural requirements for transfers between residents and non-residents making them far easier, but it also cedes RBI’s approval powers on pricing to regulators such as SEBI which also impose pricing norms on specific securities transactions.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • Does this mean that an NR to R transfer need not be at maximum DCF Value? and a R to NR transfer need not be at minimum DCF value expect (i) where transfer is under FIPB approval route; or (ii) Takeover provisions apply?

  • A couple of thoughts:

    (a) For financial services companies, no pricing norms are mentioned. For every other type of transaction which has been liberalised by this circular, either the RBI or SEBI pricing norms are mandatory. Is this RBI’s way of saying that transfers in these sectors do not have to comply with RBI pricing norms as long as the relevant regulators approve the transaction? This becomes relevant since IRDA has already expressed its view that insurance companies, being in the financial services sector, are not bound by RBI pricing norms.

    (b) There appears to be an apparent disconnect in saying that (i) transactions that attract the Takeover Code must comply with RBI pricing norms and (ii) transactions that do not comply with RBI pricing norms must comply with the relevant SEBI regulation (such as the Takeover Code). Perhaps a way to harmoniously construe the circular is that whilst underlying transactions that trigger the Takeover Code must be compliant with the RBI pricing norms; the pricing of open offer shares may be governed by the Takeover Code. Even transfers exempted from the Takeover Code may be priced as per the pricing norms for exempted transfers under the Takeover Code.

    (c) In an open offer, if there is considerable fluctuation of the target’s share price between the date of the (i) public announcement and (ii) the transfer of the shares for the underlying transaction (which is the relevant date for the 6 month look-back period for the RBI pricing method) then there is a possibility that the RBI price may become commercially unviable. Moreover, if the RBI price is higher than the negotiated price, the acquirer will be unable to pay the higher RBI price since this would run afoul of the Takeover Code. If this happens, an acquirer would have to approach the RBI for permission to effect the underlying transaction at the negotiated price. Such fluctuations are likely in a case of delay due the need for regulatory approvals.
    (d) For listed companies, transfers may take place through the block deal window without having to comply with RBI pricing norms. Before RBI revised its pricing norms in 2010, listed company transfers had to be effected at the ruling market price. Since, the block deal price is a minor deviation from the ruling market price, it seems that the earlier RBI pricing norm has been given a back door entry.

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