RBI – Transfer of Capital Instrument under FEMA

INTRODUCTION:

                             Capital instruments are securities in the form of shares, bonds, etc, that a company sells in order to raise capital. Shares are very important and reliable source of investment; it gives higher returns if invested mindfully. Shareholders can transfer their shares by sale or as a way of gift. These transfers are monitored and governed by RBI, FEMA and FDI.

TYPES OF CAPITAL INSTRUMENTS:

  1. Equities – equity instruments are ownership capital owned by shareholders in a company. Shareholders get dividend on their investments in shares, dividend is distributed annually or quarterly it’s up to companies when to distribute dividend. This dividend is announced out of the profit earned by the company in the year. Shareholders get ownership rights over the company for their part of the investment. In case of company going bankrupt, equity shareholders get remaining residue amount after the loans are paid off.
  2. Debt securities –

Bonds -Bonds are fixed-income instruments that are primarily issued by the centre and state governments, municipalities, and even companies for financing infrastructural development or other types of projects. It can be referred to as a loaning capital market instrument, where the issuer of the bond is known as the borrower. Bonds generally carry a fixed lock-in period. Thus, the bond issuers have to repay the principal amount on the maturity date to the bondholders.

Debentures- Debentures are unsecured investment options unlike bonds and they are not backed by any collateral. The lending is based on mutual trust and, herein, investors act as potential creditors of an issuing institution or company.

  • Derivatives- Derivative instruments are capital market financial instruments whose values are determined from the underlying assets, such as currency, bonds, stocks, and stock indexes.

The four most common types of derivative instruments are forwards, futures, options and interest rate swaps:

Forward: A forward is a contract between two parties in which the exchange occurs at the end of the contract at a particular price.

Future: A future is a derivative transaction that involves the exchange of derivatives on a determined future date at a predetermined price.

Options: An option is an agreement between two parties in which the buyer has the right to purchase or sell a particular number of derivatives at a particular price for a particular period of time.

Interest Rate Swap: An interest rate swap is an agreement between two parties which involves the swapping of interest rates where both parties agree to pay each other interest rates on their loans in different currencies, options, and swaps.

  • Exchange traded funds – Exchange-traded funds are a pool of the financial resources of many investors which are used to buy different capital market instruments such as shares, debt securities such as bonds and derivatives.

Most ETFs are registered with the Securities and Exchange Board of India (SEBI) which makes it an appealing option for investors with a limited expert having limited knowledge of the stock market.

ETFs having features of both shares as well as mutual funds are generally traded in the stock market in the form of shares produced through blocks.

ETF funds are listed on stock exchanges and can be bought and sold as per requirement during the equity trading time.

  • Foreign exchange instruments – Foreign exchange instruments are financial instruments represented on the foreign market. It mainly consists of currency agreements and derivatives. Based on currency agreements, they can be broken into three categories i.e., spot, outright forwards and currency swap.

BENEFITS OF INVESTING IN CAPITAL INVESTMENTS:

  1. Easy to invest.
  2. Gives higher returns if invested mindfully.
  3. High liquidity.
  4. Gets returns annually or quarterly.

DRAWBACKS OF INVESTING IN CAPITAL INVESTMENT:

  1. Risk of loss.
  2. Need time to learn and get knowledge about investment.
  3. Taxes on the earning.

PRIOR PERMISSION OF RBI IN CERTAIN CASES OF TRANSFER OF SECURITY:

(i) Transfer of shares or convertible debentures from residents to non-residents by way of sale requires prior approval of Reserve Bank in case where the non-resident acquirer proposes deferment of payment of the amount of consideration. Further, in case approval is granted for the transaction, the same should be reported in Form FC-TRS to the AD Category – I bank, within 60 days from the date of receipt of the full and final amount of consideration.

(ii) A person resident in India, who intends to transfer any security, by way of gift to a person resident outside India, has to obtain prior approval from the Reserve Bank10. While forwarding the application to the Reserve Bank for approval for transfer of shares by way of gift, the documents mentioned in Annex – 4 should be enclosed. The Reserve Bank considers the following factors while processing such applications:

a) The proposed transferee is eligible to hold such security under Schedules 1, 4 and 5 of Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.

b) The gift does not exceed 5 per cent of the paid-up capital of the Indian company / each series of debentures / each mutual fund scheme.

c) The applicable sectoral cap limit in the Indian company is not breached.

d) The transferor (donor) and the proposed transferee (donee) are close relatives as defined in Section 6 of the Companies Act, 1956, as amended from time to time. The current list is reproduced in Annex – 5.

e) The value of security to be transferred together with any security already transferred by the transferor, as gift, to any person residing outside India does not exceed the rupee equivalent of USD 50,000 per financial year.

f) Such other conditions as stipulated by the Reserve Bank in public interest from time to time.

(iii) Transfer of shares from NRI to NR requires the prior approval of the Reserve Bank of India. 

REFERENCE:

  1.  https://www.thebalance.com/stock-investing-for-the-individual-investor-3306182
  2.  https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7355
  3.  https://www.elearnmarkets.com/blog/5-instruments-of-capital-market/                                                            

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