Exit options for foreign investors

Foreign investors, at the time of entry, must be very clear about their exit options. In fact, knowledge of exit options is a necessary at the time of entry. Profits accruing to foreign investors hinges on their terms of exit and therefore the investors want to be prepared right at the outset. These options include transfer of shares, buy-back of shares, contractual option include Drag along and Tag along Rights, put option. This article discusses all these options widely as mention below:




Normally there is no restriction on transfer of shares, but in case of private company transfer is governed by Articles of association. Further, in case of transfer of shares of an Indian company from resident to non- resident and vice versa, provisions of the Companies Act, 2013 and Foreign Exchange Management Act, 1999 shall be applicable.





  1. Transferor has to give a notice in writing to convey his intention to transfer his share to Company.
  2. On receipt of such notice, the company has to notify the other members regarding the availability of such shares, Fair price and time limit within which they should communicate their options to purchase such shares.
  3. If none of the members show interest in purchasing the shares, such shares can be transferred to an outsider.
  4. As per section 56 of Companies Act, 2013 , person deliver the following instrument to Company such as:

1. Transfer deed i.e SH-7

2. Share Certificate.


Note: Transfer deed must be duly stamped, dated and executed by or on behalf of the transferor and the transferee.  Such Instrument delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution.


  1. Conduct board meeting for taken a note of transfer of shares.




  1. Transfer of shares subject to Articles of Association of Company


Note: Restriction on transfer is not applicable in the following cases:


1. Where the member transfers the shares to his/her representative(s).

2. Where the shares have been devolved to the heirs in the event of death of a shareholder.

3. Where shares are proposed to be allotted on a rights basis.


  1. According to Indian Stamp Act, the transfer deed should need to have stamp. Rate of  stamp duty for transfer of share as : 0. 25 paise for every one hundred rupees of the value of the shares or part thereof




Foreign investors can exit from Indian market via a buy-back of shares at a mutually agreed internal rate of return. Buy-back governed as per the guidelines laid down in the Companies Act, 1956 read with the Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999, in case of private companies and unlisted public companies and the SEBI (Buy-Back of Securities) Regulations, 1999, in case of public listed companies.




  1. Convene a Board Meeting after giving notice to all the directors and pass the necessary resolution in respect of
  1. Buyback of shares
  2. Approve the notice of general meeting of the Company with explanatory statement, the details as per Rule 17(1) is required to be mentioned.


Note : If the buyback is less than 10% of paid up equity share capital & free reserve, then Board resolution will sufficient, therefore is the Board resolution passed for the same purpose  or


But if the buyback is more than 10% but less than 25% of paid up capital and free reserve then Special resolution is required, is it passed? (Maximum permissible in a year is 25% of paid up capital + free reserves)


  1. Whether Form MGT-14 is filed with the registrar along with the fees within 30 days from passing special resolution.


  1. File a letter of offer in Form SH-8 with ROC . Such letter of offer shall be dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director, where there is one.


  1. File a Declaration of solvency in Form No. SH.9 with the Registrar of Companies  and verified by affidavit which is to be signed by at least two directors of the company, one of whom shall be the managing director, if any, and verified by an affidavit as specified in the said Form.


  1. Dispatch the Letter of offer to the shareholders/security holders not later than 20 days after filling of Form SH-8 with ROC.


  1. Verifications of the offers received, in case there is no communication of rejection of offer within 21 days from the date of closure of offer, it is deemed to be accepted within 15 days from the date of closure of offer.


  1. Opening of the separate bank account & deposit therein, the amount of buyback of shares tendered for Buyback immediately after the date of closure of the offer.


  1. Making payment in cash to those shareholders whose offer has been accepted & return the Certificates to the Shareholders whose securities are not accepted or the balance of securities in case of part acceptance within 7 days from completion of Verification.


  1. Extinguish and destroy the security certificate so bought back within 7 days from the last date of completion of Buyback.


  1. File with the Registrar a return in Form No. SH-11 along with annexure to the return, a certificate in Form No. SH-15 signed by at least two directors of the company  one of whom shall be the managing director, if any, to the effect that the Buy-back has been made in compliance with the provisions of the Act & rules within 30 days of completion of buyback.


  1. Company shall maintain a register in Form No. SH.10 of the shares or securities so bought, the consideration paid for the shares or securities bought back, the date of cancellation of shares or securities, the date of extinguishing and physically destroying the shares, which shall be authenticated by CS or any other person authorized by Board.



  1. Buy- back must be authorised by Article of Association of Company
  2. A company may purchase its own shares or other specified securities (hereinafter referred to as buy-back) out of—

(a) Its free reserves;

(b) The securities premium account; or

(c) The proceeds of the issue of any shares or other specified securities


  1. All the shares or other specified securities for buy-back are fully paid-up
  2. Debt (both secured & unsecured) equity ratio should be less than 2:1 Provided CG may notify higher ratio 
  3. NO offer for buyback shall be made within a period of 1 year from the date of closure of preceding buyback offer
  4. The audited accounts on the basis of which calculation with reference to buy back is done is not more than six months old from the date of offer document;.


However, where the audited accounts are more than six months old, the calculations with reference to buy back shall be on the basis of un-audited accounts not older than six months from the date of offer document which are subjected to limited review by the auditors of the company.


  1. Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under clause (a) of sub-section (1) of section 62 or other specified securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.




  1. Drag along and Tag along Rights:


It is contractual exit option given to foreign shareholder where drag along clause in shareholders’ agreement which is stipulates that if a third party offers to purchase all the shares of the company and if it is acceptable to the majority shareholder, all the remaining shareholders will be bound to sell their shares to such third party on same terms.


  1. Put Option:


‘Put Option’ is another exit route given to foreign shareholder which enables it to sell its shares at fair value. A put option is a right but not an obligation to sell shares upon the occurrence of a specified event at a specified price. Thus, on happening of such event, if the minority shareholder wishes to exit from the company, it may give notice to the dominant shareholder to purchase its shares as per the terms and conditions of agreement and Foreign Exchange Management (Transfer or Issue of Security by Persons Resident outside India) Regulations, 2000,





  1.   Transfer of shares by a Person resident outside India in following cases:



Non Resident to Non-Resident 

A person resident outside India (other than NRI and OCB) may transfer by way of sale or gift shares to any person resident outside India excluding oversea corporate body.


Provided that prior Government approval shall be obtained for any transfer where the person resident outside India is an FPI (Foreign Portfolio Investor) and the acquisition of capital instruments made under Schedule 2 of these regulations has resulted in a breach of the applicable aggregate FPI limits or Sectoral limits.




NRI and OCB may transfer by way of sale or gift shares to any person resident outside.


Provided that where the acquisition of capital instruments by an NRI or an OCI under the provisions of Schedule 3 of these regulations has resulted in a breach of the applicable limit or sectoral limits, the NRI or the OCI shall sell such capital instruments to a person resident in India eligible to hold such instruments within the time stipulated by Reserve Bank in consultation with the Central Government




NRIs may transfer by way of sale or gift the shares held by them to another NRI.



Non Resident to Resident(Sale / Gift)

(i) Gift: A person resident outside India can transfer any security to a person resident in India by way of gift.

(ii) Sale under private arrangement: General permission is also available for transfer of shares by way of sale under private arrangement by a person resident outside India to a person resident in India where the FEMA pricing guidelines are met.





The transferred by a person resident outside India to a person resident in India shall not exceed:


  1. The price worked out in accordance with the relevant Securities and Exchange Board of India guidelines in case of a listed Indian company.


  1. Price at which a preferential allotment of shares can be made under the Securities and Exchange Board of India Guidelines, as applicable, in case of a listed Indian company or in case of a company going through a delisting process as per the Securities and Exchange Board of India (Delisting of Equity Shares) regulations, 2009;


  1. The valuation of capital instruments done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company.




  1. Taxes and other duties


All transaction under these regulations shall be undertaken through banking channels in India and subject to 3ayment of applicable taxes and other duties/ levies in India.


  1. Reporting in Foreign Currency-Transfer of Shares form


Foreign Currency-Transfer of Shares (FC-TRS): Reporting for transfer of capital instrument shall be made in FC-TRS form when capital instrument hold on repatriable Basis through authorized dealer.


Such FC-TRS form shall be filed with the Authorized Dealer bank within sixty days of transfer of capital instruments or receipt/ remittance of funds whichever is earlier.


  1. Delays in reporting


The person/ entity responsible for filing the reports shall be liable for payment of late submission fee, as may be decided by the Reserve Bank, in consultation with the Central Government, for any delays in reporting.