When an Indian Party, who has acquired shares in a Foreign Company in accordance with relevant provisions of Foreign Exchange Management Act, 1999 and Foreign Exchange Management (Transfer or Issue of a Foreign Security) Regulations, 2004, decides to withdraw the same, it is known as Disinvestment.
Disinvestment is in the form of transfer/ sale of shares. An Indian Party may transfer by way of sale to another Indian Party which complies with FEMA Regulations or to a Person resident outside India, any share or security held by it in an overseas JV or WOS.
Disinvestment of Foreign Shareholdings by Indian Party:
- Automatic Route:- If the Indian Party complies with the following conditions, then it will not be required to obtain any approval of RBI. It will just have to furnish details of disinvestment in Form ODI within 30 days of transaction:
- The sale does not result in any write off of the investment made OR
- If the sale results in write off of investment made in the JV/ WOS by the Indian Party Listed on a Recognized Stock Exchange in India and transfer price is less than amount invested, then amount of write off should not exceed the difference between the sale price and amount invested approved by RBI
- f the shares are listed: The sale is effected through the stock exchange on which the shares of the overseas JV/ WOS are listed
- If the shares are not listed: The shares are disinvested by a private arrangement, the share price is not less than the value certified by a CA/CPA as the fair value of the shares based on the latest audited financial statements of the JV / WOS
- The Indian party does not have any outstanding dues by way of dividend, technical know-how fees, royalty, consultancy, commission or other entitlements and / or export proceeds from the JV or WOS
- The overseas concern has been in operation for at least 1 full year and the Annual Performance Report together with the audited accounts for that year has been submitted to the Reserve Bank
- The Indian party is not under investigation by CBI / DoE/ SEBI / IRDA or any other regulatory authority in India.
- Approval Route:- If one does not satisfy the above conditions then a prior approval of RBI is required. Also, one shall require approval to write-off investment exceeding the amount specified above.An Indian party is also allowed to pledge such shares to an AD Category – I bank or a public financial institution in India for availing of any credit facility for itself or for the JV / WOS abroad. Indian party may also transfer by way of pledge, the shares held in overseas JV/WOS, to an overseas lender, provided the lender is regulated and supervised as a bank and the total financial commitments of the Indian party remain within the limit stipulated by the Reserve Bank for overseas investments.On sale of shares, sale proceeds must be repatriated to India within 90 days from date of receipt thereof.
Disinvestment of Foreign Shareholdings by Resident Individuals:
The resident individuals are allowed to invest in equity shares/ CCPS of an overseas JV/WOS without prior approval of RBI, if they satisfy certain specific conditions. But the Investment should be within limits prescribed in Liberalized Remittance Scheme. In addition, they are given general permission to sell the shares so purchased or acquired. A resident Indian can remit, up to the limit prescribed by the Reserve Bank from time to time, per financial year under the Liberalized Remittance Scheme (LRS), for permitted current and capital account transactions including purchase of securities and also setting up/acquisition of JV/WOS overseas. Following points in this regard should be taken care:
- A resident individual, who has acquired / set up a JV or WOS under the provisions of this Schedule, may disinvest by way of transfer / sale or by way of liquidation / merger of the JV or WOS.
- It shall be allowed after one year from the date of making first remittance for setting up or acquiring the JV or WOS abroad.
- The disinvestment proceeds shall be repatriated to India within 60 days from the date of disinvestment and the same may be reported to the designated AD within 30 days in Form ODI.
- No write off shall be allowed in case of disinvestments by the resident individuals.
Taxability on Disinvestment of Foreign Shareholdings:-
The sale of Foreign Investment will lead to Capital Gains. When shares are held for less than 12 months, it is regarded as Short term Capital Gains and those held for more than 12 months shall be regarded as Long term Capital Gains, it shall be taxed in India as follows:
- In case of Resident and Ordinarily resident: It shall be taxed, irrespective of place of receipt or accrual
- In case of Resident but not Ordinarily Resident: It shall be taxed if received in India or accrued in India or arises out of any business relationship in India.
- In case of Non-Resident: It shall not be taxed, if not received/accrued/ deemed to be received/accrued in India
Section 111A of Income Tax Act, 1961 levies short-term capital gains tax @ 15% on transfer of equity shares in a company which is listed on any recognized stock exchange in India. Vide Section 10(38) of the Act, the long -term capital gains on such equity shares shall be exempt.
Section 112 of the Act levies a lower rate of tax on all long-term capital Gains. However, in case of a non-resident, if such LTCG arises out of transfer of a capital asset, it shall be taxed @10% without giving effect to indexation.
The taxability of foreign investment also depends on the tax laws of that country. There is some relief for the investor if there is a tax agreement between India and the other country. In the case of double taxation, the investor can seek relief under the Double Taxation Avoidance Agreement (DTAA) between India and the country concerned.
Taxability of Dividend from a foreign company:-
Dividend received form a Foreign Company shall be chargeable to tax and shall be included in total income of assessee as Income from other sources in accordance with sections 56 to 58 of the Income Tax Act, 1961. Again, the taxability depends upon residential status, place of accrual and DTA, if any, with the concerned Foreign Country.
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