19 Nov 2023



Unlocking Investment Opportunities: A Comprehensive Guide for NRIs on Investing in Unlisted Companies in India



India, a rapidly advancing major economy, has become an attractive investment destination for Non-Resident Indians (NRIs). The regulatory landscape governing foreign and NRI investments has evolved significantly, offering increased flexibility and ease of capital inflow. While NRIs traditionally diversify their investments across listed shares, ETFs, mutual funds, debentures, and NCDs, a compelling avenue has emerged – investing in unlisted companies. This guide aims to provide a comprehensive overview of the regulatory intricacies, delve into the diverse investment opportunities, and illuminate the associated risks linked to NRI investments in shares of unlisted companies in India.



Unlisted shares, in simple terms, are financial instruments that aren't listed on public stock exchanges. Instead, they are traded over-the-counter (OTC), making them distinct from shares available on major stock markets and are often associated with smaller or newer firms that choose not to trade on public exchanges due to various reasons, such as not meeting market capitalization requirements. Unlisted shares are known for offering attractive returns, often sold at discounted prices to entice investors.



1. Pre-IPO Investments:

   - NRIs can invest in pre-IPO companies, which are private entities not yet listed on stock exchanges but may plan to go public in the future.

   - Shares can be deposited in the NRI Demat account, even though the trade is off-record.

   - Purchase unlisted shares through investment firms; they may later get listed, allowing you to profit from potential increases. However, you are not allowed to sell them before 6 months from the date of listing.


In accordance with Regulation 288(1) of ICDR Regulations,2018 the entire pre-issue capital of the shareholders shall be locked-in for a period of 6 months from the date of allotment . However, the lock-in is subject to certain exemptions provided for shares arising out of ESOPs and shares held by VCF/AIF Category I/FVCI


2. Investment in Startups:

   - NRIs can explore opportunities to invest in unlisted startups with high growth potential.

   - While riskier, successful investments in startups can yield significant profits.


3. Buying ESOPs Directly from Employees:

   - NRIs can purchase unlisted shares through Employee Stock Ownership Plans (ESOPs) from employees looking to sell at a predetermined price.


4. Investing in PMS Schemes of Unlisted Shares:

   - Portfolio Management System (PMS) schemes managed by professional fund managers offer a safer way to invest in unlisted companies.

   - Diversification and active management minimize risk for NRI investors.

-  The PMS are provided against a fee. The investments are diversified across various asset categories like Equities, Mutual funds, bonds that may take of growth and income of investors. One such investment category that many PMS provide is access to unlisted shares.


5. Purchase from Promoters:

   - Usually promoters have a stake in the company and they can sell their shares to a select group of qualified individual investors through private placement. NRIs can directly buy unlisted shares from promoters of the company.


6. Through Crowdfunding Platforms:

   - Crowdfunding allows a community of investors, including NRIs, to fund startups in exchange for unlisted shares.



While the potential returns from unlisted shares can be enticing, it's essential to be aware of the associated risks:

- Risky transaction as its not backed by the stock exchanges.

- Longer transaction time.

- Lack of liquidity.

- Higher investment amount as the minimum lot size required to purchase is higher.

- Only a few dealers available for transactions.

- The investment in unlisted shares is beneficial when done for a long-term period.





As per the regulations/ guidelines issued by the Reserve Bank of India/ Government of India, investments can be made in shares issued by an unlisted Indian company subject to compliance with FEMA provisions. Investment in unlisted shares by an NRI including those resident in Nepal and Bhutan is considered as 'foreign direct investment' (FDI).



- Automatic Route: Non-residents can invest in shares of an unlisted Indian company under the automatic route, subject to compliance with pricing guidelines and sectoral caps.



- Inward Remittance: The payment for the shares can be made through inward remittance in foreign currency through normal banking channels.


- Debit to NRE/FCNR Account: Non-residents can also use funds from their NRE (Non-Resident External) or FCNR (Foreign Currency Non-Resident) accounts to make the payment.


- Escrow Account: The consideration amount may be paid through a non-interest bearing Escrow account in Indian Rupees maintained with an authorized dealer (AD) bank.



Investments can be made on a repatriation basis, which means that the subsequent sale or maturity proceeds (net of taxes) are eligible to be repatriated outside India. This is an important consideration for NRIs who may want the flexibility to move funds internationally.




  1. Ensure Eligibility:

Confirm that the proposed investment by the NRI complies with the foreign direct investment (FDI) policy and other relevant regulations.


  1. Compliance with Pricing Guidelines:

In the case of issues by unlisted companies, the pricing is determined based on a valuation conducted using an Internationally Accepted Pricing Methodology for valuation on an arm's length basis.

The valuation must be duly certified by professionals such as Chartered Accountants, SEBI registered Merchant Bankers, or Practising Cost Accountants. This certification process adds a layer of assurance to the valuation methodology.


  1. Reporting Obligations:

Report the transaction by submitting Form FC-TRS (Transfer of Shares) to the Authorized Dealer (AD) Category – I bank within 60 days from the date of receipt/remittance of the consideration amount.


  1. Remittance of Funds:

The funds for the investment should be remitted through normal banking channels. This can include inward remittance or a debit from the NRE/FCNR account of the NRI.

Note:- Inward remittance received by Indian companies via the issuance of Depository Receipts (DRs) and Foreign Currency Convertible Bonds (FCCBs) is treated as FDI and counted towards FDI.


  1. Escrow Account (if applicable):

 If an Escrow account is used, ensure compliance with the Foreign Exchange Management (Deposit) Regulations, 2000.


  1. Regulatory Approvals (if applicable):

Confirm if any specific regulatory approvals are required based on the nature of the investment or the sector.Some sectors may have restrictions on the level of foreign investment or may require specific approvals. NRIs looking to invest in unlisted companies need to be aware of any sector-specific regulations and comply with them.


  1. Use of Dividends for Payment:

  If applicable, ensure compliance with conditions related to using dividends for the payment of shares.


  1. KYC & Documentation For NRI Investment In Unlisted Companies' Shares

Investing in unlisted shares as an NRI has been simplified through the KYC process. The necessary documents include a PAN card, NRI Demat account, and additional required paperwork. It's crucial to distinguish between Non-Residential External (NRE) and Non-Resident Ordinary (NRO) bank accounts.

NRE Account (Non-Resident (External) Account) :

- Opened for foreign earnings.

- Exempt from tax.

- Allows the transfer of funds to a foreign account.

NRO Account (Non-Resident (Ordinary) Account) :

- Opened to manage income in India.

- Taxable.

- Limits on transferring money abroad, but interest amounts can be transferred.


  1. Annual Compliance:

Ensure compliance with annual reporting requirements, such as filing the Annual Return of Foreign Liabilities and Assets (FLA) by July 15 of the relevant year.




Transferring shares from a Resident of India (ROI) to a Non-Resident of India (NRI) involves navigating through the legal frameworks of the Foreign Exchange Management Act, 1999 (FEMA), and the Companies Act, 2013. This comprehensive guide outlines the detailed procedure, legal sections, provisions, and form numbers to ensure a seamless and compliant share transfer process.




1.1 FEMA and Capital Account Transactions:

The Foreign Exchange Management Act, 1999, defines Capital Account Transactions under Section 2(e). These transactions cover the movement of financial assets and liabilities between residents and non-residents.


1.2 FEMA Regulations 2017:

The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, effective from 07.11.2017, specifically govern capital account transactions related to the transfer of securities.


2. Permissible Capital Account Transactions by NRI:


2.1 Investment in India:

   - NRIs are allowed to invest in securities issued by a body corporate or company in India.

   - Investment made by a resident outside India in an Indian company is also permissible.


2.2 Transfer of Shares:

   - NRIs have the authority to transfer shares in India as provided under FEMA or with the permission of the Reserve Bank of India (RBI).

   - Government approval is mandatory for transfers involving companies engaged in sectors requiring government approval.


3. Reporting of Share Transfer:


3.1 Preliminary Steps:

   - Obtain the Receipt of Consideration from the NRI.

   - Acquire the Foreign Inward Remittance Certificate (FIRC) and Know Your Customer (KYC) documentation from the AD Category-I Bank.


3.2 FC-TRS Form Filing:

   - File Form FC-TRS within 60 days from the date of payment of the consideration for the transfer of shares.

   - Register the reporting entity on the RBI website at firms.rbi.org.in.

   - Complete the business registration process at firms.rbi.org.in/firms.

   - File Form FC-TRS, which is exclusive to residents of India (ROIs).

   - No penalty is imposed if the form is filed within the prescribed time.


3.3 Required Documents:

   - Certificate of Fair Value by a Chartered Accountant.

   - Securities Transfer Deed (SH4 Form).

   - FIRC and KYC obtained from AD Category-I Bank.

   - Securities purchase agreement.

   - Signed Consent letter for the transfer of shares between the buyer and seller.


3.4 RBI Approval and Compliance:

   - Fulfilling all requirements within the stipulated time ensures RBI approval.

   - Non-compliance may lead to RBI notifications and potential investigations against the involved entity.


4. Procedure for Share Transfer as per The Companies Act, 2013:


4.1 Legal Framework and Definitions:

   - Shares are defined as freely transferable and movable securities under Sections 2(81), 44, and 58(2) of The Companies Act, 2013.


4.2 Reporting of Share Transfer:

   - Section 56 of The Companies Act, 2013, defines the process for registering share transfers.

   - The transfer is registered by the company upon filing a proper instrument of share transfer.

   - The prescribed form for this purpose is SH-4.


4.3 SH-4 Form:

   - This form contains a comprehensive summary of the share transfer agreement.

   - It must be filed with the company within 60 days from the date of share transfer.



The holding period of unlisted shares determines the capital gains tax rate. Short-term capital gains (STCG), realized within 24 months, are taxed according to the investor's applicable tax slab. Long-term capital gains (LTCG), from shares held for more than 24 months, are taxed at a flat rate of 20%, subject to indexation benefits. And it will be taxed at 10% without indexation benefits.

Note :- NRIs can invest in Indian unlisted shares on a non-repatriation basis. Repatriation is allowed but requires reporting to the RBI. If unlisted shares are sold within two years, gains are considered short-term and taxed at the marginal rate.



Investing in unlisted companies in India presents NRIs with a unique set of opportunities and challenges. While the potential for higher returns is substantial, it's crucial for NRIs to conduct thorough due diligence, understand the associated risks, and comply with regulatory requirements. The evolving regulatory landscape, coupled with recent amendments, reflects a concerted effort to strike a balance between encouraging investments and ensuring investor protection. NRIs keen on exploring unlisted shares should leverage trusted intermediaries, stay informed about regulatory changes, and approach these investments with a well-thought-out strategy. As the Indian market continues to evolve, the potential for strategic and lucrative investments in unlisted companies remains a compelling proposition for NRIs.


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Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc