How to Purchase Shares in an Indian Company

A Complete Guide for Foreign Individuals and Companies

India is one of the fastest-growing major economies in the world, and for good reason — a booming consumer market, a young workforce, and a rapidly expanding startup ecosystem. Foreign investors are increasingly looking to purchase shares in an Indian company, whether through direct share purchases or fresh capital infusions.

But investing in Indian shares as a foreign national or foreign company is not as simple as buying stock on a domestic exchange. It is governed by a web of regulations spanning the Foreign Exchange Management Act (FEMA), Reserve Bank of India (RBI) guidelines, the Companies Act 2013, Income Tax Act, and applicable Double Taxation Avoidance Agreements (DTAAs). Get the process right, and you gain a powerful foothold in one of the world’s most dynamic markets.

This step-by-step guide breaks down exactly how foreign individuals and entities can legally acquire shares in Indian private or unlisted public companies.

What Steps Must a Foreign Investor Follow to Purchase Shares in an Indian Company?

To purchase shares in an Indian company as a foreign individual or entity, you need to verify FDI sectoral caps, sign an NDA, execute an MOU, conduct due diligence across financial, legal, and operational streams, obtain a SEBI-compliant valuation, execute definitive agreements, and complete FEMA reporting through FC-GPR or FC-TRS on the RBI FIRMS portal — all within prescribed regulatory timelines. Skipping or delaying any of these steps exposes the foreign investor to FEMA compounding penalties and ROC non-compliance.

Step 1: Verify FDI Sectoral Caps and Entry Routes

The first thing any foreign investor must confirm before they purchase shares in an Indian company is whether FDI is permitted in the target sector under India’s FDI Policy maintained by DPIIT.

India’s FDI Policy, maintained by the Department for Promotion of Industry and Internal Trade (DPIIT), classifies sectors into three categories:

• Automatic Route — No prior government approval required
• Government Approval Route — Prior approval from the relevant ministry is mandatory
• Prohibited Sectors — FDI is not permitted (e.g., lottery, gambling, chit funds, tobacco manufacturing)

Common sectors open to 100% FDI under the Automatic Route include IT, manufacturing, construction, and most services. Sectors like defence, media, and insurance carry caps or require government approval. Always confirm the applicable cap before proceeding further.

Step 2: Sign a Non-Disclosure Agreement (NDA)

Once you have confirmed FDI eligibility, the next step is executing a Non-Disclosure Agreement with the Indian company. The NDA protects both parties during the due diligence and negotiation phase, ensuring that commercially sensitive information — financials, customer data, IP, and business plans — is not misused or disclosed to third parties.

A well-drafted NDA should clearly specify the scope of confidential information, the purpose of disclosure, the obligations of each party, and the remedies available in case of breach.

Step 3: Execute a Memorandum of Understanding (MOU)

Following the NDA, parties typically sign a Memorandum of Understanding (MOU) or a Term Sheet. This non-binding (or sometimes binding) document sets out the broad commercial terms of the proposed investment:

• Proposed investment amount and percentage stake
• Indicative valuation
• Key conditions and timelines
• Exclusivity period for negotiations

The MOU establishes intent and creates a structured framework before significant time and money are spent on due diligence.

Step 4: Conduct Comprehensive Due Diligence

Due diligence is arguably the most critical stage of the entire process. A thorough review protects the foreign investor from hidden liabilities, regulatory non-compliances, or overvaluation. Due diligence typically covers:

• Financial Due Diligence — Audited financials, tax filings, debt obligations, working capital
• Legal Due Diligence — Corporate records, contracts, litigation history, shareholding structure
• Operational Due Diligence — Business model, key clients, supply chain, HR practices
• Vendor and Commercial Due Diligence — Customer concentration, competition landscape
• Intellectual Property (IP) Due Diligence — Ownership of trademarks, patents, software, and trade secrets

Any red flags identified during this process should either be resolved before closing or addressed through appropriate indemnities in the definitive agreements.

Step 5: Valuation as per Indian Regulatory Requirements

Unlike many jurisdictions, India mandates that shares in unlisted companies be valued using a specific framework whenever a foreign investor seeks to purchase shares in an Indian company — and this valuation directly determines the minimum or maximum permissible price. The valuation must be:

• Conducted by a SEBI-registered Category I Merchant Banker or a Registered Valuer (under the Companies Act 2013)
• Compliant with the Discounted Cash Flow (DCF) or Net Asset Value (NAV) method, as applicable
• For income tax purposes, compliant with Rule 11UA of the Income Tax Rules — particularly relevant for transactions involving shares issued at a premium or acquired at a discount

This valuation is not merely procedural — it determines the minimum or maximum permissible price for the share transfer, depending on whether the foreign investor is buying from existing shareholders (secondary sale) or subscribing to new shares (primary infusion).

Step 6: Execute Definitive Agreements

With due diligence complete and valuation in hand, the parties execute the formal legal agreements:

• Share Subscription Agreement (SSA) — For fresh issuance of new shares by the company
• Share Purchase Agreement (SPA) — For acquisition of existing shares from current shareholders
• Shareholders’ Agreement (SHA) — Governs the ongoing relationship between shareholders: board rights, exit mechanisms, anti-dilution, drag-along, and tag-along rights

These agreements must carefully address Conditions Precedent (CPs) — actions that must be completed before the transaction closes — as well as Post-Closing Conditions, such as filing obligations and milestone-based payments.

Step 7: RBI and FEMA Compliance — Filing FC-TRS / FC-GPR

This is a critical regulatory step that foreign investors often overlook when they purchase shares in an Indian Company. Under FEMA and RBI guidelines, all FDI transactions must be reported to the RBI through the Single Master Form (SMF) on the FIRMS portal:

• FC-GPR (Foreign Currency — Gross Provisional Return): Filed within 30 days of share allotment when the company issues new shares to a foreign investor
• FC-TRS (Foreign Currency — Transfer of Shares): Filed within 60 days of receipt/remittance of funds when existing shares are transferred from a resident to a non-resident (or vice versa)

Non-compliance with FEMA reporting requirements can attract compounding penalties. Ensure your legal or compliance team files these forms accurately and on time.

Step 8: ROC Filings under the Companies Act

Once the investment is complete and shares are allotted or transferred, the Indian company must complete its Registrar of Companies (ROC) obligations:

• File Form PAS-3 (Return of Allotment) within 30 days of share allotment
• Update the Register of Members and issue share certificates
• File MGT-7 (Annual Return) reflecting the updated foreign shareholding

Any changes to the Board of Directors arising from the investment (such as a nominee director) also require separate ROC filings.

Key Tax Considerations for Foreign Investors

Tax efficiency is central to any cross-border investment. Key considerations include:

• Applicable DTAA: India has DTAAs with over 90 countries. These treaties can reduce withholding tax on dividends and capital gains, depending on the investor’s country of residence.
• Capital Gains Tax: Long-term capital gains (holding period above 24 months for unlisted shares) are taxed at 12.5% for foreign investors. Short-term gains attract tax at applicable slab rates.
• Transfer Pricing: Related-party transactions must comply with India’s transfer pricing regulations under the Income Tax Act.
• TDS on Dividends: Dividends paid to foreign shareholders attract TDS at 20% (subject to DTAA relief).

Quick Process Summary

Here is a consolidated view of every step required to purchase shares in an Indian company as a foreign investor.

1. Check FDI sectoral caps and entry route
2. Execute Non-Disclosure Agreement (NDA)
3. Sign Memorandum of Understanding (MOU) / Term Sheet
4. Conduct due diligence — financial, legal, operational, IP
5. Obtain valuation from registered valuer or merchant banker
6. Execute SSA / SPA / Shareholders’ Agreement
7. File FC-GPR or FC-TRS with RBI via FIRMS portal
8. Complete ROC filings under Companies Act 2013

Final Thoughts

Acquiring shares in an Indian company is a rewarding but regulation-intensive exercise. The combination of FEMA, RBI reporting, Companies Act requirements, and tax treaty planning makes it essential to work with experienced legal, tax, and advisory professionals on the ground in India.

Corporate Legit Consulting LLP specialises in assisting foreign individuals and companies with end-to-end India market entry, FDI compliance, and share acquisition transactions. Whether you are a Japanese manufacturer seeking an Indian joint venture partner, a Korean conglomerate evaluating an acquisition, or a global investor exploring Indian startups, our team provides clear, commercially focused guidance to help you purchase shares in an Indian company — compliantly, efficiently, and with full regulatory protection.