In this blogpost, Subhalagna Choudhury, Student of University of Calcutta and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about, When Foreign Companies Are Required To File Compliances Under The Indian Companies Act

Understanding the meaning

A ‘Foreign Company’  is a company or a Body Corporate, incorporated outside India which has a place of business in India whether by itself or through an agent, physically or through electronic mode and conduct any business activity in India in any other manner {section 2(42) of The Companies Act, 2013}. This new act refers to a Company or a Body Corporate incorporated outside India. This, therefore, extends to other foreign entities as well. The new act has been constituted at a time of technological prominence. That is why electronic modes of business have achieved tremendous popularity, and thus, the Act puts an emphasis on electronic mode of communication. Thus, a foreign company , that carries out business from an established place in India is needed to follow certain guidelines or rather abide by certain compliances that are exhaustively dealt in The Companies Act, 2013. However, not all foreign companies are required to follow the compliance under the Companies Act, 2013. Compliance essentially is for those companies, where more 51% of the shares, are held by Indian shareholder/s. This is because, in such cases, the company is treated like any other Indian company. There are a number of compliances that a foreign company needs to follow in India. It includes compliances under Foreign Exchange and Management Act (FEMA), procedural filings and even certain tax laws, in the case of their products or services being sold in the Indian markets. In calculating the respective stakes of the foreign companies, it is important to understand that total foreign investment is the summation of direct foreign investment and indirect foreign investment. Thus, a foreign company in India needs to follow the compliances when it operates in any of the below forms:

• Branch Office
• Liaison Office
• Project Office
• Corporate Entity
• Joint Venture/ Partnerships etc

According to section 379 of The Companies Act, 2013 where not less than fifty percent of the paid up share capital, whether it is equity share or preference share of a foreign company is held by one or more citizens in India, or by one or more Companies or Body Corporate incorporated in India, whether singly or in aggregate, such company is required to comply with the provisions of chapter XXII of the , 2013

Compliance required by foreign companies in India is exclusively dealt in chapter XXII of The Companies Act, 2013 and the Companies (Registration of Foreign Companies ) Rules, 2013. When a foreign company is operating in India as any of the above entities, it has to adhere to certain compliance guidelines.

Under The Companies Act 1956, there was no compliance procedure to be followed by the foreign companies. This was because at that time, the economic scenario of the Indian economy was staggering and Indian entities did not own much shares of a foreign company. Foreign companies then did not have to comply with the sections 592 to 602 of the old act. The rights and liabilities of such companies were similar to that of Indian companies. Because of this leniency, there were tax evasion and other financial corruptions. But with the rising economic development , Indian shareholding in foreign companies saw an upward swing. Thus, the new law was more strict with the compliance procedures, that limited the privilege of  foreign companies and required them to follow the compliance procedures as given in chapter XXII of the companies act 3013.

Section 379 has created a considerable dilution of meaning and created doubt as to whether the provisions would be applicable to only those companies falling under the section or whether it is to apply to all foreign companies. We might as well assume that the act applies to only those foreign companies where more than half the paid up capital is held by the Indian citizens. Does that mean, that a foreign company not having such ownership can as well not comply with the provisions of the said chapter?

The following elaboration may clarify the doubt.

Explanation

Instance 1: Suppose A is a foreign company which has its place of operation in India. The shares are held by a foreign entity, X ( 50% of the paid up capital), and Y  is an Indian company holding the rest 50% of the paid-up share capital. This is a case, where under the revised company law, such a company has to abide by the compliances laid down in chapter XXII of the Indian companies act, 2013. Thus, there is no exemption of the particular foreign company.

Instance 2: consider four companies—-Company A, COMPANY B , Company B, Company D. In case of Company A the Indians hold 50% of the paid-up share capital, and the company operates in India. In Company B, Indian shareholding is 40%  and the company has its operations in India. In Company C, Indian shareholding is 75% of the paid-up share capital but there is no offices or business of the company in India, and in Company D, the total Indian paid up share capital nil, where the company operates in India. In other words, in the case of Company D there is no ownership of share capital by Indian entities.

Now if one considers Company A, it is to be noted that it complies with the provisions of section 379 of the Indian Companies Act, 2013 whereby holding fifty percent of the paid-up share capital. Thus, it has to comply with the compliances laid down under chapter XXII of the companies act 2013. Like any other Indian companies, it shall not stand exempted from any tax laws or RBI regulations.

In the case of Company B, where the shareholding by Indian entities is less than fifty percent, but business operations are conducted in India, it is to be noted that this company shall be complying with the compliances laid down in chapter XXII. However, it is exempted from the other compliances that may be applicable to Indian companies.

In the case of Company C, it may have a large percentage of the paid up share capital, namely 75% . However because it does not carry out its business operations in India, it shall remain exempted from the provisions of compliances under this chapter.

Company D is a company where there are no Indian stakes. Thus, it fails to fulfil the criteria of section 379, and hence it shall remain exempted from all forms of compliances under this chapter.

Raising of capital

The foreign companies, carrying out their respective businesses in India usually do not access the Indian capital markets. They approach the private investors, banks or other financial institutions for raising capital. If capital, is to be accessed publicly, they are required to issue a prospectus. There are specific documents laid down under rule 11 of the Companies ( Registration Of Foreign Companies) Rules, 2014 which are to be annexed with the prospectus such as :

• Consent from any person who is an expert.
• A copy of contracts for appointment of managing director or manager
• A copy of any other material contracts not entered in the ordinary course of business but entered within preceding two years etc

A foreign company must comply with section 34 to 36 that elaborates on the fact that a prospectus issued by a foreign company shall be treated as s it has been issued by an Indian company

Winding up

A foreign company may be wound up as an unregistered company if it ceases to carry out its operations in India whether the body corporate has been dissolved or ceased to exist as per the law, under which it was incorporated ( section 376)

Contravention Or Non-Compliance

As per the provisions of section 391, any foreign company  that contravenes the provisions as laid down in chapter XXII of the Companies Act 2013, shall be punished with a fine of one lakh rupees which may be extended to 3 lakh rupees, and if such contravention continues there can be a charge of fifty thousand rupees every day, and the officers in default shall be punished with imprisonment that may be six months with a fine between twenty five thousand and 5 lakh rupees. The company shall also be barred from instituting any legal proceedings in connection with any of its contract. This in no case shall, however, affect the validity of the contract.

Conclusion

Compliances, in general, are required by every corporate house to ensure the fulfilment of its objectives and long term goals. Compliances help a company to remain free of legal charges which in turn aids in its smooth functioning. A relatively modern concept is the ‘Corporate Social Responsibility’ or the CSR. This too is significant in the growth of an economy, as it helps to evaluate the development at the cost of social disturbances. It thus checks an entrepreneur from over-exploitation of resources and thereby promotes responsible entrepreneurship.

Acknowledgements and Idea

 1)  www.indiacorplaw.blogspot.in

   2)   www.icai.org