The article is written by Somya Agarwal, 4th Year, BA LLB (Hons.), Symbiosis Law School, Pune.

Introduction

There are various kinds of companies like public, private or government-owned that operate in a country. Depending on their particular nature suitable rules and regulations have to be formulated for each kind of company. Every country has specific rules and regulations applicable to home-grown companies. Similarly, a company operating in a country other than its home country is required to follow the rules and regulation of the given local area of operation and the home country where it was originally incorporated.

In India, a foreign company is mandated to follow special or modified provisions as compared to a domestic company. For instance, a foreign company at the time of making investment in India or setting up an office is required to comply with the Foreign Exchange Management Act (FEMA). Similarly, if the foreign company is involved in selling goods or providing services then it is required to comply with the Indian tax laws.

A ‘foreign company’ is defined as an entity which is incorporated outside India, but has a place of business in India or conducts any business activity in India in any other manner. The accurate definition of foreign company is given under the Companies Act, 2013 though the concept of ‘foreign company’ was existent in the older act as well.

Definition under the old Act: Companies Act, 1956

The erstwhile Companies’ Act of 1956 (Old Act), did not provide any definition for ‘foreign company’. Section 591, subsection 1 was the sole repository for classification of a company as foreign company under the old Act.

Section 592 (1) states that foreign companies shall mean the following two classes of companies:

1. companies incorporated outside India which, after the commencement of the Old Act, establish a place of business within India; and
2. companies incorporated outside India which have, before the commencement of the Old Act, established a place of business within India and continue to have an established place of business within India at the commencement of the Old Act.[1]

A place of business means premises where there is a physical or visible indication that the company may be contacted there. The Indian courts emphasized on the requisite of establishing a physical presence in India for a foreign body corporate to be considered as having a place of business in India, and consequently being categorised as a ‘foreign company’ under the Companies Act, 1956. In the matter of Willis Europe BV v. Willis India Insurance Brokers (P) Ltd.,[2] the High Court of Bombay observed that”. Section 591(1) (a) applies not to companies that carry on business in India, but to companies that establish a place of business in India.”

In determining whether a foreign company has established a place of business in India under Section 591 of the Companies Act, 1956, the High Court of Delhi in Dabur (Nepal) P. Ltd. v. Woodworth Trade Links P. Ltd.[3] held that “a company would be held to have established a place of business in India if it has a specified or identifiable place at which it carries on business, such as an office, storehouse, godown or other premises, having some concrete connection between the place and its business.”

The above text makes it evident that under the 1956 Act, the definition of ‘foreign company’ was exclusively based on condition of having established ‘place of business’ in India. The requisite of having a physical place of business restricted a lot of companies operating in India to be termed as foreign companies. Due to technological boom, various companies were operating in the country without having any physical presence, solely coordinating their functions through internet and providing services to Indian citizens.

During the overhaul of the company laws in India during the 2013, definition of foreign companies was also expanded to include all kinds of companies operating in India and to regulate their functioning.

Definition under Companies Act, 2013 and its scope

The term ‘foreign company’ is clearly laid down under Section 2 sub-section 42 of the Companies Act, 2013 (New Act). A foreign company is any company or body corporate incorporated outside India which,

1. has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
2. conducts any business activity in India in any other manner.[4]

In order to be considered a ‘foreign company’, one has to fulfil both the abovementioned criteria. Hence, this new definition has a wider scope compared to the earlier Act. To fully appreciate the scope of the definition, it is necessary to define the terms ‘electronic mode’ as well as ‘business activity’.

1. Electronic Mode

The Companies (Specification of Definitions Details) Rules, 2014 defines the term ‘electronic mode’ in the context of a foreign company under Rule 2(h). The same is also defined under Rule 2 (1)(c) of Companies (Registration of Foreign Companies) Rules, 2014.

The definition of electronic mode encompasses all electronic based transactions, such as business to business and business to consumer transactions, data exchange and other digital supply transactions. It further includes all online services and all related data communication services whether conducted by e-mail, mobile devices, cloud computing, social media, data transmission or otherwise.

This definition clearly states that even if the location of the main server is outside India, it would still come within the purview of the term ‘electronic mode’. Hence, leaving no ambiguity in its interpretation.

1. Business Activity

The Companies (Registration Offices and Fees) Rules, 2014, defines ‘business activity’ under Rule 3. The definition of ‘business activity’ is identical to ‘electronic mode’. Rule 3 states that every company including a foreign company that carries out its business through electronic mode, whether its main server is installed in India or outside India, shall be deemed to have carried out business in India.

The sole difference being that definition of ‘electronic mode’ in Companies (Specification of Definitions Details) Rules, 2014 is applicable to only foreign companies whereas, ‘business activity’ defined under the Companies (Registration Offices and Fees) Rules, 2014 is applicable to all kinds of companies.

As per the definitions of specified terms, a ‘foreign company’ under the Companies Act, 2013 would include not just those companies incorporated outside India which subsequently established an office or a branch in the territory of India for carrying on business activity, but would extend to any foreign company which has entered into any kind of transaction with an entity or person located in India through electronic mode. By virtue of this definition of ‘foreign company’ under the Companies Act, 2013, even a foreign e-commerce website based outside India, not having any office, employees, servers, or any other sort of physical presence in India would attract the provisions of the Companies Act, 2013, if an Indian resident placed an order on such merchant website.

Difference between the Old and the New Act

At first blush the provisions of the Old Act and the New Act seem similar but the Act of 2013, expanded its scope of foreign companies and has increased the compliance requirements as well.

• The new definition of foreign company includes ‘body corporates’ as well as corporation in the definition, thus extending its scope to various entities which were not regulated in the earlier act. As the earlier act referred to only companies and not body corporates.
• The 2013 Act has done away with the requirement of having any sort of physical presence in India to carry out business in order to be characterised as ‘foreign company’ as required under the old Act. Now, the entities having any virtual presence would also come under the ambit of the new Act.

The same is evident from joint reading of Section 379 (Application of Act to Foreign Companies) and Section 2 (42) (definition of Foreign Company) of Companies Act 2013 along with Rule 2 (1) (c) (definition of Electronic Mode) of Companies (Registration of Foreign Companies) Rules, 2014 which brings to fore that there is need for physical presence, as entities with no physical presence yet having any virtual presence would also now come under the net.

• The definition of foreign company under the New Act has further widened the regulations for foreign companies controlled by Indian corporate, putting the latter under increased pressure of compliance. Foreign companies controlled by Indian corporates have been mandated to comply with the provisions of Chapter 22 along with other provisions of the New Act prescribed for companies that are incorporated in India. Essentially, equating the foreign companies controlled by Indian citizens or corporates to a domestic company that is incorporated in India.

In light of this, it can be said without doubt that the definition under 2013 Act has in a categorical manner laid down the conditions and clearly demarcated the scope of foreign company in India.

Impact of the New Definition under Companies Act 2013

The impact of the definition of foreign companies under the New Act has been two fold. First, as the scope of the definition has expanded, it covers various companies that were before eluded from the scope of the Companies Act. Second, the statutory compliance of the foreign companies have increased under the new act.

1. Wider Scope

Inclusion of ‘electronic mode’ and ‘business activity’ in the definition of foreign company has huge impact on the application of the Companies Act, 2013.

The ambit of term ‘electronic mode’ under the definition of foreign company is extensive enough to cover essentially all transaction carried through electronic mode. Hence, such a definition has a huge potential to impact the transactions undertaken by various foreign companies. In accordance with the new Act, the companies involved in transaction pertaining to consultancy services, financial services, e-commerce, etc. having the customer base in India would be required to establish a permanent place of work in India through registration, in order to continue to operate in the country.

Currently, there are a number of foreign based websites that operate directly or indirectly in India and may be said to have a place of business in India through electronic mode. For instance, online travel companies in joint venture with several airlines selling tickets of those airlines on their online portal, airline companies who operate through their booking agents in India or Company or Body Corporate providing online coaching to Indian students.

Further, the second part of the definition of foreign company refers to any other ‘business activity’ which will now include companies in media and broadcasting business like Zee Entertainment Enterprise Limited which have foreign subsidiaries like Asia Today Limited which render satellite services in India or Indian Asset Management Companies with foreign subsidiaries in countries like Singapore and Mauritius making investments in Indian securities or Indian mutual funds. This will have huge implications on such business as they will have the burden of adhering to statutory compliance under the companies act, 2013.

1. Increased Compliance

The foreign companies incorporated outside India always had some provisions of the Companies Act, 1956 being applicable to them under Part XI. Such foreign companies which would have established a place of business in India before or after the commencement of the Old Act had to comply with some of the provisions of Old Act which included submitting with the registrar charter documents of the place of business in India, its address, details of directors etc. for registration, accounts of the Indian entity, details of charges made on property in India and so on. 

The provisions applicable to the foreign companies have now been widened under the New Act. For instance, under the Old Act required the foreign companies had to provide details of charges created on property in India, under the New Act any charge created by such foreign company will have to be registered with the Registrar of Companies. They are further bound to file a statement with regard to related party transactions, repatriation of profits, etc. and get its accounts audited by a practicing Chartered Accountant in India. The new requirements of registration and other compliance will again have an impact on the operation of various companies, as it will act as an increased burden on foreign companies.

Amendment of 2017

Prior to enactment of Companies (Amendment) Act, 2017 (hereafter referred as “Amendment Act”)[5] there was an ambiguity as to whether Chapter 22 of 2013 Act was applicable to all foreign companies or specifically to foreign companies having less than 50% paid up capital held by Indian citizen or companies/body corporate incorporated in India.

Section 379 of the 2013 Act laid down that where not less than 50% of the paid up capital of a foreign company is held by one or more citizens of India, or companies/body corporates incorporated in India, such company has to comply with the provisions of Chapter 22 and other provisions of the 2013 Act, as may be prescribed, with regard to the business carried on by it in India, as if it was a company incorporated in India.

It failed to clarify whether Chapter 22 referring to ‘companies incorporated outside India’ applied to all foreign companies. The bare perusal of the provisions makes it clear that after defining ‘foreign companies’ in a comprehensive manner, the intention of the legislature was not to restrict the scope of applicability of Chapter 22 to a specific class of companies.

There was an urgent need to fulfil the same gap before the foreign companies could use the same lacuna in order to avoid their statutory compliance. This issue has been finally addressed by the Companies (Amendment) Act, 2017.[6]

“(1) Sections 380 to 386 (both inclusive) and sections 392 and 393 shall apply to all foreign companies:

Provided that the Central Government may, by Order published in the Official Gazette, exempt any class of foreign companies, specified in the Order, from any of the provisions of sections 380 to 386 and sections 392 and 393 and a copy of every such Order shall, as soon as may be after it is made, be laid before both Houses of Parliament….”

This amendment clarified that Chapter 22 of the 2013 Act would be applicable to ‘all the foreign companies’ irrespective of any other condition. This amendment further empowered the Central Government to exempt any class of foreign companies from complying with one or more provisions of the 2013 Act.

Conclusion

The 2013 Act and the recent amendments have clarified the scope of definition of ‘foreign companies’ to a large extent. Nevertheless, still some gaps exist under the given definition.  The Companies Law Committee in its report of 2016[7], observed that definition of the term ‘foreign company’ under the Companies Act, 2013 read with the definition of ‘electronic mode’, could result in insignificant internet based electronic transactions of a company incorporated outside India, with no adequate relation to Indian customers and no establishment in India would deem to fall under the ambit of such definition. It was further assumed by the Committee that it would be impracticable to cover companies incorporated outside India that have a mere incidental presence in India through electronic means, without the company having any actual intention of setting up a place of business in country. In light of this, it was suggested by the committee that the same be exempted from registration and other statutory requirements applicable to foreign companies under the Companies Act, 2013.

Further to such recommendations of the Committee, the 37^th Report issued by the Standing Committee on Finance (2016-2017)[8] sought to implement the same in the Companies (Amendment) Bill, 2016. Among the crucial amendments proposed under the Companies (Amendment) Bill, 2016, was the proposed amendment to Section 379 of the 2013 Act stating that “…Foreign companies having incidental transactions through electronic mode to be exempted from registering and compliance regime under the Act.”

The Statement of Objects and Reasons of the Companies (Amendment) Bill, 2016 emphasized on the need of exempting certain companies under the act. The notes to clauses of the bill further reiterated the same in order to bring clarity with respect to applicability of the provisions of the Companies Act, 2013 to foreign companies.

However, the amended Section 379 does not refer to exclusion of incidental transactions. Moreover, no Order under the proviso to amended Section 379 of the Companies Act, 2013 has been introduced in the public domain, referring to the same. Hence, the issue relating to incidental transactions still persists.

In light of the above mentioned text, the enactment of Amendment Act of 2017 has to an extent limited the overarching scope of definition of foreign company, but still there is scope of improvement in the given definition of ‘foreign company’ under the Companies Act, 2013

[1] Section 591, Companies Act, 1956.

[2] Willis Europe BV v. Willis India Insurance Brokers (P) Ltd. (2011 (113) Bom LR 1842). 

[3] Dabur (Nepal) P. Ltd. v. Woodworth Trade Links P. Ltd. [2012] 175 Comp Cas 338 (Delhi).

[4] Section 2 (42), Companies Act, 2013.

[5] Companies (Amendment) Act, 2017 notified on January 8, 2018.

[6] Section 77 of Amendment Act amended Section 379 of the Companies Act 2013 the same being notified on February 9, 2018.

[7] Report of The Companies Law Committee. New Delhi, Dated 1st February, 2016.

[8] Standing Committee on Finance (2016-17) “The Companies (Amendment) Bill, 2016 (Ministry of Corporate Affairs)” Sixteenth Lok Sabha.