The new Companies Act has widened the regulations for foreign companies controlled by Indian corporates, putting the latter under increased pressure of compliance
The Companies Act, 2013, consolidated, amended, updated, refurbished and pruned, is bringing new surprises for the corporate world. The more you dig into it the more are the surprises. In this article we are trying to bring to the fore the provisions as applicable to foreign companies under the Companies Act, 2013 (New Act).
The concept of foreign companies understood as companies incorporated outside India had always had some provisions of the Companies Act, 1956 (Old Act) being applicable to them under part XI of the Old Act. 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. Section 591 of the Old Act explained the coverage of foreign companies as -
Sec 591 - Application of sections 592 to 602 to foreign companies.
(1) Sections 592 to 602, both inclusive, shall apply to all foreign companies, that is to say, companies falling under the following two classes, namely:-
(a) companies incorporated outside India which, after the commencement of this Act, establish a place of business within India; and
(b) companies incorporated outside India which have, before the commencement of this Act, established a place of business within India and continue to have an established place of business within India at the commencement of this Act.
(2) Notwithstanding anything contained in sub-section (1), where not less than fifty per cent, of the paid-up share capital (whether equity or preference or partly equity and partly
This part of the Act was mostly understated since such foreign companies owned by Indian citizens or body corporates with place of business in India were negligible.
Changed position under Act, 2013
The new Act, 2013, however, in the pretext of updating the law to the present times has now expanded its scope of such foreign companies and has increased the compliance requirements as well. Chapter XXII of the New Act, Section 379 onwards provides for provisions of the Act as applicable to such foreign companies in which Indian individuals or body corporates jointly/ severally hold not less than 50% of the paid-up share capital either in the form of equity or preference and have a place of business in India. At first blush the provisions of the Old Act and the New Act seem similar, but on a little careful reading one would understand the change in the scope of coverage of such foreign companies.
To bring the point to light, it is pertinent to look at Section 379 of the New Act which is reproduced as below --
“Where not less than fifty per cent of the paid-up share capital, whether equity or preference or partly equity and partly preference, of a foreign company is held by one or more citizens of India or by one or more companies or bodies corporate incorporated in India, or by one or more citizens of India and one or more companies or bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with the provisions of this Chapter and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India.”
At this juncture it is also pertinent to understand what a foreign company is. Section 2(42) of the Act defines foreign companies as –
(42) “foreign company” means any company or body corporate incorporated outside India which—
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.
Further, under the Companies (Registration of Foreign Companies) Rules, 2014, electronic mode is defined to mean –
For the purposes of clause (42) of section 2 of the Act, “electronic mode” means carrying out electronically based, whether main server is installed in India or not, including, but not limited to –
(i) business to business and business to consumer transactions, data interchange and other digital supply transactions;
(ii) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India;
(iii) financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management;
(iv) online services such as telemarketing, telecommuting, telemedicine, education and information research; and
(v) all related data communication services,
whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise;
A joint reading of these sections brings to the fore that earlier only if the foreign companies owned by Indians had a physical presence in India, the provisions of the chapter were to apply.
What is the impact of the change under Act, 2013?
With the New Act, the need for physical presence has been done away with, as entities with no physical presence yet having any virtual presence would also now come under the net. If one had to think of what sort of foreign companies owned by Indians would have virtual presence several sectors of the industry would take a hit. Companies in media and broadcasting business (like Zee Enterprises) which have foreign subsidiaries (like Asia Today Ltd) and the subsidiaries would be rendering satellite services to group.
Think of companies such as Indian asset management companies with foreign subsidiaries set up in the likes of Singapore and Mauritius where setting up funds is much easier a task than our own country making investments in Indian securities or Indian mutual funds. Consider several AIFs which set up with co-investor and master investors in Cayman Islands, Luxembourg, Dublin etc which would be rendering services to the Indian AIFs with Indian managers. Not to forget online B2C platforms, online travel companies with joint ventures with several airlines etc selling tickets of these airlines on their online portals or Indian airline companies with joint ventures with foreign entities selling tickets through agents in India would also now be covered.
Compliances to be made by such companies
The troubles don’t end here. It is not just the fact that the list of foreign companies has become longer, the compliance burden under the New Act is also manifold. Under the New Act apart from the compliances under the Old Act now the foreign companies will also have to comply with the provisions of Section 71 as applicable to debenture issuances, will have to file annual returns with the Registrar in India u/s 92 of the New Act. Also the Old Act required the foreign companies to provide for 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.
The foreign companies will also have to file a statement with regard to related party transactions, repatriation of profits, transfer of funds including dividends from the place of business in India and any other related party of the foreign company outside India. The foreign company will also have to get its accounts audited by a practising Chartered Accountant in India and the chapter of audit and auditors including rotation of auditors will apply. The annexure below gives a comparative of the changes in the compliance requirements as applicable to such foreign companies under the Old and the New Act.
Under the New Act, like the Indian counterparts these foreign companies cannot think of non-complying with the provisions of these sections as punishment for contravention under section 392 of the New Act could impose a fine on the foreign company to the tune of Rs1 lakh which may extend up to Rs3 lakh and an additional fine of Rs50,000 every day for a continuing offence till the default subsisted. Also, every officer of such foreign company who is in default shall be punishable with imprisonment for a term which may extend up to 6 months or fine which may not be less than Rs25,000 but which may extend up to Rs5 lakh or with both. (Under the Old Act non-compliance with the provisions of the chapter imposed a fine of Rs10,000 on the company and every office in default and Rs1,000 every day as additional fine for a continuing offence till the default subsisted.)
Several of the compliance requirements under the New Act may not be understandable. For instance, filing of charge requirement for these foreign companies is silent on whether the charge created on a property in India is only covered or any charge created by the foreign company will have to be registered. The Old Act was very explicit in the mention however the New Act simply says that the chapter on charges will mutis mutandis apply. Also the New Act requires the foreign companies to make disclosures with regard to related party transactions which may not be of great relevance to the regulators here. In the attempt to regulate, the only worry for the corporate sector is that we don’t over-regulate and get written off as a country where doing business is daunting.
(Nidhi Bothra works as executive vice president at Vinod Kothari & Company)
Suraj Arora
Corporate Lawyer