To understand more about Foreign Company, let’s discuss some important definitions:
Definition of Company under Companies Act, 2013
Section 2(20): Company means a company incorporated under this Act or under any previous company law.
Definition of Body Corporate under Companies Act, 2013
Section 2(11): Body Corporate or Corporation includes a Company incorporated outside India, but does not include-
i. A co-operative society registered under any law relating to co-operative societies; and
ii. Any other body corporate (not being a company defined in this act), which the Central Government may by notification specify in this behalf.
Definition of Foreign Company under Companies Act, 2013 vs. Companies Act, 1956:
|Foreign Company under Companies Act 1956 – Section 591||Foreign Company as per Companies Act, 2013 – Section 2(42)|
|Company incorporated outside India and having a place of business in India||Company or Body Corporate incorporated outside India havinga. a place of business in India whether by itself or through an agent, physically or through electronic mode andb. conducts any business activity in India in any other manner.|
The Companies Act, 2013 has the potential to impact a large number of Foreign Companies that may be doing business in India through electronic mode. The registration requirement of companies doing business in India through ‘electronic mode’ has been the subject matter of discussions and debates. Rule 2 (c) of the Companies (Registration of Foreign Companies) Rules, 2014 defines ‘electronic mode’ as carrying out electronically based, whether main server is installed in India or not, including but not limited to-
- Business to business and business to consumer transactions, data interchange and other digital supply transactions;
- offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities in India or from citizens of India;
- financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management;
- online services such as telemarketing, telecommuting, telemedicine, education and information research; and
- all related data communication services.
These transactions may be conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise.
Impact of change in definition of Foreign Companies
The New Act has drastically expanded the definition of Foreign Companies to include those foreign companies as well that are doing business in India through electronic mode. As discussed earlier, Rule 2 (c) defines ‘electronic mode’, which definition is wide enough to cover virtually every transaction carried through electronic mode including through e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise. Such a wide coverage on transactions done through electronic modes is, therefore, likely to have a great impact on various foreign companies involved in transactions such as consultancy services, financial services, e-commerce etc. with their customers in India that 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 such as Amazon.com, Rakuten.com etc., where customers located in India can purchase products and get the shipment in India. Moreover, ebooks, softwares, or subscription to e-magazines, dailies or subscription of other members only websites could be purchased online at many websites that need no physical shipment to India. The New Act specifically provides that in order to ascertain the place of business in India through electronic mode, the main server is not required to be installed in India.
The bare perusal of the provisions of the New Act (esp. section 380 and section 2 (42) along with prescribed Rules) suggests that even a single transaction conducted in India by a foreign company would be sufficient to infer that such foreign company has established a place of business in India. Such an interpretation would lead to undesirable consequences as any foreign company e.g. a consultancy company based outside India would require registration in India even if it undertakes only one single transaction in a whole year. Imagine a situation where a customer in India buys an application or software worth $1 on a foreign based marketplace websites like googleplaystore that may not be registered in India. The marketplace websites could have sellers that are also not registered in India as per the requirement of section 380. In such a case, it would be absurd to expect that for the sale of a $1 product/service both the seller company as well as the marketplace owner company be required to get registered under the New Act. However, as absurd as it may appear, the bare interpretation of the New Act leads to this conclusion
So from above, it is clear that foreign companies must comply with the provisions of the Companies Act, 2013 in respect to the business as if it were a company incorporated in India.
The Companies Act, 2013 aims to:
- revise and modify the Companies Act, 1956 in consonance with the changes in the national and international economy;
- bring about compactness by deleting the provisions that had become redundant over time and by regrouping the scattered provisions relating to specific subjects;
- re-write various provisions of the Companies Act,1956 to enable easy interpretation;
- delink the procedural aspects from the substantive law and provide greater flexibility in rule making to enable adaptation to the changing economic and technical environment; and,
- inculcate the culture of corporate governance in the Indian corporate world.
Compliances for Foreign Companies under Companies Act, 2013 and rules made thereunder:
- Chapter XXII
- Companies(Registration of Foreign Companies) Rules, 2014
Section 380: Documents etc., to be delivered to Registrar by Foreign Companies:
Every Foreign company is required to submit these documents to the Registrar for registration, within 30 days of the establishment of its place of business in India:
- Certified copy of the charter, statutes or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company and, if the instrument is not in the English language, a certified translation thereof in the English language;
- Full address of the registered or principal office of the company
- List of the directors and secretary of the company containing such particulars as prescribed under Rule 3.
- Name and address or the names and addresses of one or more persons resident in India authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company
- Full address of the office of the company in India which is deemed to be its principal place of business in India
- Particulars of opening and closing of a place of business in India on earlier occasion or occasions
- Declaration that none of the directors of the company or the authorized representative in India has ever been convicted or debarred from formation of companies and management in India or abroad.
- Other Documents as may be prescribed.
Rule 3(3) of the Companies (Registration of Foreign Companies) Rules, 2014 requires application in Form FC-1 to be supported with an attested copy of approval from the Reserve Bank of India under Foreign Exchange Management Act and the rules and regulations thereunder or a declaration from the authorised representative of such Foreign Company that no such approval is required.
And Rule 3(4) provides that in case of any alteration in the aforesaid documents the Foreign Company is require to submit a return in Form FC-2 containing the particulars of alteration as per the prescribed format with the Registrar of Companies, within 30 days of any such alteration.
Section 381: Accounts of Foreign Companies:
The Foreign Companies in each calendar year are required to prepare a balance sheet and profit & loss account in such form, containing such particulars and shall also annex the documents as prescribed under Rule 4 along with the balance sheet and profit & loss account. All these documents shall be filed with Registrar of Companies along with a copy of list of all the places where business has been established in India as on the date of the balance Sheet in Form FC-3.
If any of such documents is not in English Language, a certified translation of these documents in English Language shall be attached.
And Rule 5 provides that every foreign company shall get its accounts, pertaining to the Indian business operations prepared in accordance with the requirements of section 381 and rule 4, audited by a practicing Chartered Accountant in India or a firm or limited liability partnership of practicing chartered accountants.
The provisions of Chapter X i.e. Audit and Auditors and rules made there under, as far as applicable, shall apply, mutatis mutandis, to the foreign company.
Section 382: Display of Name of Foreign Companies:
Every Foreign Company is required to exhibit outside its every office or place of business in India, and in all business letters, bill heads and letter paper, and in all notices, and other official publications, the name of the company and the country where it is incorporated. The name shall be in legible letters of English language and also in the local language of the state where such office is situated.
Besides the name and the country of Incorporation, the company is also required to mention the fact that the liability of the company is limited if it is so.
Section 383: Service on Foreign Company:
Any process, notice, or other document required to be served on a foreign company shall be addressed to the person whose name and address have been delivered to the Registrar and sent by post or by electronic mode. The documents on Foreign Company as per the New Act may now also be served by Electronic Mode.
Section 384: Debentures, Annual Return, Registration of Charges, Books of Accounts and their Inspection
The provisions of Section 71 shall apply mutatis mutandis to a foreign company.
The provisions of Section 92 shall subject to such exceptions, modification and adaptations as may be made therein by rules made under this act, apply to a foreign company as they apply to a foreign company as they apply to a company incorporated in India.
Also, Rule 7 provides that every foreign company shall prepare and file, within a period of sixty days from the last day of its financial year, to the Registrar annual return in Form FC.4 along with such fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 containing the particulars as they stood on the close of the financial year.
Books of Accounts:
The provisions of Section 128 shall apply to a foreign company to the extent of requiring it to keep at its principal place of business in India, the books of account referred to in that section, with respect to monies received and spent, sales and purchases made, and assets and liabilities, in the course of or in relation to its business in India.
Registration of Charges:
Companies Act 1956: As per Section 600 read with Section 125 of the Companies Act 1956 charges on properties in India which are created by a Foreign Companies and charges on properties in India which is acquired by any Foreign Company shall be registered with Registrar.
Companies Act 2013: The provisions of Chapter VI shall apply mutatis mutandis to charges on properties which are created or acquired by any foreign company. As per Section 384 read with Section 77 of the Companies Act 2013 charges on properties which are created or acquired by any Foreign Companies whether situated in or outside India shall be registered with Registrar. Under Companies Act 2013 properties need not be situated in India. Foreign Companies shall register charges on properties which are created or acquired by Foreign Companies whether situated in or outside India with Registrar.
The provisions of Chapter XIV shall apply mutatis mutandis to the Indian business of a foreign company as they apply to a company incorporated in India.
Section 391: Application of sections 34 to 36 and Chapter XX
The provisions of sections 34 to 36 (both inclusive) shall apply to—
(i) the issue of a prospectus by a company incorporated outside India under section 389 as they apply to prospectus issued by an Indian company;
(ii) the issue of Indian Depository Receipts by a foreign company.
The provisions of Chapter XX (Winding Up) shall apply mutatis mutandis for closure of the place of business of a foreign company in India as if it were a company incorporated in India.
Section 392: Punishment for Contravention
Without prejudice to the provisions of section 391, if a foreign company contravenes the provisions of this Chapter, the foreign company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and in the case of a continuing offence, with an additional fine which may extend to fifty thousand rupees for every day after the first during which the contravention continues and every officer of the foreign company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees, or with both.
Provisions for raising capital
Typically, foreign companies operating in India do not access Indian capital markets. They can raise capital privately from Indian investors or banks and financial institutions in India.
In case they want to access capital publicly, they need to issue a prospectus. There are certain documents specified under Rule 11 of Companies (Registration of Foreign Companies) Rules, 2014 that shall be annexed to the prospects such as
- consent required from any person as 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,
- a copy of underwriting agreement etc.
Typically, securities issued are Indian Depository Receipts (IDRs) and not shares, because the company is incorporated offshore. Foreign company can make an issue of Indian Depository Receipts (IDRs) only when such company complies with the conditions mentioned under Rule 13 of Companies (Registration of Foreign Companies) Rules, 2014, in addition to the Chapter X of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and any directions issued by the Reserve Bank of India. IDRs have not been popular with only Standard Chartered Bank issuing them since the route has been made available to foreign companies.
A foreign company may be wound up as an unregistered company if it ceases to carry on business in India, whether the body corporate has been dissolved or otherwise ceased to exist as per the law under which it was incorporated. (Refer to section 376 of Companies Act, 2013)
Compliances under Foreign Exchange Management Act (FEMA) 1999
- An offshore business which has a direct Indian operation in India (and is not operating through an agent) will be treated as one of Liaison Office (LO), Branch Office (BO) or Project Office (PO), for which Reserve Bank of India (RBI) under provisions of the FEMA
- After establishment, all new entities setting up LO/BO/PO shall submit a report containing information, as per format provided in Annex 3 within five working days of the LO/BO becoming functional to the Director General of Police (DGP) of the state concerned in which LO/BO has established its office.
- Branch Offices / Liaison Offices have to file Annual Activity Certificates (AAC) (Annex 4) from Chartered Accountants, at the end of March 31, along with the audited Balance Sheet on or before September 30 of that year.AAC certifies that the company is undertaking only those activities which are permitted by the Reserve bank.
- At the time of winding up of Branch/Liaison/ Project Office the company has to approach the designated AD Category – I bank with the documents prescribed.
- Annual return on Foreign Liabilities and Assets has been notified under FEMA 1999 and it is required to be submitted by all the India resident companies which have received FDI and/ or made overseas investment in any of the previous year(s), including current year by July 15 every year. Non-filing of the return before due date will be treated as a violation of FEMA and penalty clause may be invoked for violation of FEMA.
Source: Companies Act, 2013 and rules made thereunder, Foreign Exchange Management Act, 1999 & rules made thereunder and RBI Guidelines
Disclaimer: This article contains interpretation of the Act, Rules and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.
About Author: The above has been compiled by CS Varun Kapoor, an Associate Member of ICSI. His areas of interest include Corporate and Allied Laws and advisory services vis a vis SEBI, Listing Agreement etc.. For any queries or suggestions, he can be approached at firstname.lastname@example.org, Contact No- 9899110705.