Laws & Compliances provisions relating for Foreign ...Laws & Compliances provisions relating for...

Laws & Compliances provisions relating for Foreign Companies under the Companies Act 2013

Sagar NimkarWadia Ghandy & Co

N.M.Wadia Building ,123,M.G.Road,

Mumbai –400 [email protected]

mailto:[email protected]

Disclaimer

• Views expressed herein may not necessarily reflect views of the firm.

• A presentation which raises an idea or concept does not amount to opinion of the firm or the author but should be merely viewed as matters having potential possibility.

• Presentations are intended to be discussive not conclusive.• A presentation is not replacement for formal opinion of point of law

which may require to be addressed.• The information and views contained in the presentation are to be

viewed with caution. At times views expressed in the presentations are radical in order to have an appropriate impact on audience/spectators and hence should be appropriately considered.

Definition of Foreign Company

• Companies Act 1956Did not have any definition of Foreign Company.

As per Section 591 of Companies Act 1956 foreign company means companies incorporated outside India which have established place of business within India 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 company incorporated outside India and having an established place of business in India, is held by one or more citizens of India or by one or more bodies corporate incorporated in India, or by one or more citizens of India and one or more bodies corporate incorporated in India whether singly or in aggregate.

• Companies Act 2013 Defines Foreign Company for the first time.As per Section 2(42) of Companies Act 2013 “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 .

Definition of Foreign Company (cont.)

• As per Rule 2(1)(c) of the Companies (Registration of Foreign Companies) Rules 2014, for the purposes of clause (42) of Section 2 of the Companies Act 2013, “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 transaction 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 email, mobile devices , social media, cloud computing, document management, voice or data transmission or otherwise;

Definition of Foreign Company (cont.)

• As per Section 379 of Companies Act 2013, where not less than fifty percent of the paid 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 provisions of chapter XXII and such other provisions of Companies Act 2013 as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India.

Impact of New Definition of Foreign Company under Companies Act 2013

• Companies Act 2013 has expanded the scope of the definition of Foreign Company .

• Under the Companies Act 2013 need for physical presence has been done away with, as the company or body corporate incorporated outside India with no physical presence yet having virtual presence are covered under new definition of Foreign Company under Companies Act 2013.

• Companies in media and broadcasting business like Zee Entertainment Enterprise Limited which have foreign subsidiaries like Asia Today Limited which render satellite services to the group will now be covered under the new definition of Foreign Company under Companies Act 2013.

• Indian Asset Management Companies with foreign subsidiaries in countries like Singapore and Mauritius making investments in Indian securities or Indian mutual funds will now be covered under the new definition of Foreign Company under Companies Act 2013.

Impact of New Definition of Foreign Company under Companies Act 2013(Cont.)

• Online travel companies with joint venture with several airlines selling tickets of those airlines on their online portal will now be covered under new definition of Foreign Company under Companies Act 2013.

• Company or Body Corporate providing online coaching to Indian students will now be covered under new definition of Foreign Company under Companies Act 2013.

• Airline companies who operate through their booking agents in India will now be covered under new definition of Foreign Company under Companies Act 2013.

Subsidiary of Foreign Holding Company

• Companies Act 1956

As per definition of “Public Company” as given under Section 3 of the Companies Act 1956, Public Company means a company which is a private company which is a subsidiary of a company which is not a private company. These deemed public companies are viewed by law as public companies and are subject to all compliances as public company even though these companies are private companies.

As per Section 4(7) of the Companies Act 1956 , a private company being a subsidiary of a body corporate incorporated outside India ,which if incorporated in India would be a public company within the meaning of the Companies Act 1956 shall be deemed for the purposes of the Companies Act 1956 to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India.

Subsidiary of Foreign Holding Company(Cont.)

Therefore one can say that as per Section 4(7) of the Companies Act 1956, private company incorporated in India would be deemed public company if it is a subsidiary of a public company incorporated out side India except those private company whose entire share capital is held by a public company incorporated outside India whether alone or together with one or more other bodies corporate incorporated outside India. Foreign Companies used this provision to operate in India through subsidiaries which are private companies as per Section 4(7) of the Companies Act 1956


Companies Act 2013 does not have provision similar to Section 4(7) of the Companies Act 1956 .

As per proviso to Section 2(71) of the Companies Act 2013, a company which is a subsidiary of a company ,not being a private company, shall be deemed to be a public company for the purposes of the Companies Act 2013 even where such subsidiary company continues to be private company in its articles.


Therefore one can say that as per proviso to Section 2(71) of the Companies Act 2013 a subsidiary company will be a deemed public company if its holding company is not a private company even where such subsidiary company continues to be a private company by its articles.Therefore subsidiary company may remain private company by its own choice as far as internal matters are concerned e.g. it does not invite public to subscribe for any securities of the company but in the eyes of law it will be a deemed public company .• Clarification issued by Ministry of Corporate AffairsAs per clarification issued by Ministry of Corporate Affairs , an existing company being subsidiary of the company incorporated outside India registered under Companies Act 1956,either as private company or public company by virtue of the Section 4(7) of the Companies Act 2013 will continue as private company or public company as the case may be without any change in incorporation status of such company . The said clarification also clarifies that there is no bar in the Companies Act 2013 for a company incorporated out side India to incorporate subsidiary in India either as public company or a private company.


• Impact on Foreign Investment

Such ambiguity in law generally affects the foreign investments in India as Foreign Companies generally operate through private subsidiary companies in India .

Merger and Amalgamation


Section 394 of the Companies Act 1956 deals with reconstruction and amalgamation of companies. As per Section 394(4)(b) of the Companies Act 1956, “transferee company ’’ does not include any company other than a company within the meaning of Companies Act 1956; but “transferor company” includes any body corporate, whether company within the meaning the Companies Act 1956 or not. Therefore, one can say that Companies Act 1956 permitted a Foreign Company to merge into an Indian Company but Companies Act 1956 did not permit an Indian Company to merge into a Foreign Company.


Section 234 of the Companies Act 2013 allows Foreign Company to merge with Indian Company and Indian Company to merge with Foreign Company.

Prior approval of Reserve Bank of India is necessary.

Merger and Amalgamation(Cont.)

Terms and conditions of the scheme of merger may provide among other things, for the payment of consideration to the shareholders of the merging company in cash or in Depository Receipts or partly in cash or partly in Depository Receipts. Therefore one can say that Foreign Company can not issue shares to its Indian shareholders of the Transferor Company. For instance if Hindustan Unilever were to merge into Unilever(UK), Unilever (UK) can not issue its shares to shareholders of Hindustan Unilever.

Section 234 of the Companies Act 2013 allows merger and amalgamation between Indian Company and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government.


• Indian Depository Receipts(IDRs)

Now you could use IDRs to pay for outbound mergers. This will make IDRs more appealing. Today companies are not coming forward and tap the Indian capital markets on standalone basis and have IDRs. Standard Chartered Bank PLC UK is the only Foreign Company to have issued IDRs in India. Therefore IDRs in the pretext of Merger and Amalgamation could actually be more positive

• Taxation

In India Amalgamation enjoys tax neutrality if the amalgamating company(ies) transferring the assets, the amalgamated company should be an Indian Company. In addition, the shareholders of amalgamating company are allotted shares in the amalgamated company and such shares are allotted in consideration of surrender of shares in the amalgamating company. Tax Law needs to change to say that if an IDR is issued on merger it is tax neutral for the Indian shareholders


• Securities LawsDual listing should be made possible. Securities laws should be amended to this extent.• FEMAUnder FEMA rules branch of the Foreign Company can under take very limited prescribed following activities:i. Export / Import of goods.ii. Rendering professional or consultancy services.iii. Carrying out research work, in areas in which the parent company is engaged.iv. Promoting technical or financial collaborations between Indian companies and parent or

overseas group company. v. Representing the parent company in India and acting as buying / selling agent in India. vi. Rendering services in information technology and development of software in India. vii.vii. Rendering technical support to the products supplied by parent/group companies. viii.viii. Foreign airline / shipping company. Normally, the Branch Office should be engaged in the activity in which the parent company is engaged. Therefore activities which can be undertaken by these branches are very limited. Branch offices are not on par with subsidiary company or company incorporated in India. Therefore FEMA rule should be amended to such extent.


• Permanent Establishment

Permanent Establishment means a fixed place of business through which business of an enterprise if wholly or partly carried on and includes a branch or an office.

The profits of an enterprise of a Contracting Party shall be taxable only in that state unless the enterprise carries on business in the other Contracting State through a permanent establishment situated there. If the enterprise carries on business as aforesaid , the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to

a. that Permanent Establishment ;

b. sales in the other state of goods or merchandise of the same or similar kind as those sold through that Permanent Establishment ;

c. other business activities carried on in the other State of the same or similar kind as those affected through Permanent Estalishment.


Therefore when an Indian Company merges with a Foreign Company , the Branch Office of the merged company continues its business operations in India. The profits from the Branch Office situated in India will be taxed in India under Section 9 of the Income Tax Act 1961.

The profit arising may once again be taxed in that other State.


• Notified Jurisdictions

Section 234 of the Companies Act 2013 allows merger and amgalmation between companies registered under Companies Act 2013 and companies incorporated in jurisdictions of such countries as may be notified from time to time by the Central Government. There should not be any restriction on jurisdiction for inbound merger because Companies Act 2013 more transparency and more disclosures. Central Government mostly not notify tax heaven countries in list of jurisdictions.

• Demerger

Section 234 talks about merger and amalgamation with Foreign Company. All other provisions regarding merger and amalgamation say that the same provisions will be applicable to demerger. This is the only Section where demerger is not covered.

More Compliance under Companies Act 2013 for Foreign Companies

• Companies Act 1956As per Section 592 of Companies Act 1956 every Foreign Company carrying on business in India needs to file the following documents with Registrar :a. A certified copy of the charter , statues or memorandum and articles, of the

company or other instrument constituting or defining constitution of the company if the instrument is not in English language , a certified translation thereof;

b. The full address of the registered or principal office of the company c. List of director or secretary of the company.d. Name and address or the names and addresses of some 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.

e. the full address of the office of the company in India which is to be deemed it principal place of business in India.

More Compliance under Companies Act 2013 for Foreign Companies(cont.)

• Companies Act 2013 As per Section 380 of the Companies Act 2013 , every foreign company shall within thirty days of the establishment of its place business in India, deliver to the Registrar for registration-a. A certified copy of the charter , statues or memorandum and articles, of the company or other

instrument constituting or defining constitution of the company if the instrument is not in English language , a certified translation thereof;

b. The full address of the registered or principal office of the company ;c. List of director or secretary of the company;d. Name and address or the names and addresses of some 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;

e. the full address of the office of the company in India which is to be deemed it principal place of business in India;

f. Particulars of opening and closing of place of business in India on earlier occasion or occasions(New)g. Declaration that none of the directors of the company or the authorised representative in India has ever

been convicted or debarred from formation of companies and management in India or abroad; and (New)

h. Any other information as may be prescribed,(New) As per Section 384(2) of the Companies Act 2013 read with Rule 7 of Companies (Registration of Foreign Companies) Rules 2014 every Foreign Company is required tom prepare and file within period of 60(sixty days) form the last day of its financial year to the registrar return in prescribed Form FC-4 along with the prescribed fee.

Registration of Charges


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.


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.

Accounts of Foreign Company

• Companies Act 1956 As per Section 594 of the Companies Act 1956 , every Foreign Company shall, in every calendar year make out a balance sheet and profit and loss account as per Schedule VI of the Companies Act 1956. • Companies Act 2013As per Section 381 of the Companies Act 2013 read with Rule 4 of the Companies (Registration of Foreign Company) Rules 2014 every Foreign Company shall prepare a balance sheet , profit and loss account of its Indian Business Operations in accordance with Schedule III of the Companies Act 2013 or as near thereto as may be possible for every financial year.As per Rule 4 of the Companies (Registration of Foreign Company) Rules 2014, every financial company shall along with the financial statement required to be filed with Registrar, attached thereto the following documents:

a. Statement of Related Party Transaction;b. Statement of Repatriation of Profits;c. Statement of Transfer of Funds (including dividend if any) in relation of any fund transfer

between place of business of Foreign Company in India and any other related party of foreign company out side India including its holding, subsidiary and associate company.

Accounts of Foreign Company(Cont.)

As per Section 2(41) of the Companies Act 2013 “financial year” ,in relation to any company or body corporate means , the period ending on the 31st day of March every year , and where it has been incorporated on or after 1st day of the January of a year , the period ending on the 31st day of March of the following year , in respect whereof financial statement of the company or body corporate is made up:

As per proviso to Section 2(41) of the Companies Act 2013, on an application made by a company or body corporate which is holding company or a subsidiary of a company incorporated outside India and is required to follow different financial year for consolidation of its accounts outside India , the Tribunal may , if it is satisfied ,allow any period as its financial year ,whether or not that period is a year.

Prospectus

• Companies Act 1956As per Section 603 of the Companies Act 1956, no Foreign Company shall issue, circulate or distribute in India any prospectus offering for subscription of shares in or debentures of a Foreign Company unless the prospectus is dated and contains particulars with respect to the following matters-i. the instrument constituting or defining the constitution of the company;ii. the enactments or provisions having the force of enactments, by or under which the

incorporation of the company was effected;iii. an address in India where the said instrument, enactments or provision, or copies thereof,

and if the same are not in English, a translation thereof certified in the prescribed manner can be inspected;

iv. the date on which and country in which the company was incorporated;v. Whether the company has established a place of business in India and, if so, the address of

principal office India; and States the matters specified in part I of Schedule II and sets out the reports specified in part II of Schedule II subject to provisions contained in part III of the Schedule.In the event of non-compliance with or contravention of any of the above requirements ,a director or other person responsible for the prospectus shall not incur any liability by reason of the non compliance or contravention, if –a. As regards any matter not disclosed, he proves that he had no knowledge thereof ; or

Prospectus(Cont.)

b. he proves that the non-compliance or contravention arose from an honest mistake of fact on his part; or

c. the non-compliance or contravention was in respect of matters which, in the opinion of the Court dealing with the case, were immaterial, or was otherwise such as in the opinion of that Court, having regard to all circumstances of the case, reasonably to be excused.


As per Section 387 of the Companies Act 2013, no person shall issue, circulate or distribute in India any prospectus offering to subscribe for Securities of Foreign Company, unless the prospectus is dated and singed, and contains particulars with respect to the following matters, namely:

i. the instrument constituting or defining constitution of the company;

ii. the enactments or provisions by or under which the incorporation of the company was effected;

iii. address in India where the said instrument, enactments or provisions or copies thereof , and if the same are not in the English language can be inspected;

iv. the date on which and the country in which the company would be or was incorporated: and

v. whether the company has established place of business in India, and, if so, the address of its principal office in India; and

States the matters specified under Section 26 of the Companies Act 2013

Prospectus(Cont.)

There are no exceptions given under Section 387 in case of non compliance or contravention of any of the above requirements by a director or other person responsible for prospectus.

Penalties and Punishment for Contravention


As per Section 598 of the Companies Act 1956, if any Foreign Company fails to comply with any of the provisions of Section 591 to Section 597 of the Companies Act 1956 then the Company and every officer or agent of the company who is in default shall be punishable with fine which may extend to ten thousand rupees and in case of a continuing offence , with an additional fine which may extend to one thousand rupees for every day during which the default continues.

As per Section 606 of the Companies Act 1956 , any person who is knowingly responsible for the issue, circulation or distribution of a prospectus; or for the issue of a form of application for shares, debentures or Indian Depository Receipts in the contravention of the provisions of Sections 603 ,604 ,605 and 605A shall be punishable with imprisonment for a term which may extend to six months ,or with the fine which may extend to fifty thousand rupees or with both.

Penalties and Punishment for Contravention(Cont.)


As per Section 392 of the Companies Act 2013,without prejudice to the provisions of Section 391 ,if Foreign Company contravenes the provisions of Chapter XXII , then 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 case of 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 both .Therefore one can say that amount of penalties and quantum of punishment has increased under Companies Act 2013.

Corporate Social Responsibility

• As per Section 135 of the Companies Act 2013 every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more director, out of which at least one director shall be an independent director.

• As per Rule 3 of the Companies ( Corporate Social Responsibility Policy) Rules 2014 including its holding or subsidiary and a Foreign Company asdefined under clause 42 of Section 2 of the Companies Act 2013 having its branch office or project office in India which fulfils the criteria specified under subsection (1) of Section 135 of the Companies Act 2013 shall comply with provisions of Section 135 of the Companies Act 2013 and Companies (Corporate Social Responsibility Policy) Rules 2014

Corporate Social Responsibility(Cont.)

• As per Rule 2(f) of Companies(Corporate Social Responsibility Policy) Rules 2014, Net Profit in case of Companies other than Foreign Companies for the purpose of Section 135 (1) of Companies Act 2013 means net profit of the company as per its financial statements prepared in accordance with the applicable provisions of the Companies Act 2013 but shall not include the following namely:i. Any profits arising from any overseas branch or branches of the company

whether operated as separate company or otherwise; andii. Any dividend received from other companies in India which are covered and

complying with the provisions of the Section 135 of the Companies Act 2013.• As per proviso to Rule 2(f) and proviso to Rule 3 of Companies (Corporate Social

Responsibility Policy) Rules 2014, net worth, turnover and net profits of Foreign Company shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance with clause(a) of subsection (1) of Section 381 and Section 198 of the Companies Act 2013. Therefore, the abovementioned profits and dividend which are excluded for calculation of Net Profits for companies other than Foreign Companies for the purpose of Section 135(1) of the Companies Act 2013 are not excluded for the purpose of the calculation of the Net Profit for the Foreign Company for the purpose of Section 135(1) of the Companies Act 2013.

Corporate Social Responsibility(Cont.)

• For Foreign Company CSR committee shall comprise of at least two persons of which one person shall be a person resident in India authorised to accept on behalf of the Foreign Company service of process and any notices or other documents required to be served on the Foreign Company under Section 380 (1) (d) of Companies Act 2013 and another person shall be nominated by the Foreign Company.

• As per Rule 8 of Companies (Corporate Social Responsibility Policy) Rules 2014 ,the Board’s Report of the Company other than Foreign Company pertaining to the financial year shall contain an annual report on CSR containing particulars specified in the Annexure of Companies (Corporate Social Responsibility Policy) Rules 2014.

• As per Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules 2014 in case of Foreign Company balance sheet filed under Section 381(1)(b) shall contain an Annexure regarding report on CSR.

Winding Up

• As per Section 376 of the Companies Act 2013, where body corporate incorporated outside India which has been carrying on business in India, ceases to carry on business in India , it may be wound up as an unregistered company under Part II of the Chapter XXI of the Companies Act 2013.

• Therefore, Foreign Company can not be wound up voluntarily under the Companies Act 2013.

• As per Section 375 of the Companies Act 2013 ,Foreign Company may be wound up on the following grounds:

a. if the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affair.

b. If the company is unable to pay its debts;

c. If the tribunal is of the opinion that it is just or equitable that the company should be wound up.

Thank You

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