HSBC office in Kolkata. Photo credits: Drgarga
This article is written by Megha Bhatia, a student of Amity Law School, Noida.
Foreign companies which undertake business activities in India or invest in Indian businesses need to comply with certain Indian laws. For example, at the time of making an investment in India or setting up an Indian office, the foreign company needs to comply with the Foreign Exchange Management Act (FEMA). FEMA also requires foreign companies in India to comply with certain procedural and filing requirements on a periodic basis when they conduct operations in India. Similarly, if the company sells products or services in India and has an office in India, it will have to comply with Indian tax laws. Similarly, it will be required to comply with local regulations if it has an office (such as a Shops and Establishment Registration).
Does the Companies Act apply to such companies, considering they are incorporated outside India?
Understanding the definition of foreign company under Companies Act, 2013
A foreign company is a company which is incorporated outside India but having its place of business (including a share transfer or an office registered with a regulatory authority) in India. Under the Companies Act 2013, a foreign company means any company or body corporate incorporated outside India which has a place of business in India, either of its own or if it conducts business through an agent, physically / electronically or any other manner. However, all foreign companies are not required to comply with the Companies Act, it is only applicable to foreign companies where 50% or more of the paid-up share capital (calculated by including preference shares) is held by Indian entities.
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.
(For further details, refer to Sections 379-393 of Companies Act, 2013 deals with the provisions relating to the control and regulation of companies incorporated outside India.)
Filing and Compliance Requirements
There are 4 major filing and compliance-related requirements that foreign company needs to comply with:
1)Delivery of documents to Registrar:
Every foreign company has to deliver the following documents to the registrar for registration within 30 days from the establishment of place of business in India-
i)Instruments constituting and defining the constitution of the company. For example, a UK incorporated company will have to file its memorandum and articles (as they exist under UK law) with the RO.
ii) Full address of the principal office of the company;
iii) A list of the directors and secretary of the company.
iv The name and address of the person resident in India who has been authorized to accept documents on behalf of the company
This is important because a notice or other document shall be deemed to be sufficiently served on the foreign company if it is addressed to a person whose name and address has been delivered to the Registrar.
(Refer to Section 380 for a detailed list of documents).
If the documents are not in English a certified translation in English must be submitted.
A foreign company must comply with section 34 to 36 which states that issue of prospectus by a foreign company will be treated as if the prospectus is issued by an Indian company.
2) Books of account and records of foreign company
Every foreign company must prepare a balance sheet and profit and loss account and attach necessary documents and file them with the ROC (with suitable translations in case they are not in English). This must be accompanied by a copy of the list of all offices or places of business in India.
It must also keep at its principal place of business in India (e.g. Indian head office) the books of account which reflect receipts and expenditure, details of sales and purchases and assets and liabilities in connection with Indian operations.
3) Display of name
Name of the company and the country in which it is incorporated shall be exhibit on the outside of every office and place where it carries on business. It shall also be stated in all its official publication. Example: business letters, bill heads, notices etc. It shall be in letters easily legible in English characters, and also in the characters of the language or one of the languages in general use in the locality in which the office or place is situated.
Consequences of non-compliance
Non-compliance has the following consequences:
a) The company will be punishable with fine ranging between INR 1 lakh to 3 lakhs. If the violation continues an additional fine of up to INR 50,000 per day can be levied.
b) Specific officers who are in default shall be punishable with imprisonment of up to 6 months or fine ranging between INR 25,000 to INR 5,00,000.
c) The company will not be able to institute legal proceedings in connection with any contracts entered by it. However, the validity of the contracts will not be affected and the other party can sue on it.
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 (Refer 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 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.
For more details, see: Companies (Registration of Foreign Companies) Rules, 2014
Winding up
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)
Overview of compliance requirements under foreign exchange laws
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 Foreign Exchange Management Act (FEMA) 1999.
Compliance requirements under FEMA are mentioned below:
1.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.
2. 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.