Companies Bill redefines how foreign companies carry out business in India

01 October, 2013

The long-pending Companies Bill finally received the approval of both the houses of the Parliament and the presidential ascent recently. Of the 470 sections included in the Bill, a large number of sections are dependent upon rules, which are yet to be finalised. Accordingly, it was expected that the Bill will be notified in a phased manner and that it will take some time before it entirely replaces the more-than-five-decade old Companies Act, 1956 (Old Act). The Ministry of Corporate Affairs (MCA) notified the Companies Act 2013 (New Act) in the official gazette the next day after receiving the presidential ascent.  Further, in a flurry of other announcements, the MCA released a set of draft rules in respect of some of the provisions in the New Act, followed it up by notifying additional 98 sections of the New Act and then released one more set of draft rules for some other provisions in the New Act.  These clearly indicate the desire on the part of the government and MCA to implement the New Act and to replace the Old Act as soon as possible. The New Act is progressive and inclusive. It considers needs of the business and includes concepts like One Person Company and Small Companies. It inter alia includes provisions for social welfare activities, encourages appointment of women directors, casts significant obligations on independent directors and auditors and empowers investors against any frauds committed by promoters. It is clear that the New Act will change the way business is undertaken in India, be it for stakeholders or regulators.

As regards foreign entities undertaking business in India, the subject of our discussion, the New Act contains provisions to regulate their activities in India. While at first read it may appear that these provisions are similar to the ones contained in the Old Act, these provisions are expansive in the New Act.

The New Act expands the scope of these provisions to a larger universe. These are expanded to apply to other entities like foreign limited liability partnerships incorporated outside of India. Further, these provisions will now apply to foreign entities establishing even a virtual presence in India either through electronic mode or through an agent.

The provisions related to presence through physical office and the applicability of the associated compliance are similar to the Old Act and hence, clear; however, there is a significant level of ambiguity as to the applicability of these provisions to foreign entities establishing a virtual presence. It is unclear as to what kind of agency relationship in India or what type of presence in India through electronic mode will constitute a place of business in India.

Literally read, these provisions could get triggered where a foreign entity appoints a service provider who in performance of its services acts as an agent of such a foreign entity and such a foreign entity could be liable to comply with the above provisions. This will be so, regardless of whether the Indian agent acts in similar capacity for multiple clients and is legally and economically independent of its clients. For example, shipping/airline companies that operate through their booking agents in India could be subject to the above provisions.

Further, the provisions also include companies carrying on business in India through electronic mode. These provisions could extend to foreign entities that operate online selling portals, search engines, data subscription portals, etc so long as these have any Indian customer, even though some of these may be targeting customers primarily from other countries and not from India.

Given the intention of the government to regulate all foreign entities that undertake business in India by establishing a place of business in whichever way and given that with the advent of technology there are several newer ways of doing businesses, the provisions had to be broad; however, the current provisions are extremely broad and can cover within their ambit unintended foreign entities as well as discussed earlier.

Where a foreign entity qualifies as a ‘foreign company’, it will be required to undertake prescribed compliances and will be subject to other provisions in this regard.  The compliances under the New Act including seeking registration with the RoC, maintaining books of account and submitting audited accounts periodically are largely similar to the ones prescribed under the Old Act.  Similarly, the provisions relating to registration of charges, investigations, etc as applicable under the Old Act will continue to apply. 

Under the New Act, entities incorporated outside India (as companies) are permitted to invite public in India by issuing prospectus to subscribe to their securities (the Old Act permitted issue of shares and debentures only), subject to prescribed conditions. Further, like the Old Act, the New Act prescribes penal consequences for non-compliance for the foreign entities. However, the amount up to which penalty could be levied has been significantly increased under the New Act. The New Act also provides for penal consequences as well as imprisonment for officers of such foreign companies. Further, the Old Act provided for some safeguards for the persons responsible for issuing the prospectus from being liable to penal consequences arising out of non-disclosure/non-compliance – these have been omitted in the New Act.  The New Act extends the applicability of the ‘winding up’ provisions to closure of place of business in India for foreign entities – accordingly, closure of the place of business in India by any foreign company would require a prior approval from a Tribunal.

There was an expectation that the draft rules will provide some clarity on the above; however, it appears that the draft rules don’t throw any light on any of the above issues.

However, it remains to be seen as to how foreign entities sans any physical presence in India will comply with the above provisions and associated compliances.

In summary, though the New Act intends to be more effective by ensuring strong hold of the regulators on the foreign entities undertaking business in India, the same also has the potential to cause hardship and unnecessary inconvenience for the foreign companies which until now have not been subject to such stringent regulations in India.

(Kalpesh Desai is Partner and Samudra Acharyya is Vice President, BMR Advisors. )

To become a guest contributor with VCCircle, write to shrija@vccircle.com.


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Companies Bill redefines how foreign companies carry out business in India

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