iPleaders

Regulation of foreign companies doing

business in India under Companies Act,
2013
By Sonal Negi - July 11, 2014

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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

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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;

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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

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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.

Click Above

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

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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

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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.

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