What is a Foreign Company Under the Companies Act?

[This guest post is contributed by Ananya Banerjee, who is a Fifth
year B.A.LLB(H) Student, Department of Law, University of Calcutta.
The post relates to an interpretation of certain provisions
of the Companies Act, 2013, and represents the view of the author, which have
been backed up by arguments and reasoning. The possibility of alternative views
and interpretation cannot be ruled out]
This
post deals with some issues arising out of Chapter 22 of the Companies Act,
2013 (“Act” or “New Act”) and examines the same in the light of the provisions of
the Companies Act, 1956 (“Old Act”).
Definition of Foreign Companies
Definition of Foreign Companies
under the Old Act
: The definition Section of the Old Act does not
define foreign companies. However, Section 591 lays down that, all foreign
companies mentioned therein shall have to comply with the provisions of
Sections 592 to 602. Subsection 1 clarifies that foreign companies shall mean
the following two classes of companies:
a)   companies incorporated outside India which,
after the commencement of the Old Act, establish a place of business within
India; and
b)   companies incorporated outside India which
have, before the commencement of the Old Act, established a place of business
within India and continue to have an established place of business within India
at the commencement of the Old Act.
Hence,
Section 591(1) was held to be the definition section for the purpose of foreign
companies under the Old Act. Hence, under the Old Act a foreign company is:
i.    a company incorporated outside India;
and
ii.   having a place of business in India, whether
established before the commencement of the statute, or afterwards.
Definition of Foreign Companies
under the Act
: The Act clearly defines a foreign company
under Section 2(42). A foreign company is 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.
Hence,
a foreign entity to be considered as a foreign company, has to fulfill both the
criteria mentioned above, i.e., having a place of business in any manner
specified above, and conducting any business activity in India.
Scope of the Two Definitions: The
scope of definition of the foreign company has been expanded to a great extent
under the Act. While the Old Act only referred to a company, the New Act refers
to a company or any body corporate incorporated outside India. Hence, other
foreign entities can also be treated as a foreign company under the New Act,
subject to the other conditions. Moreover, the old definition mentioned only
about a place of business. A place of business could traditionally mean place
of business like a branch office, liaison office or a project office or similar
place of business. The New Act is drafted during a time when electronic modes
of business have achieved tremendous popularity and it is possible for entities
incorporated outside India to carry out business activities without having any physical
presence in India. In order to monitor all such foreign entities, the Act
defines a foreign company as a foreign body corporate (or company) which has a
place of business by itself or through its agents. In addition to that, it also
includes a place of business kept through electronic mode. The Companies
(Registration of Foreign Companies) Rules, 2014 has further explained the term
electronic mode as any of the transactions mentioned below, carried through an
electronic mode:
– 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,
Such
transactions would be considered as having a place of business in electronic
mode, irrespective of whether they are conducted by e-mail, mobile devices,
social media, cloud computing, document management, voice or data transmission
or otherwise. Further, the scope of keeping a place of business through
electronic mode is not restricted within the definition given above. The
definition of electronic mode lays down that it shall include the
abovementioned transactions but shall not be restricted to such transactions.
Thus, the provisions of the New Act, read with the rules made thereunder have
included all those foreign entities which (i) maintain a place of business in
India, either through themselves or through their agents, either physically or
through various electronic modes; and (ii) which carry out any business
activity in any manner in India.
Foreign Companies having 50%
Indian Ownership
Position under the Old Act: As
provided under Section 591(2) of the Old Act, the foreign companies 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 the aggregate
”, such companies were treated as companies incorporated in
India with respect to the business conducted by them in India. If we analyse
the provisions of this sub-section, we see that foreign companies where 50% of
the total paid-up share capital (calculated on a fully diluted basis) is owned
by Indian entities or Indian citizens, whether in aggregate or by one such
person or entity, were treated as Indian companies with respect to the business
conducted by them in India. The rights and liabilities of such companies were
similar to that of Indian companies and they did not have to comply with the
provisions of Sections 592 to 602 of the Old Act.
The
Old Act was operative during a time period where Indian entrepreneurs hardly
owned or controlled foreign entities and so, this privilege was available to
those few entities which fulfilled the abovementioned conditions. However, with
the growth of Indian economy, Indian entities and individuals started
establishing and controlling foreign entities. In addition to that, due to the
privilege of being treated as an Indian company within the purview of the Old
Act, some Indian individuals (also, entities) established business in tax
saving countries just to evade Indian taxation regime, although they made India
their principal place of business.
Position under the New Act: The position
of the foreign companies, under the Act, where Indian entities or individuals
or both own at least 50% of the paid-up share capital, calculated on a fully
diluted basis, is radically different than under the Old Act. As per the
provisions of Section 379 of the Act, such companies will have to comply with
the provisions of Chapter XXII of the Act, as well as such other provisions as
may be prescribed with regard to the business carried out by those companies in
India, as if they were incorporated in India. Hence, these foreign companies
not only have to follow the provisions applicable to the foreign companies,
they would also have to follow the provisions applicable to the Indian
companies, as prescribed under the Act. So, evidently, the compliance requirements
have been increased for this type of foreign companies and thus, the Indian
citizens or individuals would have to keep these issues in my while structuring
their foreign operations.
Dealing with the Confusion
The
heading of Section 379 says ‘Application of Act to Foreign Companies’, which
has considerably created a confusion in many minds whether the provisions of
Chapter 22 of the Act would be applicable to only those companies mentioned
under that Section or to all foreign companies coming under the purview of the
definition. Several articles have adopted the position that the provisions of
that Chapter are applicable only to the companies mentioned under Section 379.
However, I beg to differ. One cannot interpret a full chapter reading the
heading of one Section. The heading may only be interpreted for the purpose of
that Section and not for other sections. Moreover, the Chapter heading does not
specify foreign companies having 50% Indian ownership. It says ‘Companies
Incorporated outside India’. The subsequent Sections also do not specify that only
those foreign companies mentioned under Section 379 of the Act would have to
follow the provisions of Chapter 22. It says foreign companies and it would
naturally mean the foreign entities defined to be foreign companies under the
definition section.
If,
for the sake of argument, we say that the Chapter is applicable only to such
companies where Indian citizens and entities have at least 50% ownership, then
what happens to those foreign entities which do not have such ownership and yet
operates within India? Does the Act exempt all such foreign companies? Wouldn’t
such companies have any liability under the Act? Even the Old Act provided
enough provisions to control the activities of foreign companies operating in
India. Then why would the New Act not provide the necessary provisions? Is it a
feasible conclusion that foreign entities having a place of business in India
and conducting business in India would not be accounted for their activities
conducted in India? The answer is ‘NO’. It is not a feasible conclusion.
The
provisions of the New Act are more extensive than the Old Act and so is the
case for foreign companies. Chapter 22 of the Act, thus, would be applicable to
all the foreign entities coming under the purview of the definition of foreign
companies as given in the New Act, including those foreign companies where at
least 50% ownership belongs to Indian citizens and/or entities.
Example 1: Now,
let me try to further explain this through some examples. Suppose A is a
foreign company, i.e. a foreign entity having a place of business in India and
conducting business in India. Mr. X, Ms. Y and M/s. Z are the shareholders of A
where Mr. X holds 50%, Ms. Y holds 30% and M/s. Z owns the rest, i.e. 20%. Now,
suppose Mr. Y is an Indian citizen and M/s. Z is an Indian company. So, total 50%
of the ownership of A belongs to Indian individuals and Indian entities in
aggregate.
Under
the provisions of Section 591 of the Old Act, A would be treated as a foreign
company. Yet, it would be treated as a company incorporated in India for the
purpose of the business conducted by A in India, as provided under Sub-section
2 of Section 591 and would not have to comply with the provisions laid down in
Sections 592 to 602 of the Old Act.
Under
the provisions of Section 379 of the New Act, however, A would have to comply
with the provisions of Chapter 22 of the New Act in addition to such other
provisions as prescribed for the companies incorporated in India (only with
regards to the business conducted in India). So, A would not be exempted from
the provisions of Sections 380 to 393 of the Act, unlike the Old Act.
Example 2: If
however, there is still any confusion, then let us consider one more example.
Suppose Company A, Company B, Company C and Company D are all incorporated
outside India. In Company A, Indian entities and citizens hold 50% of the total
paid-up share capital. In Company B, an Indian individual owns 40% of the total
paid-up share capital. In Company C, Indian entities own 70% of the paid-up shareholding
capital and in Company D, no Indian entities or individuals own any securities.
Now, while Company A, Company B and Company D – all of them conduct business
activities in India and have places of business in India, through electronic
mode or otherwise, Company C does not carry out any business activity in India.
As per the provisions of the New Act, each of the companies shall have the
following responsibilities:
Company
A
:
It has a place of business in India and conducts business activity in India.
So, it is a foreign company which also complies with the provisions of Section
379 of the Act. Hence, it would not only have to comply with the provisions of
Chapter XXII, it’d also have to comply with such other prescribed provisions as
are applicable to Indian companies with regards to its business conducted in
India.
Company
B
:
It has a place of business in India and conducts business in India. However, it
does not fulfill the conditions of Section 379. So, it would not have to comply
with the provisions applicable to Indian companies, as prescribed, although, it
would still have to comply with the provisions of Chapter 22 of the Act.
Company
C
:
It does not carry out any business activity in India. Hence, even though more
than 50% of the paid-up share capital belongs to Indians, it would not be a
foreign company within the meaning of the New Act.
Company
D
:
Company D has a place of business in India and conducts business activities in
this country. But it does not fulfill the conditions of Section 379. However,
it would still have to comply with the provisions of Chapter 22 applicable to
foreign companies.
Conclusion
This
post does not delve into the details as to what are the duties and
responsibilities of foreign companies under the New Act as the other provisions
of Chapter 22 of the Act are pretty clear. Every foreign company or body
corporate which is conducting business in India and has a place of business (in
any manner discussed in this post) shall now have to comply with the provisions
of the Chapter which would necessarily include the foreign entities owned or
controlled (at least 50% of the paid-up share capital should belong to Indian
citizens and/or entities) by Indian entities or individuals or both.

Ananya Banerjee

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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