India: Key Provisions In The Companies Act 2013 Affecting The Foreign Residents Doing Business In India

The Companies Act 2013 brings a lot of new features, compliances, disclosures for foreign companies operating in India in any mode. The Central Government of India is promoting foreign investment in India and by coming out with a law, which is based on the principle of "Self Regulation Heavy Penalties", it seems that corporate culture and discipline will improve in the system. The government has liberalized many provisions in the act and given powers to the Board and shareholders to take a conscious and compliant decision without intervention of the Central Government in the best interest of company and its stakeholders.

1. Modes of entry for foreign Residents desiring to setup business in India

Foreign company can carry on business in India by the formation of a wholly owned subsidiary, subsidiary, a joint venture or a place of business as branch/liaison/project office after obtaining permission from Reserve Bank of India, if applicable. Below are different types of options with a foreign entity to operate their business in India which are permissible under Companies Act, 2013 read with the provisions of Foreign Exchange Management Act, 1999.

1.1 Company under the provisions of Companies Act 2013

1.1.1 Wholly Owned Subsidiaries

Wholly-owned subsidiaries are the result of the parent company owning all (100%) of the subsidiary's shares. Since the parent company owns all of the subsidiary's shares, it has the right to appoint the subsidiary's board of directors, which controls the subsidiary. Wholly owned subsidiaries may be part of the same industry as the parent company or part of an entirely different industry. A company operating in more than one country may choose to operate a business through a wholly owned subsidiary. The Investment is subject to compliance of FDI Policy.

1.1.2 Subsidiary

A foreign company can open up a subsidiary company in India. This can be done either by acquiring the majority of shares (more than 50%) of the company or by controlling the composition of board of directors of the company. Both holding and subsidiary companies are separate legal entities and they are related to each other by virtue of subsidiary –holding company relationship. The Investment is subject to compliance of FDI Policy.

1.1.3 Joint Venture

A foreign company can enter into India by forming a strategic alliance with an Indian partner. In general parlance, it is defined as a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. The ratio of foreign party in shareholding can be anywhere between 0 to 50%. By mutual agreement they may exercise control over the enterprise and consequently share revenues, expenses, assets & liabilities. It can be incorporated either as private limited company or public limited company which has to be registered under the Companies Act, 2013 and subject to exchange control regulations and Foreign Direct Policy of the Government of India. The Investments are subject to compliance of FDI Policy.

2.1 Limited Liability Partnership under Limited Liability Partnership Act, 2008

LLP is a hybrid between a corporate and partnership structure as it encircles elements of both. A corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in a flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership. This entity has to get registered under the Limited Liability Act, 2008. No foreign investment can be made in LLP unless prior approval of Foreign Investment Promotion Board is obtained.

3.1 Place of Business under Companies Act 2013 with the permission of RBI

3.1.1 Branch Office- A branch office refers to an establishment, which carries on substantially the same business and activity as is carried out by its Head Office. Such offices help the company in spreading its business to diverse locations and thus help in increasing the customer base and bringing its product closer to the customers by increasing their accessibility to it. Such Branch office can be opened only with the prior approval of RBI.

3.1.2 Liaison/ Representative Office- Foreign companies can also start their Indian operations by setting up a liaison (representative) office in India. The role of liaison office is limited to collecting information about possible market opportunities in India and providing information about the parent company and its products to the prospective Indian customers. It acts as a communication channel between the parent company and Indian companies. Such Liaison office can be opened only with the prior approval of RBI.

3.1.3 Project Office-'Project Office' means a place of business to represent the interests of the foreign company executing a project in India but excludes a Liaison Office. Foreign companies planning to execute specific projects in India can set up temporary project and site offices for this purpose. The RBI has granted general permission to a foreign entity for setting up a project office in India, subject to the fulfillment of certain conditions

3.1.4 Place of Business in electronic mode- A new dimension under Companies Act, 2013 The Companies Act 2013 has also widened the definition of foreign companies to include those having a place of business in India via an agent or through electronic mode, which means online services provided by foreign companies without opening a physical office in India also covered under the provisions of companies Act 2013. This would require foreign companies to comply with the maintenance of financial records and reporting requirements in India.

4.1 Other Important & Material changes under Companies Act, 2013

  • Foreign companies will now have an option to form private or public limited companies in India at their choice without any limitation like sec 4(7) of the companies Act 1956;
  • The Articles of Association may contain entrenchments provisions, regarding the alteration of specified provisions of articles, which means that they may be altered only if conditions restrictive than special resolution are met. So there is indirect recognition to veto powers provisions as contained in articles of association for protecting the interest of minority.
  • The subscribed capital has to be received by company within 180 days of such subscription.
  • Shares of a public company are freely transferable, provided any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract, which means "Tag along" or "Drag Along" rights as mentioned in shareholders' agreement will be enforceable as contract.
  • The minimum number of directors in case of public company and private company are same , however the Act, introduced a concept of One Person Company, where minimum 1 (one) director is mandatory, however as per rules no foreign resident can form a One Person company in India.
  • Mandatory one woman director on the board of every listed company and as per rules every other public company having a paid-up share capital of INR 100 crore or more or turnover of INR 300 or more.
  • Each Company to have at least one resident director who has stayed in India for a minimum period of 182 in previous calendar year.
  • Participation of director through video conferring is the welcome steps, which allow directors to attend the meeting from anywhere in the world, however it is also been stated that every director has to attend at least one board meeting physically in each 12 months.
  • The Board may appoint alternate director, if authorized by its articles or by a resolution passed by company in general meeting, not being a person holding any alternate directorship for any other director in the company, during the absence of a director, for a period of not less than three months from India.
  •  Director Responsibility Statement in Board report shall state that they had devised proper systems to ensure compliance with the provisions of all applicable laws and that such system were adequate and operating effectively.
  • CEO and CFO has been defined in the Act and covered in the category of KMP with wider responsibilities and liabilities.
  • The company can maintain its book of accounts in electronic mode.
  • A consolidated financial statement shall be produced at the Annual General Meeting, if the company has any subsidiary, associate company, joint venture in India or abroad along with the financial statement of the company and also attach with it a statement containing salient features of the financial statement of its subsidiary or subsidiaries.
  • The definition of financial year has been provided under the Act, where a company has to adopt a financial year starting form 1 April to 31 March. A period of two years as a transitional phase has been provided under the Act to comply with this provision, however companies having foreign subsidiary or are subsidiary of body corporate have an option to maintain different financial year to match the same with holding or subsidiary company with the permission of Tribunal.
  • An audit firm cannot be appointed for more than 2 consecutive terms of five years and individual auditor has to be rotated after the expiry of period of 5 years.
  • Cross Border Merger, means amalgamation of Indian Company with foreign company or vice versa has been allowed as per provisions of Companies Act 2013 subject to certain conditions.
  • Registered Valuer, with such qualification as prescribed by the Central Government, shall be appointed to do the valuation of property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities.
  • Class Action Suit under which a prescribed class of members or deposit holders will have the right to file a Class Action suit with the Tribunal.
  • Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of Dormant company.
  • A document may be served on a Company by sending it to the registered office of the company by registered post, speed post, courier service, leaving it at its registered office, electronic means any other mode as may be prescribed.
  • A company with net worth of Rs. 500 crores or more or turnover of Rs 1000 crores or more or net profit of Rs 5 crores or more during any financial year shall have to constitute a CSR committee and implement CSR policies. Such companies will have to spend at least 2% of the average net profits made by the company in the preceding three financial years in accordance with the CSR policy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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