May 29, 2024

INDIA TAAZA KHABAR

SABSE BADA NEWS

Regulatory Framework for Foreign Companies under Companies Act 2013

6 min read

The Indian government has undertaken significant initiatives to enhance the nation’s investment environment, leading to a remarkable ascent in the World Bank’s Ease of Doing Business ranking from 142nd place in 2014 to 63rd in 2022, as documented in the World Bank’s Business Report 2022. Alongside, India boasts one of the most extensive arrays of tax treaties globally and has relaxed norms governing foreign direct investment (FDI).  This article delves into the provisions delineated in Chapter XXII of the Companies Act, 2013, governing the establishment and commencement of operations by foreign companies in India. We will explore crucial aspects together, such as registration, financial disclosure, authorized representatives, corporate social responsibility, and other pertinent facets.
According to section 2(42) ‘Foreign company” means any company 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.
To be considered as a foreign company in India, a company must meet three conditions. Specifically, the company must:
1. Have been incorporated outside India.
2. Have a place of business in India.
3. Conduct business activities in India.
Rule 2(1)(c) of Companies (Registration of Foreign Companies) Rules, 2014 defines “electronic mode” for the purposes of section 2(42) of the Act. Electronic mode means carrying out electronically based or digital based,
(i) business to business and business to consumer transactions, data interchange and other digital supply transactions;
(ii) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India;
(iii) financial settlements, web-based marketing, advisory and transactional services, database services and products, supply chain management;
(iv) online services such as telemarketing, telecommuting, telemedicine, education and information research; and
(v) all related data communication services,
whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise. Location of server can be in India or outside India.
Electronic mode shall not include electronic based offering of securities, subscription thereof or listing of securities in the International Financial Services Centres set up under section 18 of the Special Economic Zones Act, 2005.
Some specified foreign companies conducting business in India are treated as if they were incorporated in India. Specified foreign companies are defined as those in which at least 50% of the paid-up share capital is held, either individually or collectively, by one or more citizens of India, or by one or more companies or bodies corporate incorporated in India, or by a combination of both.  Paid-up capital can consist of equity shares, preference shares, or a combination of both equity and preference shares. Such foreign company shall also comply with the provisions of Chapter XXII and such other provisions of this Act as may be prescribed for the business they conduct in India.

Required Documents for Foreign Company Registration in India
According section 380 every foreign company for its registration shall deliver the following documents in the English language to the Registrar having jurisdiction over New Delhi within 30 days of establishment of its place of business in India in Form No. FC-1 along with the required fee.;
(a) a certified copy of the charter, statutes or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company.
(b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company containing such particulars as may be prescribed;
(d) the name and address or the names and addresses of one or more persons resident in India authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company;
(e) the full address of the office of the company in India which is deemed to be its principal place of business in India;
(f) particulars of opening and closing of a place of business in India on earlier occasion or occasions;
(g) declaration that none of the directors of the company or the authorised representative in India has ever been convicted or debarred from formation of companies and management in India or abroad;
(h) an attested copy of RBI’s approval under the Foreign Exchange Management Act, 1999 or Regulations, and also from other regulators, if necessary, for establishment of place of business in India or a declaration from the authorised representative of such foreign company that no such approval is required; and
(i) any other information as may be prescribed.
Where any alteration is made in the above-delivered documents, such alteration shall be reported to the registrar within 30 days of the alteration using Form No. FC-2, along with the prescribed fee for registration.
Accounts of Foreign Company
According to section 381 read with the Companies (Registration of Foreign Companies) Rules, 2014, every foreign company within a period of 6 months from the end of every financial year shall file in Form No. FC-3 to registrar following documents;
(1) Financial statement of its Indian business operations prepared in accordance with schedule III,
(2) Latest consolidated financial statements of the parent foreign company in English language,
(3) Statement of related party transaction,
(4) Statement of repatriation of profits,
(5) Statement of transfer of funds (including dividends if any), and
(6) A list of all the places of business established by the foreign company in India as on the date of balance sheet.
Registrar may extend the 6 months period by a period not exceeding 3 months. It is important to note that a foreign company with its business presence in India may not necessarily follow a March 31st financial year, provided it has obtained the necessary approvals from the Central Government.
Annual Return of Foreign company
The annual return in Form No. FC-4 shall be filed with the registrar by every foreign company within 60 days from the last day of its financial year. The return shall state the matters specified under section 92.
Corporate social Responsibility of Foreign company
Every foreign company shall spend on the activities specified in Schedule VII in each financial year 2% of the average net profit of the company made during the immediately preceding three financial years.  Non-compliance with CSR requirements can lead to penal consequences. Such spending shall be made only when the foreign company has, in the immediately preceding financial year:

Net worth ≥ ₹500 crores, or
Turnover ≥ ₹1000 crores, or
Net profit ≥ ₹5 corers..

Display of Name and Other Information of Foreign Company
he name of the foreign company and its country of incorporation shall be prominently displayed on the outside of every office or place where it conducts business in India, in English characters and also in the vernacular language of that office or place, in letters that are easily legible. The same shall also be stated in English characters in all business letters, billheads, and letter paper, as well as in all notices and other official publications of the company.
Where the foreign company’s member has limited liability, the same shall be stated in every such prospectus issued, as well as in all business letters, billheads, letter paper, notices, advertisements, and other official publications of the company, and prominently displayed on the outside of every office or place where it conducts business in India.
Service of notice on Foreign Company
Any document or notice required to be served on a foreign company shall be served to the person resident in India authorized to accept it on its behalf. The service shall be made either in person or by electronic mode.
Punishment for Contravention by Foreign company
Failure to comply with provisions of Chapter XXII by a foreign company shall have the following consequence:
(1) A foreign company in default shall be punishable with a fine of ₹1.00 lakh to ₹3.00 lakhs, and in the case of a continuing offense, with an additional fine of ₹50,000 for each day of default.
(2) Every officer of a defaulting foreign company shall be punishable with a fine of ₹25,000 to ₹5.00 lakhs
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Rishikant Mehta, Practicing Chartered Accountant can be contacted For any query/information /suggestion at kkantrishi@gmail.com

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