Regulations
Compliance issues for Indian companies incorporated abroad, under the New Companies Act
The new Companies Act has widened the regulations for foreign companies controlled by Indian corporates, putting the latter under increased pressure of compliance 
 
The Companies Act, 2013, consolidated, amended, updated, refurbished and pruned, is bringing new surprises for the corporate world. The more you dig into it the more are the surprises. In this article we are trying to bring to the fore the provisions as applicable to foreign companies under the Companies Act, 2013 (New Act).
 
The concept of foreign companies understood as companies incorporated outside India had always had some provisions of the Companies Act, 1956 (Old Act) being applicable to them under part XI of the Old Act. Such foreign companies which would have established a place of business in India before or after the commencement of the Old Act had to comply with some of the provisions of Old Act which included submitting with the registrar charter documents of the place of business in India, its address, details of directors etc for registration, accounts of the Indian entity, details of charges made on property in India and so on. Section 591 of the Old Act explained the coverage of foreign companies as -
Sec 591 - Application of sections 592 to 602 to foreign companies. 
(1) Sections 592 to 602, both inclusive, shall apply to all foreign companies, that is to say, companies falling under the following two classes, namely:- 
(a) companies incorporated outside India which, after the commencement of this Act, establish a place of business within India; and 
(b) companies incorporated outside India which have, before the commencement of this Act, established a place of business within India and continue to have an established place of business within India at the commencement of this Act. 
(2) Notwithstanding anything contained in sub-section (1), where not less than fifty per cent, of the paid-up share capital (whether equity or preference or partly equity and partly 
 
This part of the Act was mostly understated since such foreign companies owned by Indian citizens or body corporates with place of business in India were negligible. 
 
Changed position under Act, 2013
The new Act, 2013, however, in the pretext of updating the law to the present times has now expanded its scope of such foreign companies and has increased the compliance requirements as well. Chapter XXII of the New Act, Section 379 onwards provides for provisions of the Act as applicable to such foreign companies in which Indian individuals or body corporates jointly/ severally hold not less than 50% of the paid-up share capital either in the form of equity or preference and have a place of business in India. At first blush the provisions of the Old Act and the New Act seem similar, but on a little careful reading one would understand the change in the scope of coverage of such foreign companies. 
 
To bring the point to light, it is pertinent to look at Section 379 of the New Act which is reproduced as below -- 
 “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 foreign company is held by one or more citizens of India or by one or more companies or bodies corporate incorporated in India, or by one or more citizens of India and one or more companies or bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with the provisions of this Chapter and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India.”
 
At this juncture it is also pertinent to understand what a foreign company is. Section 2(42) of the Act defines foreign companies as – 
(42) “foreign company” means 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.
 
Further, under the Companies (Registration of Foreign Companies) Rules, 2014, electronic mode is defined to mean – 
 
For the purposes of clause (42) of section 2 of the Act, “electronic mode” means carrying out electronically based, whether main server is installed in India or not, including, but not limited to –
(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;
 
A joint reading of these sections brings to the fore that earlier only if the foreign companies owned by Indians had a physical presence in India, the provisions of the chapter were to apply. 
 
What is the impact of the change under Act, 2013?
With the New Act, the need for physical presence has been done away with, as entities with no physical presence yet having any virtual presence would also now come under the net. If one had to think of what sort of foreign companies owned by Indians would have virtual presence several sectors of the industry would take a hit. Companies in media and broadcasting business (like Zee Enterprises) which have foreign subsidiaries (like Asia Today Ltd) and the subsidiaries would be rendering satellite services to group. 
 
Think of companies such as Indian asset management companies with foreign subsidiaries set up in the likes of Singapore and Mauritius where setting up funds is much easier a task than our own country making investments in Indian securities or Indian mutual funds. Consider several AIFs which set up with co-investor and master investors in Cayman Islands, Luxembourg, Dublin etc which would be rendering services to the Indian AIFs with Indian managers. Not to forget online B2C platforms, online travel companies with joint ventures with several airlines etc selling tickets of these airlines on their online portals or Indian airline companies with joint ventures with foreign entities selling tickets through agents in India would also now be covered. 
 
Compliances to be made by such companies
The troubles don’t end here. It is not just the fact that the list of foreign companies has become longer, the compliance burden under the New Act is also manifold. Under the New Act apart from the compliances under the Old Act now the foreign companies will also have to comply with the provisions of Section 71 as applicable to debenture issuances, will have to file annual returns with the Registrar in India u/s 92 of the New Act. Also the Old Act required the foreign companies to provide for details of charges created on property in India, under the New Act any charge created by such foreign company will have to be registered with the Registrar of Companies. 
 
The foreign companies will also have to file a statement with regard to related party transactions, repatriation of profits, transfer of funds including dividends from the place of business in India and any other related party of the foreign company outside India. The foreign company will also have to get its accounts audited by a practising Chartered Accountant in India and the chapter of audit and auditors including rotation of auditors will apply. The annexure below gives a comparative of the changes in the compliance requirements as applicable to such foreign companies under the Old and the New Act.
 
Under the New Act, like the Indian counterparts these foreign companies cannot think of non-complying with the provisions of these sections as punishment for contravention under section 392 of the New Act could impose a fine on the foreign company to the tune of Rs1 lakh which may extend up to Rs3 lakh  and an additional fine of Rs50,000 every day for a continuing offence till the default subsisted. Also, every officer of such foreign company who is in default shall be punishable with imprisonment for a term which may extend up to 6 months or fine which may not be less than Rs25,000 but which may extend up to Rs5 lakh or with both. (Under the Old Act non-compliance with the provisions of the chapter imposed a fine of Rs10,000 on the company and every office in default and Rs1,000 every day as additional fine for a continuing offence till the default subsisted.)
 
Several of the compliance requirements under the New Act may not be understandable. For instance, filing of charge requirement for these foreign companies is silent on whether the charge created on a property in India is only covered or any charge created by the foreign company will have to be registered. The Old Act was very explicit in the mention however the New Act simply says that the chapter on charges will mutis mutandis apply. Also the New Act requires the foreign companies to make disclosures with regard to related party transactions which may not be of great relevance to the regulators here. In the attempt to regulate, the only worry for the corporate sector is that we don’t over-regulate and get written off as a country where doing business is daunting. 
 

 

(Nidhi Bothra works as executive vice president at Vinod Kothari & Company)

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COMMENTS

Suraj Arora

3 years ago

I would say Corporate Governance is the Buzz word for Companies Act 2013, because Compliance cost may look redundant at the moment but it would definitely have a positive Impact on the society in the long term.

Suraj Arora
Corporate Lawyer

Will the PMO under Modi be fairer in dealing with RTI applications?
Last year, Narendra Modi ridiculed the PMO for denying information to a citizen. Will his office be open to seriously dealing with RTI applications, considering that his home state Gujarat does not have a good record?
 
People have given a huge mandate to one single party and soon a new government will begin its work under Prime Minister Narendra Modi. While issues like curtailing price rise and bolstering economy would be a priority, it would be interesting to see his strategy on transparency, meaning the implementation of RTI Act, particularly in the PMO (Prime Minister’s Office), besides the rest of India.
 
The reason for broaching this issue is Narendra Modi’s speech while addressing a BJP workers’ meeting in Kolkata on the 9th April, 2013. In an apparent reference to RTI activist Commodore Lokesh Batra’s RTI application which was dismissed by the PMO office and had gained publicity through newspapers, Modi had stated that, a citizen had asked a question to the PMO under RTI but the PMO office declined to provide the necessary information. He further stated that the Congress flaunts that it has brought in the RTI Act but what is the use if it does not abide by the true spirit of the Law. His speech can be heard here. For the specific comment, go to timing 1:07:58 in the speech.
 
Batra had filed a RTI application to get information on the details of files and records which have been digitized by it as per the rules of Section 4(1)(a) of the RTI Act. The Public Information Officer (PIO) replied that the applicant “has not specified how the information is useful to him either personally, socially or nationally.” As most are aware, a RTI query does not require motive. The first appellate authority overruled PIO’s reply and directed him to make the information available within  a fortnight. Despite that, the PIO did not comply.
 
While Modi was correct in raising the issue, the fact is that there is the general apathy in implementing the RTI Act in Modi’s home state of Gujarat. Several activists who I spoke to on Tuesday confessed that RTI compliance is poor in the State. Bhadresh Wamja, the 20 year old Sarpanch of Saldi village, 120 kms from Gandhinagar who is an ardent RTI activist too stated that, ``RTI in Gujarat is weak. There is apathy over appointment of Central Information Commissioners (CIC) –we have only four out of nine presently. PIOs are very lax in providing information so most of the applications go for first and second appeal.’’
 
RTI activist Vinod Sanepara of Surat also stated that Gujarat has not implemented RTI Act in true spirit. He states, ``My RTI applications regarding various schemes and rights for the disabled have been stonewalled. I have had to go for first appeals but there too it is not smooth sailing. PIOs are particularly callous about replying queries and there is no political or administrative will to strengthen RTI.’’
 
Another RTI applicant mentioned that, it is difficult, nearly impossible to get information concerning MLAs and MPs of Gujarat. This results in threats and he thinks it is pertinent and of urgent importance that a strong Whistleblowers Act is put in place. Gujarat and Maharashtra are two prominent states where assaults, most of them fatal, have occurred. 
 
As for the PMO office under Manmohan Singh, it was clearly RTI-unfriendly in the UPA-II era, say RTI activists. Observes Batra, “Earlier, I was asked to name the most transparent Public Authority, without second thought I would say PMO. As per my experience PMO was role model in implementing RTI Act. Then suddenly towards October 2011 everything changed and transparency in PMO took a dip. The status of Central Public Information Officer (CPIO) who is a Deputy Secretary level officer was reduced to a Post Office.
 
“The CPIO started signing RTI replies with standard phrase 'The matter was referred to the office for providing inputs. The inputs provided by the office in respect of your request for information, is enclosed.' In my view, it was clear that the RTI responses were being vetted by Senior Officers in PMO before being signed and sent to CPIO by a Section level Officer who is much junior in rank to CPIO who holds the rank of Deputy Secretary but left with little say. Transparency in PMO became the causality.’’
 
States Shailesh Gandhi, former CIC: “It is a very good sign that Mr. Narendra Modi,-the PM designate,- displayed his inclination for transparency when he criticised the PMO for refusing to give certain information under RTI. My experience with the PMO as an Information Commissioner is that generally it is very professional and correct in RTI matters. However, at times there are unjustifiable denials of information. With Mr. Modi as PM we expect that the PMO will not deny any information which should be provided. We hope Mr. Modi will increase transparency in the PMO and the Central government. He will find that increased transparency will allow thousands of vigilant citizens to curb arbitrariness and corruption. I am hopeful that he will take the Government towards complete digital working without paper files which would facilitate transparency, adherence to Section 4 and improve efficiency in working.’’
 
Delhi-based RTI activist Veeresh Malik, opines that, “The UPA Government has been talking about the RTI Act of India as one of its stellar achievements while the actual fact is that they have been responsible for resisting downstream implementation in real top-down cases, on various subjects such as:
* Costs incurred on so-called VIPs/VVIPs under multiple heads, not only security
* Subhash Chandra Bose files
* Definition of "Muslim Citizen of India" as used in Parliament
* Definition of "minorities" after marriage with non-minorities as well as sub-sects within minorities
* Bringing PPPs / JVs / NGOs and other substantially financed by taxpayer entities under RTI.
 
Let us hope the new Modi government opens RTI and PG (Public Grievance) up properly, for real citizen governance.”
 
Will Modi do an Obama in this case? As soon as he became President of USA in his first term, he had sent a letter to all public departments, asking them to be transparent in their day to day work. Here is the link
 

A survey by CHRI and Nagarik Adhikar Kendra in 2009 revealed that RTI implementation is poor in Gujarat. Excerpts:

 

"CHRI and Nagarik Adhikar Kendra, Kalol designed this survey to assess compliance of public authorities with their obligations under the RTI Act in Panchmahals district.
Panchmahals was the district of choice as it was handpicked by the State Government in 2006-2007 for intensive capacity building of public authorities under a UNDP sponsored programme. This survey is an exercise aimed at evaluating the performance of public authorities in terms of objective parameters based on their duties described under the RTI Act and the RTI Rules issued by the Government of Gujarat…

 

"…With the exception of a handful of public authorities that have made serious efforts to implement the RTI Act, the record of compliance is poor in a large majority of the offices. Compliance at the taluka level is much weaker compared to offices at the district level. The dismal levels of performance overall in Panchmahals can be attributed to several factors:
a) negligible or partial understanding of the obligations under the RTI Act;
b) a cavalier attitude towards fulfillment of the objectives of the RTI Act;
c) lack of proper understanding about the effect and consequences of
providing access to information that they hold in custody;
d) lack of incentives to change from deep-set ways of maintaining undue
secrecy in every aspect of governance; and
e) unjustifiable attitudes towards the taxpaying citizen ranging from
casual treatment to blatant disregard.


The narratives of the experience the survey team went through to obtain mundane, everyday information about the implementation of this Act are illustrative of the degree of resistance within the bureaucracy to changing old habits of keeping information hidden from public view.'' Full Report here.

 
(Vinita Deshmukh is consulting editor of Moneylife, an RTI activist and convener of the Pune Metro Jagruti Abhiyaan. She is the recipient of prestigious awards like the Statesman Award for Rural Reporting which she won twice in 1998 and 2005 and the Chameli Devi Jain award for outstanding media person for her investigation series on Dow Chemicals. She co-authored the book “To The Last Bullet - The Inspiring Story of A Braveheart - Ashok Kamte” with Vinita Kamte and is the author of “The Mighty Fall”.)

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COMMENTS

Amit Bhargava

3 years ago

In so called #AccheDin, the PMO has removed all information, including that it is supposed to disclose u/s 4(1)(b) of the RTI act, 2005, from its website pmindia.nic.in, [email protected]

Moresoever, newspapers are reporting that NDA ministers are not allowing any pen or mobile phone in their offices.

So much for transparency in #AccheDin @narendramodi ji?

Bapoo Malcolm

3 years ago

RTI will be back to its original full name. RATAN TATA INSTITUTE.

Bapoo M. Malcolm

Dolphy Dsouza

3 years ago

Vinita's article exposes the underbelly of what is said and what should be done and not done. If Gujarat has been tardy in the implementation of Transparency Law , the wait and watch how the Prime Minister will look at RTI and how the PMO will respond will be interesting. If Mr. Modi has to leave his legacy than he will need to do that extra bit to really implement RTI at his door [PMO].Thank you Vinita for bringing this in the public domain.

Reverse Gear
Car companies are blaming everything but themselves for slow growth

When Maruti-Suzuki India Ltd catches a cold, the rest of the automobile industry in India goes into sneezing fits. If you analyse Maruti’s latest quarterly results, you can see that it could have easily avoided the pickle it finds itself in now. To start with, there’s the contentious issue of multiple-stage royalties paid out under, what can best be called, opaque conditions. There appears to be no clarity; but if one believes a global banker familiar with the way some of the suppliers, ancillaries and subsidiaries are structured, it is very likely that between 5% and 7% of Maruti Suzuki India Ltd’s turnover in India goes out of India as royalties.
 
And there is no denying that much of the research for the more successful models and variants from Maruti-Suzuki, like the Ertiga and the D’Zire, has been done almost totally in India. But the results appear to blame compensation to dealers for excise reductions on stocks held and employee benefits. The reality is the same with other international automobile manufacturers in India. All of them appear to be in India to blame anybody but themselves. And, at present, this can be drilled down to two specific aspects. 
 
One, the industry has been asking for excise cuts, for years now. If excise rates had gone up, the moan would have been the same; so who benefits in such cases? Certainly not the customer, who is regularly faced with a series of bewildering advertisements on discounts and offers which evaporate into thin air when he visits the showroom. This is where the second reason trotted out—high marketing costs—kicks in. If ‘marketing’ means that your dealer’s salesman on the floor is unable, or unwilling, to provide a single composite proforma invoice spelling out exactly how much it will cost for a commodity called a ‘motor-car’, all your marketing is nothing but an attempt to fool the customer.
 
There is also the moan about high cost of manpower and labour. Why don’t we hear of labour problems or high cost from companies like Amul or Reliance? 
 
In India, the customer votes with her feet and chequebook and is too polite to provide real feedback. The customer increasingly views buying a new motor vehicle as purchasing a commodity, having done all her research online, and taken guidance from a variety of external entities. A dealer becomes somebody who is providing a facility to fill up a KYC (know your customer) form full of useless information like ‘anniversary date’ and collect a payment—a layer of inefficiency she can do without, as she has got used to it with other purchases.
 
Which begs the question: Why can’t the KYC form and make/model interested in be completed online BEFORE? I, as a customer, select from a choice of dealers in my area, so that all of us are prepared—just like when applying for a passport? 
 
It is one thing that people are buying fewer private cars for a variety of reasons—better public transport, improved online commerce and common sense frugality. Manufacturers reporting lower profits or losses and trying to pass price increases to consumers is another thing altogether. If car companies cannot reduce layers of inefficiencies in their own systems, then they’d better forget about getting more customers.
 
A visit to an automobile dealer’s showroom is, often, an event where the prospective customer is viewed as an opportunity for not just the sale of a product, but commission to a range of people involved. If you have dealt with second-hand cars salesmen in America, you will get what I mean—it is hustle, hustle all the way. Do anything, but close the deal.
 
BMW, on the other hand, has introduced a highly paid individual in their showrooms globally, borrowing from Apple, called ‘genius’, whose only role is to explain features of its vehicles and NOT to push a sale at all. Which, if you recall, is what a ‘showroom’ is meant to be. And the best showroom, nowadays, is, as many of us discover, online. 

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COMMENTS

rajivahuja

3 years ago

Valid points.

JAYDIP JHALA

3 years ago

exactly , if I visit a showroom to to review new vehicle ...fist question is 'when u are planning to buy' ?....

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