This content is from: Local Insights

Favourable changes for foreign companies in India

Anup Koushik KaravadiKaran Talwar
India, as an emerging economy, has hundreds of foreign companies being registered each year. Setting up business in India may be a complex process with its administrative and procedural compliances, but since the liberalisation policy in 1991, the government has time and again made changes, favourable for foreign investment and entry of foreign companies.

One of the recent welcome developments is the enactment of the Companies Act, 2013, (the Act), which is more comprehensive than its predecessor, particularly with regard to the concept of a 'foreign company'. The said term is defined in section 2(42) to mean a company or corporate body incorporated outside India, and which has a place of business in India either by itself or through any agent, physically or through electronic mode, and which conducts any business activity in India in any other manner.

As per section 379 of the new Act, the provisions apply to a foreign company if an Indian citizen or Indian company holds not less than 50% of paid up share capital (equity or preference) of such company, which need not have an established place of business in India. The provisions of winding up under the Act apply mutatis mutandis to foreign companies as if it were incorporated in India. The Act also makes such a company liable (both on a criminal and civil level) for misstatement in a prospectus, and any non-compliance in relation to issue of Indian depository receipts, as opposed to only civil liability under the old Act.

It is pertinent to note that the Act has not only increased penalties exorbitantly, but also made every officer in default of the foreign company punishable with imprisonment.

From the above provisions, it is clear that the scope of the term foreign company is widened to an extent so as to include a virtual presence of a company through agents in India. This broadened definition will have huge implications, and may prove to be favourable for new entrants into the Indian market. At the same time, it is broad enough to include unintended foreign companies. However, this liberal definition, being coupled with stringent provisions of the Act, may perhaps help in reducing corporate fraud.

The government has recently widened the definition of 'control' in the FDI policy to align it with the definition contained in the new Act. Further clarifications and changes are awaited for credible implementation of the provisions of the Act.

Anup Koushik Karavadi and Karan Talwar

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