Foreign Company: Applicability of Companies Act, 2013

This article provides succinct explanation of the term “Foreign Company” and the applicability of the Companies Act, 2013 on such companies.

Before we start with our journey of understanding the aforesaid concept, we shall take the opportunity to provide the glimpse of basic definitions that will be helpful in better understanding of the concept.

General Definitions:

  • Company {Sec:2(20)}: Company means a company incorporated under this act or under any previous company law.
  • Body Corporate{Sec. 2(11)}: Body Corporate or corporation includes a company incorporated outside India, but does not include-
  1. A co-operative society registered under any law relating to co-operative  societies; and
  2. Any other body corporate (not being a company as defined in this Act), which  the central government may, by notification, specify in this behalf;
  • Foreign Company{Sec.2(42)}: Foreign Company means any company or body corporate incorporated outside India which-
  1. Has a place of business in India whether by itself or through an agent, physically  or through electronic mode; and
  2. Conducts any business activity in India in any other manner;

Electronic Mode: Electronic mode means carrying out electronically based, whether main server is installed in India or not, including but not limited to-

  1. Business to business and business to consumer transactions, data interchange and other digital supply transaction;
  2. Offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India;
  3. Financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management;
  4. Online services such as telemarketing, telecommuting, telemedicine, education and   information research; and
  5. All related data communication services,

Whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise, shall be deemed to have carried out business in India.

Analysis of definition of Foreign Company:

The definition of foreign company includes a company carrying on business electronically also, and, such a definition is wide enough to cover almost every transaction carried out electronically, including through e-mail(Gmail), mobile devices, cloud computing, social media(Facebook, twitter), document management, web based marketing, advisory and transactional services, database services etc.

Now, let us analyze it further with the help of some pragmatic examples:

Example 1: Amazon LLC, a company incorporated in USA is doing e-commerce business and selling its products through online medium in India.

Example 2: Kirloskar LLC, a company incorporated in USA is in the business of providing consultancy services relating to engineering solutions. During the Financial year 2016-17, it gives its only consultancy in India, to Mr. XYZ. It charged him INR 50,000 for the consultancy.

Example 3 :ABC Software Solutions LLC, a company incorporated in USA is in the business of providing software solutions, wherein it provides online access to the software developed by it to its customer and charges them appropriate amount for it. During the Financial year 2016-17, it sells usage right of its software in India, only to Mr. B and charged him INR 10,000.

“Now, the Million Dollar Question is, Whether the aforesaid companies be termed as Foreign Companies, and if in case, Whether they will be required to comply with the requirements set out in the Companies Act 2013, for foreign Companies?”

The Answer to first is Yes and for the second is NO.

Let us analyze the above scenarios:

If in case the answer for second would have been a ‘YES’, it would mean that all the foreign companies who are doing even a meager say ‘one Rupee” business in India are into the clutches of the Companies Act, 2013 and they would be required to complete the herculean task of compliance with the same..!!

To avoid such situations, Companies Act, 2013 contains certain provisions, which lays down certain conditions, which if met, and then only, such foreign companies will be governed by the provision of Companies Act, 2013. The conditions are in the way of situations in which “The Act” shall apply, no matter what’s the turnover. It means if the conditions are met, then these companies will be required to comply with Chapter XXII of the Act (The Governing Chapter), regardless of their turnover.

Applicability of The Act on Foreign Companies:

(Chapter XXII) (Section 379 to Section 393)

Section 379: Where not less than 50% (i.e. 50% or more) 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 body corporate incorporated in India or by one or more citizens of India and one or more companies or body corporate incorporated in India, whether singly or in 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.

Analysis of the above Section:

Not all foreign companies are required to comply with the provisions of Chapter XXII. Only the Foreign Companies whose at least 50% paid-up capital is held by one or more Indian Citizen or one or more companies or body corporate incorporated in India, or jointly by the both are required to comply with the provision of this chapter.

Different situations can be:

1. 50% or more holding by Indian Citizens.

2. 50% or more holding by Indian Companies.

3. 50% or more holding by both (Citizens and companies) in any proportion.

  • the applicability of the act on such companies can be summarized as a three steps process, as follows:

1. Determine if it is a foreign company.

2. See its shareholding pattern.

3. Decide based on the steps above, if it is covered by the provision of Chapter XXII.

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