Financial Chronicle - - EDIT, OPED, THE WORKS - VIVEK CHANDY & ARCHANA TEWARY (The writ­ers are part­ners of J Sa­gar As­so­ciates)

IN a world where trans­ac­tions are in­creas­ingly be­ing done on­line, the gov­ern­ment of In­dia has vis­i­bly pushed for dig­i­tal or on­line trans­ac­tions to be­come the norm. But there is also a recog­ni­tion that the tra­di­tional norms of how busi­ness is con­ducted and reg­u­lated can­not be ap­plied and in­deed, needs to be sig­nif­i­cantly re­vised to ap­ply to com­pa­nies with only a vir­tual pres­ence in In­dia.

One such at­tempt to reg­u­late such com­pa­nies was seen in the amend­ments to the Com­pa­nies Act 2013 as the said law ap­plies to for­eign com­pa­nies. A for­eign com­pany has been de­fined to mean any com­pany or body cor­po­rate in­cor­po­rated out­side In­dia, which has a place of busi­ness in In­dia whether by it­self or through an agent, phys­i­cally or through elec­tronic mode; and con­ducts any busi­ness ac­tiv­ity in In­dia in any other man­ner. The term “elec­tronic mode” is de­fined in­clu­sively, to mean car­ry­ing out elec­tron­i­cally based busi­ness, whether the main server is in­stalled in In­dia or not, in­clud­ing busi­ness-to-busi­ness and busi­ness-to-con­sumer trans­ac­tions, data in­ter­change and other dig­i­tal sup­ply trans­ac­tions. These def­i­ni­tions are wider than those that were con­tained in the Com­pa­nies Act 1956, which oth­er­wise could be read as ap­pli­ca­ble to com­pa­nies hav­ing a pres­ence in In­dia through a branch of­fice, project of­fice and/ or li­ai­son of­fice, with a view to adapt­ing the laws to an elec­tronic world.

As can be seen from just the above pro­vi­sions, the scope of these def­i­ni­tions is wide, and can cover vir­tu­ally any en­tity, which has on­line trans­ac­tions with any­one res­i­dent in In­dia. But the true im­pli­ca­tions that need to be con­sid­ered are those pur­suant to the amend­ment of sec­tion 379 of the 2013 Act vide the Com­pa­nies (Amend­ment) Act 2017, with the amend­ment be­ing no­ti­fied on Fe­bru­ary 9, 2018. This amend­ment has made cer­tain pro­vi­sions of the 2013 Act con­tained in Chap­ter XXII, ap­pli­ca­ble to all for­eign firms.

This is com­pli­cated for sev­eral rea­sons, since the pro­vi­sions, which are made ap­pli­ca­ble, im­pose sev­eral oner­ous obli­ga­tions on for­eign com­pa­nies. Apart from an obli­ga­tion to reg­is­ter as a “for­eign com­pany”, as de­fined in the 2013 Act, all such en­ti­ties may need to pre­pare ac­counts in a spec­i­fied man­ner and com­ply with cor­po­rate so­cial re­spon­si­bil­ity obli­ga­tions, among oth­ers. Among the ap­pli­ca­ble pro­vi­sions, it is not even clear if some of the obli­ga­tions made ap­pli­ca­ble can be en­forced, for in­stance as such obli­ga­tions re­late to the is­suance of deben­tures or regis­tra­tion of charges. Taken to a log­i­cal con­clu­sion, for­eign com­pa­nies, which have a small amount of busi­ness in In­dia may need to com­ply with pro­vi­sions of the 2013 Act, for is­suance of deben­tures and regis­tra­tion of charges, and it is not clear how such com­pli­ances can be made or en­forced. Fur­ther, a for­eign com­pany, which meets the thresh­olds for cor­po­rate so­cial re­spon­si­bil­ity obli­ga­tions, may be re­quired to con­sti­tute a com­mit­tee and adopt a pol­icy for the same, as well as spend 2 per cent of its av­er­age net prof­its made dur­ing the 3 im­me­di­ately pre­ced­ing fi­nan­cial years in pur­suance of such a pol­icy. The 2013 Act also pre­scribes penalty where a for­eign com­pany does not/fails to com­ply with the pro­vi­sions con­tained in Chap­ter XXII of the Act.

It would seem ob­vi­ous that such broad pro­vi­sions would need to be re­stricted in some man­ner, if noth­ing else to pro­vide com­fort to for­eign com­pa­nies that not all of them will need to com­ply with such obli­ga­tions due to the mere fact of hav­ing some trans­ac­tions with per­sons res­i­dent in In­dia. How­ever, while the drafts­men seem to have recog­nised the prob­lem, they seem to have de­lib­er­ately with­held a solution. The com­pa­nies law com­mit­tee, in its re­port, notes “even in­signif­i­cant web/in­ter­net-based elec­tronic trans­ac­tions of a com­pany in­cor­po­rated out­side In­dia, with no es­tab­lish­ment in In­dia, with In­dian cus­tomers could re­sult in such a com­pany fall­ing within the ambit of” the above pro­vi­sions. The com­mit­tee goes on to recog­nise the im­prac­ti­cal­ity of this but con­cludes that there is no need to mod­ify the def­i­ni­tion of “for­eign com­pany” in the 2013 Act in any way. But it is rec­om­mended that for­eign com­pa­nies with in­ci­den­tal, in­signif­i­cant trans­ac­tions in In­dia be ex­empted, though no spe­cific ex­cep­tions have been pro­vided un­der the 2013 Act or ap­pli­ca­ble rules.

For a num­ber of for­eign com­pa­nies, this is prob­lem­atic, since a con­ser­va­tive read­ing would sug­gest that they should min­imise any trans­ac­tions, which could re­sult in them be­ing con­sid­ered as en­ti­ties that re­quire regis­tra­tion as “for­eign com­pa­nies”. Yet a num­ber of them, es­pe­cially for­eign e-com­merce en­ti­ties, have ser­vice providers, ven­dors, cus­tomers and sellers located in In­dia. If we are seek­ing to es­tab­lish In­dia as a ju­ris­dic­tion where the ease of do­ing busi­ness is in­creas­ing, such pro­vi­sions should be ap­plied in a man­ner that will en­able busi­nesses to flour­ish and include In­dian per­sons in their op­er­a­tions. Should a com­pany be re­quired to reg­is­ter as a “for­eign com­pany” for the pur­poses of the 2013 Act, it will also need to ex­am­ine what, if any, im­pli­ca­tions arise un­der ex­change con­trol laws in In­dia as well as un­der tax laws.

In the above con­text, a prac­ti­cal read­ing of the pro­vi­sions needs to be ap­plied to each com­pany, which would eval­u­ate the need to reg­is­ter it­self as a “for­eign com­pany” for the pur­poses of the 2013 Act. It ap­pears that rel­e­vant fac­tors would include the amount of busi­ness con­ducted by the for­eign com­pany in In­dia, the num­ber of ven­dors/ser­vice providers/cus­tomers located in In­dia, the amount of rev­enues gen­er­ated by op­er­a­tions in In­dia or from per­sons res­i­dent in In­dia, and whether the for­eign com­pany is fo­cused on In­dia as a ju­ris­dic­tion it con­ducts busi­ness in.

While the in­ten­tion of reg­u­lat­ing com­pa­nies, which have vir­tual pres­ence in In­dia seems rea­son­able, the gov­ern­ment should con­sider whether some of the pro­vi­sions drafted to achieve this in­ten­tion are prac­ti­cal.

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