Companies Act 2013 Key Aspects for Foreigners
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Companies Act 2013 Key Aspects for Foreigners

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This presentation was used at a Conference of Practicing Company Secretaries and other professionals. The Companies Act 2013 has brought about a new system of control of companies in India. The new ...

This presentation was used at a Conference of Practicing Company Secretaries and other professionals. The Companies Act 2013 has brought about a new system of control of companies in India. The new law has many provisions which affect a foreign resident (whether foreign citizen or Indian citizen) wanting to do business in India. This presentation gives a quick view of the most interesting aspects of the Act.

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Companies Act 2013 Key Aspects for Foreigners Companies Act 2013 Key Aspects for Foreigners Presentation Transcript

  • Based on Presentation at Conference on The Companies Act 2013 – An Era of New Opportunities & Challenges organized by The Institute of Company Secretaries of India, Bhopal Chapter 22 March 2014 Modified on 27 March 2014 By Advocate Anil Chawla (B.Tech. LL.B.) Senior Partner, Anil Chawla Law Associates LLP www.indialegalhelp.com
  • Who is a foreigner?  The Companies Act, 2013 (the Act) does not define a foreigner (individual)  Any one (including an Indian citizen) may be treated like a foreigner if he / she has not been staying in India for continuous period of twelve months immediately preceding the date of his appointment as a managerial person (Schedule V)  Anyone (including an Indian citizen) who has stayed in India for a total period of less than one hundred and eighty two days in the previous calendar year will be treated as a foreigner (Sec. 149(3))  A foreign citizen staying in India for 12 months may enjoy all rights under the Act while the same rights are not available to a Non-resident Indian citizen. Copyright - Anil Chawla Law Associates LLP 2
  • A1. Need for a Resident Director A2. Appointment of Managing Director A3. Board Meetings by video conferencing Copyright - Anil Chawla Law Associates LLP 3
  • A1. Resident Director  Every company (whether private or public) needs a resident director  Even a one-person company needs a resident director, so a foreign individual wanting to set up a one-person company must necessarily partner with an Indian resident  If a NRI couple (Indian citizens) move to India anytime during 4th July – 31st December 2013 and wish to form a company owned by two of them anytime during 2014, they shall need a third person as a resident director.  Resident Director condition – 182 days  Resident director need not be Indian citizen Copyright - Anil Chawla Law Associates LLP 4
  • A1. Resident Director (Continued) 5Copyright - Anil Chawla Law Associates LLP Section 149(3) - Notified  Total Stay; not continuous days  Minimum 182 days in previous CALENDAR year  Necessary from the day of incorporation of the company  No relaxations / exceptions
  • A2. Appointment of Managing Director  Must be a resident of India. If not a resident, Central Government approval necessary  Resident not defined; Explanation I lists two categories which are included (a) staying in India for a continuous period of not less than 12 months immediately preceding the date of his appointment (b) has come to India for taking up employment in India or for carrying on business or vacation in India. (The word vacation is an obvious mistake. It should have been vocation.)  An Indian citizen who has gone to visit his son in USA and stayed there for, say, two months will need Central Government approval for appointment as MD.  Proviso does not mention Business Visa  A badly drafted Schedule with a typographical error. Probably will be amended before it is notified. Copyright - Anil Chawla Law Associates LLP 6
  • A2. Appointment of Managing Director (Continued) 7Copyright - Anil Chawla Law Associates LLP Section 196(4) & Schedule V - Notified
  • A3. Attending Meeting of Board of Directors  Necessary for a Director to attend at least one meeting in a year.  Participation may be in person or by video conference.  Physical meetings can be held anywhere in the world.  Video conference meetings will not be able to take up all issues. The issues that need physical meetings not yet specified.  Video meetings will need to be recorded (The requirement is not for physical meetings).  Telephonic conferences (audio only) not recognized  A small company can hold only one physical meeting and one video meeting in a year. So, practically possible to own a company in India without ever coming to India. Copyright - Anil Chawla Law Associates LLP 8
  • A3. Attending Meeting of Board of Directors (Continued) 9Copyright - Anil Chawla Law Associates LLP Section 173(2) & 167(1)(b) - Notified
  • B1. Business Visa B2. Employment Visa Copyright - Anil Chawla Law Associates LLP 10
  • B1. Business Visa  Granted to Foreign citizens coming to India to set up a business / industrial venture or to explore possibility of doing so; also to Directors  Must be a person of assured financial standing  Not granted for petty business or trade (What is petty is not defined; Business should achieve gross sales / turnover of Rs. 10 million per annum within two years of setting up the business)  Not granted for employment  Can be of up to five years duration (10 years, in case of citizens of USA)  Multiple entry; maximum duration of each visit may be limited to six months at a stretch (In case of such a restriction, the person may go out and revisit) Copyright - Anil Chawla Law Associates LLP 11
  • B1. Business Visa (Continued) 12Copyright - Anil Chawla Law Associates LLP
  • B2. Employment Visa  India discourages employment visas  Granted only to highly qualified or skilled professional being engaged by a company in India  Not granted for jobs for which qualified Indians available  Should draw salary in excess of USD 25,000 p.a.  Name of sponsoring organization shall be specified in Visa sticker  Duration – 2/3/5 years or period of Agreement, whichever is less  Employment visa not converted into any other category  No change of employer Copyright - Anil Chawla Law Associates LLP 13
  • B2. Employment Visa (Continued) 14Copyright - Anil Chawla Law Associates LLP
  • C1. One-Person Company C2. Financial Year C3. Promoter C4. Officer in Default C5. Control of Company Copyright - Anil Chawla Law Associates LLP 15 C6. Resignation by all Directors C7. Associate Company C8. Subsidiary Company C9. Public Company
  • C1. One Person Company  Very useful for persons from Western world where family bonds are becoming weak and unstable  Also useful for foreign professionals like doctors, lawyers, engineers etc. who want to operate with limited liability  Foreign citizen will need a resident director till he / she becomes resident of India  Necessary to define line of inheritance  A One-Person Company with only one director still needs to hold meetings of Board (exception under 173(5) strangely relates to only the sub-section and not the whole section) Copyright - Anil Chawla Law Associates LLP 16
  • C1. One Person Company (Continued) 17Copyright - Anil Chawla Law Associates LLP Section 2(62) & 3(1) - Notified
  • C2. Financial Year  Financial Year in India is 1 April to 31 March  An Indian company, which is holding company or subsidiary of a foreign company may apply for adopting a different financial year if needed to consolidate its accounts with the foreign company.  Application to be made to the Tribunal  Corresponding change not made in Income Tax. Section 2(9) of IT Act states - "assessment year" means the period of twelve months commencing on the 1st day of April every year  Companies adopting a different F.Y. under Companies Act will still need to prepare accounts for April-March to comply with IT Act. Copyright - Anil Chawla Law Associates LLP 18
  • C2. Financial Year (Continued) 19Copyright - Anil Chawla Law Associates LLP Section 2(41) - Notified
  • C3. Promoter  A new concept under India’s Companies Act  A foreign company / individual getting into a Joint Venture (JV) with an Indian partner must decide if they want to be known as the Promoter of the Indian company  If the foreigner does not want to be a Promoter care should be taken in drafting the JV Agreement regarding their powers in relation to control over the affairs of the Indian company and about powers to give directions to the Board.  On the other hand, there are clear advantages in becoming a Promoter and the foreigner may be advised to get the status.  Power of the Promoter to give directions to the Board may be cast in stone in the JV Agreement. Copyright - Anil Chawla Law Associates LLP 20
  • C3. Promoter (Continued) 21Copyright - Anil Chawla Law Associates LLP Section 2(69) - Notified
  • C4. Officer in Default  Promoter shall always be the first to be caught as an Officer in Default, if the company makes some mistakes.  Officer in Default need not be an individual since the word used is “person” and not an individual. So a foreign company may become Officer in Default.  Officer need not be an employee of the company. Officer need not even receive any remuneration / benefit from the company.  The key is “any person in accordance with whose directions or instructions, the Board of Directors or any one or more of the Directors is or are accustomed to act.”  If a foreigner wishes to avoid being Officer in Default, care should be taken in drafting the JV Agreement. Copyright - Anil Chawla Law Associates LLP 22
  • C4. Officer in Default - (Continued) 23Copyright - Anil Chawla Law Associates LLP Section 2(60) and 2(59) - Notified
  • C5. Control of the Company  A much wider term than Promoter since many possibilities are covered including due to either of (a) shareholding (b) management rights (c) shareholders’ agreement (d) voting agreement (e) any other manner  Key is right to (a) appoint majority of the Directors or (b) control management or policy decisions.  Existence of right will establish control. One may have never exercised the right.  Adverse effects of being in control are not clear. All punishments and penalties are for officers and not for person in control. So, there need not be any fear of becoming in control. Copyright - Anil Chawla Law Associates LLP 24
  • C5. Control of the Company (Continued) 25Copyright - Anil Chawla Law Associates LLP Section 2(27) - Notified
  • C6. Resignation by all Directors  A special situation that gives power to Promoter  Now it is possible for a Promoter to manage a private company with all dummy directors who will hold office at the pleasure of the Promoter.  Articles of a private co. may provide “Directors shall hold office at the pleasure of the Promoter and displeasure of the Promoter will be a disqualification under 164 of the Act”.  Foreign Investors / Entrepreneurs may take advantage of this. (Foreign companies may not be able to take advantage) Copyright - Anil Chawla Law Associates LLP 26 Section 164(3) - Notified
  • C6. Resignation by all Directors (Continued) 27Copyright - Anil Chawla Law Associates LLP Section 167(3-4), 168(3) - Notified
  • C7. Associate Company  A new concept in Indian law (Was earlier in Accounting Standards)  A foreign company (FC) owns 20% or more share capital of Indian company (IC) or has control of business decisions. IC is associate of FC but FC is not associate of IC.  Associate is a one-way relation and not a two-way relationship.  Often the Indian Joint Venture of a Foreign Company is an Associate Company of the Foreign Company under the Act  Need to check from the view of home law of the Foreign Company whether the Indian Company is an Associate. This is important from the view of accounting of the Foreign Company. Copyright - Anil Chawla Law Associates LLP 28
  • C7. Associate Company (Continued) 29Copyright - Anil Chawla Law Associates LLP Section 2(6) – Notified
  • C8. Subsidiary Company  One of two criteria – (a) control composition of Board of Directors or (b) exercise or control more than half of the total share capital  Restriction on number of layers  Controlling composition means one can appoint or remove all or majority of the directors.  There is a view that if holding company is a foreign company, the Indian subsidiary will be deemed to be a public limited company – ref. definition of public company, sec. 2(71).  Any JV agreement involving a foreign company must mull whether the foreign company wants to create a subsidiary. Copyright - Anil Chawla Law Associates LLP 30
  • C8. Subsidiary Company (Continued) 31Copyright - Anil Chawla Law Associates LLP Section 2(87) - Notified except for proviso
  • C9. Public Company  A subsidiary of any company (which is not a private company) is a deemed public company.  Definition of private company refers to a company fulfilling some conditions.  Definition of company refers only to company registered in India  By joining up all definitions, it emerges that any Indian subsidiary of a foreign company will be a deemed public company.  Legal position on this point is in the process of debate and deliberations. Will take some time before legal view in the matter is settled. Copyright - Anil Chawla Law Associates LLP 32
  • C9. Public Company (Continued) 33Copyright - Anil Chawla Law Associates LLP Section 2(71) - Not yet Notified; 2(20) and 2(68) - Notified
  • D1. Additional Matters in Articles of Association D2. Merger of Indian Company with Foreign Company Copyright - Anil Chawla Law Associates LLP 34
  • D1. Additional Matters in Articles of Association  Articles can include all types of restrictive clauses that JV partners want to safeguard their interests.  For example, we recently included a provision in the Articles of a new company that all decisions of Board shall be by consensus.  For example, we included a provision that a Special Resolution / Extra Ordinary General Meeting will need approval of all directors without any absentees.  Use of standard Articles of Association should be avoided in case of Joint Venture involving foreigners.  A Shareholders’ Agreement / JV Agreement has limited enforceability. Articles of Association is a stronger document and higher care should be taken.  Entrenchment – a new word in Indian law – needs careful attention. Copyright - Anil Chawla Law Associates LLP 35
  • D1. Additional Matters in Articles (Continued) 36Copyright - Anil Chawla Law Associates LLP Section 5(2-5) - Notified
  • D2. Merger of Indian Company with Foreign Co.  It is only an enabling provision in law. Details have yet to emerge.  Likely to be permitted with only companies of a few friendly countries.  Nevertheless, it may be worthwhile for Joint Venture Agreements to provide for the merger of either Indian company with the foreign company or vice versa, subject to such terms as may be provided in the Agreement and also subject to the rules / restrictions under section 234 of the Act. Copyright - Anil Chawla Law Associates LLP 37
  • D2. Merger with a Foreign Company (Continued) 38Copyright - Anil Chawla Law Associates LLP Section 234 - Not yet Notified
  • Hope that you did not get bored and that it was useful! Copyright - Anil Chawla Law Associates LLP 39 Anil Chawla Law Associates LLP www.indialegalhelp.com info@indialegalhelp.com Tel. – 09425009280