CHAPTER XXII

COMPANIES INCORPORATED OUTSIDE INDIA

[Section 379 is brought to force with effect from September 12, 2013.]

“Application of Act to foreign companies.

Section 379. 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.”

Comments:

Corresponding provision of the Companies Act, 1956: Section 591

Section 379 of Act of 2013 is though similar to Section 591 of the Act of 1956, there are several striking and far reaching difference.

Term “foreign Company” is defined under section 2(42) of the Companies Act, 2013, while it was not defined under the Companies Act, 1956.

As per the definition under Act of 2013 three tests are to be satisfied for any company or body corporate incorporated outside India to be considered as ‘Foreign Company’ under the Act of 2013.

1. Company or body Corporate must be incorporated outside India.

2. Such incorporated Company or body Corporate must have a place of business in India, by itself or through agent, physically or through electronic mode.

As per the definition, a company or body corporate incorporated outside India shall have place of business in India either in the form of having own office in India, or operating through agents in India.

And where a company or body corporate incorporated outside India, though not having any physical place of business in India, still it can be treated as ‘foreign company’ if it conducts any business in India through ‘electronic mode’.

The term ‘electronic mode’  is not defined under the Act of 2013. However, the drat Rules defines it (Rule 1.2(1)(k)) as under:

“For the purposes of clause (42) of section 2 of the Act, the phrase ‘electronic mode’ means carrying out, business electronically 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 subscriptions 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.”

Thus, second condition for a company or body corporate incorporated outside India, to be treated as a ‘foreign company’ under the Act of 2013 is about either having a place of business in India itself or through agent or doing some business activity through electronic mode.

3. Such incorporated Company or body Corporate conducts business activity in India ‘in any other mode’.

The third condition is about carrying on some business activity in India. The words ‘in any other mode’ needs to be read in conjunction with the second condition stated above.

Thus, it can be summarised that ‘foreign company’ is a company or a body corporate, incorporated outside India and carrying on business in India either by having a place of business in India or by electronic mode or in any other manner.

Where atleast 50% of the paid-up share capital (equity and/or preference) of a foreign company (as defined above) is held, whether singly or in aggregate, by

(a) one or more citizens of India, or

(b) one or more companies or body corporate incorporated in India

such company shall comply with the provisions of Chapter XII of the Companies Act, 2013 with regard to business carried on by it in India, as if it were a company incorporated in India.

 

Let’s consider an hypothetical example to understand the above provision.

ABCDE Inc. is a body corporate, incorporated in USA.

Mr. A and Mr. B, resident of UK but Citizen of India and M/s. CDE Pvt. Ltd. is a private limited company incorporated in India.

Total paid-up share capital of ABCDE Inc. is say 1,000,000 USD (One million USD) comprising of 50,000 equity of USD 1 each and 50,000 preference shares of USD 1 each.

Shareholders of ABCDE Inc. are –

Mr. A – 10,000 USD equity

CDE Pvt Ltd – 6,000 USD equity

M/s. MQR Inc., an US company – 34,000 equity

Mr. B – 10,000 USD preference

CDE Pvt Ltd – 24,000 USD preference

M/s. MQR Inc., an US company – 16,000 preference

From the above, it is clear that holding of Indian Citizens (Mr. A and Mr.B) along with holding of Indian Company M/s. CDE Pvt. Ltd. is 50% of total paid-up share capital of ABCDE Inc.

This holding itself will not make M/s. ABCDE Inc. a foreign company under the Companies Act, 2013 (i.e not falling within the definition of ‘foreign company’).

However, if M/s. ABCDE Inc. carries on business in India either by having physical office or through agent or through electronic mode or in any other mode, then it will be treated as a foreign company under the Companies Act, 2013.

And since holding of Citizens of India and Indian Company, together, in the foreign company is 50% of its total paid-up share capital, provisions of section 379 of the Companies Act, 2013 is applicable.