REGULATORY OVERREACH

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.

 (The writers are partners of J Sagar Associates)