Foreign Companies in India- Investment Law



Foreign Companies in India- Investment Law



Description:
The foreign investment law in India has changed substantially, since this article, due the promulgation of Foreign Exchange Management Act

Published in International Company & Commercial Law Review, November 1996

Foreign companies in India, operating through a branch, subsidiary, liaison office, representative office or agent, have become very prominent. They have started giving the local corporate giants a run for their money. But they have also brought with them those customary characteristics – professionalism, competition, accountability and transparency – which are essential in the Big Emerging Market that India is vying to become. In the following analysis, the author has endeavoured to sum up in a nutshell the foreign investment law that affects such foreign companies

THE FERA

The Foreign Exchange Regulation Act 1973 (FERA) was promulgated, inter alia, to consolidate and amend the law regulating certain payments, dealings in foreign exchange and securities, and transactions indirectly affecting foreign exchange, the aim being the conservation of the foreign exchange of the country and the proper utilisation thereof in the interest of the country’s economic development

Having the above avowed aim, the Act, for several years, stifled the growth of foreign investment in India. Recent amendments, in line with the on-going liberalisation and globalisation measures, have reduced the rigour of the Act. It still, however, regulates foreign investment in India and contains several provisions affecting foreigners and foreign companies (including their agents and employees who are non-Indian), notwithstanding anything contained to the contrary in any other enactment or law. It thus becomes essential to know and follow these provisions

SOME SPECIFIC PROVISIONS

Section 29 of the FERA suggests that a foreign company is a company (other than a banking company) which is not incorporated under any law in force in India. The following sections merit special attention

For the purposes of sections 28 and 29 of FERA, the term company includes a firm or other association of individuals. Accordingly, the term foreign company also connotes firms and institutions which are registered or incorporated outside India. The term FERA company also deserves attention. It is a company (including Indian firms and institutions) in which the non-resident interest exceeds 40 per cent. The term non-resident is defined to mean participation in the share capital by, or entitlement to the distributable profits of, any individual or company resident outside India, or any company not incorporated under any law in force in India or any branch of such a company, whether resident outside India or not

The Exchange Control Manual (ECM) issued by the Reserve Bank of India (RBI), in Volume I, defines a foreign company as a firm, company or any other organisation incorporated/registered outside India

Provision affecting transfer or sale of shares or bonds and so on of Indian companies (section 19[5]) – No transfer of any share, bond or debenture of a company registered in India made by a foreign company to a national in India will be valid unless such a transfer is confirmed by the Reserve Bank on an application made to it by the transferor or the transferee

Appointment of foreign companies as agents in India (section 28) – Any foreign company or any branch thereof, must not, except with the general or special permission of the Reserve Bank of India (the central regulatory bank in India), act or accept the appointment as agent in India of any person or company in the trading or commercial transactions of such a person or company. Any action in breach of the above will be void. The term agent includes any person or company (including its branch) buying goods with the view to selling them before any processing thereof

Restrictions on establishment of place of business in India (section 29) – A foreign company must not, except with the general or special permission of the Reserve Bank of India –

carry on in India, or establish in India, a branch, office or other place of business for carrying on any activity of a trading, commercial or industrial nature (save as permitted under section 28)

acquire the whole or any part of any undertaking in India of any person or company carrying on any trade, commerce or industry or purchase the shares in India of such company

For the purposes of (2) above, the association of a foreign company as a partner in an existing partnership firm in India is deemed to be an acquisition of the undertaking in India by the foreign company requiring Reserve Bank approval

The Reserve Bank has granted general permission to shipping companies incorporated outside India to carry on their normal commercial activities through agents, provided such companies do not have a branch, office or other place of business in India. Foreign shipping and airline companies are permitted to open branches in India on a reciprocal basis

Foreign companies engaged in manufacturing or trading activities will be permitted to open branches in India for the following purposes –

to represent the parent company/other foreign companies in various matters in India, for example, acting as a buying/selling agent in India

to conduct research work in which the parent company is engaged provided the results of the research are made available to Indian companies

to undertake export and import trading activities

to promote technical and/or financial collaborations between Indian companies and overseas companies

Foreign companies are permitted, on application, to set up a liaison office in India or to post a representative in India for undertaking liaison activities on behalf of the parent. A similar case concerns foreign trading- companies intending to set up liaison offices in India for promotion of exports from India. In approved cases, permission is initially granted for three years on the condition that the expenses of the liaison/representative office in India are met exclusively out of inward remittances

Similarly, foreign companies are permitted, on application and approval, to open temporary project/site offices in India to enable the company to engage in the execution of specific projects/contracts undertaken with the approval of the Government of India/Reserve Bank of India

Foreign Banks are permitted to open branches in India after obtaining permission of the Reserve Bank under section 22 of the Banking Regulation Act, 1949

Restriction on acquisition, holding and so on of immovable property in India (section 31) – A foreign company must not, except with the general or special permission of the Reserve Bank, acquire or hold or transfer or dispose of by way of sale, mortgage, lease (unless granted for a period not exceeding five years) gift, settlement or otherwise, an immovable property situate in India

REMITTANCE FROM INDIA

The Reserve Bank may refuse permission for remittances outside India on account of dividend, profits, income, interest and so on unless the necessary permission under the applicable sections above has been obtained

In particular, it is stipulated that remittance by branches (other than foreign banks) to their head offices outside India, of profits earned in India are subject to prior approval of the Reserve Bank. Specified documents, including certified copies of the audited balance sheet and profit and loss account (for the year to which the profit relates), an auditors certificate containing stipulated items, an auditor’s certificate of compliance with the provisions of sections 28,29 and 31 of the FERA, and documents showing compliance with Indian tax requirements and so on should accompany the application. More detailed requirements are laid down for remittance by branches of foreign banks operating in India

Similarly, an application has to be made to the Reserve Bank for remittance of winding up proceeds arising from the winding up of the branch/office in India. Enclosures to the application include details of the Reserve Bank’s approval to establish the branch/office in India, approval to sell immovable property held in India, an auditor’s certificate containing stipulated particulars, tax clearance in respect of Indian income tax on the net surplus and confirmation that no legal or other proceedings are pending and that, on such remittance, no further remittance facilities will be asked for

The author will now endeavour to bring out the finer points that regulate foreign companies. These are contained in the ECM, referred to above (Chapter II). The Manual is constantly updated by circulars from the Reserve Bank of India, to support and fuel the on-going liberalisation programme

Appointment as agent in India

Foreign companies are required to obtain permission of the RBI for acting or accepting an appointment as agent in India of any person or company in the trading or commercial transactions of such a person or company. This application should be made on Form FNC I to the Central Office of the RBI (Foreign Investment Division)

Trading, commercial and industrial activities

Foreign companies are required to obtain permission from the RBI to carry on in India any activity of a trading, commercial or industrial nature, or to establish in India a branch, office or other place of business for carrying on such activities. Application for this purpose is to be made to the Central Office of the RBI (Foreign Investment Division) on form FNC 2

Acquisition of undertakings in India

Application for this purpose is to be made to the Central Office of the RBI (Foreign Investment Division) on form FNC 6

Purchase of shares in Indian companies

Application for this purpose is to be made on form FNC 7

Transfer/sale of shares/bonds/debentures of Indian companies

Such transfers by foreign companies to Indian residents is required to be confirmed by the RBI on an application (Form TS 1) made to it by the transferor or transferee

Maintenance of bank accounts

Branches/offices in India of foreign companies are permitted to maintain and operate bank accounts in India only with authorised dealers (ADs). The object behind subjecting the opening of and operations on such accounts to a certain degree of regulation is to bring to the notice of such account holders that it is illegal for them to provide any foreign exchange to other residents through their nonresident associates against reimbursement provided locally and to ensure that necessary approval of the RBI has been obtained for their activities in India

While opening Indian rupee accounts in the names of branches/offices in India of foreign companies, ADs are required to obtain an undertaking on Form QA 22 duly signed by all the persons who are authorised to operate the accounts. A fresh declaration will be made when there is an addition to the list of persons so authorised

Such accounts are then treated as resident accounts and operations thereon allowed freely, provided credits to the account arise out of sources declared on the form

Loans in India to liaison offices of foreign companies

Loans/overdrafts are not granted to liaison offices of foreign companies, since the entire expenses of such offices are required to be met out of funds remitted from abroad

Refund of income tax to foreign companies

Application for this purpose should be made to ADs supported by specified documents/particulars, including an indication of the source of funds from which the tax was originally paid, that is, paid out of remittance from abroad or paid by deduction at source

Immovable property

The RBI has granted general permission to foreign companies (other than foreign banking companies) to acquire to hold any immovable property in India which is necessary or incidental to any activity permitted by it under sections 28 and 29 of the FERA. Such companies are required to submit to the RBI a declaration on Form IPI 5 not later than 90 days from the date of acquisition of the property. This general permission does not apply to foreign companies permitted under section 29 of the FERA to open liaison offices or to post representatives in India

For acquiring any additional property, the foreign company has to obtain permission of the RBI. Such property should be for residential use only, the purchase price should be met out of foreign exchange remitted from abroad through normal banking channels and the rent/sale value will not be allowed to be repatriated outside India