India's New Companies Bill - How It Impacts Foreigners Doing Business in India
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The Companies Bill, 2013 has been passed by the two houses of Parliament of India and is awaiting the assent of the President, which, when assented to by the President of India, will replace the 57 year old Companies Act, 1956. An attempt is made in this article to focus on how the new Bill impacts small and medium sized foreign companies who seek to do business in India through the means of a limited liability company.
Wholly Owned Subsidiary (WoS)
It will now be possible for foreign companies to incorporate their wholly owned subsidiaries with a single shareholder. Hitherto, it was mandatory, that a private limited company has at least two shareholders and hence the foreign company was holding all the shares except one which was in most cases given to a group company or given to an individual. This won’t be the requirement any more.
Such private limited company with a single shareholder is defined as a “One Person Company” (OPC) and will be a great advantage for foreign companies who intend to have their wholly owned subsidiary in its true sense. For all purposes OPC will be a private limited company with limited liability.
Commencement of Business Certificate
Commencement of Business Certificate (CoBC) has been introduced even for a private limited company and hence the time taken to incorporate and commence business is now a little longer than before.
Under the 1956 Act, a private limited company was able to commence business as soon as it received the Certificate of Incorporation (CoI). Under the new Bill, even a private limited company has to file a declaration in the manner prescribed with the Registrar of Companies (RoC) declaring that the subscribers to the memorandum have paid the value of the shares agreed to be taken by them. Only after such declaration is filed and taken on record by the RoC and a CoBC is issued, the company can commence its business.
Given the fact that it normally takes at least 15 to 20 days to open a bank account and have the share capital received into the account from the shareholders, and only thereafter a declaration can be filed with the RoC and CoBC obtained, this could delay the commencement of business for such companies. Foreign companies now will have to take these factors into account and plan accordingly.
Registered Office
Under the 1956 Act, companies were required to provide a registered office even at the time of submission of incorporation documents. This always lead to the query - How can a company have a registered office address prior to incorporation as the company won’t have funds to take on lease an office space?
Under the new Bill, the promoters have to provide an address for correspondence till the registered office is established. However the Bill allows the promoters a mere fifteen days for the company to have a registered office which will be capable of receiving and acknowledging all communications and notices sent to it and further the company is required to furnish to the RoC, verification of the registered office address within 30 days of its incorporation. Only upon verification of the registered office address, the CoBC will be issued and the company can commence its business. Hence it is advisable for foreign companies to take the situation of the registered office into account at the earliest possible time.
Resident Director
By far the largest impact will be felt on the requirement of all companies to have at least one director who will be resident in India. Since a resident director has not been defined as an Indian National, it is possible for large companies who post their representatives to work in India, qualify as a resident director. However for small companies, it will now become necessary to rely on Indian Nationals to fulfill this requirement.
Dormant Company
The Bill has introduced the concept of a dormant company for the first time in India. Under this concept, a company can be incorporated for a future project or to hold an asset or intellectual property. However the company should not have any significant accounting transaction. Even an active company which has turned inactive, due to say, a downturn in business can acquire the status of a dormant company. All dormant companies can turn active on an application so made for this purpose.
Corporate Social Responsibility
It is every company’s dream to increase its profits year on year. But now along with the increase in profits, comes the stipulation to spend at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. This will be applicable for the following categories of companies:
Company having a net worth of INR Five Hundred Crore or more
Company having a turnover of INR One Thousand Crore or more
Company having a Net Profit of INR Five Crores or more
(One Crore INR equals INR Ten Million)
Cross Border Mergers
The new Bill has permitted for the first time, cross border mergers. Now an Indian company can merge with companies incorporated in the jurisdiction of certain countries as may be notified from time to time by the Central Government.
Foreign Companies hitherto were using the acquisition route to take over an Indian company. Now they can try their hands at mergers too. However the prior approval of the Reserve Bank of India (RBI) needs to be obtained. The exact procedures may emerge when the rules have been notified.
Certain Details to be printed
Under the new Bill, every company shall get its name, address of the registered office and the Corporate Identity Number (CIN) along with telephone number, fax number, if any, email and website addresses, if any, printed on all its business letters, billheads, letter papers and in all its notices and other official publications.
This requirement though common in the law in several other countries, was not hitherto followed in India and it will not become mandatory.
ABOUT THE AUTHOR: Rajkishore Bhagwatsaran
Rajkishore Bhagwatsaran, Founder and Managing Partner - Rajkishore Associates
Copyright Rajkishore Associates
More information about Rajkishore Associates
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
It will now be possible for foreign companies to incorporate their wholly owned subsidiaries with a single shareholder. Hitherto, it was mandatory, that a private limited company has at least two shareholders and hence the foreign company was holding all the shares except one which was in most cases given to a group company or given to an individual. This won’t be the requirement any more.
Such private limited company with a single shareholder is defined as a “One Person Company” (OPC) and will be a great advantage for foreign companies who intend to have their wholly owned subsidiary in its true sense. For all purposes OPC will be a private limited company with limited liability.
Commencement of Business Certificate
Commencement of Business Certificate (CoBC) has been introduced even for a private limited company and hence the time taken to incorporate and commence business is now a little longer than before.
Under the 1956 Act, a private limited company was able to commence business as soon as it received the Certificate of Incorporation (CoI). Under the new Bill, even a private limited company has to file a declaration in the manner prescribed with the Registrar of Companies (RoC) declaring that the subscribers to the memorandum have paid the value of the shares agreed to be taken by them. Only after such declaration is filed and taken on record by the RoC and a CoBC is issued, the company can commence its business.
Given the fact that it normally takes at least 15 to 20 days to open a bank account and have the share capital received into the account from the shareholders, and only thereafter a declaration can be filed with the RoC and CoBC obtained, this could delay the commencement of business for such companies. Foreign companies now will have to take these factors into account and plan accordingly.
Registered Office
Under the 1956 Act, companies were required to provide a registered office even at the time of submission of incorporation documents. This always lead to the query - How can a company have a registered office address prior to incorporation as the company won’t have funds to take on lease an office space?
Under the new Bill, the promoters have to provide an address for correspondence till the registered office is established. However the Bill allows the promoters a mere fifteen days for the company to have a registered office which will be capable of receiving and acknowledging all communications and notices sent to it and further the company is required to furnish to the RoC, verification of the registered office address within 30 days of its incorporation. Only upon verification of the registered office address, the CoBC will be issued and the company can commence its business. Hence it is advisable for foreign companies to take the situation of the registered office into account at the earliest possible time.
Resident Director
By far the largest impact will be felt on the requirement of all companies to have at least one director who will be resident in India. Since a resident director has not been defined as an Indian National, it is possible for large companies who post their representatives to work in India, qualify as a resident director. However for small companies, it will now become necessary to rely on Indian Nationals to fulfill this requirement.
Dormant Company
The Bill has introduced the concept of a dormant company for the first time in India. Under this concept, a company can be incorporated for a future project or to hold an asset or intellectual property. However the company should not have any significant accounting transaction. Even an active company which has turned inactive, due to say, a downturn in business can acquire the status of a dormant company. All dormant companies can turn active on an application so made for this purpose.
Corporate Social Responsibility
It is every company’s dream to increase its profits year on year. But now along with the increase in profits, comes the stipulation to spend at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. This will be applicable for the following categories of companies:
Company having a net worth of INR Five Hundred Crore or more
Company having a turnover of INR One Thousand Crore or more
Company having a Net Profit of INR Five Crores or more
(One Crore INR equals INR Ten Million)
Cross Border Mergers
The new Bill has permitted for the first time, cross border mergers. Now an Indian company can merge with companies incorporated in the jurisdiction of certain countries as may be notified from time to time by the Central Government.
Foreign Companies hitherto were using the acquisition route to take over an Indian company. Now they can try their hands at mergers too. However the prior approval of the Reserve Bank of India (RBI) needs to be obtained. The exact procedures may emerge when the rules have been notified.
Certain Details to be printed
Under the new Bill, every company shall get its name, address of the registered office and the Corporate Identity Number (CIN) along with telephone number, fax number, if any, email and website addresses, if any, printed on all its business letters, billheads, letter papers and in all its notices and other official publications.
This requirement though common in the law in several other countries, was not hitherto followed in India and it will not become mandatory.
ABOUT THE AUTHOR: Rajkishore Bhagwatsaran
Rajkishore Bhagwatsaran, Founder and Managing Partner - Rajkishore Associates
Copyright Rajkishore Associates
More information about Rajkishore Associates
View all articles published by Rajkishore Associates
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
