Provision Of The Day: Section 2(42) Of The Companies Act, 2013

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Provision

Section 2(42) – Definition of ‘Foreign Company’

‘Foreign company’ means any company or body corporate incorporated outside India which – (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(b) conducts any business activity in India in any other manner.;

Analysis

A Foreign company is defined under section 2(42) of the Companies Act 2013. According to the definition, it is not mandatory for a foreign company to be a ‘company’, it can be a ‘body corporate’ and comes under the domain of ‘foreign company’. ‘Body Corporate includes a company incorporated outside India, but does not include -(i) a co-operative society registered under any law relating to co-operative societies; and (ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf[1].The definition of the body corporate also includes ‘corporation’ which in general sense means an entity having separate legal existence. Hence, apart from the exclusions which the definition makes, a body corporate includes entities like LLP, company, statutory body, etc. For an entity to be termed as a foreign company, the act lays down two requirements both of which needs to be fulfilled as it has the word ‘and’.

The old act of 1956 only covered ‘having a place of business in India’ as the criterion. However, the extant law covers a wide ambit as it also includes the outside companies doing their business in India through agents. A place of business could traditionally mean having a branch office or a project office. But considering that the electronic modes of business are more prevalent where an office is also not required, the present act covers companies doing business through electronic means also. For the purpose of bringing clarity with respect to ‘electronic mode’, there is Companies (Registration of Foreign Companies) Rules, 2014. Rule 2(1)(c) defines ‘electronic mode’ as carrying out electronically based, whether main server is installed in India or not, 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 inviting deposits or accepting deposits or subscriptions in securities, 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. The definition of ‘electronic mode’ is wide enough to cover virtually every transaction carried through electronic mode including through e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission. Such a wide coverage on transactions done through electronic modes is expected to have a great impact on various foreign companies involved in transactions such as consultancy services, financial services, e-commerce etc. Even if the company is opening its shares for the people of India to buy then also it would fall under the ambit of definition. As the rule suggests, the definitions is not exhaustive but illustrative and may cover other things which could be explored during the judicial scrutiny of the rule. The bare perusal of the definition suggests that even a single transaction in India would be sufficient to infer that such foreign company has established a place of business in India. The companies act mandates that every foreign company falling under its definition needs to register itself and establish a permanent place of work in India. Considering the example, Alibaba is doing its business through electronic means, not having any business office in India and hence a foreign company according to the act. As it fall under the domain, Alibaba needs to register itself under the act and have its own permanent place of work in India.

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Crucial Point of Information

The definition is not just for the sake of classifying companies, but has various compliance attached to it. Companies act covers much compliance for a foreign company to comply with, given under Chapter XXII of the act covering sections from 379-393. Confusion rises regarding the foreign companies which are Indian subsidiaries. Such companies are treated as a foreign company, but there are more compliance attached to it than just foreign company which needs to be fulfilled as it has Indian ownership.

[1] Section 2(11) of the Companies Act 2013.

-Samyak Jain (LC Content Writer)


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