indian company law - key aspects and procedures for foreigners

Indian Company Law - Key Aspects and Procedures for Foreign Residents

Indian Company Law - Key Aspects & Proceduresfor Foreign Residents

Modified on 20 January 2015

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Table of ContentsCopyright - Anil Chawla Law Associates LLP www.indialegalhelp.com2Slide No.Preface3Who is a Foreign Resident4AThree Important Points5A1Need for a Resident Director6A2Appointment of Managing Director8A3Board Meetings by video conferencing10BPoints of Interest / Concern12B1One-Person Company13B2Financial Year15B3Promoter17B4Officer in Default19B5Control of Company21B6Resignation by all Directors23B7Associate Company25B8Subsidiary Company27

Slide No.B9Public Company29B10Authorized Capital31CPoints For Collaboration33C1Additional Matters in Articles of Association34C2Merger of Indian Co. with Foreign Co. 36DKey Procedural Requirements38D1Digital Signature39D2Director Identification No. (DIN)41D3PAN under Income Tax Act44EVisa to India A Quick Glance45E1Visa-on Arrival46E2Business Visa48E3Employment Visa50

PrefaceCopyright - Anil Chawla Law Associates LLP www.indialegalhelp.com3Indian economy has been growing at >5% for over a decade. A large economy growing at such a high rate combined with Indias stable political system, free economy and dynamic spirit of the people is attracting interest from business houses and individuals across the globe.This Presentation is part of the on-going efforts of Anil Chawla Law Associates LLP to help the world get a better understanding of India and her legal system. Companies Act, 2013 replaced Companies Act, 1956. There are many confusions even among Indian professionals about the new law. There are many points on which Indian industry is pleading with Government of India for change. It may be said that the law relating to companies is in a state of flux in India. At the time of writing this, The Companies (Amendment) Bill, 2014 has been passed by the lower house of the Parliament and is awaiting clearance from the upper house. Some observers feel that there may be many more amendments in the pipeline. As the law goes through changes, we shall endeavor to modify this Presentation. This Presentation is for Indian citizens resident abroad as well as for foreign nationals. A word of caution this Presentation is not intended to replace professional advice. Please do consult a legal professional / company secretary. In this Presentation, key points related to a topic are given in one slide and the relevant extract from Companies Act, 2013 is given verbatim in the next slide. The Presentation also gives a quick overview of the type of visas that a foreign citizen may avail of for doing business in India.

Who is a Foreign Resident?The Companies Act, 2013 (the Act) does not define a foreign resident / foreignerAny one (including an Indian citizen) may be treated like a foreign resident if he / she has not been staying in India for continuous period of 12 months immediately preceding the date of his appointment as a managerial person (Schedule V)Anyone (including an Indian citizen) who has stayed in India for a total period of less than 182 days in the previous calendar year will be treated as a foreign resident (Sec. 149(3))A foreign citizen staying in India for 12 months may enjoy all rights under the Act while the same rights are not available to a Non-resident Indian citizen.Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com4

A. Three Important PointsA1.Need for a Resident DirectorA2.Appointment of Managing DirectorA3.Board Meetings by video conferencing

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A1.Resident DirectorEvery company (whether private or public) needs a resident directorEven a one-person company needs a resident director, so a foreign individual wanting to set up a one-person company must necessarily partner with an Indian residentIf a NRI couple (Indian citizens) move to India anytime during 4th July 31st December 2014 and wish to form a company owned by two of them anytime during 2015, they shall need a third person as a resident director.Resident Director condition 182 days Resident director need not be Indian citizen


A1.Resident Director (Continued)7Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 149(3)

Total Stay; not continuous daysMinimum 182 days in previous CALENDAR yearNecessary from the day of incorporation of the companyNo relaxations / exceptions

A2.Appointment of Managing DirectorMust be a resident of India. If not a resident, Central Government approval necessaryResident not defined; Explanation I lists two categories which are included (a) staying in India for a continuous period of not less than 12 months immediately preceding the date of his appointment (b) has come to India for taking up employment in India or for carrying on business or vacation in India. (The word vacation is an obvious mistake. It should have been vocation.)An Indian citizen who has gone to visit his son in USA and stayed there for, say, two months will need Central Government approval for appointment as MD.Proviso does not mention Business VisaA badly drafted Schedule apparently with a typographical error.


A2.Appointment of Managing Director (Continued)9Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 196(4) & Schedule V

A3.Attending Meeting of Board of DirectorsNecessary for a Director to attend at least one meeting in a year.Participation may be in person or by video conference.Physical meetings can be held anywhere in the world.Video conference meetings will not be able to take up all issues. The issues that need physical meetings not yet specified.Video meetings will need to be recorded (The requirement is not for physical meetings).Telephonic conferences (audio only) not recognizedA small company can hold only one physical meeting (anywhere in the world) and one video meeting in a year. So, practically possible to own a company in India without ever coming to India.


A3.Attending Meeting of Board of Directors (Continued)11Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 173(2) & 167(1)(b)

B.Points of Interest / ConcernB1.One-Person CompanyB2.Financial YearB3.PromoterB4.Officer in DefaultB5.Control of Company

Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com12B6.Resignation by all DirectorsB7.Associate CompanyB8.Subsidiary Company B9.Public Company

B1.One Person CompanyVery useful for persons who find it difficult to find trustworthy persons to act as shareholdersAlso useful for foreign professionals like doctors, lawyers, engineers etc. who want to operate with limited liabilityForeign citizen will need a resident director till he / she becomes resident of IndiaNecessary to define line of inheritanceA One-Person Company with only one director still needs to hold meetings of Board (exception under 173(5) strangely relates to only the sub-section and not the whole section)Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com13

B1.One Person Company (Continued)14Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 2(62) & 3(1)

B2.Financial YearFinancial Year in India is 1 April to 31 MarchAn Indian company, which is holding company or subsidiary of a foreign company may apply for adopting a different financial year if needed to consolidate its accounts with the foreign company.Application to be made to the TribunalCorresponding change not made in Income Tax. Section 2(9) of IT Act states -"assessment year" means the period of twelve months commencing on the 1st day of April every yearCompanies adopting a different F.Y. under Companies Act will still need to prepare accounts for April-March to comply with IT Act.


B2.Financial Year (Continued)16Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 2(41)

B3.PromoterA new concept under Indias Companies ActA foreign company / individual getting into a Joint Venture (JV) with an Indian partner must decide if they want to be known as the Promoter of the Indian companyIf the foreigner does not want to be a Promoter, care should be taken in drafting the JV Agreement regarding their powers in relation to control over the affairs of the Indian company and about powers to give directions to the Board.On the other hand, there are clear advantages in becoming a Promoter and the foreigner may be advised to get the status.Power of the Promoter to give directions to the Board may be cast in stone in the JV Agreement.Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com17

B3.Promoter (Continued)18Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 2(69)

B4.Officer in DefaultPromoter shall always be the first to be caught as an Officer in Default, if the company makes some mistakes.Officer in Default need not be an individual since the word used is person and not an individual. So a foreign company may become Officer in Default.Officer need not be an employee of the company. Officer need not even receive any remuneration / benefit from the company.The key is any person in accordance with whose directions or instructions, the Board of Directors or any one or more of the Directors is or are accustomed to act.If a foreigner wishes to avoid being Officer in Default, care should be taken in drafting the JV Agreement.


B4.Officer in Default - (Continued) 20Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 2(60) and 2(59)

B5.Control of the CompanyA much wider term than Promoter since many possibilities are covered including due to either of (a) shareholding (b) management rights (c) shareholders agreement (d) voting agreement (e) any other mannerKey is right to (a) appoint majority of the Directors or (b) control management or policy decisions.Existence of right will establish control. One may have never exercised the right.Adverse effects of being in control are not clear. All punishments and penalties are for officers and not for person in control. So, there need not be any fear of becoming in control.Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com21

B5.Control of the Company (Continued)22Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 2(27)

B6.Resignation by all DirectorsA special situation that gives power to PromoterNow it is possible for a Promoter to manage a private company with all dummy directors who will hold office at the pleasure of the Promoter.Articles of a private co. may provide Directors shall hold office at the pleasure of the Promoter and displeasure of the Promoter will be a disqualification under 164 of the Act.Foreign Investors / Entrepreneurs may take advantage of this to remote control Indian company promoted by them.Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com23

Section 164(3)

B6.Resignation by all Directors (Continued)24Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 167(3-4), 168(3)

B7.Associate Company A new concept in Indian law (Was earlier in Accounting Standards)A foreign company (FC) owns 20% or more share capital of Indian company (IC) or has control of business decisions. IC is associate of FC but FC is not associate of IC.Associate is a one-way relation and not a two-way relationship. Often the Indian Joint Venture of a Foreign Company is an Associate Company of the Foreign Company under the Act Need to check from the view of home law of the Foreign Company whether the Indian Company is an Associate. This is important from the view of accounting of the Foreign Company.Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com25

B7.Associate Company (Continued)26Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com

Section 2(6)

B8.Subsidiary CompanyOne of two criteria (a) control composition of Board of Directors or (b) exercise or control more than half of the total share capitalRestriction on number of layersControlling composition means one can appoint or remove all or majority of the directors.There is a view that if holding company is a foreign company, the Indian subsidiary will be deemed to be a public limited company ref. definition of public company, sec. 2(71). Any JV agreement involving a foreign company must mull whether the foreign company wants to create a subsidiary.Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com27

B8.Subsidiary Company (Continued)28Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 2(87) - Notified except for proviso

B9.Public CompanyA subsidiary of any company (which is not a private company) is a deemed public company.Definition of private company refers to a company fulfilling some conditions.Definition of company refers only to company registered in IndiaBy joining up all definitions, it emerges that any Indian subsidiary of a foreign company will be a deemed public company.Legal position on this point is in the process of debate and deliberations. Will take some time before legal view in the matter is settled.Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com29

B9.Public Company (Continued)30Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 2(71); 2(20) and 2(68)

B10.Authorized CapitalCompanies (Amendment) Bill, 2014 has removed the need for a minimum authorized capital for a company.The Bill has not yet become law. At present, a private limited company must have an authorized capital of Rs. 100,000- and a public limited capital of Rs. 500,000-. The Bill follows the practice followed by many countriesA very low (almost zero) capital company will be most convenient for foreign citizens who wish to own an Indian entity without committing investments. Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com31

B10.Authorized Capital (Continued)32Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comBill not yet passed by Parliament

C.Points for CollaborationC1.Additional Matters in Articles of AssociationC2.Merger of Indian Company with Foreign Company


C1.Additional Matters in Articles of AssociationArticles can include all types of restrictive clauses that JV partners want to safeguard their interests.For example, we recently included a provision in the Articles of a new company that all decisions of Board shall be by consensus.For example, we included a provision that a Special Resolution / Extra Ordinary General Meeting will need approval of all directors without any absentees.Use of standard Articles of Association should be avoided in case of Joint Venture involving foreigners.A Shareholders Agreement / JV Agreement has limited enforceability. Articles of Association is a stronger document and higher care should be taken.Entrenchment a new word in Indian law needs careful attention.Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com34

C1.Additional Matters in Articles (Continued)35Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 5(2-5)

C2.Merger of Indian Company with Foreign Co.It is only an enabling provision in law. Details have yet to emerge.Likely to be permitted with only companies of a few friendly countries.Nevertheless, it may be worthwhile for Joint Venture Agreements to provide for the merger of either Indian company with the foreign company or vice versa, subject to such terms as may be provided in the Agreement and also subject to the rules / restrictions under section 234 of the Act.Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com36

C2.Merger with a Foreign Company (Continued)37Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.comSection 234 - Not yet Notified

D.Key Procedural RequirementsD1.Digital Signature (DS)D2. Director Identification No. (DIN)D3. PAN under Income Tax Act

Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com38Getting a PAN is a simple matter and a foreign resident individual can do it oneself without need of a legal professionals assistance. For DIN and DS it is best to let the Company Secretary who is going to handle company incorporation take care of the formalities. Here, we give only the documents required to be given to the Company Secretary for getting DIN and DS.Please note that it is possible to get DS, DIN and PAN without visiting India. Similarly, it is possible for a foreign resident to incorporate an Indian company without visiting India.

D1.Digital SignatureAt least one of the promoters must have a digital signature. A digital signature is given on a pen drive. Typically, your company secretary will keep it with him and use it for completing all formalities with Ministry of Company Affairs.Documents required for a digital signature: One proof of identity and One proof of address + passport size photograph. In case passport has address, passport serves both as proof of identity and address.Copy of above document(s) for foreign nationals to be attested by public notary / Indian embassy in the country where residing.


D1.Digital Signature (Continued)Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com40

D1.Director Identification Number (DIN)DIN is necessary for everyone who wishes to become a Director or promoter of a companyA person has to take only one DIN. The same DIN works for all companies that the person is associated with.Taking more than one DIN is an offence.DIN application has to be signed by digital signature. Hence, digital signature essential for getting DIN.


D1.DIN (Continued)PAN (Permanent Account Number) under Indian Income Tax Act necessary for Indian citizens whether they are resident in India or abroad.For foreign nationals, PAN is not necessary; passport number and copy is essential. DIN application (DIR 3) has to be accompanied by copy of identity proof, copy of address proof and a photograph in jpg / gif / png format.For foreign residents, documents to be attested by foreign public notary / Indian embassy.DIN 3 has to be verified by a Company Secretary / Chartered Accountant / Cost Accountant.


D2.DIN (Continued)Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com43

D3.PAN under Income Tax ActVisit the website https://tin.tin.nsdl.com/pan/ or http://www.myutiitsl.com/PANONLINE/form49AA.jsp and fill the form 49A or 49AA online.Documents required one for proof of identity and one for proof of address.Proof of Identity DocumentCopy of Passport attested by Indian Embassy / Consulate / High Commission / Apostille orPerson of Indian Origin (PIO) card issued by Government of India orCopy of Overseas Citizen of India (OCI) card issued by Government of IndiaProof of Address DocumentCopy of Passport attested by Indian Embassy / Consulate /High Commission /Apostille orBank account statement in country of residence, duly attested by Indian Embassy /High Commission / Consulate / Apostille in the country where applicant is located orPerson of Indian Origin (PIO) card issued by Government of India orNRE bank account statementOverseas Citizen of India (OCI) card issued by Government of IndiaPlease note that Indian citizens need to fill Form 49 A, while foreign citizens need to fill Form 49AA.There is no need to have an address in India to get a PAN.Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com44

E.VISA to India A Quick GlanceE1.Visa-on-ArrivalE2.Business VisaE3.Employment Visa


E1.Visa-on-ArrivalUseful for initial business meetings before India entry plans finalizedOnly for nationals of Finland, Japan, Luxembourg, New Zealand, Singapore, Cambodia, Vietnam, Philippines, Laos, Indonesia, Myanmar and South Korea.Provided at international airports of Delhi, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad, Trivandrum and Cochin.Should be holding return ticket and money for expenses during stay in India.Not granted to foreigners who have permanent residence or occupation in India.Single entry; duration of each visit limited to 30 days with maximum of two times in a calendar year. Cannot be extended or converted to any other type of visa Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com46

E1.Visa-on-Arrival (Continued)47Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com

E2.Business VisaGranted to Foreign citizens coming to India to set up a business / industrial venture or to explore possibility of doing so; also to DirectorsMust be a person of assured financial standingNot granted for petty business or trade (Business should achieve gross sales / turnover of Rs. 10 million per annum within two years of setting up the business)Not granted for employmentCan be of up to five years duration (10 years, in case of citizens of USA)Multiple entry; maximum duration of each visit may be limited to six months at a stretch (In case of such a restriction, the person may go out and revisit)Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com48

E2.Business Visa (Continued)49Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com

E3.Employment VisaIndia discourages employment visasGranted only to highly qualified or skilled professional being engaged by a company in IndiaNot granted for jobs for which qualified Indians availableShould draw salary in excess of USD 25,000 p.a.Name of sponsoring organization shall be specified in Visa stickerDuration 2/3/5 years or period of Agreement, whichever is lessEmployment visa, generally, not converted into any other categoryNo change of employer, except under special cases


E3.Employment Visa (Continued)51Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com

Thanks!Hope that it was useful!Copyright - Anil Chawla Law Associates LLP www.indialegalhelp.com52Anil Chawla Law Associates [email protected]. 09425009280