Introduction:
A foreign company within the definition provided by Section 2(42) of the Companies Act, 2013 is a body corporate or company which is incorporated outside India but possesses a place of business in India through an agent or by itself either physically or electronically or carries on any business in any other mode in India. It is not mandated for all foreign companies to adhere to the provisions of the Companies Act. Only those foreign companies wherein half or more of the paid-up capital is held by Indian entities need to comply with the Act. Such companies need to act in consonance with the Companies Act as if they were incorporated companies in India. Form FC-3 provides for the annual accounts of a foreign company along with a list of all the principal places established by it and where it conducts business in India. This article sheds light on the relevant provisions with regard to the above.
History
The need for the FCRA or the Foreign Contribution Regulation Act was felt in the late sixties. It was then established that foreigners with foreign cash could not be allowed to have an effect on the performance of the Government or other Indian institutions, especially those non-governmental organizations who were dedicated to the causes of the needy. The primary objective of this Act was to regulate the usage and acceptance of foreign hospitality and contribution by persons and organizations who were engaged in upholding the welfare of the underprivileged. It also seeks to regulate the flow of foreign funds in such a manner that they are received by voluntary organizations that seek to function in a manner consistent with the ideals of the nation and the values of a sovereign democratic republic. It aims to prevent any diversion of these funds to any other persons or activities which are harmful or detrimental to the interest of the nation. However, it is to be made sure that such foreign aid is not used to influence or affect judges, political servants or electoral politics, and others in important areas of national life. The Ministry of Home Affairs, Government of India enforces this law. Any trust, society, or company which carries on economic, religious, social, or educational welfare activities can register under Section 6(1) of the Act if they are desirous of obtaining foreign funds.[1] However, it has been observed that the amendments brought to the FCRA last year[2] which make it compulsory for NGOs to open bank accounts have hindered the work of several organizations, which have failed to receive foreign funds or donations.[3]
Foreign Company Compliance
There are a few essential filing and compliance requirements that must be adhered to by foreign companies. These are-(1) every foreign company is required to deliver certain documents for registration to the registrar within thirty days from the date on which the place of business was established in India. These include the address of principal office, directors, and secretary of the company and instruments which define and constitute the constitution of the company, (2) a balance sheet and profit and loss account must be prepared by all foreign companies and other documents must be attached and filed with the Registrar of Companies. Furthermore, the book of accounts reflecting the expenditure and receipts, assets, liabilities, etc should be kept at the principal place of business and (3) outside each office and place where the foreign company carries out business, the name of company and country where it is incorporated has to be exhibited.
Companies Act, 2013
Section 381 provides for accounts of foreign companies. It mandates that all foreign companies need to prepare a balance sheet showing the losses and profits in every calendar year with the requisite particulars and a particular form with prescribed documents attached. A copy of the above needs to be delivered to the Registrar. Furthermore, a certified translation of such documents also needs to be attached if it is not in the English language. Besides these documents, foreign companies also need to send a copy of a record of all places of business that had been established by them in India in the prescribed format and in consonance with the balance sheet referred to in sub-section (1).
Companies (Registration of Foreign Companies) Rules, 2014
Rule 4 provides that all foreign companies need to make financial statements relating to business operations in India in compliance with Schedule III for each financial year along with the necessary documents. Furthermore, certain other documents also need to be furnished to the registrar with the financial statement within six months of the end of the financial year of the company to which the documents relate. These include a statement of related party transaction, statement of repatriation of profits, and statement of transfer of funds.
Rule 5(1) talks of audits of a foreign company. It states that all foreign companies need to get their accounts of Indian business operations prepared in consonance with Section 381(1)(a). Also, a chartered accountant practicing in India or a firm comprising of chartered accounts needs to be employed to audit such accounts. Sub-section (2) lays down that the rules made under Chapter X are applicable mutatis mutandis to all foreign companies.
Rule 6 states that all foreign companies need to file a list of all places where it carries on business in India (on the date of the balance sheet) with the financial statement in Form FC-3 along with required fees with the Registrar.
Form FC-3
All foreign companies are required to prepare and file the financial statements within six months of the ending of the financial year of the company to which the financial statements relate in form FC-3. A list of all places of business established in India by the foreign company as on the date of the balance sheet also needs to be prepared by it in the same form. The above period may be extended by the Registrar on an application in writing, up to three months. Some attachments mandatorily need to be made with this copy of the authenticated profit and loss account under Section 381(1), the newest consolidated financial statement of the parent company, and a certified translation in English (if the document is in any other language).[4]
Any organization which receives foreign contributions needs to provide a certificate from a chartered accountant. Form FC-3 provides for the proforma of the certificate that is to be given by the accountant. An audited balance sheet, statement of receipt, and payment account also need to be furnished besides these. Furthermore, all organizations receiving foreign contributions need to file annual returns within a period of 120 days in Form FC-3. This form along with the statement of receipt and payment and balance sheet for foreign contributions received needs to be signed by the chief functionary, certified by the chartered accountant, and submitted in duplicate.
Form FC-3 underwent an amendment in 2001. In the new form, changes have been made as per which details such as interest earned on foreign contributions, total contribution received, and purposes for which these funds were used and received all need to be given. It provides for a plethora of purposes for which the foreign contributions might have been given. When the amount exceeds Rs, one lakh, the details of individual and institutional donors and their names, addresses, purpose, etc need to be furnished. In FC-3 details such as receipt of foreign funds as per the country need to be submitted along with the annual return, balance sheet, and statement of payment account and receipt. An FCRA registered organization needs to file nil returns even if it has not received any foreign contributions. As long as the registration is sought to be retained, the organizations need to mandatorily file Form FC-3. The Chief Functionary of the organization needs to sign the said form and the Chartered Accountant needs to issue a certificate summarizing the opening, closing, and movement of the FCRA funds.
Conclusion
Foreign companies undertaking business activities in India or investing in the businesses in the country have to comply with the relevant laws in India. As an illustration, while setting up an office in India or making an investment a foreign company has to comply with the provisions of the Foreign Exchange Management Act. This Act also mandates that such foreign companies comply with filing and procedural requirements periodically while conducting operations in the country. If a foreign company fails to comply with these guidelines, the company or specific defaulting officers will be liable to pay fines or be imprisoned. Generally, foreign companies that operate in India do not access the capital markets of the country. It is observed that such companies privately raise capital from banks, financial institutions, or Indian investors. A prospectus is needed to be issued if they seek to access capital in a public manner. If a foreign company stops conducting business in India, it may be wound up as an unregistered company- regardless of whether it does not exist as per the law under which it was incorporated or if the body corporate was dissolved.
References:
[1] Details about foreign contribution regulation act, http://www.fcra.co.in/introduction-fcra.html
[2] New Indian FCRA Amendments Impact Foreign Grants to Indian NGOs, COUNCIL ON FOUNDATIONS, https://www.cof.org/news/new-indian-fcra-amendments-impact-foreign-grants-indian-ngos
[3] Vijaita Singh, FCRA amendments crippling our work, say NGOs, THE HINDU (May 9, 2021), https://www.thehindu.com/news/national/fcra-amendments-crippling-our-work-say-ngos/article34521449.ece
[4] FCRA Online Forms, https://fcraonline.nic.in/home/fcra_onlineform.aspx
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