Corporate Compliance for Foreign Entities in India

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India is one of the fastest growing economies in the world today. According to a few reports, the next 30 years will see India emerging as the third largest economy in the world, behind China and the USA. This could largely be due to certain policies of the ruling government like the Skill India, Digital India and the Make in India campaigns. These initiatives have enthused a lot of domestic and also overseas stake holders. In the coming years, with the way our economy is growing, young and new start-up companies stand to benefit a lot by entering the Indian market scene now.

It is important to note that conducting business in India usually requires keen ability to understand some of the complex and some not so complex truths that are linked to this country, like the developing policies of the Governments, new laws that have been sanctioned in recent times and the revisions or changes to the existing statues.

This article will help highlight one such aspect of realities which concerns the statutory, regulatory compliances, and the probable precautionary measures that an entry-level company should keep in mind when doing business in India. The focus is mainly on the requirements under the Companies Act, 2013 (New Companies Act) and some other important legislations.

Requirements Under the New Companies Act

Companies that are incorporated in India are mainly regulated by the recently enacted New Companies Act.

The New Companies Act, along with other requirements, also puts down the detailed requirements regarding the appointment ,qualification, retirement of directors, remuneration removal, conducting shareholders and board meetings, related party transactions, passing of resolutions, maintenance of books of accounts and preparation and the presentation of annual accounts, periodical filing of the forms with the Registrar of Companies, etc.

When all the legal formalities that are required for the incorporation are completed and certificate of incorporation is issued to the company, then the law recognises the company as a separate legal entity, distinct from its members who have combined such entity. The company could be public or a private company, several things need to be done post incorporation. There are several matters which need to be looked into immediately after the first board meeting. After that work needs to be done on a periodical and regular basis. The work of the company is done by the directors who warrant the above compliances.

Within 30 days of the company getting incorporated, a director needs to call for the first board meeting by issuing a notice (along with the agenda) of the meeting at least seven days prior to the meeting. A number of matters are then needed to be resolved in the first board meeting.

It is mandatory for the company display its name board along with the registered office address, the company identification number, its email ID, phone number, fax number and website address outside the registered office address. It is important to have these details printed on all bill-heads, business letters and all the official publications. The company must apply for PAN and TAN along with the incorporation.

The company has to convene regular board meetings have to be convened in the calendar year and the minutes of the shareholders meeting and of the Board of Directors has to be prepared and maintained in a form of a permanent document till the life time of the company. This has to be done within 30 days of the meeting. The minutes have to be maintained in a minute’s binder after they are prepared and duly signed. In the similar way the company has to issue the share certificates to the people who have been allotted these shares and maintain a register.

A company needs to file its auditor’s report, balance sheet, profit and loss account and annual return every financial year well before the due date, with the Registrar of Companies.

Apart from this, a company has to inform the concerned Registrar of Companies, on a regular basis, about the removal or appointments of directors and certain other changes in the approved manner.

The CSR (Corporate Social Responsibility), being introduced by the New companies Act, has the provisions wherein corporate entities are supposed to undertake certain philanthropic activities. The companies that satisfy the CSR criteria have to undertake these activities during the given financial year.

Requirements under the Labor and Employment Legislation

The businesses with factories, production lines, will also have to comply and consider with a host of statutes like the Employees’ State Insurance Act, 1948; the Industrial Disputes Act,1948; the Maternity Benefits Act, 1961;The Contract Labor (Regulation and Abolition) Act, 1970;The Equal Remuneration Act,1976; the Trade Union Act, 1926; the Payment of Gratuity Act, 1972; the Employees’ Provident Funds , Miscellaneous Provisions Act, 1952 and the Workman’s Compensation Act,1923,etc.

These statutes oversee issues like the working time and conditions of employment of workers’, rights and obligations of the trade unions, minimum wages and remuneration, insurance of the employees, employment retrenchment, maternity benefits, payment of gratuity/provident fund, regulations of the contract labor, payment of bonus and such other issues concerning the employees.

Requirements Under the Environmental Law

The pollution and environmental control matters are governed by other statutes such as the Environment (Protection) Act,1986; the Air (Prevention and Control of Pollution) Act, 1981 ; the Manufacture, Storage and Import of Hazardous Chemicals Rules, 1989;the Water (Prevention and Control of Pollution) Act, 1974; Hazardous Wastes (Management, Handling and Trans boundary Movement) Rules, 2008; the Indian Forest Act, 1927; the Forest (Conservation) Act, 1980; the National Environment Tribunal Act, 1995; the Public Liability Insurance Act, 1991, etc.

Companies are required to observe the provisions of these environmental laws to the extent applicable to the business operations of such company.

Tax and Stamp Duty

In India, we have a federal tax structure and the taxes are levied by the local regulatory authorities, the state government and the Central Government. These taxes are generally in the nature of

Direct Tax, which includes wealth tax, income tax, minimum alternate tax (MAT), dividend distribution tax, share buy-back tax. Indirect Tax, which includes, Service Tax, VAT/Excise Duty, Entry Tax, R&D Cess, Customs Duty Levies on transaction (this includes securities transaction tax, stamp duty and commodity tax, customs transaction tax).

All Indian companies are subjected to payment of the tax and stamp duty for their business transactions which were undertaken during the course of any financial year along with the income which is generated from such operations. Non-payment (untimely and /or inadequate payment) of stamp and tax duty may attract a moderate to a heavy penalty, and may cause enforceability issues of the documents and, in certain cases, impounding of documents by the authority.

Given above are the general laws which govern companies in India. Local laws also play an important role here.
A company has to keep in mind and adhere to the laws of the state or city where the company is registered and /or where it conducts its operations.

In the last several years, the procedures and policies governing and regulating and the Indian corporation have been increasingly simplified and liberalised. Nevertheless, there are many compliances requirements that need to be obeyed, failing which there may be consequences attracting of penal provisions, disqualifications of directors and in certain cases even imprisonment of the key personnel and the directors.

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.

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