Monday, 10 April 2017

And it is back…..

For a person who loves adventure and challenges such as rash driving and walking into dark alleys, it is the best time to be in the corporate law, and especially in the Companies Act, practice, since our Companies Act, 2013 presents new challenges and things to ponder on, on almost a weekly basis.
Recently, I stumbled upon a clarification from MCA which states that Section 392(2) applies only to foreign companies which have issued prospectus and IDRs pursuant to the provisions of Chapter XXII, viz. the chapter under which Section 392 falls and which governs foreign companies having a place of business in India.
A little background. Companies and other body corporates which are foreign i.e. incorporated outside India, which need to have a place of business in India (uch as branch offices, liaison offices, project offices, but not a subsidiary) have to comply with and register under Chapter XXII. I covered the issues related to Chapter XXII in my earlier post.  
Once you are done with India, you may wish to close that place of business formally. For this closure, Section 392(2) provides that provisions of winding up of companies (Chapter XX) which are otherwise applicable to Indian companies will mutatis mutandis apply for closure of the place of business of a foreign company India, as if it were a company incorporated in India. The verbiage cannot be simpler.
There are other Sections (ex. 384) in the same Chapter where the Act makes sections applicable to Indian companies apply (with or without modification) to the foreign companies having a place of business in India. Further, it appears that in order to curb foreign companies who raise funds from Indian public (crowd funding, get-rich-quick schemes etc), an attempt (though not completely accurate) has been made to provide for elaborate provisions so that such companies come within the ambit of the Act and the capital markets regulators, whether or not they have an actual physical place of business and have to formally issue a prospectus and comply with provisions relevant to the type of funding or investment schemes that they run.
Although Section 392(2) presents a huge inconvenience as one will have to take recourse of tribunal etc. for winding up a simple branch office, it is a section of a statute and one has to live with it and is capable of being amended only by the Parliament. To further clarify the fun, Section 391 is repeated below:
Application of Sections 34 to 36 and Chapter XX
391.(1) The provisions of sections 34 to 36 (both inclusive) shall apply to—
(i) the issue of a prospectus by a company incorporated outside India under section 389 as they apply to prospectus issued by an Indian company;
(ii) the issue of Indian Depository Receipts by a foreign company.
(2) The provisions of Chapter XX shall apply mutatis mutandis for closure of the place of business of a foreign company in India as if it were a company incorporated in India.
Turns out, the inconvenience of approaching the tribunal took over the need to go to the Parliament and in a jiffy, MCA clarified that Subsection (2) applies only to those companies who have issued prospectus and/or IDR’s. Essentially, the clarification attempts to state that subsection (2) applies to only those companies which are covered under subsection (1), an intention which by no stretch of imagination or statutory interpretation rules can be possible, unless the section itself is amended for which one has to knock the doors of the Parliament.
Also, it basically means that one has to go to the tribunal for winding up only for those companies which are into vicarious fund raising, fly by night operations, crowd funding etc., which have actually registered under Chapter XXII as a place of business and which, because of applicability of all the provisions related to issue of prospectus etc., have actually complied with them, and now they wish to wind up.
Too ambitious I say.
Another issue is that if at all such an interpretation is possible, how does one close a place of business of a foreign company who has not issued a prospectus or issued IDR’s in India? Does this clarification mean that one doesn’t have to get such place of business closed or de-registered under the Companies Act, 2013 and only has to get things done at RBI and income tax? What happens to the requirement of RBI to have a report from Registrar of Companies submitted that compliances related to winding up are complete?

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