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Summary
 COMPANY LAW I RESEARCH PAPER

LEGAL COMPLIANCES AND CHALLENGES FACED BY FOREIGN

COMPANIES IN INDIA
&
LEGAL COMPLIANCE AND CHALLENGES FACED BY INDIAN
COMPANIES IN FOREIGN

GROUP MEMBERS:
1. SHANKH SHUKLA – 81022019338
2. VATSALA VATSA – 81022019253

COURSE: BBA-LLB (HONS.)

BATCH- 2020-2025

SEMESTER: 5TH SEMESTER

FACULTY: PROF. MANIKA SHARMA

DATE OF SUBMISSION: 20.09.2022

Table of Contents
Abstract

The judicial system in India is complicated, and its courts are clogged with too many pending
cases. Before a business may begin operating in India, it must first satisfy a variety of regulatory
requirements, each of which must be complied with in the prescribed manner. Occasionally,
investors find themselves involved in legal conflicts about property in general and other matters
even before operations have begun. As a direct consequence of this, international businesses
who want to start operations in India have to go through a number of hoops in order to secure
the appropriate permissions and approvals. Understanding the laws of various countries is a
strenuous process. Every country has different laws for registration of properties, protecting
the interest of their citizens and protecting their environment. International companies entering
different countries need to abide by the rules in order to sustain and operate without any
hindrances or legal challenges.

Research Objectives

 To know what are the challenges faced by the foreign company while operating in India
 To know the compliances of the foreign company under the Companies Act 2013
 To know the difficulties Indian Companies face while running its business outside India
 Case study on IT rules made by the Indian Government for the social media
 Huddle for the Adani coalmine, an Indian MNC setup in Australia.
 Corporate compliance for the foreign entities in India

Problem Statement

Research questions

 Why are multinational companies quitting India?

 What are the huddles for the Indian company operating outside India?
 How can the foreign company comply with the local government rules?
 What are the legalities to be followed by the foreign company entering into India?

Methodology

In this research paper, we have done the doctrinal research wherein we have relied on the
secondary data like multiple law journals, research papers, news articles and guide book of
taxman and universal law series for our assistance to get well versed with the concept of the
topic and for the in-depth knowledge of the legal challenges and compliances of the Indian
companies and the foreign entities.
 Literature Review

INTRODUCTION

FOREIGN COMPANY

A foreign corporation is defined under section 2(42) of the Companies Act, 2013; such a firm
must adhere to the norms and restrictions imposed by several statutes and directives, including:
• 2013 Companies Act – 1961 Income Tax Act
• GST - SEBI rules and regulations for 2017

• Foreign Exchange Management Act of 1999 - RBI requirements, etc.

5
According to the Companies Act of 2013, a foreign company is any business or body corporate
established outside of India that:

a. Has a physical or electronic place of business in India, either directly or via an agent; and

b. Engages in any commercial activities in India in some other way

Different ways how foreign companies can enter Indian Markets

JOINT VENTURE
13
Section 2(42) of the Companies Act, 2013 defines a foreign corporation; such a firm must
comply with laws and norms imposed by numerous statutes. Joint ventures are the most popular
method used by foreign corporations16to do business in India. A joint venture is possible with
any of the various business divisions in India. A joint venture is a new business formed when
two or more entities collaborate to accomplish a commercial goal. The joint venture is done for
a connection with business objective and for a set time period. A foreign corporation might
engage in commercial operations in India by investing in an Indian company via a joint venture
agreement. In a joint venture, both partners share income, costs, and assets and exert control
over the new firm. Joint ventures are the greatest way to join areas in India that forbid 100
percent FDI.

Liaison office in India

11
Establishing a liaison or representative office is a typical method for foreign enterprises to join
the Indian market. Communication and collaboration are referred to as liaison. Therefore, the
liaison office is employed to communicate with the corporate headquarters. It is referred to as
the company's representative office. The job of these offices is restricted to gathering
information about the potential market and providing prospective Indian clients with
information about the firm and its goods.
Branch office in India

Companies established outside of India that engage in manufacturing and commerce may open
a branch office in India, subject to RBI approval. The branch office must do the same operations
as the main firm. Branch offices are not authorized to engage in direct or indirect retail trade,
nor are they permitted to execute manufacturing or processing operations.
i. Export or Import of products.
ii. Offering professional or advisory services.

iii. Conducting research in the same fields as its parent corporation.

Project office in India

Foreign firms might open a Project Office in India in order to undertake unique projects on a
short-term basis. When a foreign firm acquires a project from an Indian company and the
project receives funding from a bilateral or multilateral finance agency, project offices are often
formed.
Wholly owned subsidiary
A wholly owned subsidiary is a corporation in which a foreign investor invests 100 percent of
its foreign direct investment in India using the automatic method. This is 6considered the
simplest and most popular option for foreign firms to start a company in India. Wholly Owned
Subsidiary is a distinct, independent legal entity that is wholly owned and managed by another
firm (parent company) and operates directly under the direction and decisions of the parent
company. It has its own senior management to oversee the firm's business operations, but all
group-level strategic decisions have been made by the parent corporation alone.
10
Limited Liability Partnership (LLP)

The Limited Liability Partnership Act of 2008 governs the formation and incorporation of
limited liability partnerships. It is a legally distinct entity from its business partner.
A LLP is accountable to the entire amount of its assets, but the partners responsibility is limited
to their agreed-upon portion. Since the partners liability is restricted to their agreed-upon
contribution to the LLP, it combines features of both a corporation and a partnership business.

ANALYSIS
“Compliances for Foreign Companies under Companies Act, 2013
1
1. Chapter XXII
2. Companies (Registration of Foreign Companies) Rules, 2014”

Section 340- Documents to be delivered to the 15 registrar by the foreign companies

Within 30 days of opening a business location in India, every Foreign Company must submit
these documents to the Registrar for registration; The documents include a certified English
translation of the document's original language if it is not in the English language, and a
certified copy of the company's charter, laws, memorandum 1
of incorporation, or other
document outlining or defining the company's constitution; full address of the business's
registered or main office List of the company's directors and secretary 5
that includes the
information required by Rule. It must also include Details concerning the opening 8
and shutting
of a place of business in India on an earlier occasion or occasions, including the full address of
the office of the company in India that is considered to be its major place of business in India.
3
The application in Form FC-1 must be supported by an attested copy of approval from the
Reserve Bank of India under the Foreign Exchange Management Act and the rules and
regulations thereunder, or by a declaration from the authorized representative
1
of such a Foreign
Company that no such approval is necessary, according to Rule 3(3) of the Companies
(Registration of Foreign Companies) Rules, 2014.
The application in Form FC-1 must be supported by an attested copy of approval from the
Reserve Bank of India under the Foreign Exchange Management Act and the rules and
regulations thereunder, or by a declaration from the authorised representative of such a Foreign
Company that no such approval is necessary.
1
Section 381: Accounts of Foreign Companies:
Each calendar year, Foreign Firms are required to file a balance sheet and profit & loss account
in such1 manner, having such details, having the documents and the papers as defined under
Rule 4. Along with a copy of the list of all the locations where businesses have been created in
India as of the balance sheet date, all of these documents must be filed with the Registrar of
Companies. A professional chartered accountant in India, a firm of practicing chartered
accountants, or a limited liability partnership of practicing chartered accountants must audit
every foreign company's accounts relevant to its Indian business operations, according to Rule
5.
1
Section 382: Display of Name of Foreign Companies:14
Every Foreign Company is required 1
to display the name of the company and the country in
which it was incorporated outside every office or place of business in India, as well as in all
business letters, bill heads, and letter paper, as well as in all notices and other official
publications. The name must be written in clearly readable English letters as well as the native
tongue of the state in where the office is located.

Yearly return
Within sixty days of the end of the fiscal year, every foreign firm is required to compile and
submit an E-Form FC-4 annual return detailing the company's financial information.

Provisions for capital-raising

1
Foreign enterprises operating in India often do not have access to Indian finance markets. They
may raise private financing from Indian investors, Indian banks, and Indian financial
organizations.
1
If they want to generate money publicly, they must publish a prospectus.
Rule 11 of the Companies (Registration of Foreign Companies) Rules, 2014 specifies specific
documents that must
7
be affixed to the prospectus, including:
1. Consent from an expert
2. a copy of contracts for the appointment of the managing director or manager
3. a copy of any other important contracts not entered in the regular course of
business but entered during the previous 2 years, a copy of the underwriting
agreement, etc.

Legal challenge
Revenue and Stamp Duty

Foreign businesses are subject to a staggering 40% Corporate Income Tax (CIT), plus a
surcharge and an education cess. When a foreign company's revenue reaches Rs. 1,00,00,000,
a 2% surcharge is applied, and a 5% surcharge is applied if the revenue surpasses Rs.
10,00,00,000. In order to prevent double taxation on income received in both the country of
resident and the source country, India has negotiated a number of double tax avoidance
agreements with other nations. This is done to encourage commerce, investment, and mutually
beneficial economic partnerships. Knowing whether the nation in which you live or make
money has a double tax avoidance agreement with India is necessary in order to take advantage
of this benefit.

The municipal regulatory agencies, state governments, and the federal government all levy
taxes in India, which has a federal tax framework. Typically, these taxes take the form of

Income tax is included under direct tax. Service tax, excise tax, and customs duty are all
examples of indirect taxes that are imposed on transactions (securities transaction tax and
commodity tax, customs transaction tax).

For all commercial transactions completed within a given fiscal year, Indian corporations are
required to pay tax and stamp duty on top of whatever revenue they get from such transactions.
In addition to incurring a light to high fine, failure to pay stamp and tax duties may result in
problems with the papers enforceability and, in certain circumstances, the authority may decide
to seize the documents.

Labour and Employment Legislation requirements

Businesses
4
with factories and production lines have to also abide by and take into account a
number of statutes, including the Employees State Insurance Act of 1948, the Industrial
Disputes Act of 1948, the Maternity Benefits Act of 1961, the Contract Labour (Regulation and
Abolition) Act of 1970, the Equal Remuneration Act of 1976, the Trade Union Act of 1926, the
Payment of Gratuity Act of 1972, the Employees Provident Funds.

These statutes regulate things like employee working hours and working conditions, trade
union rights and responsibilities, minimum pay and compensation, employee insurance,
layoffs, maternity benefits, payment of gratuities and provident funds, rules for contract labor,
bonus payments, and other things that affect employees.

CASE STUDY
VIVO INDIA CASE
The recent instance of ED raids at many sites on the Chinese multinational Vivo, doing
business as Vivo India Pvt. Ltd., is one of the best examples of noncompliance with Indian law.
This year, Vivo India was accused with money laundering, falsification, and transferring funds
to China to dodge Indian taxes. It was reported that the Chinese smartphone manufacturer sent
over half of its revenue Rs 62,476 core to China.The ED thinks that this alleged forgery was
committed to launder unlawfully obtained cash via the use of shell or paper corporations.
According to the ED, there is evidence that Vivo executives manipulated paperwork during the
businesses incorporation.

The rules of CHAPTER X MISCELLANEOUS 62 of the Prevention of Money Laundering

Act provide that the minimum sentence for money laundering is three years, which may be
increased to seven years and accompanied by a fine for the firm. It further specifies that the
company's accounts may be suspended and its assets can be taken.

Vivo India filed a related affidavit with the Delhi High Court after the accounts were stopped.
The Delhi High Court ordered India to provide a bank guarantee of Rs. 950 Cr. in connection
to the searches at several sites. In accordance with the most recent court decision, the ED had
requested that the business give specific evidence in support of its claim that it will pay around
Rs. 260 crores for direct and indirect taxes, employee perks, and other expenses. The matter is
currently pending before the Delhi High Court. Other Chinese multinational corporations have
also been implicated in violations of Indian tax laws and regulations.

EXAMPLE OF LEGAL CHALLENGE OF MNC IN INDIA – ADAPTION OF

CONSTANT AMENDING INDIAN LAWS

The Indian government criticized IT and social media corporations such as Facebook, Instagram,
Google, and Twitter in 2021 for failing to comply with the modified IT guidelines of 2021 that put
obligation on the businesses to prevent unlawful content and remove the same. The guidelines were
announced in February 2021, and businesses were given three months to comply.

The penalty of failing to comply was the termination of operations in India. After the majority of
corporations agreed to comply with the new regulations, Twitter, a social media company located in
the United States, sued the Indian government for the same.

This proved to be one of the most difficult legal issues Twitter has ever faced in India, as it was forced
to choose between adhering by the regulations or ceasing operations in the country. After a few
sessions, the Delhi High Court dismissed the petition, and Twitter has just complied with the updated
IT legislation of 2021.

LEGAL CHALLENGE INDIAN COMPANY FACE IN FOREIGN COUNTRY

Registeration of the property

Property registration requires a lot of time in other nations. Private businesses handle the first
two phases of getting a title report and an environmental assessment, while a governmental
body handles the remaining two steps of transferring the forms and registering the title.

Ex. In Los Angeles, registering a property involves five steps and takes a number of days. The
longest procedure, which might take two weeks, calls for a third party to conduct a number of
environmental checks before title insurance covers can be issued.

Cross-Border –
Trade Indian companies face challenge while running its operation because of the application
of the different laws of the different countries.
Comparing the US , the country is placed 36th for the ease of cross-border trade. Canada and
Mexico are the US's two border trading partners, and each has its own set of rules. The
USMCA, often known as the US-Mexico-Canada Agreement, just superseded the North
American Free Trade Agreement (NAFTA). The negotiation's main goals were protecting
intellectual property, labour and environmental rights, and achieving a balance between the
interests of the agricultural and automobile sectors.

Ownership of the company

A huddle which is faced by Indian Companies include complying with the legal requirements
in the host company in which it is operating its business in. There are many counties which has
made it mandatory that the MNC has to share its ownership of the business to the host country
if it wants to set up its operation in that country
Ex- Whether via local distributors, local business partnerships, franchising, or operating a
representative office. To establish a Limited Liability Company in the UAE, the foreign firm
also requires a local partner.
Having difficulty locating a local sponsor or partner
When a foreign firm intends to establish a business in the host nation, a local sponsor, partner,
or adviser is required. Finding a competent and qualified sponsor or partner for the business
proves to be challenging.

Construction Permits
Getting construction permissions is a big challenge in almost all major economies of the world
and even within various cities of a country, acknowledging the environment and pollution laws
with respect to the different categories of land. The number of steps involved in acquiring the
construction permits vary significantly from city to city and also makes the process time
consuming and lengthy. For examples, getting a construction permit in the city of Novosibirsk
in Russia is easier and less time consuming then getting such permits in the premises of
Moscow.

CASE STUDY

ADANI’S’ AUSTRALIA COAL MINE STUDY:

Background
Beginning in May 2011, the Adani company bought Queensland's Abbot Point coal port from
2
the Queensland government for $1.98 billion and a 99-year lease. This was a key transaction
since the Adani company intended to export most of the coal from the Carmichael coal mine
to India for use in Adani Power's power facilities. The Carmichael coal mine is situated around
300 kilometers inland in isolated Central Queensland.

The 'Carmichael Coal mine and a simultaneous connecting of the said mine with the rail project
was classified a'significant project' by the Queensland government 2in November 2010,
suggesting the project required a thorough environmental impact study. The Adani group got
the terms of reference for the Environment Impact Statement (EIS) in May 2011, and then
started a complex process of paperwork, approvals, and legal battles due to lawsuits filed
against the planned mine by environmentalists and landowners. In 2016, the mining lease was
granted.

Problems at the Coal Mine

12
Coal prices dropped from $90 per tonne
2
in 2010 to $52 per tonne in 2016, raising doubts on
the mine's financial sustainability. India's coal imports peaked in 2014-2015 at 217 million
tonnes, decreased to 204 million tonnes in 2015-2016, and continued to decline in 2016-2017.
The price of solar energy was dropped to be almost at par with coal pricing.
2
During this time, Piyush Goyal, the then Union minister for electricity, coal, new and
renewable energy, declared the government's decision to discontinue coal imports, significantly
diminishing the chances for the Carmichael coal project.
As pressure mounted on Australian banks to follow suit, up to eleven large foreign banks
declined to support the project. Here, the corporation encountered financial challenges from
Australia and all of the world's largest banks. The worldwide decline of the coal market
increased the financial feasibility of the project in Australia, since none of the financial
institutions were willing to risk incurring losses.

The government's decision in 2019 to award Adani Mining an unlimited license for 60 years
to utilize groundwater from the2 Great Artesian basin for the project sparked considerable
protests and more lawsuits. The Great Artesian basin is one of the biggest underground fresh-
water reservoirs in the world
9
and the sole stable source of fresh water for a significant portion
of Australia's regions. It is predicted that the Carmichael coal mine might utilize up to 26
million litres of water per day from the basin, causing farmers to fear for the future of their
source of potable water.

Opposition and lawsuits from traditional landowners 2

The communities of the Wangan and Jagalingou (W&J) protested because they were the
traditional owners of the land on which the Adani group proposed to build its mine. They
argued that if the mine were built on their homelands, it would irreparably destroy their
customs, culture, and heritage. In court, the W&J people filed a "native title claim" for around
30,000 sq. kilometers.
All of this resulted in the filing of four separate lawsuits in the Federal Court of Sydney by the
Mackay Conservation Group, which alleged that Adani Enterprises had violated the
requirements of the Environment Protection and Biodiversity Conservation Act 1999 by
refusing to accept Conservation advices listing the threats to two different species of the "Great
Barrier Reef" (Australia).

After four legal challenges in several Australian jurisdictions, Adani mining changed its name
to Bravus Mining and Resource. The most difficult aspect of their activities was winning their
legal fights. Today, Adani Mining (formerly Bravus Mining Resource) is establishing and
functioning with less than half of their early ambitions for large-scale investment. In addition,
the Rail Link Project will be self-funded by the organization since the banking industry is
unable to provide the necessary financial help.

CONCLUSION
Almost every nation has a tax system that is intended to generate revenue from businesses that
operate there. Even though it is theoretically required, some businesses avoid paying taxes to
host countries by taking advantage of loopholes and ambiguous tax regulations. Such strategies
can cost the host countries billions of dollars. Not complying to the laws can extend from
criminal liability to even closure of the business in the operating country.
The MNCs along with working according to the laws, also need to respect the cultures and
traditions of the place. The interests of the citizens must be protected for smooth running of the
business. As discussed in the paper, even though the govt. of Queensland was satisfied with
Adani’s business model, since it could not go in the interest of its citizens for protecting
environment, it had to face legal challenges at every stage of their commencement of
operations.
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