MAIN FEATURES OF INDIA

 

   India has a large and growing market, developing infrastructure, sophisticated financial sector, flexible regulatory environment incentives and at present is an attractive investment destination in South Asia.

     1.                 Stable democratic environment

2.                 Large market size with a middle class population of 250 to 350 million.

     3.                 Access to Regional International Markets.

     4.                 Large manufacturing capability and well developed R & D infrastructure.

     5.                 Large resources and untapped natural wealth.

     6.                 Highly promising information technology sector. 

7.                 Developed banking system with commercial banking network of over 63000 branches supported by national and state level financial institutions. 

8.                 Vibrant capital market comprising  of 25 stock exchanges. 

9.                 Most competitive technical workforce. 

10.             Conducive foreign investment environment that provides freedom of entry, investment, choice of location location, choice of technology and liberalized import and export. 

11.             Acceleration of privatization process and restructuring of public enterprises. 

12.             Current account convertibility and capital account convertibility. 

13.             Special investments and tax incentives in certain sectors like electronics, telecom, software, oil and gas etc. 

14.             Legal protection of intellectual property rights. 

15.             Import-exports policies in conformity with WTO commitments.  

 

FOREIGN DIRECT INVESTMENT (FDI) POLICY

     Governments, both State & Central in India provide fiscal incentives for investments in core and infrastructure sectors and also in high priority industries such as information technology through specific schemes and creating suitable environment like electronic hardware technology park software technology park export promotion zones special economic zones etc. FDI may be undertaken either by individual entrepreneurs or corporate entities.  The flow of FDI comprises of capital provided by a foreign direct investor through an FDI enterprise or capital received from an FDI enterprise by a foreign direct investor.   FDI has 3 components. 

I.                   Equity capital

II.                Re-invested earning

And

III.             Intra company loans

 

I.                   Equity is the Foreign Direct Investor’s purchase of shares of an enterprise in a country other than his own.

II.                Reinvested earning is the direct investor’s share (in proportion to direct equity participation) of earning not distributed as dividends by affiliates or earnings not remitted to the direct investor.

III.             Intra Company loans or Intra Company debt transaction is a short or long-term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises.

  

    Foreign Direct Investment stock is the value of the share of capital and reserves attributable to the parent enterprise plus the net indebtedness of affiliates to the parent enterprise of the Foreign Direct Investors.  

   Foreign Direct Investors may also obtain effective control the management of the business entity through other names without acquiring any equity shares.   Such methods include inter-alia sub contacting, management contracts turnkey the arrangements, franchising, licensing and product sharing. 

   There are two modalities for Foreign Direct Investment approval – (1) automatic route and (2) approval of FIPB.  Cases not falling under automatic route approval are to be considered by FIPB.   But in the case of Technical collaboration alone without any financial and other collaboration it need only be considered by project approval board.  There are so many sectors were 100 percent FDI is permitted.  Major sectors are 

1.     B to B e-commerce, airports, drugs and pharmaceuticals integrated township development ISPs without gateways electronic mail and voice mail. 

2.     Courier services other than distribution of letters. 

     The above sectors are open for 100 percent foreign ownership but through Government route.    But in the automatic route several sectors like manufacturing activities other than those which attract compulsory licensing loan banking financial services infrastructure like roads and highways drugs and pharmaceuticals which does not attract compulsory licensing and involve re-combinant DNA Technology, Hotel and Tourism, Food processing, electronic hardware, software development, film industry, hospitals private oil refineries, management consultancy, exploration and mining of minerals other than diamonds and precious stones, management, consultancy and venture capital funds. 

It is possible to do business through 

1.                 Liaison/representative office

2.                 Project office

3.                 Branch Office

4.                 Wholly owned subsidiary with 100% foreign equity

5.                 Joint venture.  

  The necessary form {form FC (RBT)} for approval under automatic route should be submitted to the Reserve Bank of India, along with necessary documents. A declaration of foreign investment shall also be filed in form FC (GRP).  The total non-resident shareholding in the undertaking should not exceed the percentage specified in the approval letter.    The royalty will be calculated on the basis of the net ex-factory sale prize of the product exclusive of exercise duties minus the cost of the standard bought out components and the landed cost of imported components irrespective of the source procurements including ocean freight, insurance, customs duties etc.  No minimum guaranteed royalty would be allowed.  Only 20% of the entire contribution brought in by the promoter cumulatively in public or preferential issue shall be locked in for not more than 5 years.   The automatic route for Foreign Direct Investment or technology agreement would not be available to those who have or had any previous Joint Venture or technology transfer agreement in the same or allied field in India. 

 

FOREIGN INVESTMENT ENTRY RULES

   All proposal for foreign investment which do not fulfill the parameters laid down for automatic approval are considered on a case to case basis by the government for grating approvals.  The recommendation of a FIPB in respect of investment up to Rs.600/- crores are considered and approved by the Ministry of Industry and Commerce.  If the investment and more than Rs.600/- crores the same is submitted to cabinet committee on economic affairs for decision. 

 All MNCs and OCBs enjoy the same status as domestic companies.   The following important points are to be noted. 

1.                 The foreign investors have to obtain FIPB approval in respect of all proposals in which the foreign collaborator has a previous venture/tie-up in India.

2.                 The foreign investor has to obtain FIPB approval to all proposals relating to acquisition of equity shares in Indian Company.

3.                 The mergers and amalgamation of companies also require approval of both FIPB and RBI.

4.                 Investment and returns are not freely repatriable in certain cases and is subject to conditions such as period of original investments, say, 5 years, dividend cap, foreign exchange etc.  

There is a special incentive to enhance foreign investment in Information Technology Sector and the following initiatives have been introduced 

1.                 Automatic approval for foreign equity upto 100% in the IT Sector.

2.                 100% equity participation is permitted for NRIs and OCBs

3.                 A foreign collaborator who has a previous venture/tie-up in India in the IT Sector does not require a no objection certificate from the erstwhile Indian partner for establishing another venture

4.                 Certain states have thereon IT policies to promote the development of the IT Sector. 

India has the following special advantages. 

1.                 Large pool of skilled and university trained technical manpower matching global standards.

2.                 Manpower costs in India are a quarter of international costs.

3.                 Relatively well developed supporting infrastructure.

4.                 Usage of latest software tools and a variety of computer hardware platforms.

5.                 Large number of research and development organisations and design/development centers.

6.                 Elaborate testing and quality control, infrastructure and large number of companies approved for ISO 9000, IECQ.

 

   In India market openings have emerged across four business sectors, i.e., IT services, software products, outsourcing (including IT enabled services) and e-business.  Given the availability of relatively cheap and high quality human resources, the second largest English speaking population in the world and its location in a convenient time zone, India offers excellent opportunities for outsourcing.  The slowdown of the US economy may be more of a boon than a bane to the Indian business community as more and more companies are turning to the offshore development model and cross border outsourcing as a measure of cost cutting. 

JOINT VENTURE AGREEMENT 

  A Joint Venture Agreement can be formal or informal and generally involves process of vertical and horizontal integration.  Vertical integration establishes control over resources, production and distribution.    Horizontal integration provides for control or competition.  The success of a Joint Venture (JV) depends on 

1.                 Clearly defined agreement

2.                 Honesty and integrity between the parties And

3.                 Business synergies which are complementary for the new venture.  

  The smooth functioning of Joint Venture requires not only funds and inputs of technical know-how but also a partner who is having adequate managerial skill.  The partner’s integrity is very essential for the success of a Joint Venture.  The advantages offered by FDI are that foreign investors believe in justifying  the undertaking of the following significant commitments: 

1.               Market penetration and revenue potential.

2.               Technology, proprietary knowledge and intellectual property.

3.               Research and Development.

4.               Competition from global rivals. 

   The alliances involving Joint Venture may be either contractual or  structural or both.  The MNCs with substantial investment in India for long term should consider economies of scale and efficiencies that can be achieved through a Joint Venture which provides consolidation of management and control over their investment in India.  Such corporate ventures are characterised by distributive ownership and shared functions 

DIFFERENT STEPS FOR FORMATION OF JOINT VENTURE.

    The different steps involves identifying a suitable location, choosing an appropriate Indian Partner, preparing documents for the approval process and navigating various levels of approval process.  The Joint Ventures are mainly governed by the Companies Act, 1956 and Foreign Exchange Management Act, 1999 and various rules and regulations made there under.  The foreign investment can be either through automatic route or through the other route on getting the approval of Foreign Investment Promotion Board.  The choice of local partner is very important and depends on the type of industry involved.   The next equally important task as already stated is choosing of the right local partner.    Then comes the importance of due diligence.    Due diligence is required to ascertain the issues involved, the local partners, their antecedents debts, liabilities etc.    Once the foreign investor obtains a clear picture of the local partner’s background he can make a decision whether to proceed with the joint venture or not.  A great deal of effort and resource will be required to prepare legal documents and unless those documents are prepared, neither party is protected in the event, if the other party, backs out from the agreed terms of the agreement for Joint Venture.   Only when both parties sign the agreement, it becomes binding on them. 

The major points which should be taken in to consideration at the time of drafting the Joint Venture Agreement are 

1.                 The proposed activities.

2.                 Project, specific or ongoing.

3.                 Geographical limits.

4.                 Obligation of parties to promote and develop business.

   Finance is a matter equally relevant and important and non-availability of finance would leave to failure of the proposed Joint Venture.  The main factors for consideration are:- 

1.                 Amount and respective proportions of initial investment required from parties.

2.                 Contributions – Cash or in kind.

3.                 Mode of financing if by way of loans, consider if interest is deductible in respect of foreign partner.

4.                 Timing/conditionality of contributions together with any consents if required.

5.                 Additional finance if required, then the limits (e.g) time, amount) that obligation on the parties and will additional finance be made pro rata to the original investment or otherwise.

6.                 Default/dilution provisions, if any finance commitment is not met.

7.                 Percentage of new shares to be offered to parties, whether in proportion to existing share-holdings or otherwise.

8.                 Third party finance (the parties will often want their own financing to be repaid pro rata or at the same time.) 

  The obligations that arise from a Joint Venture Agreement are also to be entered in the contract.   The obligation depends upon the 

1.                 Contribution of assets or business.

2.                 Intellectual property right or transfer of technology.

3.                 Undertaking research, innovation and product improvements. 

  The terms in a Joint Venture Agreement provide all relevant terms and respective contribution of the parties to the assets, method of valuation and the funding obligation of the contributor and the details of assets whether a third party approval is required or not.  The Joint Venture Agreement should stipulate the share holding ratio of the local and original partners and agreement for future issue of share capital.   There must be also a clause for transfer pricing policy and buy/sell agreements.  This clause setting out the transfer pricing policy in cases where the Joint Venture company buys raw materials, components, parts semi-finished products or intermediaries from the Joint Venture partners or sells finished good in a buy-back arrangement.  The minimum quantity and price are also to be mentioned.  The joint Venture agreement also should stipulate the method of dispute resolution including any term for appointment of arbitrator and in the event of the termination of the Joint Venture Agreement the mode of distribution of assets after meeting the liabilities.  The supremacy of the agreement over the articles of Association of the Joint Venture Company shall be stated in clear terms. 

100% Export-Oriented Units

 100% Export-Oriented Units (EOUs) are industrial units which produce or manufacture articles or things for export.  The Scheme of 100% of Export Oriented Units was introduced by the Government of India in the year 1980 with a view to give a fillip to exports from the country.  Various incentives are offered to the 100%  EOUs which include the following: 

1.                 Exemption from Central excise duty.

2.                 Import of capital goods, office equipments, components, raw materials and consumables will be exempt from import duty.

3.                 Supplies made by units in the Domestic Tariff Area will be exempt from the payment of Central Sales Tax.

4.                 Release of cement, steel and telephone/ telex connections will be made to 100% EOUs on a priority basis.

5.                 The profits and gains derived by the unit, in respect of the first ten consecutive assessment years from the beginning of the manufacturing or production of articles or thing by the unit, are totally exempt from Indian Income Tax. 

   In order to meet any unforeseen difficulties in exporting their entire production, 100% EOUs are allowed to sell up to 25% of their products in the Domestic Tariff Area. 

  The minimum value additions by the Unit should be 20% or such percentage as mentioned in the Letter of Intent.  Moreover the entire production and operation of EOUs is to be executed in a custom bonded area unless otherwise exempted by the Department of Revenue in the Ministry of Finance.  Automatic approval for quick clearance of proposals of 100% EOUs are given which includes grant of Letters of intent/Permission.  Import of Capital goods and Foreign Collaboration simultaneously. 

  NRIs and OCBs are allowed to invest in 100% EOUs upto 100% equity participation. 

Export Processing/Free Trade Zones.

   Export Processing Zones and Free Trade Zones are intended to provide an internationally competitive duty-free environment for export production, at low costs.   This enables the products to be competitive, both quality-wise and price-wise in the national market and to boost exports of manufactured products. 

 Each Zone provides basic infrastructure facilities like developed land, standard factory buildings, built-up sheds, road, power, water supply and drainage and a whole range of fiscal incentives, Customs clearance facilities are offered with the zone.  Banks, post office and clearing agents are arranged to operate in the service centers attached to each zone.   Various financial incentives are also provided.  Investments in these zones are also open to non-resident Indian Citizens/persons of Indian origin and foreigners. 

 Profits and gains derived by newly established industrial undertakings in the Free Trade Zones are totally exempt from Payment of income tax for first ten conseqcutive assessment years beginning the year in which the unit commences manufacture or production. 

 NRIs and OCBs are allowed to invest in 100% EOUs up to 100% equity participation. 

Electronics Hardware Technology Parks. 

 Electronics industry is another thrust area identified by the Government to tap the vast potential of the export market.   Thus the Government offers various incentives to industrial units set up under the Electronics Hardware Technology Park Scheme. 

 An Electronic Hardware Technology Park (EHTP) may be set up by the Central Government, any State Government.  Public and Private sector undertakings or any combination thereof.  An EHTP may be an individual unit by itself or a unit located in an area designated as an Electronics Hardware Technology Park. 

 Supplies made by units in Domestic Tariff Area (DTA) to EHTP units will be regarded as deemed export and such units will be eligible for the export benefits.    EHTPs will be eligible for clubbing the net foreign exchange earned by them with the net foreign exchange earned by their parent or associate companies in the Domestic Tariff Area for the purpose of according Export House/Trading House/Star Trading House status to the latter.  For the customs duty purposes.  EHTPs will be duty-free and bonded area. 

 The Electronic Hardware Technology Parks may also sell the products manufactured by them in the Domestic Tariff Area to the extent they are entitled to do so under the Electronic Hardware Technology Park Scheme. 

 Application for establishing an area to be designated as an Electronic Hardware Technology Park or for setting up an individual unit as Electronic Hardware Technology Park shall be made to the Department of Electronics, Government of India, New Delhi. 

Software Technology Parks.

  Information Technology is perhaps the fastest growing industry worldwide.  The last decade has witnessed tremendous growth of this industry sector.     There is a great demand for software packages even in developed countries.  India, with its highly skilled but relatively cheaper manpower, is at an advantageous position to enter the field as a major software supplier globally.   The Government of India in its attempt the seize this opportunity and exploit the potential of the world market, has set up Software Technology Parks (STP) at different places in the country where software packages and related service tools will be developed and supplied to overseas buyers.  The Government offers various incentives to the industrial units set up in the Software Technology Parks. 

  Besides the Central Government, an STP may also be set up by a State Government, Public or Private sector undertaking or any combination thereof.   It could be an individual unit by itself or one of such units located in an area designated as Software Technology Park complex by the Department of Electronics. 

 Software Technology Park scheme is a 100% Export-Oriented Scheme for undertaking software development for export using data communication link or in the form of physical exports including export of professional services. 

  An STP unit may import free of duty all types of goods including capital goods required by it for manufacturing, production or processing.  For customs duty purposes, an STP unit will be a duty-free customs bonded area. Goods manufactured in the Domestic Tariff Area and supplied to an STP unit will be regarded as deemed export, and such domestic units supplying goods to STPs will be eligible for the benefits of export of goods. 

  Application for establishing industrial units in Software Technology Parks shall be submitted to the Chief Executive of the Software Technology Park Complex with details of the software project. 

Small Scale & Ancillary Industrial Units. 

 The investment limits for small scale and ancillary industrial units have been reduced from Rs.3 crores to Rs.1 crore in both cases.   The Government has reserved some 812 items for manufacture exclusively in the small-scale sector.  Various incentives, including subsidies and tax concessions are offered to small scale sector by Central as well as State Governments.  The small-scale sector has always been enjoying a protected status in Indian Government policies.

 

FORMATION OF COMPANIES IN INDIA

     The Companies in India are formed under the provision the Companies Act, 1956.  The Companies can be either limited by shares or by guarantee.  Companies limited by shares or guarantee can be incorporated either as a private company or as a public company.  If the purpose is not commercial but to promote are science of charity, then a charity company can be incorporated under Section 25 of the Companies Act.  Such a company can be limited by guarantee.    There are mainly two types of Company, namely a Private Company or a Public Company.   Minimum number of persons required for forming in a private company is two and the maximum number is 50 with certain exclusions.  The minimum number of persons the public company is 7 persons and there is no maximum number.   A private company must have a minimum paid up capital of Rs.1 lakh.    Further by its very nature it prohibits any invitation to the public to subscribe for any shares or debentures and also thee is a prohibition against invitation or acceptance of deposits from any persons other than its members directors or relatives.  There are certain advantageous available to a private company. 

1.                 Provisions as to the type of share capital, further issue of share capital, voting rights, issue of shares with disproportionate rights, etc.

2.                 Provisions restricting the company from giving financial assistance to subscribe to its own shares.

3.                 Provisions restricting the amount of managerial remuneration paid and certain other provisions relating to managerial personnel.

4.                 Provisions restricting the powers of the Board of directors.

5.                 Provisions restricting loans to directors. 

    A public company on the other hand must have a minimum paid up capital of Rs.5 lakh and a private company which is a subsidiary of a public company will be deemed to be a public company.  A company will be a subsidiary company if one company controls the board of directors of the other company or holds more than half of the equity capital. 

Steps  for incorporation of the Company. 

    Application for approval of a name should be given to the concerned Registrar of Companies.   Upon receipt of a name approved by the Registrar of Companies, Memorandum and Articles of Association setting of the objects of the company and rules and regulations of the company shall be drafted.   The Memorandum of Association should contain the objects and the scope of activity of the company.  The Articles of Association shall contain the rules and regulations of the company for management of its internal affairs. 

  The printed Memorandum and Articles of Association shall be stamped before they are signed by the subscribers.  It has to be stamped by getting the desired value of adhesive stamps affixed at the office of collector of stamps.  The value of stamps to be affixed depends on the Stamp Rules of the state where the registered office of the company is situate.   The following documents are required to be submitted to the Registrar of Companies for incorporation of a company within a period of 6 months from the date of intimation by the Registrar of the availability of name: -  

a)     3 Copies of Memorandum and Articles of Association of the Company, but of which one shall be stamped with adhesive stamps and all copies duly signed and witnessed.

b)     A declaration in Form No.1 by an advocate of the Supreme Court or of a High Court, an attorney or a pleader entitled to appear before a High Court, or a company secretary, or a Chartered Accountant, in whole time practice in India, who is engaged in the formation of a company, or by a person named in the articles as director, manager or secretary of the company, that all the requirements of the Companies Act, 1956 and the rules thereunder have been complied with in respect of registration and matters precedent and incidental thereto.

c)    List of directors along with their consent to act as director in From No.29.   The consent in Form No.29 is not required in case of a private company unless it is a subsidiary of a public company.   In default of and subject to any regulations in the articles of a company, subscribers of the memorandum who are individual shall be deemed to be the directors of the company, until the directors are duly appointed in accordance with section 255.

d)    Form No.32 in duplicate regarding particulars of directors.

e)     Form No.18 regarding intimation of the place of registered office of the company.

f)      Certified copy of letter from the Registrar of Companies regarding name availability.

g)    Evidence of fee for company incorporation based on the authorized capital of the company as prescribed in Schedule X to the Companies Act, 1956.

h)    Power of Attorney signed by all the subscribers to Memorandum and Articles of Association authorizing one of the subscribers or any other person authorising him to make corrections in the documents filed for company incorporation if required by the Registrar of Companies.

i)       Power of Attorney, if any, executed by any subscriber(s) authorizing a person to sign the Memorandum and Articles on his or their behalf or executed on behalf of a corporate subscriber. 

    The Registrar of Companies (ROC) will give the certificate of incorporation after the required documents are presented along with the requisite registration fee, which is scaled, according to the authorized share capital of the company, as stated in its memorandum.  A private company can commence business on receipt of its certificate of incorporation. 

   A public company has the option of inviting the public for subscription to its share capital.  Accordingly, the company has to issue a prospectus, which provides information about the company to potential investors.  The Act and SEBI (Disclosure and Investor Protection) Guidelines, 2000 specifies the information to be contained in the prospectus. 

   The prospectus has to be filed with the ROC before it can be issued to the public.  In case the company decides not to approach the public for the necessary capital and obtains it privately, it can file a “statement in lieu of prospectus” with the ROC.  This statement is required to contain information similar to that in a prospectus. 

  On compliance of these requirements, the ROC issues a certificate of commencement of business to the public company.  The company can commence business only after it receives this certificate. 

SHARES 

    The shares of a company are regarded as movable property.  Indian law prescribes two kinds of share capital, viz., Preference and Equity further, Equity can be shares with equal rights and shares with differential rights as to voting, dividend or otherwise.  However, the portion of equity shares with differential rights cannot exceed 25 per cent of the total issued capital of the company.  Preference shares must be redeemable.  Irredeemable preference shares cannot be issued.  The period within which redemption has to be made from the date of their issue has been increased to twenty years from ten years to facilitate raising of funds for infrastructure projects which typically require long-term funds.  In the case of a public company it can be transferred freely.  However, a private company may impose any restrictions for the transfer of the shares.  However, the manner of transfer is specified in each company’s articles of association, which may impose restrictions on the right of transfer.  Prior approval of RBI and FIPB in specified cases is required for share transfers to NRIs or OCBs, if by any transfer or allotment, the percentage of such shares exceed the sectoral cap fixed by the Government.

 

  It may however be noted for a public company it is impossible to refuse transfer because refusal can be only on the following two grounds: 

1.                 The transfer is in violation of the SEBI Act;

2.                 The transfer is in violation of the Sick Industrial Companies (Special Provisions) Act, 1985; or

3.                 The transfer is in violation of its Articles of Association. 

DEBENTURES 

   Within the framework of SEBI guidelines, debentures can be issued to raise funds for setting up new projects, expansion/diversification of existing projects, restructuring of capital, etc.  The popular types of debentures are Fully Convertible Debentures (FCDs), Non-Convertible Debentures (NCDs) and Partly Convertible Debentures (PCDs). 

FIXED DEPOSITS 

  A public company can invite and accept fixed deposits from the general public in accordance with the Companies (Acceptance of Deposits) Rules, 1975.  A non-banking non-finance company in India is allowed to invite and accept deposits from public up 35 per cent of its net worth.  An important condition for such acceptance is that a company planning to invite deposits should not be in default in the repayment of any deposit or in the matter of payment of interest in accordance with the terms and conditions of deposit.  Such default also affects a company’s freedom to make loans to, and invest in, other companies.  Because till such time the default in adhering to the terms of deposit, continue, a company cannot make inter-corporate loans or investments.

 

The Act has created a special protective umbrella for small depositors whose deposit does not exceed Rs.20,000.   In case of any default in either paying interest of principal to them, a company has to on its own initiative intimate the Company Law Board which is enjoined to pass an appropriate order within 30 days of such intimation.  No company shall at any time accept further deposits from small depositors, unless each small depositor, whose deposit has matured, had been paid the amount of the deposit and the interest accrued thereupon.  A depositor can also make nomination on the same lines a share or debenture holder can, to take effect on his death and such nomination will be binding on everyone and shall override the terms of will, even if any written by depositor.

 

DIVIDENDS

 

  Dividends can be paid only out of the profits of a year, undistributed profits of previous years and moneys provided by the Central or any
State Government for the purpose, in pursuance of a guarantee given by the government concerned.  Dividends received in India can be repatriated subject to compliance of exchange control formalities.  Dividend outflow in consumer goods industries is required to be balanced by export earnings over a period of seven years following commencement of production.  This requirement is temporary and is expected to be removed after the balance of payments situation improves.

 

  Now under Section 205 (1A) of the Act the ‘interim dividend’ also has the status of the final dividend.  Because of this, once declared by the Board interim dividend cannot be rescinded later and the declared interim dividend has to be paid to the shareholders.   The amount of interim dividend has to be deposited in a separate bank account within 5 days from the date of declaration and the payment thereof to the shareholders has to be made within 30 days from the date of declaration.

   In the USA, buy back of shares is perceived also as a sort of dividend or reward to shareholders.  In India, companies subject to certain conditions can buyback their own shares upto 25 percent of its paid up capital during one financial year.   Buy back is ideally suited for companies which are over-capitalized with the result the unutilized capital acts as a drag on the earnings per share (EPS).   But buyback can serve sectarian interests too.  Incumbent managements fighting takeover attempts can beef up their control in the company by resorting to buyback.

 

DIRECTORS

 

   A company is managed by a team of individuals, collectively known as Board of Directors and individually known as directors.  The Act makes it necessary for a private company to have at least two directors and a public company to have at least three directors.  The Act also contains exhaustive provisions regarding appointment, removal, remuneration, powers, duties, etc., of directors.

 

  The articles of association of every company contain provisions regarding remuneration to directors.  The Act, however, prescribes an overall limit on total remuneration payable to all managerial personnel which is eleven per cent of the net profit of the company during the financial year.  If in any particular year there are no or inadequate profits, the company may, after obtaining requisite approval, pay any sum by way of minimum remuneration.  Provisions relating to managerial remuneration do not apply to an independent private company.  However, a public company and a private company, which is a subsidiary of a public company, should have a managing director if it has a paid up capital of not less than Rs.5 crore.  Such appointment can be made only after obtaining Central government approval except in circumstances where Schedule XIII has been complied.  The approval contemplated in the Act is ‘post appointment’ approval.   In the event of non-approval of such appointment, the candidate has to return to the company all the remuneration he received from it in the capacity as the Managing Director.

 

The directors have the power to perform all such acts as the company is authorized to perform.  These powers, however, must be exercised as a Board and not individually.    The Act makes it obligatory for the Board of directors to meet at least once in every three months and at least four times every year. 

 

MAINTENANCE OF PROPER BOOKS OF ACCOUNT AND RECORDS

 

 

Every company is required to maintain books of account showing all sums received and expended by the company, all sales and purchases of goods, all assets and liabilities and utilization of material and labour.  The accounts must give a true and fair view of the state of affairs of the company.  Account books are required to be preserved for eight years.  The annual accounts, i.e., the balance sheet and the profit and loss account are required to be presented to the shareholders at the Annual General Meeting (AGM).

 

Where the profit and loss account and the balance sheet of a company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following:

 

1.                 The deviation from accounting standards;

2.                  The reasons for such deviation; and

3.                 The financial effect, if any, arising due to such deviations.

 

AUDIT REQUIREMENTS

 

Audit of the books of account of companies is compulsory under the Act and is known as a statutory audit.  The Act contains elaborate provisions relating to appointment, removal, remuneration, powers, duties etc., of a company auditor.   Under the Act, the Central Government may order a special audit in case it is of the opinion that the affairs of the company are not being managed in accordance with sound business principles or that the financial position is likely to endanger its solvency.  Audit of cost accounts may also be ordered by the Central Government of certain types of industries.

 

WINDING UP

 

A company is a creature of law and as such it can be extinguished only by the process of law.   However, one has to travel a long winding road in the journey of winding up of a company.  The Act lays down the provisions and prescribes procedures for winding up operations leading to the dissolution of the company.  Winding up may be either through court or voluntarily by the members of the company.  Now the Government has formulated a Simplified Exit Scheme, 2005 under Section 560 of the Companies Act, 1956 for defunct companies to get their names struck off from the Registrar of Companies maintained by the Registrar of Companies.

 

A sick or a potentially sick company that has been referred to the Board of Financial and Industrial Reconstruction (‘BIFR’) may be wound up pursuant to an order passed by the Board.

 

If a company wishes to close down a manufacturing unit without dissolving itself, it requires clearance from the government under Industrial Disputes Act, 1947.

 

For final settlement to members of the company abroad, prior permission of RBI is required.  This permission is to be taken once the final amount for payment has been ascertained. 

 

ESTABLISHMENT OF BRANCH OR OFFICE IN OR OUT SIDE INDIA 

 

   The legal procedure is regulated by Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) regulations 2000.  A branch would have been same meaning as per Section 2 (9) of the Companies Act.  Therefore the branch can be a trading processing or manufacturing unit, subject to those activities, which are permitted by the Reserve Bank of India.   But a branch is slightly different from a liaison office which normally acts as a channel of communication between the principal place of business or head office but without undertaking any commercial, trading or industrial activity either directly or indirectly and maintain itself out of in word remittances from abroad. Prior permission of the Reserve Bank of India is required for establishing a liaison office or any other place of business but in the case of banking company no such prior approval is required if it has already obtained the necessary approval under the banking regulations Act, 1949.  A branch or a liaison office can undertake or carry on any other activity relating to or incidental to the execution of the main project.  The permitted activities are the following: - 

1.          Export and import of goods. 

2.          Rendering professional or consultancy services. 

3.          Carrying out research work of the parent company 

4.          Promotional, technical and financial collaboration between the Indian Company and foreign Company/entity. 

There is a slight difference in the matter of its position so far as a person resident out in India and resident in India are concerned.  Person resident out-side in India may undertake or carry on any activity other than the activity relating to the main project.   However there are certain restrictions in this matter as per the provisions of the Companies Act, 1956 viz:  Sections 591 to 608 of the Companies Act, 1956.   Under the said provisions, certain prescribed documents are to be filed before Registrar of Companies were the branch office is propose is to be set up.  If the company has obtained Reserve Bank of India permission already, it need only to produce a copy of the letter of Reserve Bank of India and a statement of receipts and payments made by the Indian branch.  Subject to certain procedural restrictions, remittance of profit of surplus can be effected to the main office situate abroad.  In the same manner an Indian can open an office of branch out side India for Business purposes and can also remit funds from India with the prior permission of Reserve Bank of India.   Immovable properties can also be acquired out side India for business purposes.  Further the company can also open a bank account for remittance of funds.  However half early statement should be submitted to the concerned regional office of the Reserve Bank of India.

 

A foreign company can be registered in India by submitting the following documents to the Registrar of Companies within whose jurisdiction the company wants to function with its principal place of business and simultaneously, a similar set of same documents shall be submitted to the Registrar of Companies, New Delhi. 

1.       Form No.44 as per the Companies (Central Government’s) General Rules and Forms, 1956. 

2.          Certified copy of the Memorandum and Articles of Association with its English translation.  If the translation is made outside in India, it shall be authenticated by the signature and seal of the notary of the place of the country where the company is incorporated.  But if the translation is made in India its shall authenticated by an advocate or by an affidavit of some person who has adequate knowledge of both languages in the opinions of the Registrar of Companies. 

3.       The form No.44 shall be signed by a person resident in India and he shall be authorized to accept notice of service on behalf of the foreign company.

4.       The required filing fee of Rs.300/- shall be paid to the Registrar of Companies, New Delhi.  The forms have to be submitted to the Registrar of Companies within 30 days from the date of opening of a branch or office in India. 

 

GENERAL CONDITIONS FOR FOREIGN TECHNOLOGY AGREEMENT 

 

1.       The total non-resident shareholding in the undertaking should not exceed the percentage(s) specified in the approval letter.

 

2.       The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, customs duties, etc.  The payment of royalty will be restricted to the licensed capacity plus 25 per cent in excess thereof for such items requiring industrial licence or on such capacity as specified in the approval letter.   The restriction will not apply to items not requiring industrial licence.  In case of production in excess of this quantum, prior approval of Government would have to be obtained regarding the terms of payment of royalty in respect of such excess production. 

3.       The royalty would not be payable beyond the period of the agreement if the orders had not been executed during the period of agreement.  However, where the orders themselves took a long time to execute then the royalty for an order booked during the period of agreement, but executed after the period of agreement, would be payable only after a chartered accountant certifies that the orders in fact have been firmly booked and execution began during the period of agreement, and the technical assistance was available on a continuing basis even after the period of agreement. 

4.       No minimum guaranteed royalty would be allowed. 

The lump sum shall be paid in three installments as detailed below, unless otherwise stipulated in the approval letter: -

a.     First 1/3rd after the approval for collaboration proposal is obtained from the Reserve Bank of India and collaboration agreement is filed with authorized dealer in Foreign Exchange;  

b.    Second 1/3rd on delivery of know-how documentation; 

c.     Third and final 1/3rd on commencement of commercial production, or four years after the proposal is approved by the Reserve Bank of India and agreement is filed with the authorized dealer in foreign exchange, whichever is earlier; 

d.    The lump sum can be paid in more than three installments, subject to completion of activities as specified above. 

All remittances to the foreign collaborator shall be made as per the exchange rates prevailing on the date of remittance, through authorized dealers. 

The applications for remittances may be made to the authorized dealer in Form A2 with the under noted documents: - 

a.     a “No Objection” certificate issued by the Income-tax authorities in the standard form or copy of the certificate issued by the designated bank regarding the payment of tax where the tax has been paid at a flat rate of 30 per cent to the designated bank;

b.    a certificate from the Chartered Accountant (depending upon the