A company incorporated in India under the Companies Act, 1956, being a legal personality, has to obey all the laws enacted by the Government of India for its creation, continuation and association with the parties of the outside world.
The main laws which will impinge upon the existence of a company in the corporate sector are:
-The Indian Companies Act, 1956;
-Foreign Exchange Management Act, 1999;
-Laws on Foreign Investment in India;
-Laws on Financial Systems and Capital Markets;
-Immigration Laws; and
-Taxation laws of India.
The existence of a legal framework is perhaps the most significant aspect of the corporate environment. Not being an exception, the Indian company law, largely based on its English counterpart, streamlines the procedure for regulation of Indian companies & branches of foreign companies operating in India.
Concept & Types
As understood under Companies Act, 1956 a company is an incorporated association registered under the act, having an independent entity distinct from the members constituting it. Companies so incorporated can exist as public or private companies with or without limited liability.
The promoters, deciding the nature of company to be floated, can initiate incorporation of a company, by making application for availability of the name, prepare memorandum & article of association and file it with Registrar of Company (R.O.C.), who after scrutinizing the documents issues the certificate of incorporation.
Memorandum of association (MoA) comprises of the fundamental parameters upon which company is enacted which includes clauses of name, registered office, objects, liability & subscription. Similarly, articles of association (AoA) constitute the rules & regulations that govern the management of its internal affairs & conduct of business including provisions relating to share capital of the company, rights of various shareholders, transmission of shares etc.
Shares may be defined as indivisible units of fixed amounts into which the capital of the company is divided. Generally, a public company is entitled to issue two kinds of shares-equity & preference.
FOREIGN EXCHANGE MANAGEMENT ACT
The object of this Act is to help corporate India to have foreign associations in Indian companies and Indian associations in foreign companies in the form of investments, collaborations, mergers & acquisitions and joint ventures, etc.
Foreign Investment in India:
► As an Indian company
A foreign company can commence operations in India by incorporating a company under the Companies Act, 1956 through:
o Joint Ventures
o Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment policy.
Other options are:
-Wholly Owned Subsidiary
► As a foreign company
Foreign Companies can set up their operations in India through:
o Liaison Office / Representative Office:
o Project Office;
o Branch Office on a ‘Stand Alone Basis’.
► Automatic Route
Under the existing policy, FDI up to 100% is allowed under the automatic route in all activities/sectors except the some selected sectors, which require the prior approval of the Government:
► Government Route
FDI activities not covered under the automatic route require prior Government approval & are considered by the Foreign Investment Promotion Board (FIPB). An application can be made online or on a plain paper accompanied by all the relevant documents. The approvals are generally granted expeditiously.
THE FINANCIAL SYSTEM
The financial system in India is regulated by the Government of India for raising capital for the corporate sector from the Indian capital market and by the Reserve Bank of India for regulating the foreign exchange loans in the form of external commercial borrowings. The Securities and Exchange Board of India is an important and independent legal authority created by the Central Government for regulating the raising of capital through offer of shares to the public.
Foreign Direct Investment (FDI) in India is permitted in the banking sector, however, there is a limit for FDI in the banking sector in India.
Foreign investment by way of transfer of shares of 5% and more of the paid up capital of a private sector banking company, requires prior approval of RBI. Wherever applicable, FDI in banking companies should confirm to provisions regarding shareholding and transfer etc.
The financial system in India allows an Indian corporate to raise foreign currency resources abroad by issuing ADR/GDR, Foreign Currency Convertible Bonds (FCCBs). India also encourages foreign institutional investors.
Mergers & Acquisitions:
In case of mergers and acquisitions, the primary aspect is the acquisition of shares in the Indian entity. An Indian corporate through the issue of ADRs or GDRs can issue shares.
A foreigner is a person born in or coming from a foreign country. The entry of foreigners’ stay, movements and departure is regulated by the Immigration Laws passed by the Indian Parliament and rules framed there under by the Central Government from time to time.
The relevant laws as applicable for various purposes to foreigners visiting India are:
o The Passports (Entry into India) Act, 1967
o The Foreigners Act, 1946 (as amended from time to time)
o The Citizenship Act, 1955 (as amended from time to time)
o The Immigration (Carriers’ Liability) Act, 2000
o The Illegal Migrants (Determination By Tribunals) Act, 1983
Types of Visas:
(1) Tourist Visas;
(2) Collective Visas;
(3) Transit Visas;
(4) Business Visa;
(5) Student Visa;
(6) Conference Visa;
(7) Employment Visa;
The intention behind the above immigration laws is to see that genuine entrepreneurs and business enterprises come to participate in the blooming economy of this country by participating in the economic activities of this country.
TAXATION SYSTEM IN INDIA
India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.
Value Added Tax (VAT), (Sales tax in States where VAT is not yet in force), stamp duty, State Excise, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.
In last 10-15 years, Indian Taxation System has undergone tremendous reforms to come at par with International taxation Systems. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. Since April 01, 2005, most of the State Governments in India have replaced sales tax with VAT.
LAW ENFORCEMENT AGENCIES IN INDIA
The three-tiered system of Indian judiciary comprising of Supreme Court (New Delhi) at its helm, High Courts standing at the head of State judicial system followed by District and Sessions Courts in the judicial districts, form the backbone of all laws, including Business Laws.
The Supreme Court
The apex court of the country enjoys original, appellate & advisory jurisdiction.
The High Courts
The High Courts are generally the last court of regular appeal. The High Courts of Mumbai, Chennai, Kolkata & Delhi enjoy original jurisdiction beyond a certain financial limit (For instance, Rs.20 lakhs & above in case of Delhi).