STARTING BUSINESS IN INDIA - CHOOSING A SETUP

1.     THE GREAT INDIAN POTENTIAL

India is a country with tremendous growth potential and among the emerging economies. India is an amalgam of the old and new. Its biggest strength and weakness are its multi-party democracy, diversity of opinions ('The Argumentative Indian' as the Nobel laureate And Economist Mr Amartya Sen has put it), population of over 1.2 billion and of course is diversity in terms of culture, religion, language, caste and creed. Political corruption is being taken by its horn. Yet India remains to be one of the biggest markets attracting foreign interests. India remains to be one of the countries which remained largely less affected by the economic upheavals recently suffered by the world.

2.     CHOOSING A SETUP

Choosing an appropriate set up is an important aspect of doing business in India.  Such selection of an appropriate set-up will make both economic and commercial sense by helping the investor to optimize its exposure and minimize risks.

It is important that the country’s legal and regulatory stipulations and requirements are followed with utmost care. This will require the assistance of qualified and experienced legal professionals.

The following are the types of set-ups, which are presently available:

• Liaison office/ Representative Office ("LO")
• Branch office ("BO")
• Project office("PO")
• Branch Office On “Stand Alone Basis”
• Incorporated entities (WOS/JV/LLP)

A body corporate incorporated outside India (including a firm or other association of individuals), desirous of opening a LO/ BO in India have to obtain permission from the Reserve Bank of India ("RBI") under provisions of the Foreign Exchange Regulation Act, 1999, the rules and regulations made there under (collectively "FEMA") .

The application from such foreign entity along with supporting documents, should be submitted in the prescribed form, which will be considered by RBI to ensure that they meet the stipulated criteria.

Depending on the activities/sectors in which the proposed offices will function, the application will be considered under the RBI route or Government Route"

·       RBI Route — Where principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic route.

·       Government Route — Where principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route, or if the applicant is Non - Government Organisations / Non - Profit Organisations / Government Bodies / Departments they will be considered by the RBI in consultation with the Ministry of Finance, Government of India.

In the event of winding-up of business and for remittance of proceeds, the branch shall approach an AD Category – I bank with the documents as mentioned under the Regulations.

2.1           LO

A LO (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. LO is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time.

The role of the liaison office is specifically limited to those stipulated by the RBI, namely:

i.        Representing in India the parent company / group companies.

ii.        Promoting export / import from / to India.

iii        Promoting technical/financial collaborations between parent/group companies and companies in India.

iv.       Acting as a communication channel between the parent company and Indian companies.

The approval for LO is accorded by the RBI on a case-to-case basis. While granting permission certain additional criteria, such as profit-making track record during a period of three years in the home country, and Net Worth parameters are also assessed and looked into by the reserve bank of India.

Permissions from other specific agencies for certain LO activities:

·       Foreign insurance companies can establish LO, after obtaining approval from the Insurance Regulatory and Development Authority (“IRDA”).  

·       Foreign banks can establish LO in India only   after   obtaining approval from the Department of Banking Operations and Development, RBI.

Permission to set up a LO is initially granted for a period of three years and can be extended subject to certain conditions.

2.2            PO

Foreign Companies planning to execute specific projects in India can set up temporary project/ site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specific conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project.  Project Offices may remit outside India any surplus of the project on its completion net of taxes, general permission for which has been granted by the RBI.

2.3           BO

Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up BO in India with specific approval of the RBI. Normally, the BO should be engaged in the activity in which the parent company is engaged. Such BO are permitted to represent the parent / group companies and undertake the following activities in India:

i. Export / Import of goods. Procurement of goods for export and sale of goods after import are subject to the extent government policies. 

ii. Rendering professional or consultancy services.

iii. Carrying out research work, in areas in which the parent company is engaged.

iv. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.

v. Representing the parent company in India and acting as buying / selling agent in India.

vi. Rendering services in information technology and development of software in India.

vii. Rendering technical support to the products supplied by parent/group companies.

viii. Foreign airline / shipping company.

A BO is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer.

BO established with the approval of RBI may remit outside India the profits, net of applicable Indian taxes and subject to RBI guidelines.

It may be noted that all the foreign companies, which have set-up a place of business in India, whether LO, PO or BO have to comply with certain specific provisions of the Indian Companies Act, 1956. However, no such compliance is required for a foreign partnership entering into such activities.

2.4           Branch Office On “Stand Alone Basis” In Special Economic Zone

RBI has given general permission to foreign companies for establishing BO in Special Economic Zones ("SEZs") to undertake manufacturing and service activities, hence no specific approval shall be necessary from RBI . The general permission is subject to the following conditions:

a) such units are functioning in those sectors where 100 per cent FDI is permitted;

b) such units comply with part XI of the Companies Act,1956  

c) such units function on a stand-alone basis.

 Such Branch Offices are restricted to Special Economic Zone (“SEZ”) alone and no business activity/ transaction is allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India.

In the event of winding up of business and for remittance of winding-up proceeds, the branch shall approach an authorized dealer in foreign exchange with the documents required, as per FEMA.

2.5           Incorporated entities (JV/WOS/LLP)

                    2.5.1   Companies

An investor wishing to invest or commence business in India has the option to set-up their business operations in India either in the form of  incorporated  entities  or unincorporated entities. A foreign company opting for the  incorporation  route  for setting up its operations in India is required to incorporate a company in India through either (i) a Joint Venture ("JV") or (ii) a Wholly Owned Subsidiary ("WOS") or (iii) Limited Liability Partnership ("LLP").

JV and WOS, which are generally private companies, are incorporated under the provisions of Companies Act, 1956. The Companies Act also has provisions for incorporating public companies, both listed/closely held and unlisted in stock exchanges. Companies can be formed   and registered under the Companies Act, in one of the following two ways:

(a)    Public Company (listed or unlisted) is a company which  is  (i) not  a private  company; (ii) a company with a minimum paid up capital of INR 500,000 or higher; and (iii) a private company, which is a subsidiary of a public company; or

(b)    Private Company (WOS/JV) is a company with:

           (i) a minimum of two shareholders and two directors;

          (ii) a minimum paid  up capital  of INR100,000  or higher;

          (iii) by its articles restricts the right to transfer  its  shares, 

          (iv) limits  the  number of its  members  to  fifty;

          (v) prohibits invitation to the public to subscribe for any shares in or debentures  of the  company;

          (vi) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

The Companies Act prescribes specific requirements for incorporation depending on the type of entity established. Once incorporated, a company set up by the foreign entity is required to carry on business in India in accordance with Indian law.A foreign company not opting to be incorporated in India is permitted  to conduct its business operations in India through any of the following offices:

                    2.5.2   LLP

Foreign investment in LLP will be allowed only through the Government approval route, subject to various conditions stipulated in the Foreign Direct Investment Policy of India, has modified from time to time.

LLP is also an incorporated entity, which is set up under the provisions of the Limited Liability Partnerships Act. LLP is intended as an alternative business organisation for small-scale industries and service sector enterprises, such as lawyers, chartered accountants etc, which at present, are primarily constituted as partnership firms in India.

LLP is essentially a partnership constituted in corporate form, which has a separate legal identity distinct from its partners. Its primary advantage is the benefit of limited liability, a feature not prevalent in general partnerships. Liability of an LLP’s partners is restricted to the extent of their individual contributions to the LLP. A Partner would not be held responsible for loss caused because of fraud of other partners, of which is that innocent partner had no knowledge.

Can a private company hold annual general meeting ("AGM") outside the city or town etc where its registered office is situated or even outside India?

In the current investment scenario where up to 100% of shares are held by individuals and corporate entities abroad, and the investment vehicles are private companies limited by shares, and the shareholders are residing outside India, a relevant question which is often asked is whether the shareholders need to travel to India merely for the purpose of having an AGM of the shareholders.

According to the Companies Act 1956 ("Act") every company must hold each year an AGM. No company is exempt from holding the AGM. The AGM has to be held in accordance with the stipulation contained in the Act. Broadly speaking, sections 165 to 197 of the Act deal with "Meetings and Proceedings". These sections deal with various aspects of a meeting e.g. length of notice period, penalties for default, quorum for meeting, voting, representation of the shareholders etc.

It is relevant to point out that in these sections there are certain exceptions stipulated for private companies as against public companies and/or private company which is a subsidiary of a public company. Therefore, some relaxation has been provided in the Act for private companies from the rigid rules otherwise applicable to public companies and to some extent to a private company which is a subsidiary of a public company.

For the purpose of this article we need to refer only to Section 166 of the Act which reads as under:

"166. Annual General Meeting

(1) Every company shall in each year hold in addition to any other meetings a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it; and not more than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next:

Provided that a company may hold its first annual general meeting within a period of not more than eighteen months from the date of its incorporation; and if such general meeting is held within that period, it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation or in the following year;

Provided further that the Registrar may, for any special reason, extend the time within which any annual general meeting (not being the first annual general meeting) shall be held, by a period not exceeding three months.

(2) Every annual general meeting shall be called for a time during business hours, on a day that is not a public holiday, and shall be held either at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situate:

Provided that the Central Government may exempt any class of companies from the provisions of this sub-section subject to such conditions as it may impose:

Provided further that-

(a) a public company or a private company which is a subsidiary of a public company, may by its articles fix the time for its annual general meetings and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings; and

(b) a private company which is not subsidiary of a public company, may in like manner and also by a resolution agreed to by all the numbers thereof, fix the time as well as the place for its annual general meetings."

At this juncture it is also relevant to refer to the relevant legislative history of the section. This section was extensively amended in the year 1960 by The Companies (Amendment) Act, 1960.

The legislative history of S.166 is given at pages 1912-13 of the Indian Company Law (11th edition) by Jehangir M. J. Sethna. It can be seen that the 1960 amendment was based on the recommendations of the Companies Act Amendment Committee, 1957, inter-alia to remove the rigidity of S.166, as it existed at that time. The rigidity noted by the committee, among other things, is that "a private company cannot hold AGM at a time and place more convenient to its members". The author has quoted from the "Notes on Clauses" explaining the amendments as follows: "The provisions of section 166 are not effective against delay in the holding of Annual General Meetings on the one hand, and on the other cause unnecessary inconvenience to non-profit making and certain other companies in that they cannot hold Annual General Meetings at a time and place more convenient to their members, in view of the rigid requirements of the present section. It is proposed to remove these defects from this section on the lines suggested in Para 69 of the Report." [Clause 46 of the Companies Amendment Bill, 1959]

The relevant recommendations of the Companies Act Amendment Committee, 1957 are also reproduced by the author, the relevant part of which is reproduced below:

          "Various points have been raised with reference to subsection (2) of this section. It has been said that in many cases it would be more convenient to the shareholders to hold meetings in the principal office of the company instead of the registered office, to meet on a holiday rather than on working days when they might have to attend to their regular work and to meet at such hours as might be found convenient to the large majority of them. ............... In some cases, it is found that the managing agents of the company have their offices in a big city where the accounts of the company are kept and from where they manage all the affairs of the company, but the registered office is in a village or a small township in another State where the factory is situated. Shareholders find it difficult to travel all the way to go to the registered office and, what is worse; find it difficult to get accommodation. All these complaints and criticisms arise out of amendments made in this section as a result of the recommendations of the Company Law Committee. While we appreciate the reasons which prompted these recommendations and are in sympathy with the object sought to be achieved, it appears that their implementation has introduced rigidity into the matter of convening General Meetings which, in practice, is proving irksome to companies limited by guarantee such as Chambers of Commerce and to small companies generally.

          These difficulties might be removed by giving power to the Central government to exempt any class of companies from the operation of section 166 (2) and also by providing that company may by its Articles or by resolution at its Annual General Meeting determine the time and venue of its Annual General Meetings. It may also be provided that, so far as private companies are concerned, General Meetings might be held at such times and places as may be unanimously agreed to by the shareholders.........."

It is amply clear from the above quoted passages that the purpose of the amendment in the year 1960 through The Companies (Amendment) Act, 1960 was intended to remove rigidity and also, among other things to give more flexibility to private companies.

In accordance with the above, section 166 was extensively amended, especially, for the purpose of this discussion, by incorporating the provisos to sub-section (2) of section 166.

Now, the question before us is - what is the scope and amplitude of the amendment made in 1960? Even after the amendment can it be argued that a private company can hold its AGM based on the location of its registered office or can it be held elsewhere in India or abroad. Unfortunately even after extensive research on the subject, no decisions of the Courts in India could be found. Perhaps this is because this section being so self-explanatory that nobody found it necessary to take it to a court of law.

However, I note that a large number of professionals including lawyers, chartered accountants and company secretaries still hold the view that a private company has to hold its AGM "at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated" as stipulated in the main subsection 166 (2) of the Act. They say that the word "place" has to be given a restricted meaning by referring to the main subsection (2).

Para (b) of the 2nd proviso to Section 166 (2) of the companies Act, 1956. stipulates that "a private company which is not subsidiary of a public company, may in like manner and also by a resolution agreed to by all the numbers thereof, fix the time as well as the place for its annual general meetings."

Then there is also another view which holds that it can be held anywhere including abroad with the agreement of all the shareholders/members.

Yet another argument is that proviso (b) to Section 166(2) of the act allows a private company to hold AGM in the "like manner" means as stated in para (2) of Section 166 , to hold AGM at a place within the City town or village where the registered office of the Company is situated. In my opinion this argument is totally untenable as the words "like manner" is directly related to Proviso (a) which has made special provisions for a public company or a private company which is a subsidiary of a public company and wherein such public company/its subsidiary, may by its articles fix the time for its annual general meetings and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings.

Therefore it can be seen that for public company or a private company which is a subsidiary of a public company only two options are available, being (i) articles fix the time for its AGM or (ii) by a resolution passed in one AGM fix the time for its subsequent AGMs. There is no mention of selecting any place by public company or a private company which is a subsidiary of a public company and therefore no deviation has been made for public company or a private company which is a subsidiary of a public company in so far as the place for holding of AGM is concerned. The choice of place will be regulated by the main sub-section (2) i.e. "either at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situate". If the same situation was to apply for private companies there was no necessity to incorporate proviso (b), which in addition to the time has given a right to choose the place of the meeting in accordance with the stipulation contained in proviso (b).

It is also being argued that no Department Circular or clarification has been issued with regard to the choice of place. However, it is relevant to note that there is a Department Circular in the context of the stipulation contained in subsection166 (2) of the Act are read with proviso with regard to holding AGM on a public holiday. The main Section stipulates that AGM "shall be called for a time during business hours, on a day that is not a public holiday,...". The Department vide Letter No. 8/5 (166)/65-PR dated January 21, 1963 clarified that "Section 166 (2) of the Companies Act, 1956 does not now make it absolutely obligatory on every company to hold its annual general meeting only on a day which is not a public holiday. In this connection, attention is invited to the provisions contained in the second proviso to subsection (2) of section 166 of the Companies Act which enabled a company to fix by its articles of association or by a resolution passed in one annual general meeting the time of its annual general meetings generally or any subsequent such meetings." This is clearly an acceptance of the change brought in by the second proviso. If a deviation from the stipulation that AGM "shall be called for a time during business hours, on a day that is not a public holiday," is valid, so can the stipulation in the second proviso regarding the place.

It is a cardinal rule of Interpretation of Statutes that "a proviso to a particular provision of a statute only embraces the field, which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted by the proviso and to no other." (See various Supreme Court Judgments A.N.Sehgal and Ors vs Raje Ram Sheoran and Ors; Padubidri Damodar Shenoy vs Indian Airlines Ltd. & Anr. ;  Mohan Kumar Singhania and Ors. vs Union of India and Ors.)

It is a well-known rule in the interpretation of statutes that the main part of the section must not be construed in such a way as to render a proviso to the section redundant (vide : Maxwell on the Interpretation of Statutes, 12th Edition, page 38). In R. v. Leeds Prison (Governor), Ex p. Stafford [1964] 2 Q.B. 625 it is pointed out thus: "The main part of a section must not be construed in such a way as to render a proviso to the section redundant."

It is also a rule of interpretation that proviso cannot be construed as nullifying the main provision of section. However, in the present matter there is no nullification of the main proviso of Sub-section (2). But the proviso is only carving out exceptions to the main rule vis-a-vis private company and insofar as public company is concerned there is exception made with regard to the place of holding AGM. A public company has to hold its AGM as per the main provision read with proviso (a). Especially in view of the legislative intent, the proviso (b) cannot be rendered redundant insofar as it relates to choice of place for AGM.

The 2nd proviso makes it very clear that, if the Articles of Association authorises and/or if ALL the shareholders agree through a written resolution, a private company can hold AGM anywhere.

When provisos are provided by way of an exception from the main section/ sub section, why does one need to interpret the exception as carrying the same intent as the main section? Had that been so there was no need to provide any proviso. In fact such interpretation would serve to defeat the very purpose of providing an exception. Every word used in the legislation has to be given a meaning and so by not reading a proviso by way of an exception to the main section/ sub section, the intent of the legislature would be nullified.

At page 1924 of the Indian Company Law by Sethna it is stated that "A private company not being a subsidiary of a public company may by its articles as also by resolution agreed to be all the members fix the time as well as place of its AGM. Thus a private company may hold the meeting if the Articles or the resolution so provides in a State or town other than where its registered office is situated." 

A Ramayya Guide to Companies Act (16th Edition) at page 1622 states that “In the case of a private Co, which is not a subsidiary of a public company, both the time and place of the meeting may be fixed either by articles or a preceding AGM or by resolution agreed to by all the members.

At page 2484 of Company Law by K.M.Ghosh and Dr.K.R.Chandratre (13th Edition) ' A private company not being a subsidiary of a public company can fix the place for its all AGMs by resolution agreed to by all the members of the company i.e. by unanimous consent of all its members. The resolution need not be passed at a GM of the co., since it is required to be "agreed to" by all the members. Such a resolution can be passed by obtaining individual consent of each member without holding a meeting". 

FURTHER, at page 2486 of Company Law by K.M.Ghosh and Dr.K.R.Chandratre it is stated that "The position of the proviso and legislative history of sub section (2) make it clear that the purpose of the 2nd proviso is to carve out an exception to the whole of the substantive provision of sub section (2), including, of course, an exception to the requirement of that subsection that every AGM shall be held either at the registered office of the co. or at some other place within the city, town or village in which registered office of the company is situated. IN CONCLUSION, A PRIVATE CO. WHICH IS NOT A SUBSIDIARY OF A PUBLIC COMPANY MAY, BY ANY OF THE THREE METHODS, DECIDE TO HOLD AGM AT ANY TIME (which need not be business hours of the co.) AND ALSO AT ANY PLACE IN INDIA OR EVEN OUTSIDE INDIA." 

In my humble submission, for the aforesaid reasons, a narrow interpretation of relevant proviso to subsection (2) will defeat the very purpose for which it was incorporated in 1960. So when read as a whole section 166(2) it can be seen that provisos are making exceptions to the general rule, subject to stipulations and satisfaction of certain conditions, that AGM may be held at places (including a foreign country) other than at the registered office of the Company or at some other place within the city, town or village in which the registered office of the Company is situated, subject to compliance of various stipulations regarding maintenance of records, notice and others.