• The negotiation of an international code of conduct on the transfer of technology has been the objective of the developing countries.
• Most of the transfers are between the developed countries themselves and only 10% occur between developed and developing countries.
• The principal complaint of the developing countries is that the Transfer of Technology is too costly and they are in a disadvantageous position to bargain.
• The monopolistic and patent regime prevent the developing countries from developing indigenous technologies.
Objective of the Code is to strike a balance between the rights and interests of the suppliers of technology developing countries.
• The work for a Code was started in 1974 and an expert group was constituted.
• It was its first draft in 1978 and its final form resulted in 1981. The Code was adopted in 1985.
• In the first place it is recognized that science and technology plays a fundamental role in the socio-economic development of all countries.
• Secondly it declares that technology is to buy the progress of making.
• It also asserts the belief that a code of conduct will assist the developing countries in their selection; acquisition and effective of technology which are appropriate to their needs.
• It also recognized the need to strengthen the scientific and technological capabilities of all countries.
• It also drew attention to the need to improve the flow of technological information so that countries could select the technology that was appropriate to their needs.
Definition of transfer of technology under this Code is the "transfer of systematic knowledge for the manufacture of a product, for the application of a process or for the rendering of a service and does not extend to the sale or lease of goods".
• The objective of the Code is to establish general and equitable standards for the transfer of technology and facilitate the international flow of technological information and also to specify restrictive practices which would restrain parties' technology transfer transaction.
• The States have the right to adopt appropriate steps for encouraging transfer of technology under mutually fair and reasonable terms.
• The principles of sovereignty and political independence of States should be recognised.
• States should co-operate in the international terms for transfer of technology in order to promote economic growth.
• The third Chapter contains some limitations on the right of government particularly of acquiring countries to pass legislation within the TOT code.
• So the countries should promote a favourable and beneficial climate for the international transfer of technology.
• Each country, adopting legislation on the protection of industrial property, should have regard to the national needs of social and economic development and should ensure effective protection of intellectual property.
• This claim was objected by the G 71 countries.
• Para 53 correctly expresses the fundamental role of jurisdiction that the activities of corporations are under the jurisdiction of national governments.
• The disputes between States and Trans-National Corporations (TNCs) which are not amicably settled between parties are the jurisdiction of the courts and other authorities of the State.
• But if the parties agree on Arbitration this rule apply.
• Para 51 deals with clarity and stability in national policies.
All laws and regulations with regard to TNCs should be made readily available and administrative practices also should be disseminated.
(d) Para 52. Reasonable safeguard should be taken to protect the confidentiality of informations submitted by TNCs to the concerned Governments.
(e) Para 53. Transfer of nationals from one TNC to another in some other country should be subject to the national law.
(f) Para 54. Transfer of payment relating to TNC investment.
The re-partition of any profits by TNCs are subject to the Foreign Exchange Regulation of host countries.
The developing countries oppose it on three points (G77)-
(i) The clarity and stability of national policies.
(ii) Transfer of host countries national's for training
(iii) The unrestricted transfer of payments.
• Para 55 of 1990 Code acknowledges the right of the State to nationalize the assets of TNC's and to pay adequate compensation in accordance with national laws under the Ecosoc.
• In 1990 a draft Code was formulated on the basis of proposal by
G-77 countries.
• Chapter IV of the Code provides for general provisions relating to the treatment of TNC's and Chapter V deals with Inter-Government Corporation.
• General treatment of TNC by the countries in which they operate.
• Nationalization.
• Jurisdiction.
(a) Paragraph 48, Regulation of the role of the TNC in different countries, their entry and establishment.
• Their role is the economic development and prohibiting their presence in certain areas.
(b) Para 50, Non-discriminatory or equality of treatment.
• Subject to national treatment protesting National Security and public order, the TNC should be entitled to treatment not less favourable then the domestic enterprises in certain circumstances.
The liberalization process started from 1970's in developing countries, in particular in India during 1990's had opened the activities of Trans-National Corporations (TNC's) Developing Countries.
(a) To prevent interference in the internal affairs of the countries.
(b) To eliminate their restrictive business practice and conform to their national development plans.
(c) To bring about assistance in transfer of technology and management skills in developing countries.
(d) To regulate the re-partition of the profits accruing from their operators.
(e) To promote investment of their profits in developing countries.
• Many NGO's pointed out the right of TNC's and child labour.
• To draft a Code of Conduct on TNC was entrusted with UN centre ONTC in 1975. It established measures including financial, technical, and institutional mechanisms.
• Financial sector includes currency regulations, domestic credit, treatment and pricing policies.
• Governments may also establish terms, conditions and duration for the evaluation, negotiation and registration of transfer of technology.
• This Chapter prohibits a number of restrictive practices.
• Grant back provisions - abuse of dominant position by supplying party.
• Challenges to validity: - This is a non-challenge clause and it requires the acquiring party to refrain from challenging the validity of patents and other types of protection.
• Exclusive dealing.
• Restriction on research.
• Price fixing.
• Restrictions on adaptations.
• Tying arrangements:-restricting sources of technology goods or services, or imposing additional technology which the acquiring party did not want for their use.
• Export restrictions.
• Restrictions or publicity etc.
• Foreign Company is one, which has been incorporated outside India and conducts business in India. The company is required to comply with the provisions of the Companies Act, 1956.
• Foreign Company can set up Liaison/Representative, Project and Branch Offices in India.
• Such companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.
• A Liaison office is not allowed to undertake any business activity in India and cannot therefore, earn any income in 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.
• The opening and operation of such offices is regulated by the Foreign Exchange Management Act (FEMA), 1999. Approval from the Reserve Bank of India (RBI) is required for opening such offices.
• Expenses of such offices are to be met entirely through inward maintenances of foreign exchange from the Head Office, abroad.
• Such offices cannot do trading or commercial activities. Permission to set up such offices is initially granted for a period of 3 years.
• Office activities should be limited to collecting and transmitting information between the overseas Head Office and potential Indian customers.
• Such offices should not charge any commission from Indian customers for providing liaison services.
1. Temporarory projects.
2. Approval of RBI is required.
• To represent the foreign companies in various matters in India e.g. acting as buying/selling agents in India.
• To conduct research work.
• To undertake export and import trading activities.
• To promote possible technical and financial collaborations between the Indian companies and overseas companies.
• Rendering professional or consultancy services.
• Rendering services in Information Technology and development of software in India.
• Rendering technical support to the products supplied by the parent/Group companies like LG, Whirlpool, Godrej, and GE.
• Foreign Companies can set up operations in India.
• It (J.V. & W.O.S.) is subject to the government regulations and approvals.
WOS:
CASTROL, WHIRLPOOL, PEPSI, COKE
Parle+Coke:
sold off Coke.
Coke acquired running business of Thumsup/Limca/Goldspot so that they were at par with Pepsi.
The FIPB is the nodal, single window agency for all matters relating to FDI as well as promoting investment in the country.
For the following categories for FDI/NRI and OCB investment, government approval for FDI through FIPB is necessary:-
All proposals that require an Industrial Licence include:
• the item requiring an Industrial Licence under the Industries (Development and Regulation) Act, 1951;
• foreign investment being more than 24% in the equity capital of units, manufacturing items reserved for small scale industries; and
• all items which require an Industrial Licence in terms of the locational policy notified by Government under the New Industrial Policy of 1991.
• all proposals relating to acquisition of shares in an existing Indian company in favour of a foreign/NRI/OCB investor.
Foreign Investment through Global Depository Receipts (GDR)/American Deposit Receipts (ADR)/Foreign Currency Convertible Bonds (FCCB) is treated as Foreign Direct Investment.
Indian companies are allowed to raise equity capital in the international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceiling on investment.
Foreign investment through preference shares is treated as foreign direct investment. Proposals are processed either through the automatic route or FIPB as the case may be:
- Foreign investment in preference share is considered as part of share capital and falls outside the External Commercial Borrowing (ECB) guidelines/capital.
- Preference shares to be treated as foreign direct equity for purpose of sectoral capitals on foreign equity, where such capitals are prescribed, provided they carry a conversion option. If the preference shares were structured without such conversion option, they would fall outside the foreign direct equity capital.
Q. 1. What is a foreign company?
OR
When a company is called a 'foreign company' and a 'foreign controlled company'?
Ans 1. The terms 'foreign company' and 'foreign controlled company' are explained as follows:
1. Meaning of a 'foreign company'
As per Section 591, a company shall be a foreign company if-
(a) It is incorporated outside India; and
(b) It has established a place of business in India.
Place of business in India is a must. It must be shown that the company has more or less a permanent location in India from which it regularly conducts business. At least some degree of regularity in the conduct of business should be shown. Following points may be noted:
(a) If a company incorporated outside India employs agents in India but has no office or place of business in India, it will not be a foreign company.
(b) A company is said to have a place of business in India if it has a specified or identifiable place at which it carries on business such as an office, store house, godown or other premises and has some concrete connection between the locality and business of the company. A mere occasional connection would not be sufficient. [Deverall v. Grant Advertising Inc., (1955) 25 Comp Cas 37].
(c) Where the representatives of a company incorporated outside India frequently visit and stay in a hotel for looking after the purchase of machinery and other articles, it may be said that the company has a place of business in the hotel. (Re, Tovarishestvo Manufacture Liudvig Rabenek, 1944 Ch 404).
(d) Where a company incorporated outside India uses the premises in India for storing works of art and for viewing of works of art stored there, the company has established a place of business in India.
(e) Even if a representative of a company, incorporated outside India, visits India and elicits orders from the customers, the company can not be said to have established a place of business in India, if the representative has no authority to make contracts on behalf of the company.
(f) Where a company incorporated outside India maintains a liaison office it would also amount to establishment of a place of business in India even if no trading or manufacturing activity is carried on at the liaison office.
(g) A share transfer office or share registration office constitutes a place of business (Section 602).
Section 592 requires a company incorporated outside India to submit to the registrar, certain documents within 30 days of establishment of a place of business in India. As such, where a company filed such documents with the registrar, it amounted to admission of the fact of establishment of a place of business in India. [Framroze Rustomji Paymaster v. British Burmah Petroleum Company. Ltd. (1976) 46 Comp Cas 87].
It means a company in which the majority shareholding and voting power is held by foreign individuals and/or bodies corporate. Such a company may be incorporated in India or outside India. Where it is incorporated in India, all the provisions of the Companies Act, 1956 apply to it. Where it is incorporated outside India, no provision of the Companies Act shall apply to it. However, if it establishes a place of business in India, it shall be covered in the definition of foreign company and consequently the provisions of Sections 592 to 602 shall apply to it.
This section seeks to have more control over such foreign companies that are foreign companies only in name, i.e., the companies which are incorporated outside India, but carry on practically the entire business in India.
Where not less than 50% of the paid-up share capital of a foreign company is held by Indian citizens or bodies corporate incorporated in India, whether singly or in the aggregate, such a foreign company will be treated as an Indian company in respect of its Indian business. It shall comply with such provisions of the Act as may be prescribed, as if it were a company incorporated in India.
Corporate law in India has for several years relied on its English counterpart. The same is true with the provisions governing foreign companies. The relevant sections of the Indian Companies Act, 1956 ("the Act") closely follow
Sections 408 to 423 of the English Act save for some sections which have no application to India.
Sections 591 to 608 of the Act are relevant and provide in detail the duties of a foreign company in terms of supplying information to the Registrar of Companies, submitting account conditions on issue of prospectus, registration charges on properties held by it in India, and the like. This article, which does not claim to be exhaustive, attempts to deal with some of the provisions in the Act which affect foreign companies.
Section 591 of the Act provides that Sections 592 to 608 shall apply to all foreign companies. A foreign company falls under the following two heads:-
• a company incorporated outside India which, after the commencement of the Act (1 April, 1956), establishes a place of business within India; and
• a company incorporated outside India which has, before the commencement of this Act, established a place of business within India and continues to have an established place of business within India at the commencement of this Act.
The foreign company must be distinguished from a "foreign controlled company"; the latter means a company (foreign or Indian) in which a majority shareholding and voting power is in the hands of foreign individuals and/or bodies corporate.
"Place of business" extends to having a specified or identifiable place at which it carries on business, like an office, store house or godown or having a share transfer or registration office or maintaining a liaison or branch office.
"Establish" would imply having a more or less permanent location from which the company habitually or with some degree of regularity conducts its business.
"Carrying on business" by a company would be satisfied if its business is carried on at a fixed and definite place in India for a sufficiently and reasonably long period of time [P.J. Johnson v. Astrofiel Armandorn (1989) 3 CLJ 1].
A foreign company of which more than 50 per cent paid-up share capital (equity or preference) is held by Indian citizens or bodies corporate, would attract compliance with more provisions than are stipulated below.
Foreign companies shall within 30 days of establishing a place of business in India deliver to the Registrar of Companies for Registration (Section 592) the following documents-
• A certified copy of the charter, statutes, or memorandum and articles of the company or other instruments constituting or defining the constitution of the company. If the instrument is not in English language, a certified translation thereof should be provided;
• The full address of the registered or principal office of the company;
• A list of the directors and secretary of the company with prescribed particulars as specified;
• The name and address or the names and addresses of some one or more persons resident in India, authorised to accept on behalf of the company, service of process and any notices or other documents required to be served on the company; and
• The full address of the office of the company in India which is to be deemed its principal place of business in India.
The filing shall be done at two places:
with the Principal Registrar of Companies at New Delhi, the Capital of India and with the Registrar of Companies of the State having jurisdiction where the principal place of business of the company is situated. Filing fees shall, however, be done only with the former and not the latter.
Certification of documents shall be in accordance with Rule 16 of the Companies (Central Government's) Rules and Forms, 1956. Translation shall be in accordance with Rule 17.
An Indian company is a "person" under Indian law and can be authorised by a foreign company to accept service on its behalf through the Indian directors of the former company.
These may be summarised as-
• Name of the foreign company
Section 595 obliges every foreign company to conspicuously exhibit on the outside of every office or place of business where it carries on business in India, its name and country of incorporation, in letters easily legible in English characters and also in the local language (where it is situated). It must cause both these details also to be stated in all letter-heads, business letters, bill-heads and letter papers, and in all notices and other official publications of the company. It must similarly give notice of the fact that the liability of its members is limited, if that is so,
• Notifying alterations by delivering a return
Section 593 provides that if any alteration is made or occurs in the charter, statutes, memorandum and articles of association of a foreign company or other instrument constituting or defining its constitution, its registered or principal office, its directors or secretary, the name or address of any of its authorised representatives in India or its principal place of business, the foreign company shall within a period of 30 days of the alteration, deliver to the Registrar for registration, a return containing the details of alteration.
It may be noted that changes in particulars of directors and secretary, as originally notified, need not be delivered.
• Accounts
The provisions concerning the accounts of a foreign company are detailed in Section 594. It lays down the general obligation - once in every calendar year to make out a balance sheet and profit and loss account in respect of its Indian business, under the presumption that it were an Indian company, giving details also of its subsidiaries and to deliver three copies of the documents to the Registrar. When not in English, a certified translation should also be annexed. A list of all places of business established by the foreign company in India with reference to which the balance sheet is made out should also be sent regularly.
In other words, the foreign company shall maintain books of accounts of its Indian business and file, every year, three copies of its world accounts (within nine months from the close of the financial year), Indian business accounts (within nine months from the close of the financial year) and a list of places of business established in India.
In respect of its Indian business, the foreign company is required to maintain at its principal place of business in India, proper books of accounts with respect to all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place, all sales and purchases of goods by the company, and all assets and liabilities of the company.
Where the foreign company sets up a liaison office in India, it shall prepare a "statement of receipts and payments" and a "statement of assets and liabilities" instead of a balance sheet and profit and loss account. These shall be in the prescribed form and shall be duly audited, the auditor giving his report as to the truth and fairness of the receipt and payments during the financial year.
The Government has granted several exemptions and made modifications in regard to the above, in the light of its general policy as to foreign companies. Exemptions are also given to liaison offices. Special clarifications are issued in regard to foreign shipping, airline and insurance companies and also trade and industrial activities of foreign companies.
Service of any process, notice or any other document required to be served on a foreign company shall be deemed to be sufficiently served if addressed to the authorised person and left at, or sent by post to, the address registered with the Registrar.
If the company defaults in delivering details of the authorised person to the Registrar, or if such person is dead, or ceases to reside in India or refuses to accept service on behalf of the company, a document may be served by leaving it at, or sending it by post to, any place of business established by the company in India.
Mode of service shall be as above, and not according to the Code of Civil Procedure, 1908, being the civil procedural legislation in India.
A subsidiary could be considered as a proper agent and authorised person of the principal foreign company for the purposes of service.
Section 597, inter alia, provides that if any foreign company ceases to have a place of business in India, it shall forthwith give notice thereof to the Registrar, and from such date, all the obligations to deliver documents, cited above, shall cease, provided it has no other place of business in India.
Two sections merit particular attention-
• Section 599 states that any failure by a foreign company to comply with the above specified obligations shall not affect the validity of any contract, dealing or transaction entered into by it or its liability to be sued in respect thereof. The company shall, however, not be entitled to bring any suit, claim any set-off, make any counter claim or institute any legal proceeding in respect of any such contract, dealing or transaction, until it has complied with the obligations.
• Penalties for non-compliance are laid down in Section 598. It provides that if any foreign company fails to comply with its specified obligations, the company and every officer or agent of the company who is in default shall be punishable with a fine of up to 1,000 Indian Rupees, and in case of a continuing offence, with an additional fine of up to 100 Indian Rupees for every day during which the default continues. The offence is compoundable.
Under the provisions of Section 600, a foreign company has to file the document relating to the particulars of a charge within 30 days of the date of the creation of charge with the principal Registrar as well as the Registrar of the State in which the company's principal place of business is situated.
This is in respect of charges on properties in India which are created by a foreign company after 15 January, 1937 and charges on property in India which is acquired by any foreign company after 15 January, 1937.
Where a charge is created or the completion of the acquisition of the property which takes place outside India, 30 days after the day on which the instrument creating or evidencing the charge or a copy thereof could, in due course of post and if dispatched with due diligence, have been received in India, shall be the time available to file the charge with the Registrar.
The charges which have to be registered are-
• a charge for the purpose of securing any issue of debentures;
• a charge on uncalled share capital of the company;
• a charge on any immovable property, wherever situated, or any interest therein;
• a charge on any book debts of the company;
• a charge, not being a pledge, on any movable property of the company;
• a floating charge on the undertaking or any property of the company including stock-in-trade;
• a charge on calls made but not paid;
• a charge on a ship or any share in a ship;
• a charge on goodwill, on a patent or a licence under a patent, on a trade mark, or on a copyright, or a licence under a copyright.
Non-registration would not affect the transaction altogether; however, the security created by the charge becomes void as against the liquidator and other creditors.
A foreign company is also under an obligation to provide inspection and copies of the trust deed recording the creation of a charge for securing any issue of debentures to the debenture holder.
Sections 603 to 608 relate to the issue of a prospectus and allotment by foreign companies
No person shall issue, circulate or distribute in India any prospectus offering for subscription, shares in or debentures of a foreign company (whether incorporated or to be incorporated, and whether it has or has not established, or when formed will or will not establish, a place of business in India), unless the prospectus is dated and provides particulars of the following matters:-
• The instrument constituting or defining the constitution of the company;
• The enactments or provisions having the force of enactments, by or under which the incorporation of the company was effected;
• Any address in India where the said instrument, enactments or provision, or copies thereof, and if the same are not in English, a translation thereof, certified in the prescribed manner, may be inspected;
• The date on which and the country in which the company was incorporated;
• Whether the company has on established place of business in India, and if so, the address of its principal office in India.
If the liability of the members of the company is limited, it must cause notice of that fact also to be stated in the prospectus.
The first three requirements do not apply in case of issue of prospectus more than two years after the date on which the company is entitled to commence business.
Similarly, no person shall issue a form of application for shares in or debentures of such a company or intended company unless the form is issued with a prospectus which complies with the above (save when issued in connection with a bona fide invitation to enter into an underwriting agreement with respect to the shares or debentures).
Where such prospectus includes a statement purporting to be made by an "expert", it must be ensured that such person has given, or has before delivery of the prospectus for registration not withdrawn, his written consent to the issue of the prospectus with the statement included in the form and context in which it is included, or there does not appear in the prospectus a statement that he has given and has not withdrawn his consent as aforesaid.
"Expert" includes an engineer, a valuer, an accountant, and any other person whose profession gives authority to a statement made by him.
Before issue of the prospectus, it has to be delivered (with specified attachments) for registration to the Principal Registrar in the form of a copy duly certified by the Chairman and two other directors of the company as having been approved by the managing body of the company. Material mis-statements in the prospectus attract civil, but not criminal penalties, in the case of foreign companies.
On reading Section 582(b) of the Act, it is clear that the provisions of
Part X of the Act dealing with winding-up of unregistered companies shall apply to foreign companies, whatever the number of their members
[1985 (58) Comp Cas 285].
A foreign company incorporated in a foreign country may be wound up in India if it has an office and assets here, and if a pending foreign liquidation does not affect the jurisdiction to make a winding-up order.
Where a foreign company is already being wound-up in the country of its domicile, the winding-up in India will be ancillary to the foreign liquidation, and the liquidator's powers in this country are restricted to dealing with assets in this country [Re Russian and English Bank Ltd., 1932 (2) Comp Cas 424].
A subsequent winding-up in the foreign country does not affect prior proceedings taken in India, and the liquidator's discretion is not fettered [1958 (28) Comp Cas 204]
Section 584 of the Act provides that where a body corporate incorporated outside India which has been carrying on business in India ceases to carry on business in India, it may be wound-up as an unregistered company, notwithstanding that the body corporate has been dissolved or otherwise ceased to exist as such under or by virtue of the laws of the country under which it was incorporated. Such winding-up can only be made through the court.
Where a foreign company ceases to carry on business in India or its substratum is gone or it carries on ultra vires business, it may be wound-up under the 'just and equitable' ground; (1972 (42) Comp Cas 197 Bom).
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