Indian Legal Environment For Foreign Companies

Introduction

A country that has had over 5000 years of civilisation, whose culture is synthesis of many different cultures; a country which has a very complex social structure and has diversity more than any other country in the world. India. From the last decade, as the cycle of progress and prosperity reaches India again, more and more International Businesses want to either buy from or sell in or do both, in India. It is essential for a foreign company planning to enter India, to understand its culture, traditions and peoples’ mindset. Since these foreign companies will subject themselves to the Indian jurisdiction and Laws, it is also necessary to be familiar with the basic legal environment, before deciding to enter the country.

This report will serve as just a basic guide on the Indian Legal Environment, for the foreign companies. It covers some key point and risks related to the laws and policies applicable to doing business in India.

It covers the main laws linked to the three basic categories of international business, which are:

- Trade

- International licensing of technology and intellectual property

- Foreign direct investment

The Indian Judicial System

India is divided in to 28 States and 7 centrally administered regions, called "Union Territories". It has a three tier judicial structure. At the lowest level are the District Courts, heading each of the over 600 administrative districts. Second, each State has a High Court, but some states share the same High Court. (total 21 High Courts). At the apex is the Supreme Court of India situated at New Delhi. Besides the broad three tier structure there are various specialized tribunals - the more prominent ones being the Company Law Board; Monopolies and Restrictive Trade Practices Commission; Consumer Protection Forum; Debts Recovery Tribunal; Tax Tribunal.

As India had imbibed the British Judicial System, in many aspects its system is similar to the British. The Constitution of India lists out the subjects on which the Centre or States may legislate, establishing a clear demarcation between them. The Constitution recognises 18 official languages, however English is the language of commerce and also used in High Court and Supreme Court.

There have been corruption and bureaucracy problems, at every level. The regulations and policies are twisted and reversed due to vested interests of the ministers and inter-ministry rivalries. However, more transparent regulatory systems are being introduced in previously under-regulated sectors.

Some sectors and states don’t have clearly defined regulations. Some states like Bihar and Uttar Pradesh have hostile environment for foreign companies and poor implementation of law and order. Some other states like Andhra Pradesh and Maharastra are much more friendly and sensitive to the needs of foreign companies. Companies investing in India should be very clear about which level of government--and which ministry--will oversee their affairs.

The Law of Corporations

The Companies Act, 1956, defines the Law of the corporation. Broadly, there are two types of companies - Public Limited Companies and Private Limited Companies. There main features are as follows:

Private Limited Company: It can be formed by a minimum of two persons as a shareholder (maximum 50) and a minimum of two directors. The minimum paid up capital is approx. US$ 2500. They are obliged to add to their name “Pvt. Ltd.”. No offer can be made to the public to subscribe to its shares and debentures. Thus where there is no requirement for raising finances through the public and the ownership is intended to be closely held, a Private Limited model is followed. It has lesser number of compliance required.

Public Company: It does not contain restrictive provisions in its Articles. It can be formed with a minimum of seven members, with no maximum limit on number of shareholders. The minimum paid-up capital required for a Public company is about US$ 12500 (approximately) and the minimum number of directors is three.

Corporate Governance

The Indian Government has recently being laying more emphasis on the Corporate Governance, to ensure fair corporate environment and encourage growth. The Companies Act provides all these details like the minimum number of board meetings, shareholders meetings, rotation of directors etc. In 2005 the Securities Exchange Board of India (the market regulator) introduced a new clause in the Listing Agreement of all Public Companies. Its main features are:

Constitution of Board of Directors:

The Board should have a combination of executive and non-executive directors. Not less than fifty percent of the Board should comprise of non-executive directors.

One-third of the Board should comprise of independent directors where the Chairman of the Board is a non-executive director and half of the Board should comprise of independent directors where the Chairman is an executive director. Independent director shall mean a non-executive director who apart from receiving director's remuneration does not have any material pecuniary relationships or transactions with the company, its promoters or directors.

Audit Committee:

It is necessary for all listed companies to have an Audit Committee. This committee shall review the financial statements in consultation with the management.

Disclosures:

Every company is required to give a Corporate Governance report along with its annual accounts stating its strengths, opportunities, risks and concerns.

Trade

For both imports and exports there are three broad categories of products- items which are prohibited, items which are restricted (require government license) and items which can be feely imported. The Foreign Trade Policy can be referred for specific type of products.

The Foreign Trade Policy has many other schemes specific to products and industries. The Export Promotion Capital Goods Scheme allows for the import of capital goods for pre-production, production and post-production stage at a concessional rate of customs duty of 5%, subject to an export obligation. There are schemes for setting up of undertakings to export their entire production of goods and services under the Export Oriented Unit Scheme, Electronic