Abstract

Rapid strides in the field of technology has made e-commerce a viable platform for trade, accessible to ordinary retail buyers and sellers separated geographically, who would otherwise not have contemplated any transaction between themselves. However, the legal framework governing e-commerce has lagged behind for the most part. Recent amendments to the Companies Act, 2013 and India's foreign direct investment policy may have led to some unintended ramifications for this sector, particularly for foreign e-commerce retailers looking to cater to Indian customers from outside India. We analyse this in greater detail in this paper.

Introduction

Several e-commerce ventures around the world have expressed their interest in exploring the Indian market. It is relatively easier for existing cross-border e-commerce businesses to explore means to cater to Indian clientele without necessarily having to establish a physical presence in India in the form of brick and mortar stores, warehouses or offices. Cross-border retail e-commerce websites, for the most part, would simply need to ensure suitable tie-ups with logistics partners with capabilities for executing deliveries in India, and could otherwise continue to use their existing infrastructure to display their catalogue and service orders from customers who are physically located in, or require that their orders be delivered to, India.

However, this is not without several notable drawbacks. Cross-border retail e-commerce merchants face certain constraints in addition to those experienced by their Indian peers, for instance, increased shipping and import costs, longer lead times between placement of orders and corresponding deliveries, no 'cash on delivery' payment option, and a more complex returns and repairs process. Nevertheless, there is no doubt that the presence of cross-border e-commerce websites provide Indian consumers access to a wider range and variety of products as well as a cost effective way for foreign retailers looking to test the waters before committing to a more full-fledged investment in the Indian market.

Background

Foreign Investment Laws in India on E-Commerce

By way of a brief background, it is relevant to note that foreign investment in retail trading activity in India is subject to restrictions in the form of investment caps, approval requirements and other conditions. For instance, foreign direct investment in multi-brand retail trading is under the government route and is permitted up to a maximum of 51% (fifty one percent). Additionally, investment in this sub-sector is subject to compliance with conditions such as a minimum investment amount of USD 100,000,000 (USD One Hundred Million), and requirements pertaining to minimum local sourcing/ procurement of goods manufactured or processed by Indian micro, small and medium industries. 

Prior to March 29, 2016, 100% (one hundred percent) foreign direct investment was permitted in business to business e-commerce (B2B e-commerce). However, foreign direct investment in business to consumer e-commerce (B2C e-commerce), that is, retail e-commerce, was only permitted to be carried out by (a) a manufacturer of products which were manufactured in India, or (b) a single brand retail trading entity operating through brick and mortar stores (in India).

On March 29, 2016, through Press Note 3 of 2016, further clarificatory guidelines were issued by the Government of India on the regulatory framework for foreign direct investment in e-commerce. Notably, with respect to B2C e-commerce, 100% (one hundred percent) foreign direct investment under the automatic route was permitted in the marketplace based model of e-commerce undertaken by an e-commerce entity. Foreign direct investment was not permitted in an 'inventory based model of e-commerce' (defined as an e-commerce activity where inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly) undertaken by an e-commerce entity, unless such entity was a manufacturer in India or was an entity carrying on the activity of single brand retail trading through a brick and mortar store, as mentioned above.

Further, in Press Note 3 of 2016, the term 'e-commerce entity' was defined to include a foreign company covered under Section 2(42) of the Companies Act, 2013. This could lead to widespread ramifications, as discussed in greater detail below.

Companies Act, 2013 and the Definition of Foreign Company

The term 'foreign company' has been defined in Section 2(42) of the Companies Act, 2013 to mean any company incorporated outside India which has a place of business in India, whether physically or through electronic mode, and which conducts any business activity in India in any other manner.

Further, the Companies (Specification of  Definitions Details) Rules, 2014 defines the term  'electronic mode' in the context of a foreign company to mean electronic based transactions, such as business to consumer transactions, whether conducted by e-mail, mobile devices, cloud computing, social media, data transmission or otherwise. Importantly, the definition has clarified that even if the location of the main server is outside India, it would still come within the purview of the term electronic mode.

Similarly, reference may be made to the Companies (Registration Offices and Fees) Rules, 2014, for guidance as to the meaning of the term 'business activity' under the Companies Act, 2013. This clause provides that a foreign company which carries out its business through electronic mode (including any business to consumer transactions), whether its main server is installed in India or outside India, shall be deemed to have carried out business in India.    

Accordingly, given the above criteria, a foreign company under the Companies Act, 2013 would include not just those companies incorporated outside India which subsequently established an office or a branch in the territory of India for carrying on business activity, but would extend to any foreign company which has entered into any kind of transaction with an entity or person located in India through electronic mode. By virtue of this definition of foreign company under the Companies Act, 2013, even a foreign e-commerce website based outside India, not having any office, employees, servers, or any other sort of physical presence in India would attract the provisions of the Companies Act, 2013 if an Indian resident placed an order on such merchant website.

Foreign Companies under the Companies Act, 1956

Prior to April 1, 2014, when Section 2(42) of the Companies Act, 2013 (as well as the Companies (Specification of Definitions Details) Rules, 2014 and the Companies (Registration Offices and Fees) Rules, 2014) came into force, there was no specific definition of the term 'foreign company' under Indian company law.

Under the Companies Act, 1956 (the statute governing company law in India until its subsequent repeal and replacement by the Companies Act, 2013), the concept of 'foreign company', as set out at Section 591(1) of the Companies Act, 1956, was based purely on the criteria of having established a place of business within India.

Courts in India have repeatedly emphasized the requirement of establishing a physical presence in India in order for a foreign body corporate to be considered as having a place of business in India, and consequently becoming classified as a 'foreign company' under the Companies Act, 1956. In the matter of Willis Europe BV vs. Willis India Insurance Brokers (P) Ltd.,1 the High Court of Bombay observed that "...It is significant to note that Section 591(1) (a) applies not to companies that carry on business in India, but to companies that establish a place of business in India."

In determining whether a foreign company has established a place of business in India under Section 591 of the Companies Act, 1956, the High Court of Delhi in Dabur (Nepal) P. Ltd. vs. Woodworth Trade Links P. Ltd.2 cited with approval prior decisions of courts in England as well as the High Court of Delhi on this issue in observing that a company would be held to have established a place of business in India if it has a specified or identifiable place at which it carries on business, such as an office, storehouse, godown or other premises, having some concrete connection between the place and its business.

The Brave New World of Regulated Cross-Border E-Commerce

In the backdrop of this altered and prodigiously expanded definition of the term 'foreign company' as understood in the Companies Act, 2013, it would be relevant to revisit the Indian foreign direct investment regulatory regime touched upon briefly above. Until recently, that is prior to the Press Note 3 of 2016 coming into effect, the Consolidated Foreign Direct Investment Policy Circular of 2015 (as amended) placed restrictions in relation to retail trading on Indian entities having foreign direct investment. However, with the advent of the Press Note 3 of 2016, the foreign direct investment policy was amended, and the term 'e-commerce entity' was defined for the first time for the purposes of the foreign direct investment regulations. Accordingly, under the new regulatory regime, the restrictions on carrying out the activity of business to retail e-commerce now applies to all e-commerce entities, including foreign companies as defined under the Companies Act, 2013.

It is also noteworthy to highlight at this juncture that the extant Indian foreign direct investment regulations do not seek to regulate the activity of foreign companies other than in this sole instance of e-commerce. On a holistic review of the Foreign Direct Investment Policy Circular of 2017 (as amended), it is also hard not to come away with the impression that the intent and objective of the policy is directed towards regulating foreign direct investment which establishes a lasting interest in an enterprise which is a resident of the Indian economy (as opposed the domestic economy of the foreign investor). For instance, the definition of the term foreign direct investment in the Foreign Direct Investment Policy Circular of 2017 refers to an investment by a non-resident entity or a person resident outside India in the capital of an Indian company. Furthermore, the policy is replete with provisions regulating the entry routes of foreign capital into domestic Indian entities, the nature of Indian entities in which such foreign capital may invest in and the compliances for transfer of securities/ control of the resident entity between resident and non-resident investors. This clearly indicates that the Foreign Direct Investment Policy Circular of 2017 was not framed with the view to control the possible activities of non-resident entities catering to domestic customers. Accordingly, the reference to the term 'foreign company' as used in the Foreign Direct Investment Policy Circular of 2017 with regard to the conditions applicable to e-commerce trading has unfortunately queered the pitch for cross-border e-commerce retailers which were either already operating or looking to operate in India at the time of notification of Press Note 3 of 2016.  

It may also be apposite here to take a summary glance through the various statutory requirements to be adhered to by a foreign company, and play it out in a scenario of how a cross-border e-commerce entity (assuming no physical presence or employees in India) would comply with such provisions. 

(a) Registration with the Registrar of Companies in India

Section 380 of the Companies Act, 2013 requires that within 30 (thirty) days of establishing its place of business in India, the foreign company shall submit relevant documents to the Registrar of Companies for registration as a foreign company under the provisions of the Companies Act, 2013. The mandatory information and documents required to comply with such registration requirement include matters which are relevant to an entity having a physical presence in India, as opposed to a cross-border e-commerce venture. For instance, the information required to be provided includes the address of the office of the company in India which is deemed to be its principal place of business in India, particulars on opening and closing of business of a place of India on previous occasions and the names and addresses of persons resident in India who are authorised to receive service of documents or notices to be served on the company.

Furthermore, as per Rule 3(3) of the Companies (Registration of Foreign Companies) Rules, 2014, read with Form FC-1, the documentation mandatorily required to be filed with the Registrar of Companies by a foreign company as part of its registration process, includes an attested copy of approval from the Reserve Bank of India under the Foreign Exchange Management Act, 1999, or regulations framed under such statute (as well as any other relevant regulator(s), if any. Such approval requirement referred to in the above mentioned rules flows from the provisions of the Foreign Exchange Management Act, 1999, which authorises the Reserve Bank of India to regulate the establishment in India of a branch, office, or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. 3 The relevant regulations issued by the Reserve Bank in this regard, namely the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or Any Other Place of Business) Regulations, 2016 specifically prohibits any person resident outside India to open in India a branch office, liaison office, project office, or any other place of business in India without the prior approval of the Reserve Bank of India.

However, such approval letter from the Reserve Bank of India may not be forthcoming, given that the proposed business to be carried out by the applicant is that of inventory based model of e-commerce, which is restricted from being carried out in India by either Indian companies having foreign direct investment or foreign companies, as per a strict interpretation of the Foreign Direct Investment Policy Circular of 2017 (as amended) read with the Companies Act, 2013. 

(b) Display of name of foreign company on its premises/ communications in India

A foreign company is required, under Section 382 of the Companies Act, 2013 to conspicuously exhibit outside its office or every place it carries on its business in India, in English as well as the local language, as well as its business letters and official publications certain details such as the name of the company and the country it is incorporated in, as well as the limited liability of the members of the company, if such liability is limited. Again, such compliance may not be practically applicable where the foreign company does not have a physical office in India.

(c) Annual returns and documents

 A foreign company is also required to comply with certain additional provisions prescribed in Section 384 of the Companies Act, 2013, notably pertaining to submission of an annual return and maintaining books of its accounts in relation to its business in India, in its principal place of business in India. 

To sum up, based on the above, a foreign merchant carrying on e-commerce retail activity outside India may be constrained to refuse orders from Indian customers. At the same time, neither the Government of India nor the Reserve Bank of India have expressly barred Indian citizens from making retail purchases on foreign e-commerce websites and we are not aware of any instances where authorities have held up any product at customs due to violation of the Companies Act, 2013 read with the Indian foreign direct investment regulations.      

The Companies (Amendment) Act, 2017 – a New Hope?

The comprehensive overhaul of the old Companies Act, 1956 and its replacement by the Companies Act, 2013 has not been without its teething problems, and as part of the process of ironing out the legislative creases, the Government of India had constituted the Companies Law Committee to examine the need for further amendments to the Companies Act, 2013 with a view to promote ease of doing business and address difficulties arising out of the initial experience of the statute at work.

In its report of February 2016, the Companies Law Committee has observed that the definition of the term 'foreign company' under the Companies Act, 2013 was wider than that contemplated in the prior enactment and, read with the definition of the term 'electronic mode', could result in even insignificant internet based electronic transactions of a company  incorporated outside India, with no establishment in India and having Indian customers, falling under the ambit of such definition. The Companies Law Committee further observed that it would be impractical to cover companies incorporated outside India that had a mere incidental presence through an electronic mode and never intended to setup a place of business in India and recommended that the same be exempted from registration and other requirements statutorily applicable to foreign companies under the Companies Act, 2013. 

Further to such recommendations of the Companies Law Committee, the Thirty-Seventh Report issued by the Standing Committee on Finance (2016-2017) (Sixteenth Lok Sabha) sought to implement the same in the Companies (Amendment) Bill, 2016. Among the key amendments proposed under the Companies (Amendment) Bill, 2016, as highlighted by the  said Report, the proposed amendment to Section 379 of the Companies Act, 2013 finds mention, which was indicated to be in relation to "...Foreign companies having incidental transactions through electronic mode to be exempted from registering and compliance regime under the Act." The Statement of Objects and Reasons to the Companies (Amendment) Bill, 2016 reiterated that such bill proposed to "... allow for exempting class of foreign companies from registering and compliance regime under the Act..." The notes to clauses of the bill also indicates that the proposed amendment to Section 379 of the Companies Act, 2013 was in order to bring about clarity with respect to applicability of the provisions of the Companies Act, 2013 to foreign companies.

In light of the above, Section 379 of the Companies Act, 2013 was amended by the Companies (Amendment) Act, 2017 with effect from February 9, 2018. The amended Section 379 of the Companies Act, 2013 states as follows:

Application of Act to foreign companies

(1) Sections 380 to 386 (both inclusive) and sections 392 and 393 shall apply to all foreign companies:

Provided that the Central Government may, by Order published in the Official Gazette, exempt any class of foreign companies, specified in the Order, from any of the provisions of sections 380 to 386 and sections 392 and 393 and a copy of every such Order shall, as soon as may be after it is made, be laid before both Houses of Parliament....

However, the Order under the proviso to amended Section 379 of the Companies Act, 2013 is yet to be introduced in the public domain, even in a draft form. However, given that no changes have been made to the definition of 'foreign company' under Section 2(42) of the Companies Act, 2013, no further conclusions on the effect of the amended provision can be arrived at this juncture.

Conclusion

With the recent notification of the Companies (Amendment) Act, 2017, there appears to be some recognition of the unintended consequences of having a broad and overarching definition of foreign companies under the Companies Act, 2013. The criteria to be notified by the authorities, on the basis of which foreign companies will be exempt from the requirement to comply with the provisions of the Companies Act, 2013, will therefore be keenly awaited by cross-border e-commerce players testing the waters of the Indian market.

However, this may still have limited impact on their aspirations to engage with India unless it is accompanied hand in hand with further clarification of the foreign direct investment regime, especially the applicability of the restrictions on inventory based model of e-commerce activity to foreign merchants not having a presence in India. The e-commerce policy, which is reportedly being drafted by the Ministry of Electronics and Information Technology, Government of India may yet shed further clarity on this regulatory grey area in which foreign electronic retailers are currently mired in. A comprehensive policy, which consolidates the regulations applicable to e-commerce and which ties Indian regulatory objectives with current technological and commercial ground realities, is the need of the hour. Till then, Indian consumers will have to be patient and may have to restrict themselves to window shopping on foreign e-commerce websites.    

This paper has been authored by Ashni Roy, Partner and Davis Kanjamala, Senior Associate)

Footnotes

1 The order of the High Court of Bombay dated April 11, 2011 in Willis Europe BV vs. Willis India Insurance Brokers (P) Ltd. (2011 (113) Bom LR 1842). 

2 The order of the High Court of Delhi dated September 11, 2012 in Dabur (Nepal) P. Ltd. vs. Woodworth Trade Links P. Ltd. ([2012] 175 Comp Cas 338 (Delhi)). 

3 Section 6(6) of the Foreign Exchange Management Act, 1999

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