Association for Democratic Reforms and
another vs. Union of India and others is a very important
decision not only because it came at the eve of Indian General Elections, not
only because two powerful parties Indian National Congress and Bhartiya Janata
Party are accused; but also because it comes on the eve of Indian transition on
companies law. The decision is a result of a writ Petition and we can find original decision
here. Before going to the decision, I refer relevant legal provisions
here.
Section 4 of the
Foreign Contribution (Regulation) Act, 1976 imposes prohibition on certain
classes of
persons from accepting foreign contribution. It reads as
under:-
“(1) No
foreign contribution shall be accepted by any-
(a) candidate for
election,
(b)
correspondent, columnist, cartoonist, editor, owner, printer or publisher of a
registered newspaper,
(c) Judge,
government servant or employee of any corporation,
(d) member of any
Legislature,
(e) political
party or office-bearer thereof.
Explanation: In
clause (c) and in section 9, “corporation” means a corporation owned or
controlled by government and includes a government company as defined in section
617 of the Companies Act, 1956 (1 of 1956).”
The term
“Foreign Contribution” has been defined under Section 2(c) of
the Act as under:-
“2. (c) “foreign
contribution” means the donation, delivery or transfer made by any foreign
source-
(i) of any
article, not being an article given to a person as a gift for his personal use,
if the market value, in India, of such article, on the date of such gift, does
not exceed one thousand rupees,
(ii) of any
currency, whether Indian or foreign;
(iii) of any
foreign security as defined in clause (i) of section 2 of the Foreign Exchange
Regulation Act, 1973 (46 of 1973).
Explanation: A
donation, delivery or transfer of any article, currency or foreign security
referred to in this clause by any person who has received it from any foreign
source, either directly or through one or more persons, shall also be deemed to
be foreign contribution within the meaning of this clause.”
Section 2(e) of
the Act defines “Foreign Source” as under:-
“2. (1) (e)
“foreign source” includes
(i) the
government of any foreign country or territory and any agency of such
government,
(ii) any
international agency, not being the United Nations or any of its specialized
agencies, the World Bank, International Monetary Fund or such other agency as
the Central Government may, by notification in the Official Gazette, specify in
this behalf,
(iii) a
foreign company within the meaning of section 591 of the Companies Act, 1956 (1
of 1956), and also includes
(a) a
company which is a subsidiary of a foreign company, and
(b) a
multi-national corporation within the meaning of this Act.
(iv) a
corporation, not being a foreign company, incorporated in a foreign country or
territory,
(v) a
multi-national corporation within the meaning of this Act,
(vi) a
company within the meaning of the Companies Act, 1956 (1 of 1956), if more than
one-half of the nominal value of its share capital is held, either singly or in
the aggregate, by one or more of the following, namely,-
(a)
government of a foreign country or territory,
(b)
citizens of a foreign country or territory,
(c)
corporations incorporated in a foreign country or territory,
(d)
trusts, societies or other associations of individuals (whether incorporated or
not), formed or registered in a foreign country or
territory,
(vii) a trade
union in any foreign country or territory, whether or not registered in such
foreign country or territory,
(viii) a foreign
trust by whatever name called, or a foreign foundation which is either in the
nature of trust or is mainly financed by a foreign country or
territory,
(ix) a society,
club or other association of individuals formed or registers outside
India,
(x) a citizen of
a foreign country, but does not include any foreign institution which has been
permitted by the Central Government, by notification in the Official Gazette, to
carry on its activities in India.”
The
interpretation of the term “Foreign Source” as defined under Section 2(e) of the
Act lies at the heart of the present controversy and begs for judicial
consideration. It would be relevant to note that the term “Foreign Source” is
not exhaustively defined under the Act and it assumes significance that the
legislature has chosen to employ the word- “includes”, which signifies that the
entries contained in the said provision are only illustrative of what could
constitute a “Foreign Source”. It is evident that Section 2(e)(iii) of the
Foreign Contribution (Regulation) Act, 1976 treats “Foreign Company” within the
meaning of Section 591 of the Companies Act, 1956, its subsidiaries and
multi-national corporations as a “Foreign Source” for the purpose of the
Act.
Part XI of the
Companies Act, 1956 under the caption “Companies Incorporated outside India‟ has
Sections 591 to 608 as a part of the Chapter. Section 591 reads as
under:-
“(1) Sections 592
to 602, both inclusive, shall apply to all foreign companies, that is to say,
companies falling under the following two classes, namely:—
(a) companies
incorporated outside India which, after the commencement of this Act, establish
a place of business within India; and
(b) companies
incorporated outside India which have, before the commencement of this Act,
established a place of business within India and continue to have an established
place of business within India at the commencement of this Act.
(2)
Notwithstanding anything contained in sub-section (1), where not less
than fifty per cent of the paid up share capital (whether equity or preference
or partly equity and partly preference) of a company incorporated outside India
and having an established place of business in India, is held by one or more
citizens of India or by one or more bodies corporate incorporated in India, or
by one or more citizens of India and one or more bodies corporate incorporated
in India, whether singly or in the aggregate, such company shall comply with
such of the provisions of this Act as may be prescribed with regard to the
business carried on by it in India, as if it were a company incorporated in
India.”
The recently
enacted Companies Act, 2013 distinctly defines “Foreign
Company” under section 2(42) in the following terms-
(42) “foreign
company” means any company or body corporate incorporated outside
India which—
(a) has a place
of business in India whether by itself or through an agent, physically or
through electronic mode; and
(b ) conducts any
business activity in India in any other manner.”
In light of the
legislative mandate flowing from clause (1) of Section 591 of the Companies Act,
1956, Vedanta is unquestionably a “Foreign Company” by virtue of the fact that
Vedanta is incorporated outside India i.e. in the United Kingdom and has
established its place of business in India, as it operates in the territory of
India through its subsidiary companies like Sterlite and Sesa.
A careful
analysis of Section 591(2) reveals that if more than one-half of the
share-capital of a company incorporated outside India and having an established
place of business in India (A “Foreign Company‟ within the meaning of section
591(1) of Companies Act, 1956) is held by one or more citizens of India or by
one or more bodies corporate incorporated in India, or by one or more citizens
of India and one or more bodies corporate incorporated in India, whether singly
or in the aggregate, such company shall comply with such of the provisions of
this Act as may be prescribed with regard to the business carried on by it in
India, as if it were a company incorporated in
India.
Therefore, by
virtue of the fulfilment of the conditions prescribed in clause (2) of Section
591 of the Companies Act, 1956, a fiction of law operates, and even a “Foreign
Company” as defined is clause (1) is obliged to scrupulously comply with all the
provisions of the Companies Act, 1956 as if it were a company incorporated in
India and not merely comply with sections 592 to 602 of the said Act.
The purport and
intent of clause (2) of Section 591 of the Companies Act, 1956 does not seem to
qualify or whittle down the meaning of “Foreign Company” which is laid down
under clause (1) of the said provision. The litmus-test for determining whether
a company is a “Foreign Company” is contained in clause (1) alone viz.
incorporation outside the territory of India. The effect of clause (2) is rather
to impose a greater burden of compliance on “Foreign Companies” having place of
business in India, which are essentially held by citizens of India. The said
burden is equivalent to the burden cast upon a company incorporated in
India.
The nationality
of a company is determined exclusively on the touchstone of the situs of its
incorporation and there exists a profusion of judicial authorities to this
effect. The nationality of its shareholders or directors has no bearing upon the
nationality of a company, the company being a distinct jural entity having an
existence independent of its constituents.
Thus, in ultimate
analysis, we are of the considered view that Vedanta is a “Foreign Company”
within the meaning of Section 591 of the Companies Act, 1956 and therefore,
Vedanta and its subsidiaries – Sterlite and Sesa are a “Foreign Source” as
contemplated under Section 2(e)(iii) of the Foreign Contribution (Regulation)
Act, 1976. However, in view of the operation of clause (2) of the Section 591 of
the Companies Act, 1956, Vedanta would be required to comply with the provisions
of the Companies Act, 1956 like a company incorporated in India.
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