Penalty for a Foreign Company Default: Section 392

The penalty for a foreign company default sits in section 392 of the Companies Act, 2013. A foreign company that contravenes the Chapter is punishable with a fine of not less than one lakh rupees extending to three lakh rupees, with a further daily fine while the contravention continues, and every officer in default is punishable with a fine of not less than twenty-five thousand rupees extending to five lakh rupees.

What is the penalty for a foreign company default under section 392?

The section opens "Without prejudice to the provisions of section 391", so it adds to whatever section 391 brings across rather than replacing it. Then it sets three amounts:

Two points of precision on that table. The daily fine runs for every day after the first, so the first day of a continuing contravention does not attract it. And the officer limb reaches "every officer of the foreign company who is in default", which is a defined status rather than every officer.

What did the 2020 amendment change in section 392?

Two things, and the India Code consolidation prints both as footnotes on the officer limb.

The first is a deletion. The words "with imprisonment for a term which may extend to six months or" were omitted by Act 29 of 2020, section 54, with effect from 21 December 2020. Before that omission an officer in default faced imprisonment as an alternative to a fine; after it, the officer limb is a fine only.

The second is a substitution in the same amendment. The upper figure "five lakh rupees" was substituted by section 54 of the same Act, with effect from 21 December 2020, for the earlier "fifty thousand rupees, or with both". The words "or with both" going out is part of the same move: they were the link between the fine and the imprisonment that was removed.

So the officer's exposure moved in two directions at once. The custodial risk went, and the maximum fine went up tenfold. Both changes carry the same commencement date on the face of the consolidation.

What does section 391 bring across?

Section 391 has two sub-sections and they cover very different ground.

Sub-section (1) applies sections 34 to 36 to two things: the issue of a prospectus by a company incorporated outside India under section 389, as those sections apply to a prospectus issued by an Indian company, and the issue of Indian Depository Receipts by a foreign company. Those are the mis-statement and fraudulent-inducement provisions, covered in context on the foreign company prospectus page.

Sub-section (2), substituted by Act 1 of 2018, section 79, with effect from 9 February 2018, applies Chapter XX mutatis mutandis, subject to the provisions of section 376, for closure of the place of business of a foreign company in India as if it were a company incorporated in India, in a case where the foreign company has raised monies through offer or issue of securities under this Chapter which have not been repaid or redeemed.

The condition is the whole point of the sub-section. Chapter XX is the winding-up chapter, and sub-section (2) does not reach every foreign company closing an Indian office. It reaches one that took money from Indian investors under Chapter XXII and has not given it back.

What can the Central Government exempt under section 393A?

Section 393A was inserted by Act 29 of 2020, section 55, with effect from 22 January 2021, on the consolidation's footnote. It lets the Central Government, by notification, exempt any class of (a) foreign companies, or (b) companies incorporated or to be incorporated outside India, whether or not they have established or will establish a place of business in India, from any of the provisions of this Chapter.

A copy of every such notification must be laid before both Houses of Parliament as soon as may be after it is made.

This is a wider power than the proviso to section 381(1), which reaches only clause (a) of that sub-section. Section 393A reaches any provision of the Chapter, and it operates by class rather than company by company. The section 381 proviso is covered on the accounts page.

Where this sits in the disclosure picture

• Foreign company under the Companies Act covers the section 379(1) list that applies section 392 to every foreign company.
• Foreign company prospectus covers sections 387 to 390, which section 391(1) attaches liability to.
• Validity of a foreign company contract covers section 393, the civil consequence that runs alongside this penal one.
• Documents a foreign company files with the Registrar covers the section 380 duties a default is usually measured against.
• Fraud under section 447 covers the separate offence the mis-statement provisions can lead to.

The penalty for a foreign company default is a fine regime after 2020, with the officer's ceiling raised and the imprisonment limb removed on the same date. Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.