Companies Act Section 228

Companies Act, Section 228: Applicability of Inspection, Inquiry, and Investigation Provisions to Foreign Companies

The corporate ecosystem today is not confined within national boundaries. With the rise of globalization, foreign companies frequently engage in business activities within India whether by establishing a place of business, appointing agents, setting up subsidiaries, or entering into partnerships with domestic companies. The regulatory oversight of such entities is essential to ensure that their operations within Indian territory comply with the principles of transparency, accountability, and legal compliance established under Indian law.

In recognition of this, Section 228 of the Companies Act, 2013, provides that the same legal framework that governs inspections, inquiries, and investigations of Indian companies shall, with necessary modifications, also apply to foreign companies operating in India. This section forms a crucial component in the regulatory machinery aimed at ensuring that foreign companies are not outside the scope of corporate scrutiny under Indian jurisdiction.

Text of the Provision

The provisions of this Chapter shall apply mutatis mutandis to inspection, inquiry or investigation in relation to foreign companies.

Though succinct, this provision carries significant legal implications and operational consequences. Let us break it down in a comprehensive manner.

Understanding the Phrase “Mutatis Mutandis”

The term “mutatis mutandis” is a Latin expression commonly used in legal drafting. It means “with the necessary changes having been made” or “with the respective differences taken into consideration.”

In this context, Section 228 implies that the provisions laid out in Chapter XIV of the Companies Act, 2013 which deal with the inspection, inquiry, and investigation of companies incorporated under Indian law shall also apply to foreign companies, with appropriate modifications that account for the differences in corporate structure, jurisdiction, and operational framework between domestic and foreign entities.

Scope and Purpose of Section 228

Section 228 ensures that foreign companies are subject to the same level of regulatory scrutiny as Indian companies, particularly when they conduct business in India or maintain a place of business within the country.

This means that the following powers and processes under Chapter XIV can be extended to foreign companies:

Power of the Registrar or inspector to call for information, documents, or records (Section 206),
Conduct of inspection or inquiry based on such information (Sections 206–207),
Appointment of inspectors to investigate the affairs of the company (Section 210),
Investigation into affairs based on complaint or public interest (Sections 213–214),
Freezing of assets, imposing restrictions on securities, and taking actions based on the inspector’s report (Sections 221–224),
And penalties for non-compliance, fraud, or obstruction of the investigative process.
Thus, if a foreign company is found to be engaging in fraudulent, illegal, or oppressive practices, or if there are credible complaints from stakeholders or findings of regulatory violations, Indian authorities have the statutory right to investigate and take appropriate legal action.

Examples of Applicability

If a foreign company with an Indian branch is suspected of money laundering, accounting fraud, or mismanagement, the Ministry of Corporate Affairs (MCA) may authorize an inspector to carry out an investigation under Chapter XIV, treating the foreign company as though it were a domestic entity, subject to necessary jurisdictional adjustments.
If such a foreign company fails to cooperate or refuses to furnish documents, it may be subjected to penal provisions similar to those applicable to Indian companies under Chapter XIV.
If the foreign company is found to have misapplied funds, or if its Indian operations are causing prejudice to shareholders or public interest, actions such as asset freezing, legal prosecution, or disgorgement of undue gains can be initiated under Sections 221 and 224.
Legal and Administrative Considerations

a. Jurisdictional Reach: While Section 228 gives Indian authorities the power to investigate foreign companies, such investigations are generally limited to activities undertaken within Indian territory or having a direct impact on Indian stakeholders.
b. International Cooperation: In certain cases, where the foreign company’s records or officers are located outside India, regulatory authorities may require the assistance of foreign governments, regulators, or international treaties such as bilateral mutual legal assistance treaties (MLATs) to obtain evidence.
c. Compliance Obligations: Foreign companies are required to maintain books of accounts, file returns, and comply with statutory obligations similar to Indian companies (as per Section 384 of the Companies Act, 2013). Failure to do so may become grounds for investigation under Chapter XIV.
Safeguards and Accountability

Section 228 ensures that the regulatory reach of the Companies Act, 2013, does not stop at national boundaries but extends to entities that, though incorporated abroad, conduct business in India and impact the Indian market and its stakeholders. This fosters a level playing field and avoids regulatory arbitrage, where foreign companies might otherwise avoid scrutiny that is mandatory for Indian companies.

At the same time, by applying the law mutatis mutandis, it ensures that procedural fairness and practical relevance are maintained when applying Indian legal provisions to foreign entities.