Companies Act Section 391

Companies Act, Section 391: Application of Provisions Relating to Prospectus and Winding Up to Foreign Companies

Section 391 of the Companies Act, 2013, extends the applicability of certain provisions of the Act to foreign companies that raise capital in India. Specifically, it addresses the application of sections 34 to 36 (relating to misstatements and liabilities in prospectus) and Chapter XX (dealing with winding up), thereby ensuring that foreign companies are subject to similar accountability and closure requirements as Indian companies when they operate in Indian markets.

1. Application of Sections 34 to 36

The section provides that the provisions contained in Sections 34 to 36 of the Act, which deal with liability for misstatements and fraudulent inducements in prospectuses, shall apply in the following two contexts:

(i) Issue of a Prospectus by a Foreign Company under Section 389

When a foreign company issues a prospectus in India under Section 389 (which requires registration of such prospectus with the Registrar), the provisions of Sections 34, 35, and 36 will apply in the same manner as they apply to a prospectus issued by an Indian company.
This ensures that directors, promoters, and other persons responsible for misstatements or false declarations in such prospectuses face the same consequences as if they were officers of an Indian company.
(ii) Issue of Indian Depository Receipts (IDRs) by a Foreign Company

If a foreign company issues Indian Depository Receipts (IDRs) in India, the same liability provisions under Sections 34-36 apply.
This includes liability for untrue statements, fraudulent inducement to invest, and criminal liability for misrepresentation.
Thus, foreign companies issuing IDRs must maintain the same level of truthfulness and integrity as Indian companies issuing securities.
2. Application of Chapter XX to Closure of Business of a Foreign Company

The section further provides that, subject to Section 376 (which deals with provisions relating to foreign companies carrying on business in India), the provisions of Chapter XX of the Companies Act (relating to winding up) shall apply mutatis mutandis (with necessary modifications) to the closure of the place of business of a foreign company in India.

This applies particularly where:

The foreign company has raised monies in India through the offer or issue of securities under this Chapter (such as through prospectuses or IDRs), and those monies have not yet been repaid or redeemed.
In such cases, the closure of the Indian place of business of the foreign company will be governed by the same rules as winding up of an Indian company, ensuring that investors and creditors in India are not left without remedies.

3. Purpose and Importance of Section 391

This provision plays a crucial role in extending the principle of parity between Indian and foreign companies when it comes to investor protection and accountability. Its key purposes include:

Level Playing Field: Foreign companies raising capital in India are subject to the same strict provisions regarding misstatements, fraud, and liability as Indian companies.
Investor Protection: Ensures that Indian investors are safeguarded from false or misleading prospectuses issued by foreign companies.
Fair Closure Procedures: In the event of closure of business, creditors and investors in India have remedies similar to those available in winding up an Indian company.
Accountability: Prevents foreign companies from escaping liability by virtue of being incorporated outside India.