Legal Post-Incorporation Compliances

Legal Post-Incorporation Compliances

Author: Dhruv Suri, Partner PSA

The process of economic reforms in India was initiated in 1991. Since then there has been a constant endeavor to create a foreign investor friendly climate by simplifying procedures for entry and operations. This chapter provides a brief overview of Indian laws that should aid German start-ups to evaluate their India strategy from a legal and compliance perspective viz. post incorporation compliances relating to intellectual property, labour, tax, data protection and competition.


1.       Intellectual property 

The various tools of IPR used to protect innovations are copyrights, patents, trademarks, industrial design, geographical indications, and layout designs for integrated circuits. There are differences in the degree of protection for each of them. Intellectual Property Law is an important aspect for marketing a start-up and ensuring that their investments reap exclusive benefits. India has a weak intellectual property rights enforcement mechanism. Therefore, registration of intellectual property rights is all the more important in such environment as it facilitates the enforcement process. The trade marks, patent and copyright laws are discussed briefly below.

1.1     Trademark

Trademark registration is an evidence of ownership, a sort of limited exclusive right to use the mark in relation to the goods or services the mark represents. The law of trade marks is contained in the Trade Marks Act, 1999 and its corresponding Trade Marks Rules. According to Trade Marks Act, 1999, registration of trade marks for goods and services including multi-class applications are also permissible.

India and Germany are both part of the Madrid Protocol. Therefore, a trademark application can first be made to the International Bureau under the Madrid Protocol, from where it is transferred to Indian trademark registry. While obtaining a trademark registration may take 1 or 2 years, the initials “TM” are instantly available for use. A German start-up is well advised to initiate the process of obtaining Trademarks through this route prior to entering into the Indian market. This step shall ensure that the German start-up has the legal right to do business under its designated name.

A trade mark is granted initially for a period of ten years and may be renewed thereafter for an additional period of ten years upon furnishing the requisite renewal fee.

1.2       Patents 

A patent is an exclusive monopoly granted by the government to an inventor over his invention for limited period of time. The legislation governing the patents in India is the Patents Act, 1970 as amended from time to time, read with the rules.

India and Germany are signatories of the Patent Cooperation Treaty (“PCT”). The PCT essentially facilitates filing of a single application for grant of patent rights in various countries.However, the patent office of the country where the application is made is solely responsible for grant of patent in that jurisdiction. PCT applications must be made within thirty-six months from the date priority is claimed. A foreign applicant is required to give a local address for service in India, which would also decide the jurisdiction where an application is required to be made.

A new product or process having an inventive step and capable of industrial application can be patented by any person who is the true and first inventor or his assignee or his legal representative upon his death. Inventive step is a feature of an invention that involves technical advancement as compared to existing knowledge or economic significance or both and which is not obvious to a person skilled in the art.

The term of a patent granted is twenty years from the date of filing of patent application. In case of applications filed under PCT the term of twenty years begins from international filing date.

1.3       Copyright

The Copyright Act, 1957, supported by the Copyright Rules, 1958 is the governing law for copyright protection in India. The Copyright Act provides that a copyright subsists in an original literary, dramatic, musical or artistic work, cinematograph films, and sound recordings. A computer programme is treated as a “literary work” and is protected as such. Under Indian law, registration is not a prerequisite for acquiring a copyright in a work. A copyright in a work is created when the work is created and given a material form, provided it is original. However, registration of a copyright allows for its easier enforceability. A German entity may apply for registration of copyright with the Indian copyright office. Registration of a copyright typically takes up to 2 to 3 months.

India and Germany are signatories of the Berne Convention, Phonograms Convention, Universal Copyright Convention and WTO’s Trade Related Aspects of Intellectual Property Rights Agreement. As per India’s International Copyright Order, 1999, works that have been made or published in Germany are eligible for copyright protection in India, regardless of any registration.

The term of copyright is, in most cases, the lifetime of the author plus 60 years thereafter.


2         Employment

 The labour laws in India provide extensive protection to industrial workers. However, the management sector is largely governed by individual contracts. Some of the central labour legislations which may be of relevance to a foreign investor are mentioned below. Apart from these, a particular state may have its own laws/rules with which an establishment would need to comply.

A foreigner coming into the country must register himself which may be done online with the Foreign Regional Registration Office (“FRRO”) of the Ministry of Home Affairs under the Foreigners Registration Act, 1939. The foreigner is issued a “permitindicating the date of his arrival and the period during which he is permitted to stay in the country. He may be required to visit the FRRO personally along with the prescribed documentation. He is required to surrender his permit immediately before his departure from India and obtain an endorsement to that effect. The purpose of this registration is to regulate the movements of the foreigner within the area in which the permit was granted and also to restrict his stay within the period specified in the visa issued to him.

2.1      Social Security Contributions

– Employers are liable to contribute 10% of basic wages, dearness allowance and retaining allowance towards the Employees Provident fund, if their establishment employs more than 20 individuals.
– Employers are liable to pay gratuity at the rate of 15 days wage per year of employment for an employee who resigns or retires after 5 years of continuous service.
– Proprietors of factories or shops employing more than 10 individuals are mandated to contribute 4.75% of wages payable to an employee towards the Employees’ State Insurance Corporation.

2.2     Laws against Sexual Harassment at Workplace

The Government of India enacted the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act (“POSH”) in 2013 for protection, prevention, and redressal of sexual harassment against women at workplace. POSH brings home the overarching mandate that no woman employee is meted with workplace sexual harassment, and the primary obligation to curb such conduct is on the employer. Every employer, irrespective of the headcount, must constitute an Internal Complaints Committee (“ICC”). If an employer fails to constitute an ICC or repeatedly contravenes any other provision under POSH, the employer’s relevant business license may be cancelled.

2.3    Maternity Benefit

The Maternity Benefit Act, 1961 mandates every employer of any establishment to provide every woman a total of 26 weeks of paid leaves, of which not more than 8 weeks shall precede the date of her expected delivery. Further, an employer has to provide crèche facility if his establishment employs more than 50 individuals.


3         Tax

A German entity may have a “permanent establishment” in India if it incorporates an Indian entity for carrying out its Indian operations. The India-Germany Double Taxation Avoidance Agreement stipulates that German companies having a permanent establishment in India shall be liable to pay income tax in India, up to the extent of income attributable to such permanent establishment. Thus, tax implications of incorporating an Indian entity must be assessed by a German start-up before venturing into the Indian market. Similar to most systems of taxation around the world, the tax regime in India is rather complex. Taxes are imposed both at the Central and State levels. Further, taxes are broadly divided into two kinds and indirect.

3.1      Direct taxation

The Income Tax Act (“IT Act”) regulates taxation of companies in India. Rates of taxes and exemptions are announced in the annual budget. The fiscal year runs from April to March in India. Some noteworthy elements are raised below.

Every company must apply for a PAN and a registration number for tax deduction at source. Direct taxes are applicable on income earned through the business dealings in India. Rates vary depending upon whether the income is earned by a domestic company, foreign company, a firm, or an individual.

Foreign companies are taxed only on income, which arises from operations carried out in India or, in certain cases, on income, which is deemed to have arisen in India. It includes royalty, fees for technical services, interest, gains from sale of capital assets situated in India (including gains from sale of shares in an Indian company) and dividends from Indian companies.

Companies engaged in cross-border M&A activity, particularly two non-resident entities need to pay special heed as there is a risk of coming under the Indian tax net. There has been considerable debate on whether income arising from cross-border transaction involving transfer of capital assets between two foreign entities should be taxed in India solely on the basis of their nexus with Indian company as part of the same group. The issue was litigated before the Supreme Court in the landmark case of Vodafone International Holdings B.V. vs. Union of India and The lower courts had favored the revenue’s tax claim makingindirect transfer of Vodafone’s Mauritian entity’s shares taxable in India. The Supreme Court overruling the lower court order, held that transfer of shares of a foreign company (holding shares or assets in an Indian company directly or indirectly) between two non-residents on a principal-to-principal basis outside India cannot be considered a transfer of capital asset situated in India and hence, not liable for tax as capital gains under the IT Act, provided that the structuring of the transaction is not for tax avoidance but for commercial reasons.

In the wake of this, the IT Act was amended in 2016 to bring thresholds for locating assets in India and thereby subjecting certain international transactions to income-tax liability in India. A capital asset being a share or interest in a foreign company or entity is deemed to be in India, only if the substantial value of the share or interest is, directly or indirectly, derived from the assets located in India. The substantial value is deemed to be derived from Indian assets, if value of the underlying India assets exceeds INR 100 million and represents at least fifty percent of the value of all assets owned by the foreign company or entity. If the substantial value threshold is satisfied, transfer of shares or interest between two foreign companies will be subject to tax in India. In such transactions, the buyer will have to withhold tax, make contractual provisions to this effect with the seller, or risk to be deemed an assessee in default. In other words, acquiring a non-resident company outside India will give the non-resident acquirer a controlling interest in an Indian company, the transaction between the two non-resident companies will fall within the purview of the Indian tax authorities.

3.2     Indirect Tax

Indirect Tax is levied in India through the Goods and Services Tax Act (“GST”) which came into effect on July 01, 2017, replacing the previous value added tax regime. It is a revolutionary tax reform done in India with the objective to replace the complex tax levying regime with a uniform and comprehensive tax regime. It is a single indirect tax for the entire nation. GST is a multi-stage and destination based tax system, levied on each value addition. It has 3 components i.e. CGST which is collected by the Central Government on an intra-state sale, SGST which is collected by the State Government on an intra-state sale and IGST which is collected by the Central Government for inter-state sale.

The major advantage of GST is the removal of cascading effect on the sale of goods and services, i.e. tax on tax is eliminated. Further, it being a technologically driven system, activities like registration, return filing, application for refund and response to notice are done online on the GST Portal. This not only speeds up the process but also reduces the procedural complexities of the previous tax regime.


4.     Competition Law

The Competition Act, 2002 bars “anti-competitive agreements”. Anti-competitive agreements which (i) determine purchase or sale prices; (ii) limit or control production; (iii) allocate geographical markets between enterprises and (iv) facilitate bid rigging; are per se against the law. Further, anti-competitive agreements which (i) require purchaser of goods to purchase some other goods as a pre-condition; (ii) determine the price at which a good may be resold etc; are illegal if they cause an appreciable adverse effect on competition in India. The Competition Act, 2002 also prohibits an Indian enterprise from abusing its dominant position in its relevant product or geographical market and the Competition Commission of India’s approval is required if valuation of a merger of two entities crosses certain financial thresholds.

If the Indian entity violates the Competition Act, 2002, a penalty may be levied which is 10% of its average turnover for the last 3 preceding financial years.


5.      Loans

Loans provided by the German entity to its Indian counterpart shall be designated as External Commercial Borrowings (“ECB”).  Depending on the facts and circumstances, such loan may require prior permission from the RBI through the approval route or may be routed through the automatic route. Therefore, it is critical no amount is disbursed as loan from outside India without consulting the Indian company’s bank and lawyers.


6.      Data Protection

The Indian Data Protection regime is on the cusp of an extensive overhaul. The legislative proposals for the Indian data protection framework suggest that India shall soon move to a General Data Protection Regulation (“GDPR”) inspired data protection regime. Thus, it becomes relevant to understand both the current framework and the proposed overhaul.

Currently, India does not have a specific legislation dedicated to data protection. India provides data protection through the Information Technology Act, 2000. Indian law regulates and protects sensitive personal data and information (“SPDI”) relating to (i) password; (ii) financial information such as Bank account, credit card, debit card or other payment instrument details; (iii) physical, physiological and mental health condition; (iv) sexual orientation; (v) medical records and history; and (vi) biometric information.An entity is allowed to collect SPDI only if collecting the information is required for the performance of its lawful functions. Prior written consent must be obtained for collecting SPDI. Such consent shall be valid only if the person concerned is informed about the reason for collection of SPDI and the intended recipients of such SPDI. Further, a body corporate has to ensure that reasonable security practices and procedures in consonance with international standards for protecting data are in place. A body corporate is mandated to provide compensation to an individual whose sensitive personal data and information is leaked causing wrongful loss or wrongful gain to any other person.

The Government of India has released the Personal Data Protection Bill, 2018 (“Draft Bill”) on July 30, 2018. The Draft Bill imposes obligations regardless of the market standing of the company, therefore if this bill goes into effect, even initial stage start-ups shall be burdened with high compliance costs. The Draft Bill provides mandatory registration requirements on data processors who conduct high risk processing. Such processors are required to implement: trust scores, data audits as well as data protection impact assessments. Further, the draft bill provides that a copy of all personal data must be stored in India; additionally the government may notify certain types of personal data that should be mandatorily processed only in India. The Draft Bill provides penalties of upto 4% of global turnover in some cases. In limited situations, criminal penalties have also been prescribed.

Further, the government has released a draft version of the Digital Information Security in Healthcare Act (“DISHA”) for specifically regulating and protecting digital health data (“DHD”).DISHA aims to provide for privacy, confidentiality, security and standardization of DHD and associated personally identifiable information. It seeks to regulate the manner of generation, collection, storage and transmission of DHD. Contraventions of DISHA entail payment compensation to the owner of the DHD, however imprisonments of upto 3 to 5 years or fines have been prescribed for serious contraventions. German entities who propose to enter India’s healthcare sector must analyse their data security norms and practices in light of this proposed legislation.

In view of the government’s clear intent to move towards a GDPR inspired data protection regime, German entrepreneurs are well advised to enter the Indian marketplace with the same security mechanisms and degree of respect for protecting personally identifiable data with which they operate in the European Union.


7.       Dispute resolution in India

In India, dispute resolution is a costly and time consuming affair. Indian courts are notoriously slow in adjudging disputes.The World Bank has reported that it takes an average of four years to enforce a contract in India. The average legal costs of the dispute amount to 1/3rdof the claim amount. Further, Indian courts seldom permit recovery of legal fees from the losing party. However, there have been efforts to improve the system, such as recent amendments to Indian arbitration law which impose a one year time limit within which arbitration proceedings have to conclude. The Indian entity must ensure that there are dispute resolution clauses within their contracts, specifying a manner through which disputes are to be resolved. In our experience, formal mediation through qualified mediator is fruitful and must be attempted prior to going for litigation/arbitration.