As cross-border transactions are increasing, cases of incorporating a company with foreign directors have increased significantly. However, before appointing a foreign person as a director of the company, it is significant that one must be aware of the conditions of such appointment, manner of appointments, limitations, documents required, etc.
In this article, a detailed discussion is carried out about the appointment of a foreign director in an Indian Company.
1. Director Under the Companies Act, 2013
- The Companies Act, 2013 defines a director as a person appointed to the company’s Board.
- As per Section 149 of the Companies Act, 2013 every company shall have a board of directors consisting of individuals as directors and shall have:
- Minimum 3 directors in case of Public Company; and
- Minimum 2 directors in case of Private Company
- Therefore, the companies Act provides that only individuals can be appointed as directors of the company and no artificial person can be appointed as a director.
- However, The Act does not impose any restriction on the appointment of non-residents as directors of the company. Accordingly, Non-residents can be appointed as directors.
- Companies Act provides for the following designations for directors:
- Managing director
- Whole-time director
- Women Director
- Independent director
- Small shareholders director
- Additional director
- Alternative director
- Nominee director
2. How many directors can be NRI/Foreigners
- In some cases, NRIs want to incorporate a company in India with foreign directors only.
- As per Section 149(3) of the Companies Act, every company shall have at least one director who has stayed in India for a total period of 182 days or more in the previous calendar year.
- Therefore, The Board of a company can comprise both Indian residents and foreign nationals. However, every company must have at least one director who is an Indian resident. The Board cannot contain only foreign directors.
3. What is the meaning of foreign Directors/NRI
- Companies Act does not provide for any definition of Non-resident Indians or Foreign nationals like Income Tax or Foreign Exchange Management Act.
- However, Section 149(3) provides that every company shall have at least one person on the board who has stayed in India for 182 days or more during the preceding calendar year.
- Therefore, a person who has stayed in India for less than 182 days during the preceding calendar year and qualified as an Indian resident under the Income Tax act or any other act shall not be considered an Indian director for Section 149(3) of the Companies Act.
4. Criteria for appointing Non-resident or foreign national as director in an Indian Company
The criteria that need to be fulfilled by a foreign national to become a director in an Indian company is as follows:
4.1 Director Identification Number (DIN)
- DIN is a unique identification number allotted to any individual who is intending to appoint as a director in any company.
- Every person proposed to be a director in an Indian company needs to obtain a Director Identification Number (DIN) before the appointment.
- Therefore, even a foreign national must obtain a DIN before appointment as a director in an Indian company.
- DIN can be obtained by filing an application in Form DIR-3 The foreign national can get a DIN by filing form DIR-3 with the Ministry of Corporate Affairs (MCA) or must apply for a DIN in the SPICe+ form (Company incorporation form).
4.2 Digital Signature Certificate (DSC)
- The digital equivalent of a handwritten signature or a stamped seal at the time offers far more inherent security. A digital signature is intended to solve the problem of tampering and impersonation in digital communications.
- Every NRI or foreign national appointed as a director in an Indian company needs to have a Class 3 Digital Signature Certificate (DSC).
- The DSC is required to file online forms on the Ministry of Corporate Affairs (MCA) portal.
- DSC of foreign nationals must be affixed on Form DIR-3 form or SPICe+ form for obtaining the DIN.
- Every person proposed to appoint as director of the company is required to furnish a declaration to the company that he is not disqualified u/s 164 of the Companies Act, 2013.
- The interest of the proposed foreign Director in other entities as a Director or a Partner under section 184 of the Companies Act, 2013.
4.4 Written Consent to Registrar:
- Every NRI proposed to be appointed as a director is required to furnish his written consent to act as a director.
- Consent is given in Form DIR-2 and the same is required to be filed with RoC within 30 days from the date of appointment.
5. Eligibility criteria to appoint as director
As per Section 164 of the Companies Act, 2013, a person shall not be eligible to appoint as director of the company if satisfies any of the following conditions:
- He is of unsound mind and same has been declared by a Competent court;
- He is an undischarged insolvent;
- The person who applied to be adjudicated as insolvent and his application is pending
- Any person who has been convicted of any offense and sentenced to imprisonment for not less than 6 months and a period of 5 years have not expired from the date of expiry of the sentence;
- The person should be between the ages of 21 and 70.
6. Documents required for appointment as director
An NRI is required to provide the following documents to file an application for allotment of DIN:
- Proof of Identity: Passport, mandatory;
- Proof of residence: Address proof should not be older than 1 year from the date of filing of the eForm.
- Translation: In case of proofs that are in languages other than Hindi / English, the proofs should be translated into Hindi / English by a professional translator carrying his details (name, signature, address) and seal. Further, In the case of foreign nationals, translation done by the notary of the home country is also acceptable.
- Attestation: In case, the director is residing outside India, then the attached supporting documents should be attested by the Consulate of the Indian Embassy, a Foreign public notary.
7. Appointment of foreign nationals at different designations:
7.1 Appointment as Managing Director or Whole Time Director
- Conditions for appointment of Managing Director or whole-time director are given under Part I of Schedule V of the Companies Act, 2013.
- As per Part I, only a resident of India can be appointed as MD or WTD.
- For the purpose of this appointment, resident in India includes a person who has been staying in India for a continuous period of 12 months or more immediately preceding the date of his appointment and who has come to stay in India:
- for taking up employment in India; or
- for carrying on a business or vacation in India.
- However, this condition not apply to the companies in Special Economic Zones as notified by the Department of Commerce from time to time:
- Further, a person, being a non-resident in India shall enter India only after obtaining a proper Employment Visa from the concerned Indian mission abroad. For this purpose, such a person shall be required to furnish, along with the visa application form, the profile of the company, the principal employer, and the terms and conditions of such person’s appointment.
- In addition, to appoint as MD or WTD, a person should not be less than 21 years and not more than 70 years.
- Also, he should not have been declared insolvent or convicted of an offense and sentenced to imprisonment for a period of more than 6 months.
7.2 Appointment as any other director
A foreign national is eligible to appoint as any of the following types of director based on their competence, skills, education, and experience:
- Independent Director
- Women Director
- Small Shareholder Director
- Additional Director
- Alternate Director
- Nominee Director
8. Compliances Under FEMA For a Foreign Director
- A foreign national appointed as a director in an Indian company is eligible for receiving remuneration, commission, and sitting fees like Indian directors. Thus, they must follow the provisions of the Foreign Exchange Management Act (‘FEMA’), 1999.
- Foreign nationals intending to be a director in an Indian company should hold a valid employment visa. They can maintain and hold a foreign currency account with a bank located outside India.
- They can remit or receive the whole salary paid to them for their services as directors in an Indian company.
- When Indian companies appoint foreign directors, the Indian companies should make an application for remittance of their remuneration to the authorized dealers with an undertaking certificate and statement regarding payment of Income Tax.
9. Income tax on Income earned by Foreign National as director
- The income earned by a foreign national as a director of an Indian company is received and earned in India and therefore, the same is taxable under the Income Tax Act, of 1961.
- The Company is required to deduct on commission or remuneration as per the provisions of the Income Tax Act.
- Under the Income Tax Act, a foreign national who is a director in an Indian company must obtain a PAN card mandatorily if he/she is having a financial transaction of Rs.2,50,000 or more in a financial year.
- Though there is no bar on the appointment of foreign directors in an Indian company, they must follow the provisions under the Companies Act, 2013, Income Tax Act, 1961, and FEMA, 1999.