India continues to witness a steady flow of global companies setting up or expanding their operations in India. Generally, their preferred option from a legal structure perspective is a private limited company. Both the new as well as existing Indian subsidiaries of foreign companies tend to depute trusted foreign personnel/non-resident Indians (NRIs) employed with them as flag-bearers in India in the form of directors or other key managerial personnel.
According to applicable Indian legislation ie. the Companies Act 2013, the Foreign Exchange Management Act, 1999 (Fema), the Securities and Exchange Board of India Act, 1992 (Sebi Act), there are no restrictions for a foreign national or non-resident Indian (foreign director) to be appointed as a director in an Indian company, subject to fulfilment of prescribed conditions.
A company, being an artificial person, is managed and controlled by its designated officials called the directors. The term “director” has been defined in an inclusive manner in the Companies Act as a “director appointed to the board of a company”. Directors may either be: (a) executive directors i.e. a managing director or whole-time director who are in whole-time employment with the company or (b) non-executive directors.
The directors are meant to supervise and regulate the management of the company as well as to protect the interests of the company’s shareholders.
Companies Act, Fema and the Sebi Act impose specific responsibilities and fiduciary duties to ensure that the company remains compliant with the regulatory requirements and the stakeholder interests are protected.
Appointment of foreign directors
Nationality is not a barrier per se for being appointed as a director in an Indian company. However, under the new Companies Act, minimum one director from the board of directors needs to be an Indian resident.
A foreign director can be appointed either by the board or the shareholders of the company. Managing director (MD) and whole-time director (WTD) are entrusted with substantial powers to carry out management decisions for and on behalf of the company. Their appointment is subject to shareholders’ approval except in case of private companies.
Any person, including a foreign director, must have a Digital Signature Certificate and a valid Director Identification Number. Further, their appointment and resignation has to be reported to the Registrar of Companies within 30 days of such event.
Although provisions under Fema have no such additional requirement around the appointment of a director, a valid Indian employment visa would be required for appointment as a managing director or a whole-time director.
While a director is paid as per his agreement with the company, limits on managerial remuneration have been defined in certain cases under Companies Act for public companies.
•Sitting fees for directors: A company may pay sitting fee of maximum Rs.1 lakh per meeting for attending the meetings of the board or committees thereof. This limit is applicable to private as well as public companies.
•Managerial remuneration: The limits for payment of managerial remuneration have been prescribed under the Companies Act. In case of inadequate profits, the remuneration can be paid upon receiving the shareholder’s approval by way of a special resolution. In case of listed companies, the earlier requirement of seeking central government approval for payment of remuneration in certain cases has recently been done away with. In case of private companies, the limits are not applicable and there is no requirement of obtaining shareholder’s approval for payment of managerial remuneration.
•Remuneration for acting in professional capacity: The board may approve payment of professional fee to a director who is acting in a professional capacity. However, such payment is subject to the threshold limits specified in the Companies Act and shareholders’ approval by way of a special resolution would be required for payments exceeding the limits. This is applicable to public companies, including listed companies.
Private companies are not required to obtain shareholder’s approval for affixing the professional fees for a director.
Under Fema, the earlier requirement of allowing remittance of only 75% of net salary paid to foreigners who are in regular employment in India has been done away with. Indian companies are free to pay the foreign directors sitting fees, remuneration, commission, travel expenses just like any other director. Needless to mention, Indian tax provisions would apply to any remuneration paid.
Compliances and checkpoints
A director has to ensure that disclosures and declarations as prescribed under the applicable laws are submitted with the regulators. A director is required to attend at least one board meeting either physically or through video conference each year. Failure would result in vacation of his office as a director.
Mere seeking a leave of absence will not suffice under the new Companies Act. A person can be appointed as a director in maximum 20 companies at any given point, out of which a maximum of 10 companies can be public companies.
According to the Companies Act, a managing director and a whole-time director must have been staying in India for the last 12 months before the date of appointment, irrespective of their nationality and must have come to India on an appropriate visa. This is applicable to private companies as well as public companies.
KYC requirement for directors
The ministry of corporate affairs has recently introduced the requirement to conduct an annual know your customer (KYC) compliance for all the directors holding a Director Identification Number. The Companies Act prescribes the list of documents to be submitted by a director for KYC purposes which includes proof of identity and proof of residence. In case of a foreign national/citizen the passport would be considered for proof of identity and utility bills/ driver’s licence or other document issued by the foreign government or authority would be considered for proof of address. In case of any document issued by a foreign government/entity, the same would need to be notarized and consularised/apostilled.
Self-governance, transparency and shareholder empowerment are cornerstones of the Indian corporate law. Accordingly, adequate safeguards have been built for disclosures and regular filings. The government is reposing trust on the collective wisdom of the shareholders and minimizing its own role in regulating a company.
Over the last few years, India has witnessed a considerable change in the requirements related to directors.
Therefore, it is imperative that foreign directors should take note of the same and remain compliant.
1. Can a director receive both sitting fee and managerial remuneration?
Yes, a director can receive sitting fee as well as managerial remuneration. Such directors are either executive in nature or key managerial personnel. The remuneration must be paid in accordance with the law.
2. Is it mandatory for a director with foreign nationality/ citizenship to obtain a Permanent Account Number (PAN)?
As per the tax laws, it is mandatory for all directors, including foreign directors, to obtain a PAN in India if the company in which he is a director enters into a financial transaction of an amount aggregating to Rs.2.5 lakh or more in a financial year.
3. Is a foreign director required to obtain Aadhaar card as per Indian Law?
Aadhaar is not mandatory for foreign citizens or Indian citizens who qualify as non-resident under the tax laws.
Prasenjit Sarkar, manager at Grant Thornton India, contributed to this article.
Vikas Vasal is national leader tax–Grant Thornton India LLP.