QUICK SUMMARY ↬ Foreign directors play a crucial role in the governance and management of Indian companies, bringing diverse perspectives and expertise to the boardroom. Understanding the legal provisions, eligibility criteria, and appointment process of foreign director in Indian company is paramount for individuals seeking directorship as well as companies looking to enhance their global presence. Hence the purpose of this blog is to give you detailed and in-depth information about such criterias and processes to enhance your knowledge on the same!
Foreign directorship in Indian companies is primarily regulated by the Companies Act, 2013, which outlines the legal provisions, requirements, and procedures for appointment as well as functioning of directors. It prescribes certain eligibility criterias that must be met before the appointment comes into effect.These include ensuring a certain stay period in India, obtaining crucial prerequisites like DIN, and adhering to laws under FEMA while remitting money back to the native country. These provisions aim to facilitate cross-border collaboration and promote global diversity in corporate governance structures.
Who is a Foreign Director?
In the context of the Indian Companies Act, a foreign director refers to an individual who holds a directorship position in an Indian company but is not a citizen of India. The Companies Act does not explicitly define the term “foreign director,” but it acknowledges the eligibility of foreign individuals to serve as directors in Indian companies under certain conditions. A foreign Director in Indian Company may be appointed for representing a foreign promoter, or bringing in diverse perspectives during crucial decision making processes.
There are two primary categories of foreign directors: foreign national directors and foreign resident directors. A foreign national director is an individual who is not a citizen of India, regardless of their residency status. On the other hand, a foreign resident director is an individual who may or may not be a citizen of India, but resides outside India for a significant period. As per the recent amendment to the Companies Act, a foreign resident director is someone who has stayed for 120 days or less, cumulatively in India, during the previous financial year.
Legal Framework for Foreign Director in Indian Company
The inclusion of foreign directors in Indian companies offers valuable diversity and global expertise to boardrooms, enriching decision-making processes. However, navigating the legal framework governing foreign directorship requires a comprehensive understanding of the Companies Act, 2013, and related regulations. So, let’s delve into the key provisions related to foreign director in Indian Company such as the requirement of Director Identification Number (DIN), eligibility criterias, grounds for disqualification, minimum age for appointment and so on.
Requirement of Director Identification Number (Section 153)
Section 153 of the Companies Act mandates foreign director in Indian Company to obtain a Director Identification Number (DIN) from the Central Government. The process involves providing details of a valid passport and submitting its certified copy along with the DIN application (Form DIR-3). Additionally, the copy of Resolution approving his appointment shall also be attached. The address proof of his Indian residence will be required as well. Authentication of these documents can be done by the Indian Embassy, a notary in the foreign national’s country of origin, or certain designated authorities within India. These include Managing Director/CEO/Company Secretary of the Indian company where the foreigner intends to serve as a director.
Eligibility Criteria For Foreign Directorship (Section 149)
Section 149 of the Companies Act delineates the eligibility criteria for foreign director in Indian Company. The eligibility criteria under Section 149 encompass attributes such as competency, integrity, and professional experience. There are no explicit citizenship or residency requirements, allowing foreign nationals to serve as directors in Indian companies, provided they meet the specified qualifications. While the Act does not specify a minimum or maximum age requirement for directors, it mandates that directors must have attained the age of major which is typically 18 years old.
Disqualifications for Directors (Section 164)
Section 164 of the Companies Act specifies various disqualifications that may apply to foreign director in Indian Company, including factors such as being declared insolvent, being convicted of certain offenses, or being disqualified by an order of a court or regulatory authority. Foreign nationals must ensure compliance with this provision to be eligible for directorship in Indian companies. Additionally, the director will also have to submit a declaration regarding his non-disqualification for the position to the ROC.
Security Clearance for Directors from Bordering Nations
In addition to the standard procedures outlined in the Companies Act, Indian companies may also require security clearance for directors hailing from bordering nations. This includes China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar, and Afghanistan. This additional step is essential to ensure national security interests and safeguard sensitive information, particularly in sectors deemed strategic or sensitive. The clearance process typically involves thorough background checks, scrutiny of affiliations, and assessment of potential risks posed by the director’s nationality. While this requirement adds an extra layer of diligence, it underscores the government’s commitment to protecting critical assets and maintaining security protocols in an increasingly interconnected global landscape.
Compliance with Foreign Exchange Management Act (FEMA)
While not a provision within the Companies Act itself, compliance with the Foreign Exchange Management Act (FEMA) is essential for foreign director in Indian company. FEMA regulates foreign investments, remittances, and other foreign exchange transactions, impacting aspects such as repatriation of profits and transactions involving foreign currency. Foreign directors must ensure adherence to FEMA guidelines to avoid legal repercussions and maintain regulatory compliance.
Other Regulatory Considerations
Depending on the nature of the business and industry sector, other regulatory considerations may apply to foreign director in Indian company, such as sector-specific regulations, tax laws, and corporate governance guidelines issued by regulatory authorities like the Securities and Exchange Board of India (SEBI) or the Reserve Bank of India (RBI). Awareness of these regulations and proactive compliance are imperative for foreign directors to operate within the legal framework and uphold corporate governance standards in Indian companies.
Procedure for Appointment of Foreign Director in Indian Company
The appointment of foreign director in Indian Company is pivotal for steering corporate governance and strategic decision-making. This process is meticulously governed by the Companies Act, 2013, ensuring transparency and regulatory compliance. Understanding the nuances of director appointment is crucial for both companies aiming to fortify their leadership and individuals aspiring to board positions. Here, we outline the concise steps involved in appointing directors in Indian companies, highlighting key legal provisions and procedural essentials to uphold governance standards effectively.
- Director Identification Number (DIN): Every individual proposed to be appointed as a director must obtain a Director Identification Number (DIN) as per Section 154 of the Companies Act.
- For foreign nationals, obtaining a DIN involves submitting the DIN application, along with legalised copies of Passport, proof of Indian residence, and DIN application.
- Authentication of documents can be done by the Indian Embassy, a notary in the foreign national’s home country, or specific authorities within India, ensuring the legitimacy of the identification process.
- If the foreign national belongs to a country that shares a land border with India, prior security clearance will be required from the Central Government. The security clearance letter so obtained will have to be attached with the DIN application as well.
- Once the DIN is obtained, the director shall intimate the company of the same, within 30 days. Following this intimation, the company shall, in the next 15 days, intimate the ROC of the same.
- Eligibility Declaration: Before appointment, the proposed director must furnish their Director Identification Number (DIN) and a declaration confirming their eligibility to serve as a director at the general meeting of the company. This declaration typically affirms that the individual is not disqualified from serving as a director under section 164 and meets the necessary eligibility criteria outlined in Section 149.
- Intimation of Consent: The proposed director must provide consent to hold office as a director (DIR-2), indicating their willingness to assume the duties and responsibilities associated with the position. This consent must be filed with the Registrar of Companies within thirty days of the director’s appointment, ensuring that the appointment process is officially documented and recorded.
- Appointment at the General Meeting: Directors are appointed in the general meeting of the company’s shareholders, as per Section 149(2) of the Companies Act. Shareholders typically approve the appointment by passing a resolution to the effect, ensuring that the process is carried out in transparency and with the consent of the company’s owners. The crucial documents that must be placed in this meeting include the Director’s DIN, eligibility declaration, and consent.
- Receipt of Official Appointment Letter:Following the approval of the director’s appointment at the general meeting, the individual is issued an official appointment letter by the company. This letter formally notifies the director of their appointment, outlining their roles, responsibilities, and any specific terms or conditions associated with the directorship. The appointment letter serves as a formal acknowledgment of the director’s position within the company and establishes the commencement of their duties as per the terms agreed upon. Additionally, the appointment letter may include details regarding remuneration, tenure, and other matters pertinent to the director’s role.
Role of the Foreign Director in Indian Company
Foreign director in Indian Company play a vital role in steering corporate governance and decision-making processes. adhering to specific legal provisions outlined in the Companies Act, 2013. Here’s a breakdown of the key responsibilities and duties of foreign directors. By upholding these responsibilities and duties, foreign directors contribute to maintaining corporate integrity, transparency, and accountability within Indian companies, fostering trust among stakeholders and promoting sustainable business practices.
- Compliance with Company Articles: As per the provisions of the Companies Act, a director is required to act in accordance with the articles of the company, ensuring alignment with its governing rules and regulations.
- Fiduciary Duties: Foreign directors are obligated to act in good faith, promoting the company’s objectives for the benefit of its members as a whole, and in the best interests of the company, its employees, shareholders, the community, and the environment.
- Exercise of Due Care and Diligence: Directors are required to exercise their duties with due and reasonable care, skill, and diligence, exercising independent judgment in decision-making processes to safeguard the interests of the company.
- Avoidance of Conflict of Interest: Directors must refrain from situations where their interests may conflict with those of the company, whether directly or indirectly. Any such conflict must be disclosed and managed appropriately to prevent any detriment to the company.
- Prohibition of Undue Gain: Directors are prohibited from seeking undue gain or advantage for themselves, their relatives, partners, or associates at the expense of the company. Any undue gain obtained by a director shall be liable to be repaid to the company.
- Non-assignability of Office: Directors are not permitted to assign their office, and any such attempt to do so shall be deemed void under the law.
- Consequences of Contravention: Directors who contravene the provisions outlined in this section are subject to penalties, including fines ranging from one to five lakh rupees, ensuring accountability and adherence to legal obligations.
Conclusion
The role of foreign director in Indian Company is pivotal in enhancing global perspectives, fostering cross-cultural collaboration, and driving strategic decision-making. By adhering to legal provisions, maintaining compliance with regulatory frameworks, and embracing best practices in corporate governance, foreign directors contribute significantly to the growth and success of Indian companies. Despite the complexities and considerations involved, navigating the landscape of Indian corporate governance offers opportunities for foreign directors to make meaningful contributions and shape the future trajectory of businesses in the dynamic Indian market.
FAQs
Q1: Can a foreign national be appointed as a director in an Indian company?
Yes, under the provisions of the Companies Act, foreign nationals can be appointed as directors in Indian companies, provided they’re eligible and have a Director Identification Number (DIN).
Q2: What are the eligibility criteria for a foreign director in Indian company?
Eligibility of Foreign Director in India Company:
- Minimum 18 years of age
- Must obtain DIN
- Must not be disqualified u/s 164 of Companies Act
- Must provide consent to appointment
- Must have security clearance from Central Government, if belonging to a bordering nation
Q3: What are the tax implications for foreign director in Indian Company?
Yes, foreign directors may have tax obligations in India, like paying income tax and professional tax on their fees and other remunerations. Besides, taxes may be applicable on foreign remittances as well.
Q4: What are the documents required for DIN of foreign directors?
Foreign directors seeking a Director Identification Number (DIN) in India typically need to submit legalised copies of their passport, proof of Indian residence, and the DIN application form. Authentication of documents can be done by the Indian Embassy, a notary in the foreign national’s home country, or specific authorities within India.
Q5: How is a foreign director appointed in an Indian company?
To appoint a foreign director in Indian Company, you must follow the steps below:
- Obtain Security Clearance from Central Government, if Director belongs to a bordering nation
- Obtain DIN using legalised documents
- Obtain Director’s Consent
- Obtain Director’s Declaration of Non-disqualification
- Pass Resolution in the General Meeting
- Intimate Director’s Consent & Declaration to the ROC
- Issue Official Appointment Letter
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