Incorporation of Company with a Foreign Director in India

Incorporation of Company explained: this guide covers what Incorporation of Company means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

India has one of the fast-growing economies in the world and this can partly be credited to the FDI (Foreign Direct Investment) inputs to the country and to globalization. A large number of foreign companies have started to set up their businesses here since the country provides them with seasoned subject matter experts who have mastered the technical know-how, special investment schemes, and tax exemptions.

On the other hand, India is also open to welcoming foreign nationals to hold high positions in several companies. The Companies Act, 2013 had introduced several new features, including having a foreign director for an Indian company.

 The Board of Directors, composed of Indian or foreign nationals, essentially administer and manage the activities of a company. Although the Act allows a foreign director to be present on the board, it is mandatory that at least one of the directors is an Indian citizen. The Act permits any foreign national or a Non-Resident Indian (NRI) to act either as an executive or independent director of a public or private limited company.

What is the Role of a Director?

The director of a company is appointed by the company’s board as per the norms defined in the Companies Act, 2013. All the directors of the company constitute the board and they are collectively known as the Board of Directors.

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The Board of Directors serves as a fiduciary to the shareholders and protects their interests. They play a decisive role in constructing the company policies and administering the resources of the company. The Board makes decisions regarding the hiring and firing of the senior personnel in the company like that of the CEO. They also formulate the compensation for the employees and play a major role in establishing the goals of the company.

The Act authorizes a person to be nominated as one of the following types of directors:

• Independent director
• Managing director
• Whole Time director
• Small shareholders director
• Alternative director
• Additional director
• Nominee director
• Woman director

The Act allows foreign nationals or NRIs to be authorized as any one of the directors as mentioned above.

What all you need to Qualify as a Foreign Director in an Indian Company:

Although the Act allows a foreign national to act as director in an Indian company, the following criteria should be promptly complied with by the individual, in order to hold the respective position.

Director Identification Number (DIN)

Any person who is about to be designated as the director of the company is required to obtain a Director Identification Number (DIN) at the time of the incorporation of the company. It is a unique 8-digit number that is assigned to every director of the company through which the details of the director are held in the database.

A foreign national is expected to acquire the DIN before being appointed as a director of the company. The same can be obtained by filing the form DIR-3 under the Ministry of Corporate Affairs (MCA). It can also be obtained by filing the SPICe+ form which is used in making the application for incorporation of a company.

While applying for the DIN, a declaration should be enclosed by the foreign national who is intending to become the director of the company that the person is not disqualified from holding the post of the director, as per the provisions of the Act. The consent to act as the director must also be furnished through the form DIR-2. Written consent is to be filed by the foreign national with the Registrar of Companies (RoC) within 30 days from the date of the appointment as the director of the company.

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The following documents are to be enclosed while making an application for the DIN:

• Recent passport size photographs
• Valid address proofs such as bank statements, driving license, telephone bills, electricity bills, etc, that are not older than 2 months on the date of the application
• A valid passport copy.

The copies of the stated documents must be duly notarized by a public notary and should be apostilled by the authorized officer belonging to the foreign national’s country of residence.

Digital Signature Certificate (DSC)

A class 3 Digital Signature Certificate (DSC) must be possessed by the foreign national who is to be appointed as the director of an Indian company. The DSC is required to file the forms online under the MCA portal. The DSC is required to be attached to the forms DIR-3 or the SPICe+ to obtain the DIN.

The following documents are required for obtaining the DSC:

• Recent passport size photographs
• Valid address proofs such as bank statements, driving license, telephone bills, electricity bills etc, that are not older than 2 months on the date of the application
• A valid passport copy.

The copies of the documents must be notarized and apostilled by a competent notary public and an authorized official respectively, belonging to the foreign national’s country of residence.

What all you need for Holding the Posts of Managing Director or Whole Time Director

The foreign nationals who intend to hold the posts of director in an Indian company must comply with the following requirements:

• The foreign national must have been a resident of India, i.e. must have resided in India continuously for not less than a period of 12 months, immediately preceding the date of appointment as a director
• Further, the foreign national must not be younger than 21 years or older than 70 years of age
• The foreign national should not have been declared as insolvent or should not have been convicted for any offense or should not have been subjected to imprisonment for a period of more than 6 months.

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Qualifications for Holding the Post of an Independent Director.

A foreign national possessing adequate educational qualifications, skills, knowledge, and experience in the fields of marketing, business law, finance, administration, and research can be chosen as an Independent Director of an Indian company.

Requirements to be fulfilled under Foreign Exchange Management (FEMA) Act, 1999:

A foreign national being appointed as a director in an Indian concern receives the same privileges an Indian national would receive like adequate remuneration, commissions, and sitting fees. In addition to these a foreign national is required to comply with the provisions of the FEMA Act, 1999.

• The foreign nationals who are to be appointed as directors must hold a valid Indian employment visa
• They can hold a foreign currency account in an authorized bank stationed outside India, wherein they can transfer their remuneration received for acting as a director in an Indian company
• An Indian company appointing a foreign director must make the appropriate measures for remunerating them like making applications to the respective dealers. An undertaking certificate must be enclosed along with the statement regarding the payment of income tax.

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Applicability of Income Tax for a Foreign Director:

The earnings of a foreign national earned in the capacity of a director of an Indian company are taxable under the Income Tax Act, 1961. As per the norms of the Act, the TDS (Tax Deducted at Source) will be withdrawn from their remuneration.

It is required that the foreign national holds a PAN (Permanent Account Number) card, if the earnings accrued are equal to or more than ₹250,000 within the period of a financial year.

Thus, appointing a foreign director to an Indian Company has the same requirements as the appointment of an Indian national as a director. The only additional compliances to be satisfied by the foreign national are those listed under the Companies Act, 2013, the Income Tax Act,1961, and the FEMA, 1999. Additionally, they are also required to have their respective documents notarized and apostilled by the authorized officers.

Inviting foreign nationals to participate in the business ventures and enabling them to hold high positions in the office would certainly open several new avenues to Indian companies. It is a welcoming move that the Indian legislations have duly codified the appropriate provisions pertaining to the appointment of foreign directors in Indian companies thus paving the way for several appreciable foreign collaborations