This post focuses on one particular aspect of the incorporation of an entity in India involving the presence of a Resident Director. It is particularly applicable in the case of foreign entities looking to establish a business presence in Indian markets.
As it happens, in early 2014 we (Coinmen) were presented with a project for the incorporation of a client that had to adhere to the new Act. The client in this case was a Group of companies that was one of the largest players in the mobile phone manufacturing sector in China and was looking to enter India. The requirement put forth before us was to assist in the Group’s pursuit to establish its business presence in 20 major Indian states.
The incorporation was to be done through the setting up of various private limited companies in the 20 major states; wherein the companies were to be structured either as:
- Ownership vested with individual shareholders
- ody corporates
- A mix of both in few cases
As per the project scope assigned to us, we assisted the Group in their initial registration formalities with the Ministry of Corporate Affairs (‘MCA’) via the Registrar of Companies (‘ROC’), Income Tax authorities, and the authorities dealing with the Import and Export Code (‘IEC’). In addition, we also supported them in undertaking compliances with the Reserve Bank of India (‘RBI’) with respect to their initial Foreign Direct Investment (‘FDI’) for company funding.
When critical Legislative changes are enforced, or new Acts are introduced, it is inevitable for practical challenges and teething issues to occur. Substantial time is ideally required to streamline the amendments in consonance with the challenges. In all fairness, the Government of India (GoI) did ensure the best possible implementation of the new Act by rolling it out in phases – while some sections were enforced with immediate effect, others were implemented gradually by way of issuance of necessary notifications from time-to-time.
However, the challenge that arose for us in the incorporation of the Group was because of the Act being enforced during the client’s entry phase into India. As a result, all related compliances and registration processes were required to undergo significant changes.
As the Group was one of our first clients to get incorporated under the new Act, we were devoid of any precedents or use cases to follow in a circumstance of hurdles in filing the paperwork. The issue primarily was that while we were in the midst of the Group’s incorporation process and some sections of the new Act were enforced on an immediate basis, their related processes and formalities were still relatively rudimentary in nature.
Legal provisions that became challenges
As outlined in Section 149 (3) of the Act, it is mandated that a ‘Resident Director’ be appointed to the Board of all companies. It is important to note here that all companies – public or privately held – are required to appoint at least one Director to their Board who has stayed in India for not less than 182 days in the previous calendar year i.e. he should be a resident of India, at the time of company incorporation.
Prior to this enactment, there was no requirement of a company – including a Wholly Owned Subsidiary (‘WoS’) of a foreign company – to have a Resident Director on the Board. Because this provision was enforced with immediate effect, all existing and new proposed entities had to re-visit their Board composition. Consequently, this led to a delay in the process of incorporation formalities of new companies; and in many cases also increased costs related to incorporation because a Resident Director had to be recruited specially to meet the compliance of this new provision.
Practical challenges faced during the incorporation process
To comply with the requirement stipulated under Section 149 (3) of the Act that mandated the inclusion of a Resident Director on the Board, i.e. to clarify to the concerned authorities the Group’s adherence to this provision, we experienced the following two challenges:
The requirement of the Resident Director having stayed in India for a period of 182 days needed to be ascertained during the period of 1st January to 31st December (referred to as a ‘calendar year’). Before the notification of this requirement was published, promoters typically planned the inception of their entity in a manner that once the entity gets incorporated, the proposed foreign Directors may schedule their frequent business travels to India going forward.
However, to meet the requirement for a Director having stayed for a period of more than 6 months in the previous calendar year at the time of incorporation, was a tough requirement to be met. For this, foreign entities had to engage in several discussions and as mentioned above, separately invest time and effort to meet the compliance requirement.
The solution proposed:
Given the above circumstances, we assisted the client Group in identifying a resident individual who was willing to become a Director of the proposed Company, and at the same time be willing to take on the risks associated therewith. Once identified, we further guided the entity to enter into a contract or arrange for an execution of an Indemnity Bond that was in interest of both the company and the Resident Director. This suggestion was based on our perception that any act done by the Director on behalf of the entity is legally binding on the Company and the Director and the Company both hold liability for such actions and decisions. Therefore, to provide clarity on the obligations, rights, and duties of the Resident Director towards the Company and simultaneously to ensure proper indemnification by the Company towards the Resident Director, it was effective to enter into a written contract that appropriately captured the terms of the engagement.
In the case of a Joint Venture where one of the parties was Indian, it was suggested to appoint the representative of the Indian counterpart party to be the Resident Director subject to mutual discussions.
Where the foreign Director was already a resident of India, a proof of her stay in India was required to be submitted to the Registrar of ROC as evidence of the duration of her stay in India. Many foreign Directors though in possession of a Permanent Account Number (PAN) were unable to provide an address proof in support of their stay that was acceptable to the MCA.
The solution proposed:
In this case, we proactively obtained and verified the address proof mentioning the Indian address of the foreign Director in India. The acceptability of such proof to the concerned authorities was also verified since only prescribed utility bills were acceptable for this purpose. In instances where the address proof shared with us was unacceptable to the MCA, we suggested a practical option to obtain a post-paid mobile connection with the Indian address mentioned therein, or provide a bank statement, or any such acceptable proof evidencing their stay in India.
Revisions from the MCA on the Act
During the course of our project, several stakeholders approached the MCA for clarifications or addressal of various issues faced relating to practical implementations and processes of the Act. Extending its due co-operation, the MCA after considering the reasonability of the concerns, duly addressed those issues and issued clarificatory circulars from time-to-time.
Details of those circulars can be accessed from the following links:
To summarize the details of those circulars – the MCA clarified that:
- A Resident Director, who is a non-Indian citizen and is not in mandatory possession of a PAN, could submit her passport number accompanied with a declaration stating the non-applicability of the provisions for her case.
- Existing entities were required to reckon the stay of such a Resident Director proportionately from the period commencing from 1st April 2014 to the remaining calendar year period. In addition, the entities incorporated during the period 1st April 2014 to 30th September 2014 were required to induct the Resident Director upon the entity’s inception or within six months of its inception.
Due to the different views on the interpretation of the newly enacted provisions related to incorporation, we obtained various insights and clarifications from the MCA offices situated in different regions of the Country.
As we successfully incorporated entities in all the 20 major states of India, this project was not only a good learning experience for our Corporate Secretary practice team, but effectively exercised our ability to think on our feet and get the job done. The key for us throughout was to ensure that we deliver to the client what we promised; and to go beyond as and when necessary to do the right thing, as many times as needed.
Today, the client Group is a house-hold name – endorsed by popular celebrities and particularly famous for its association with the Indian Premier League.
This post is part of a series that we will be sharing on aspects concerning the incorporation of companies, and the practical challenges that may arise during the process along with possible solutions.
Written by Pragati Pandey