LEGAL PROVISIONS RELATING TO APPOINTMENT OF FOREIGNERS AS DIRECTORS IN
INDIAN COMPANIES
The foreign nationals or foreign
citizen or Non-Resident Indians residing abroad can be appointed as a Director
on the Board of Indian companies. A foreign body corporate may have 100%
subsidiary company in India, may nominate one or all its Directors on the Board
of the subsidiary Indian company who are foreign nationals.
What are the Laws applicable to
foreign Directors appointed in Indian companies?
The following Acts are
applicable:
(1) COMPANIES ACT, 1956
(2) Service Tax under Finance Act
(2) FEMA 1999
AND
(3) INCOME TAX ACT
(1) COMPANIES ACT, 1956
The foreign
nationals or foreign citizen or Non-Resident Indians residing abroad can be
appointed as a Director on the Board of Indian companies whether public listed
or unlisted or private. A foreign
body corporate having 100% subsidiary company in India may nominate all its
Directors of the subsidiary Indian company who may be foreign nationals. A
foreign director may be appointed as whole time director (executive director)
or non whole time director (non – executive director). Procedures relating to
appointment of foreign directors under Companies Act are given below.
Under
Section 2(13) of the Companies Act, 1956, Director includes any person
occupying the position of Director be whatever name called. In view of
this, a foreign national can be appointed as Director in the companies
registered in India as per Companies Act 1956.
1. To
become a Foreign Director he is required to obtain Director Identification
Number (DIN) . For applying DIN,
Permanent Account Number (PAN) from
the Indian Income Tax department is compulsory. Before appointment of director,
the Director has to apply for DIN.
2. In
the case of foreign nationals, the recent
colour photograph of the director, Pass-port and
proof of residence and the
affidavit ( format of affidavit is available in MCA web site under DIN 1 ) have to be notarized from the
respective country and by applying in Form DIN 1, the Director
Identification Number can be obtained on-line.
In case of
Foreign
Director, the supporting documents can also be attested by Company secretary in
full time employment / CEO / Managing director of the Indian company in which
he / she proposed to be a director.
3.
Affidavit by the applicant to be executed on non judicial stamp paper and duly
notarised. It is a mandatory attachment.
4. In case of foreign applicant, address proof
should not be older than 1 year from the date of filing of the E form.
5.
Passport number is mandatory for foreign nationals. Foreign nationals shall
select the nationality as declared in the passport.
6.
Father’s name proof is not required in the case of foreign nationals / NRIs.
7. In
case of proofs which are in languages other than Hindi / English, the proofs
should be translated in Hindi / English from professional translator carrying
his details (name, signature, address) and seal. In the case of foreign
nationals, translation done by the notary of home country is also acceptable.
All the forms
required to be filed under the Companies Act are filed through MCA website
through the digital signature. In view of this the Foreign director is required
to have one digital signature with
his PAN number encrypted so as to enable him to file the returns with Income
tax authorities on behalf of the company.
The Private
Limited Companies are required to have a minimum of 2 Directors and Public
Limited Companies are required to have a minimum of 3 Directors under the
Companies Act. It is quite possible that all the Directors of the company
may be foreign nationals and they run the business through the persons of
Indian nationals appointed by them in India. The Companies Act does not prohibit
holding Board meetings abroad. Similarly, it is also having the provision for
conducting Board meetings through video –conference subject to adherence to the circulars
issued by the Ministry of Corporate Affairs in this regard from time to time. In view of this, it is obvious that a
company can have all the Directors consisting of foreign nationals or foreign
citizens and there is no prohibition that only Indian Directors should be on
the Board of Indian companies.
In the case of
companies incorporated in Singapore, at least one Director should the resident
of Singapore. But, no such nationality restriction is applicable for the
companies incorporated in India.
Further, a
Director belonging to China or Thaiwan who may not be expert in English and
hence a person may also become the Director of Indian company without knowing
any Indian languages. What is required is business acumen and also help
from others to understand business language in India.
The person
proposed to be entered into as Director shall give his consent to act as a
Director of the Indian company in writing. This is mandatory in case of a
public limited company but now-a-days as a good corporate governance practice,
the consent of the proposed appointee director is obtained for private limited
companies also. As a measure of caution, this consent may also be notarized in
the respective country along with the other documents for obtaining Director
Identification Number. This becomes absolutely necessary especially when the
Form 32 is required to be certified by a professional and he may have a level
of comfort if notarized documents are attached to vouch for the documents
belonging to the appointee as he may not be knowing the foreign national
personally.
Appointment of
Directors is a power which is exercised by the members but once DIN has been obtained the board
of directors can pass a resolution for appointing the foreign director by way
of an additional director to meet
urgent business needs. In addition Form 32 has to be filed with Registrar of
Companies with in 30 days
for the appointment of director. . And once Form 32 is approved the director’s name will appear in the ‘view
signatory details’ in MCA website. At
the next Annual general meeting however, the person appointed as Additional
director by the Board has to be re-appointed as a Director by the members.
Foreign
directors can be paid sitting fees for attending the board meetings even if
they are attending the meetings by video conference. In addition to this
directors in public limited companies may be also paid commission permitted
under sec 309 of the Companies Act. If they are not in the whole time employment of the company they may
be paid commission 1 % of the net profits of the company if the company has a
managing director or a whole time director or a manager; 3 % of the net profits
of the company in any other case. Sec 309 is not applicable to private limited
companies and directors of the private limited companies may be paid commission
on the net profits of the company without any restriction.
(2) SERVICE TAX AND NON- WHOLE TIME DIRECTORS
The payment of
service tax for the services rendered by the Director is of new origin. No
service tax is payable if the director is employee of the company say
MD/WTD/ED. In other cases directors remuneration is liable to service tax under
reverse tax. Basic exemption of Rs.10Lakhs
is not available when reverse tax mechanism is applicable.
Service tax will be payable on sitting fees paid to directors for attending meetings of Board and Committees of Board, travelling expenses and incidental expenses for attending meetings of Board and their committees., commission or other remuneration paid, if any..
Service tax will be payable on sitting fees paid to directors for attending meetings of Board and Committees of Board, travelling expenses and incidental expenses for attending meetings of Board and their committees., commission or other remuneration paid, if any..
The Ministry of Corporate Affairs has
clarified vide General
Circular No. 24/2012 dated August 9, 2012 that
any increase in remuneration of Non-Whole Time Director(s) of a company solely
on account of payment of service tax on commission payable to them by the
company shall not require approval of Central Government under section 309 and
310 of the Companies Act even if it exceeds the limit 1% or 3% of the profit of
the company, as the case may be, in the financial year 2012-13.This means such approval will be required after 1-4-2013.
(3) FOREIGN EXCHANGE MANAGEMENT ACT, 1999
Person resident in India means,
the person should have resided in India in the preceding financial year for
more than 182 days. Citizenship is not the criteria for determining whether or
not a person is resident in India.
Reserve Bank of India has
clarified under the Foreign Exchange Management Act, 1999 appointment of
foreign national as a Director on the Board of Indian companies does not
require the Reserve Bank’s approval.
Payment of sitting fees,
remuneration, commission, travel expenses to the
Non-whole-time Directors who
is resident outside India is permitted under
general permission. But,
foreign nationals cannot purchase property in India.
Foreign nationals intending to
enter India are required to be in possession of
a valid pass-port issued in their
country along with valid India visa.
Foreign
passengers must ensure that
they are in possession of Indian visa before
embarking their journey and
there is not clause for visa on arrival in India.
Normally visa is given for a
period of five years for employment purpose which
may be extended further.
As per FEMA guidelines, a citizen of a foreign state
resident in India, being an employee
of a foreign company and on deputation to the office/ branch/ subsidiary/ joint venture
in India of such foreign company or being an employee of a company
of a foreign company and on deputation to the office/ branch/ subsidiary/ joint venture
in India of such foreign company or being an employee of a company
incorporated in India, may open, hold and maintain a foreign
currency account
with a bank outside India and receive/ remit the whole
salary payable to him for
the services rendered, by credit to such account, provided
that income tax
chargeable under the Income Tax Act, 1961 is paid on the
entire salary as
accrued in India.
Nationals of Bhutan and Nepal are
not required to apply for Indian visa and also nationals of Maldivies can stay
in India up to 90 days without having Indian visa.
Employment visa is required to be
granted to foreign nationals employed in an Indian company. The employment visa
is valid up to 1 year which may be extended upto 5 years.
Remittance to abroad – if the
non-resident whole-time director wants to remit funds to his personal account
in abroad he can do so by sending the amount under general permission of
Reserve Bank of India.
(4) INCOME
TAX ACT
DEFINITION OF NON RESIDENT:
Non Resident is defined in
the Income Tax Act as follows;
1. A person who have not stayed in India for 182 days in the
previous year will be a Non Resident Indian
Or
2(i). A person who
have not stayed in India for 365 days or more in the 4 preceding previous year
And
2(ii). A person who have not stayed in India for atleast 60
days in the previous year
PAN for Non Residents
Foreign nationals / citizens can
apply for PAN online. Form 49AA is the relevant application form for allotment
of PAN number for Non Residents. If there is no pan number available at the
time of deduction of income tax, twenty percent tds has to be deducted.
Remuneration to Non Residents
Foreign Directors are liable to pay applicable income tax
when they receive income. Foreign Directors can provide technical services for
the Indian Companies in which they are Directors.
Any payment of remuneration to foreign directors is subject
to Income Tax. If the foreign national is employed in India, the required TDS
has to be deducted from the remuneration payable to him in accordance with Sec
192 of the Income Tax Act. In case any payment to non resident other than
remuneration in accordance with section 195, TDS of 10% has to be deducted.
Section 115A(1)(b) of the Income Tax Act 1961 is relating to income tax
provisions for royalty or technical services received by a non resident.
In case the foreign nationals are Non-whole-time Directors and any commission or any remuneration is paid to them, it can be paid subject to deduction of applicable tax.
