One Director must stay in India: Brief discussion

Section 149 subsection 3 of the Companies Act 2013 state as follows:

Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year”

Let us first analyse the provision-

  1. The provision is applicable to all the companies, irrespective of size, scale and nature of business. 
  2. A raw look of the provision requires one of the director to meet the residency requirement. 
  3. Atleast one director, i.e one or more than one director has stayed in India for the stipulated period
  4. The period of stay in the previous calendar year should be 182 days or more, however the stay may not be a continuous stay of 182 days.
  5. General Circular 25/2014 further clarifies ‘residency requirement’ would be reckoned from the date of commencement of section 149 of the Act i.e. 1st April, 2014. The first previous calendar year for compliance with these provisions would therefore be Calendar year 2014. The period to be taken into account for compliance with these provisions will be the remaining period of calendar year 2014 (i.e. 1st April to 31st December-9 months). Therefore, on a proportionate basis, the number of days for which the director(s) would need to be resident in India during Calendar year 2014, shall exceed 136 days
  6. Further special window of 6 months for companies incorporated between 1st April 2014 to 30th September 2014.

There are lot of private companies in India which are owned by foreign companies, generally such companies have nominee directors on the Board of the Indian company, who are directors or employees of the parent company and reside abroad. Also there are a number of companies privately owned and controlled by NRIs. For the sake of convenience, let us call the foreign parent company or NRI as owners. The pivot of control in such companies remain with owners of the company who are generally residing outside India. The companies appoint a manager or operational incharge in India for management and administrative convenience, though rarely, there are chances of appointment of person residing in India as Director.

Now, the provisions of the Act makes it mandatory for every Indian company to have one director residing in India for min 182 days. Hence such companies have to either :

  • appoint a person residing in India as Director

  • send an employee/close relative to India to act as Director of the Company

  • ensure that one of the existing Directors stay in India for the stipulated period

The latter two options will also have to be reviewed from tax perspective.

The potential tax implications on an employee / director for the income earned while working in India could be an important factor while deciding the options.  For instance, under section 6(1) of Income Tax Act, 1961, an individual could be considered as a resident in India if he is in India in the previous year for a period of at least 182 days and this could lead to tax costs in India. Thus apart from relocation, visa, cost of living and other allied issues the owners will also have to consider the tax implications, before deciding on any of the options.

The first option has its own limitations too, as the owners will have the fear of misuse of power in hands of Indian director. Indeed the Indian director being a part of Board of Directors would have control over both the operations and management of the company, and could possibly take advantage of the same. Thus the owners may spend sleepless nights as they are giving the controlling power of the company to another person, thus increasing manifold the chances of litigations and court cases, which take years to be resolved.

The rationale of new provision is not very clear. However analysts have referred it as a move to create accountability i.e. if the company violates any provisions of law, the Director who is residing in India can be more easily tracked n adjudged. However it is significant to note that if one director is residing in India, the decision making powers including the power for his appointment will remain with the owners of the company residing abroad. The director will only act as per instructions of the owners, and still be accountable for all the lapses and violations, becoming a scapegoat or fall guy in hands of owners and statutory authorities.

The new provision is subject to wide criticism, because in the current scenario of economic despair it is discouraging international business. Investors who are reluctant to dilute their stake or powers will be apprehensive to set up business in India. However it may take some time before there is any change in the statute, so lets live with it till then. We suggest that the companies willing to appoint their foreign or Indian employees as Director should pass necessary resolutions to delegate limited and specific powers to the director residing in India, execute indemnity bond and employment agreement specifying the role, powers, duties, liabilities etc.

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