The process of onboarding foreign directors in an Indian company is a legal procedure with the main applicable laws being the Companies act, 2013, along with the rules allied with the MCA and FEMA regulations. The on-boarding of the foreign director mandates that the applicant conduct activities such as checking the eligibility, filling statutory forms, being given with identification papers, and following up on compliance after the appointment becomes effective.
This paper will chronologically discuss how the onboarding of foreign directors into an Indian company is done in practice with emphasis to statutory compliance, the procedural aspect such as filings before the regulators and the common areas of risks.
What is the legal meaning of onboarding foreign directors to the Indian company under the Indian company law?
Onboarding foreign directors of an Indian company means the legal procedure by which a non-resident is made a director under the Indian legal regime governing the companies. The legal procedure is not merely confined to appointment and also extends to verification, filings, disclosures and post-appointment requirements.
The onboarding process under Indian law consists of:
- Incorporating eligibility in the Companies Act, 2013.
- Allocation of a Director Identification Number (DIN).
- Issuance of Digital Signature Certificate (DSC)
- Preparing and passing of board and where necessary shareholder resolutions.
- Submission of prescribed forms to the ministry of corporate affairs (MCA).
- Securing of annual and event based compliances thereafter.
Is it possible to have a foreigner to be nominated as a director of an Indian company?
Yes, the Indian law provides that foreign nationals can be appointed as directors of an Indian company.and as such is not strictly prohibited under the Companies Act, 2013.
The governing post is as follows:
- The Companies Act, 2013 is not confined to nationality with respect to directorship.
- As an executive or non-executive director, a foreign nation can be hired.
- The permissibility standard is the same with listed and unlisted companies.
The firms should however make sure that:
- One of the directors is a resident director according to Section 149(3).
- The company is in compliance with the indirect restrictions are not imposed by sector-specific legislations or conditions related to FDI.
In practice, the foreign director’s appointment has been witnessed across India in subsidiaries, joint venture, investment backed start-ups of group companies.
What are the eligibility requirements of a foreign director?
The process of onboarding foreign directors to an Indian company is allowed provided that the person meets the necessary statutory eligibility requirements which are provided by the Companies Act, 2013. The statutory requirements apply to both Indian and foreign nationals and have to be fulfilled before any board or shareholder resolution approving the appointment is passed.
Fundamental eligibility criteria according to the Companies act, 2013.
In the case of onboarding of foreign directors to an Indian company, the appointee proposed should satisfy the following requirements: The age of appointment must be at least 18 years.Under no circumstances shall be disqualified under Section 164 of Companies Act, 2013.
Statutory disqualifications which are to be evaluated
Under the compliance requirements of foreign directors under Companies Act 2013, the individual must not have been disqualified under any of the following grounds:
- Convicted of a moral turpitude offence.
- Is linked to firms that have not submitted financial reports or annual returns of the stipulated timeframes.
- Is associated with defaulting entities as far as repayment of deposits, debentures or announced dividends is concerned.
In the event it is discovered that any outstanding disqualification is applicable on an individual it shall make the appointment invalid regardless of the approval of boards or shareholders.
What documents are required to onboard a foreign director in India?
Documentation is the most crucial aspect of determing the onboarding foreign directors to an Indian company and the proper compilation of the documents will either create a successful appointment process or a r ejection of such appointment of the foreign director. The Companies Act, 2013 mandates that a foreign directors shall only be appointed in India, once the identity, address and declaration documents are presented in the prescribed format.
First-time documents needed to onboard foreign directors
To onboard foreign directors into an Indian company the following documents are required:
- Passport:
The most commonly used identity document is the passport that is mandatory to foreign nationals. - Address proof:
Documents which can be used to acertain the address of an individual which include but is not limited to a current bank statement, utility bill or government-provided address document within the foreign individual’s home jurisdiction. - Photograph:
A passport size photograph that confirms the records in the passport. - Consent to become director (Form DIR-2):
The DIR-2 form prescibes that the individual who is being appointed as a director intends to enter into the directorial roles. - Form DIR-8 Declaration of non-disqualification:
This statement confirms compliance with foreign directors in regard to Companies Act 2013 especially Section 164.
Foreign document authentication and verification
Documents prepared outside India should have a certain authentication standard to be accepted to on board foreign directors in an Indian company:
- All documents of foreign origin must be notarised.
- Where the issuing country is a signatory to the Hague Convention, apostille is necessary.
- Documents issued under non-Hague Convention jurisdictions have to be consularised.
Lack of good apostille or consularisation is a may be a ground for rejection of the application for theDIN and thereby hampering the process of appointing a foreign director in India.
What is the procedure of obtaining the Director Identification Number (DIN)?
Director Identification Number is a legal requirement that the foreign directors must have in order to be onboarded to an Indian company and this has to be acquired prior to the appointment as a director of an Indian company. The Ministry of Corporate Affairs issues DIN when Form DIR-3 is successfully filed and approved. The DIN is a permanent identification system of directors and plays a central role in foreign appointments of directors in India as provided in the Companies Act, 2013.
Statutory procedure of DIN allotment to foreigners
To get onboard foreign directors in an Indian company, DIN is acquired in the following manner:
- On the MCA portal, the applicant is required to file Form DIR-3 which is to be filled electronically.
- The applicant is required to use of passport as the main ID card..
- Address proof issued in the foreign jurisdiction is submitted.
- Depending on the country where the document is issued, apostilled or notarised documents.
- India Certification by a practising Indian accountant, company secretary, or cost accountant.
The MCA reviews the application along with the submited documents to determine identity, document authenticity and adherence to the eligibility.
Documentation guidelines and authentication specifications
The MCA scrutinizes the documents which have been uploaded with the DIR-3 for the following discrepancies:
- Passport information should be the same name as the name typed in the application.
- It should be recent and the address has to be clear.
- Apostille/consularisation should meet jurisdiction requirements.
Regular practical problems in DIN processing
Based on the applications and the documents submitted for the DIN, the grounds for which the DIN applications of foreign nationals is rejected include:
- Passport and Form DIR-3 discrepancies on the name.
- Address proofs that are not completed or up to date.
- Apostille formatting or lack of notarisation.
DIN and DSC relationship of foreign directors
DIN and DSC requirements of foreign directors shall be subject to seperate procedure but are to be conducted in in sequence whereby the DIN has to be first obtained by the foreign directors, and thereafter the foreign director can file the application for the acquisition of a Digital Signature Certificate. Digital Signature Certificate is essential to make statutory filing such as DIR-12 and DIR-3 KYC Thereby it is essential to stategies the methodology to obtain both the DSC and DIN during onboarding of a foreign director to an Indian company.
Is a Digital Signature Certificate mandatory for foreign directors?
Yes, Digital Signature Certificate is essential for the of onboarding foreign directors in an Indian company and all subsequent filings with the MCA. The DSC is valid for a maximum period of three years.
Does it need a board and shareholder approval in order to have a foreign director?
The board and the shareholder (wherever applicable) approval is mandatory for the appointment of a foreign director. This is achieved by the passing of resolution by the board or the shareholders.
The approval system is based on the character of appointment
Standard approval sequence:
- Approval of appointment for the board.
- Where necessary, shareholder resolution.
The approval of the shareholders is required to the extent that:
- The director is made the managing director or the whole time director.
- It is prescribed in the Articles of Association.
- There is remuneration that is above the statutory threshold in the appointment.
The resolutions should be specific and state:
- Designation
- Term of appointment
- Effective date
Should a foreign director fill in DIR-3 KYC annually?
Yes, when it comes to allotment of DIN of foreign directors on onboarding of foreign directors in an Indian company, annual compliance with DIR-3 KYC is obligatory. It is not only applied to the Indians but also to foreign nationals and does not depend on the residential status, physical presence, or board activity within the year.
DIR-3 KYC is an annual verification process that Companies Act, 2013 uses to ensure the identity and contact information of the holder of DIN are up to date in the MCA database.
DIR-3 KYC of foreign directors
To conduct the onboarding of foreign directors to an Indian company through the DIR-3 KYC, the requirements are as follows:
- DIN has also been assigned.
- Even when the individual is no longer a member of a board, he or she retains the DIN.
- The director is a non-resident or a foreigner.
DIR-3 KYC of foreign nationals should be done within the stipulated annual date as advised by the Ministry of Corporate Affairs.
DIR-3 KYC compliance requirements
DIR-3 KYC prescribes the following as part of the compliance of foreign directors under Companies Act 2013:
- Electronic reporting of the MCA within the due date notified by the MCA.
- Confirmation of personal and contact information, email and mobile number.
- Authentication based on the DSC of the director, which had been issued in compliance with the requirements of DIN and DSC of foreign directors.
The filing has to be certified by a practising professional otherwise it is considered to be defective.
There are repercussions of non-filing or late filing
The noncompletion of DIR-3 KYC by the foreign nationals leads to the automatic regulatory action:
- Disabling of the DIN till KYC is accomplished.
- Disqualification from the signing or filing of the MCA forms including board related filings.
- Board and statutory compliance processes: operational disruption.
DIR-3 KYC is among the most neglected post appointment requirements after onboarding foreign directors to an Indian firm and must be monitored as a periodic compliance object.
Does it mean that foreign directors have to be physically present in India?
Onboarding foreign directors to an Indian company does not need to have a physical presence in India. The Indian law allows its participation electronically.
Key points:
- Board meetings can be presented through video conferencing.
- Under VC rules, some of the restricted matters have to be dealt with cautiously.
- Occasional visits do not alter residential status.
H2: What are the continued compliances once a foreign director has been on boarded?
The foreign directors are subject to comply with the ongoing requirements which include:
- In Section 184, disclosure of interest.
- Incorporation of Section 166 fiduciary duties.
- Annual DIR-3 KYC filing
- Changes disclosure on events.
The liabilities that foreign directors have had after being boarded are similar to those of Indian directors.
What are the pitfalls that firms commit during the process of boarding foreign directors?
The majority of cases of compliance breakdown occur due to the oversight of the process and lack of planning instead of legal intricacy.
Common errors with respect to boarding of the foreign directors include:
- Wrong apostille or notarisation of the document.
- Delay in DIR-12 filing
- Missed DIR-3 KYC deadlines
Frequently asked questions on onboarding foreign directors to an Indian company
Is it possible to appoint a foreign director without paying a visit to India?
Yes, when hiring foreign directors into an Indian firm, the person will not need to come fto India during the appointment process. The regulations and procedure established in India allows appointments, documentation, and participation via electronic methods.
What happens if DIR-3 KYC is not filed by a foreign director?
Failure to execute DIR-3 KYC by the foreign nationals leads to automatically deactivation of the DIN by the MCA. When the director becomes deactivated, he cannot in any way sign or file any statutory form until the renewal of the DIR-3 KYC.
Do all countries require apostille of a document issued?
No, the documents issued by the countries that are the signatories of the Hague Convention only require apostille. In the case of the non-Hague Convention countries, consularisation by the Indian embassy or consulate is obligatory.
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