Resident Director: A mandatory compliance to companies in India

I believe the director’s primary role is to create an atmosphere where his company can be created – Charles Keating

The well-being of a company lies in the hands of the directors, who are also accountable for the company’s and the shareholders’ interests. Directors are fundamentally fiduciary agents who owe responsibilities to the company. Directors are hired by the company’s shareholders to administer the company’s operations in the best interests of the shareholders.

Furthermore, no company can achieve success without having excellent and honest directors, therefore corporate success can only be achieved if the company’s directors fulfill their obligations and completely enforce the director’s duties. As a result, directors play a critical role in every corporate governance mechanism. The general obligations of the director are founded on certain common law norms and equitable principles.

Resident Director in India

Residential Director is a director who has stayed in India for a total period of not less than 182 days in the previous calendar year. It will be mandatory for the resident director to have a local address in the country and to be currently living in the country. Provisions of Section 149(3) of the Companies Act, 2013 deals with the residence of a Director.

The Companies Act 2013 introduced this concept of Resident Director. The Companies Act 2013 makes the residence of a Director in India mandatory. Under section 149 (3) of the Companies Act 2013, it is mandated that a ‘Resident Director’ to be appointed to the Board of all companies. Prior to this enactment, there was no requirement of a company, including a Wholly Owned Subsidiary of a foreign company, to have a Resident Director on the Board.

Since section 149(3) of the act 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.

Impact of Section 149(3) of the Companies Act, 2013 on the Companies

The residency requirement will ensure that the Board shall continue to directly monitor the management of the company on a regular basis and shall be responsible for the acts and deeds of the company. The continued presence of at least one resident director will not delay statutory action steps and will be a step forward towards meeting the timely corporate compliance requirements.

Moreover, this provision will mostly affect foreign companies intending to start businesses in India, earlier they used to typically appoint foreign directors as the directors of the Indian subsidiary because such a requirement of the resident director was missing in the Act of 1956. The intention of Section 149 (3) is not limited to incorporation, but always thereafter, to ensure that there will be at least one resident director in case any issue arises with regard to the accountability of the Board.

Resident Director: Regulations

With the implementation of this pre-requisite, foreign companies doing business in India will now have a tough time ensuring the same. In the case of Companies that are newly incorporated, the requirement of 182 days shall apply proportionately at the end of the financial year in which it is incorporated – (proviso to section 149(3) inserted w.e.f. 7-5-2018).

The Ministry of Corporate Affairs has provided some relief to the recently incorporated companies. The companies which are getting incorporated post September 2014 need to have a resident director from the date of incorporation itself. A Resident Director is like any other Director, and he is required to attend at least 1 Board Meeting in a year. 

Need for the appointment of a resident director

The intention to bring forth this provision is quite practical and, in many cases, a correct one. This provision will ensure that the Board is able to have a hawk eye view on the management of the company on a regular basis. Further, the continued presence of one director will facilitate the smooth running of the statutory actions and will not delay compliances.

Moreover, it will make the procedures of obtaining Digital Signature Certificate (DSC), etc. also hassle free and fast. Most of the times, the foreign companies may use subsidiaries in India just for asset management. In addition to it, most of the time, foreign nationals simply incorporate the company and leave it to their authorized representatives. As directors, they are not able to exercise their responsibilities towards the company.

These regulations are expected to enhance the efficiency and effectiveness of company administration. However, in a scenario where there is only one resident director on the Board of Management, they may not have a significant role in the practical administration of the company. Even for special resolutions, a special majority is required.