Requirement of at least one Resident Director on the Board

The Companies Act, 2013 outlines the requirement of at least one resident director on Board. Among all the other provisions, the provisions relating to the Board of Directors and administration of the company are of prominence. The companies Act 2013 has been implemented phase by phase till date. On March 26, 2014, clarification on two items of particular note was issued. One of them being the clarification on mandatory corporate identification rules. The other being the requirement of at least one resident director on Board.  images2

Under Clause 149(3) of the new Companies Act 2013, effective April 1, 2014, every company is required to have at least one resident director who has stayed in India for not less than 182 days in the previous calendar year. All Indian subsidiaries of foreign companies established as a company would need to have a director on board by April 1, 2015, who has stayed in India for 182 days or more between Jan and Dec, 2014. This requirement needs to be complied with by 1st April, 2015. We have come across a few companies which have still not complied with this provision of the Act.

With this requirement coming into action, foreign companies/nationals doing business in India will have a tough time maintaining their business. The said provision of the Act is reproduced below:

Section 149(3) of the Companies Act 2013 (Act, 2013) stipulates following requirement: 

“(3) 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.”

Now, what will be the applicability of this provision on the current calendar year/financial year? In order to clarify the same, the MCA had issued notifications by way of General Circular 25/2014. In this circular, MCA has clarified the below concepts:

PREVIOUS CALENDAR YEAR

This provision will come into effect from 01st April, 2014. The period from 1st April 2014 till 31 December 2014 (Calendar Year 2014) will be period taken into consideration for ensuring compliance with previous calendar year. Accordingly, the number of days for which the director needs to be a resident in India, during the above mentioned period shall be computed proportionately (instead of 182 days) and in all cases shall exceed 136 days.

FOR RECENTLY INCORPORATED COMPANIES:

The MCA has provided some relief to the recently incorporated companies. The companies whose date of incorporation falls between 01st April, 2014 to 31st December, 2014 should have a resident director either as on the date of incorporation itself or within six months of their incorporation. However, the companies which will be getting incorporated post September, 2014 needs to have a resident director from the date of incorporation itself.

CONSEQUENCES OF DEFAULT:

In case of any contravention of this provision, a penalty of up to INR 10,000 will be imposed on the company and every officer of the company. Further, in case of continuing default, a fine of INR 1,000 per day till the date this default continues is applicable.

TRANSITION PERIOD RELIEF:

Existing companies do not need to fret as well. Sec 149(5) gives one year’s time for compliance to existing companies (those companies registered on or before 31st March 2014). Hence, they have one year’s time, i.e. unto 31st March 2015 for compliance with Sec 149(3).

The intention to bring forth this provision is quiet practical and in many cases, a correct one. This provision will ensure that the Board is in a position to have a hawk’s eye view on the management of the company on a regular basis. Further, the continued presence of one director will facilitate smooth running of the statutory actions 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 use their subsidiaries here in India just for the purpose of asset management. In addition to it, most of the times, foreign nationals simply incorporate the company and leave it to their authorized representatives. As directors, they are not in a position to exercise their responsibilities towards the company. These provisions are likely to tighten the screws and bolts in company administration. However, as they say, there is a hole in every loop. You only need to know how to utilize it. In a Board Management where there is only one resident director, he is not likely to have a say in the administration of the company, in the practical sense. Even in a special resolution, you require a special majority. Hence, a lot remains to be explored while theory starts to get tested on daily basis. Till then, we urge existing companies to stay in compliance and safeguard themselves by 31st March,2015.

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