With the implementation of the pre-requisite to have at least one resident director, foreign companies doing business in India will now have a tough time ensuring the residency requirement 

The Ministry of Corporate Affairs (MCA) seems to be in top gear, issuing clarifications, circulars and notifications in response to the numerous queries and representations received from various stakeholders. In the case of directors, MCA clarified rules about Independent Directors a few days ago and now subsequent to examining the matter, MCA has issued clarifications on residency requirements.

Provisions under Companies Act, 2013

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.”

The section has been enforced with effect from 1 April 2014 and has led to confusion regarding the applicability of this provision in the current financial year/ calendar year. So, in order to eliminate any sort of confusion, MCA has come out with a clarification vide General Circular No 25/2014 dated 25 June 2014 ( ).

Previous Calendar Year - clarified

The applicability of section 149 (3) mandating the residency requirement for a total period of not less than 182 days in the previous calendar year shall commence from 1 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(s) need 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.

Position for recently incorporated companies

The MCA clarified that Companies incorporated between 1 April 2014 to 30 September 2014 should have a resident director either at the incorporation stage itself or within six months of their incorporation. Further, Companies incorporated after 30 September 2014 needs to have the resident director from the date of incorporation itself.

Impact of this provision on Companies

The residency requirement will ensure that the Board shall continue to monitor directly the management of the company on a regular basis and shall be responsible for acts and deeds of the company. The continued presence of at least one 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 was missing in the Act of 1956. The intention of the Section 149 (3) is not limited to incorporation, but at all times thereafter, in order to ensure that there will be at least one resident director in case any issue arises with regard to the accountability of the Board. With the implementation of this pre-requisite, foreign companies doing business in India will now have a tough time ensuring the same.

(Nikita Snehil works with Vinod Kothari & Co)