The COVID-19 crises have had a detrimental impact on people in India and around the world. As on April 16, 2020, there are 10477 active COVID-19 cases and 414 deaths on account of the virus, in India [i]. While we all fear the adverse consequences this malady can potentially have on our health, we mustn’t ignore the elephant in the room – the ECONOMY. As per the World Bank, the Indian economy is likely to decelerate to 5 per cent in 2020 and further down to 2.8 per cent in 2021 [ii]. With many industries practically shut down or working at anywhere between a fourth and half of their workforce, the profound impact this virus can potentially have on the Indian economy is unfathomable.
At this very point in time, there may be no panacea, but any sort of relief in terms of corporate compliance is more than welcome.
On 24th of March 2020, the Honorable Finance Minister Smt Nirmala Sitharaman, during an announcement addressing concerns arising out of the adverse economic conditions caused by the COVID-19 threat, temporarily waived off the need for every company to have at least one Director qualifying as a Resident Director as mandated by subsection (3) of section 149 of the Companies Act, 2013, for the Financial Year 2019-20 [iii]. Amongst a slew of other measures such as providing an additional time of six months to newly incorporated companies to file a Commencement of Business report, the Honorable Finance Minister announced,
“If there is a Company Director, in each company that is, who does not comply with the minimum residency in India requirement, which at the moment is one hundred and eighty two days; so if there is a Director in a company who has not stayed in India for one hundred and eighty two days or more under section 149 of the Companies Act, this was treated as a violation, now it shall not be treated as a violation.”[iv]
Sub-section (3) of section 149 of the Companies Act, 2013 reads as follows:
“149 (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 financial year.”[v]
This particular section was introduced for the first time in the Companies Act 2013. It was to have effect from April 1, 2014. The words “financial year” were substituted for “calendar year” by the Companies (Amendment) Act, 2017.[vi]
This section is self-explanatory. As per this section, every company registered under this Act must have at least one Director Resident in India, for a period of 182 days during the previous financial year. Such Directors are often referred to as “Resident Directors”.
If any company contravenes this provisions, the company and the officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees. This certainly acts as a deterrent.
Section 149 (3) of the Companies Act, 2013 has certainly caused some degree of inconvenience to wholly-owned foreign subsidiaries and NRIs willing to carry out business in India, however, its benefits can hardly be overestimated.
This section has had a profound impact on foreign subsidiaries as well as companies run by NRIs. The objective behind the introduction of this section was to ensure greater involvement of Directors in the day to day affairs of the Company as well as to secure the recurring need for statutory compliance.
Now companies are compelled to have on their board at least one Resident Director, unlike the situation prior to April 1, 2014. Now local representation of the company is mandatory. This section provides the Government with the opportunity of holding someone locally available, responsible in the event that the company should indulge in any violation of the law. Ensuring stay of at least 182 days improves the functioning of the company since there is a Director who is well versed with India’s constantly evolving business climate and customer demands.
Moreover, India is not ploughing a lonely furrow. A similar need for such a provision has been felt in countries like Singapore, Australia (which are also based on the English Common Law system, like India) and Mauritius among other countries, which have a similar provision in their Company Laws.
In the case of Singapore, Section 145 of the Singapore Companies Act reads as follows:
“145.— (1) Every company shall have at least one director who is ordinarily resident in Singapore and, where the company only has one member, that sole director may also be the sole member of the company. ”[vii]
With regard to what “ordinarily resident in Singapore” means, the Singapore Accounting and Corporate Regulatory Authority (ACRA) has clarified:
“A Singapore Citizen, Singapore Permanent Resident, an EntrePass holder or an Employment Pass holder issued with such a pass to work in the company concerned and who has a local residential address can be accepted as a person who is ordinarily resident here,”
Similarly, there is also a provision mandating Resident Directors in the Australian Corporations Act 2001. Section 201A of the Act reads as follows:
“ 201A Minimum number of directors
(1) A proprietary company must have at least 1 director. That director must ordinarily reside in Australia.
(2) A public company must have at least 3 directors (not counting alternate directors). At least 2 directors must ordinarily reside in Australia. ”[viii]
However, what the words “ordinarily reside” mean, has been a point of discussion in various court cases.
Conversely, there are also other countries like the UK and Hong Kong which have no such requirement.
This temporary relaxation of section 149 (3) the Companies Act 2013 has also been a consequence of worldwide travel restrictions. On March 19, 2020, the Government Of India suspended all international commercial passenger flights until March 29, 2020[ix] and subsequently on Mach 26, 2020 further suspended flights until April 14, 2020[x]. In these days of COVID-19, when flights and most forms of transport across the world have been disrupted, if not brought to a complete standstill, this relaxation offered by the Ministry Of Finance has definitely come as a sigh of relief for many foreign subsidiaries and NRIs alike. Governments around the world are announcing total lockdowns and travel for Directors and other company personnel has become impossible and serves as a serious health hazard.
However, it is a well-known fact that various firms have sprung up across India which offer to employ Indian Directors on behalf of wholly-owned foreign subsidiaries, in order to help them to comply with this provision. A feature which is not uncommon in other countries with similar laws. Such Directors are often referred to as “ Nominee Directors ”. One of the main pitches of these firms being that Directors appointed by them will not play an “ active role ”. As a matter of fact, many of them unabashedly state that they only offer such Directors for the sake of compliance. Things don’t change very much. It is still the foreign Directors residing abroad, who sit on the saddle. Decisions regarding policy, management, production and marketing are inter alia the sole prerogative of the foreign Directors. Major decisions are not left in the hands of these Resident Directors. Moreover, the rights and powers of these Resident Directors are often constricted by way amendment to the Memorandum and Articles of Association.
It is pertinent to reiterate here that this relaxation is only applicable for the Financial Year 2019-20. In the current scenario, the next course of action is unforeseeable. It appears that such relaxation may become imperative for subsequent Financial Years until a treatment regimen for COVID-19 is discovered, followed by a Corona Virus vaccine.
(Views are personal only.)
[ii] World Bank Press Release: “ South Asia Must Ramp Up COVID-19 Action to Protect People, Revive Economies ” , April 12, 2020.
[iv] Verbatim from BloombergQuint on YouTube: “ Finance Minister Sitharaman On Statutory & Regulatory Compliance Matters: Coronavirus Pandemic ”, March 24, 2020.
ABOUT THE AUTHOR
Farhad Singh Kohli