Adding Foreign Directors and Shareholders to an Indian Company: A Complete Guide

Foreign investment in Indian companies continues to grow as India strengthens its position in the global economy. Understanding the regulatory framework is essential for businesses looking to add international expertise and capital through foreign directors and shareholders. This guide outlines the process, requirements, and considerations.

Legal Framework for Foreign Participation

Foreign Directors

The Companies Act, 2013 permits foreign nationals to serve as directors of Indian companies, with certain conditions:

1. Residency Requirement: Every company must have at least one director who has stayed in India for at least 182 days in the previous calendar year.
2. Director Identification Number (DIN): All directors, including foreign nationals, must obtain a DIN.
3. Maximum Board Composition: The maximum number of foreign directors on a company’s board is not restricted.

Foreign Shareholders

Foreign investment in Indian companies is primarily governed by:

1. Foreign Exchange Management Act (FEMA)
2. Foreign Direct Investment (FDI) Policy
3. Reserve Bank of India (RBI) regulations

Step-by-Step Process for Adding Foreign Directors

1. Obtaining a Director Identification Number (DIN)

For foreign nationals, the DIN application requires:

• Form DIR-3 submission
• Passport copy (notarized)
• Proof of address in the home country
• Recent photograph
• PAN card or passport as ID proof
• In case PAN is not available, declaration in Form 60
• Identification and address proof of foreign directors must be apostilled

2. Digital Signature Certificate (DSC)

Foreign directors need a DSC for signing documents:

• Class 2 or Class 3 DSC from authorized certifying agencies
• Foreign directors must have their documents attested by:
  • The Indian Embassy in their country, or
  • Apostille by the home country under the Hague Convention

3. Board Resolution & Appointment

• Pass a board resolution approving the appointment
• File Form DIR-12 with the Registrar of Companies (ROC)
• Update the company records

4. Compliance Requirements

Foreign directors must comply with:

• Provisions of the Companies Act, 2013
• SEBI regulations (for listed companies)
• Income Tax Act (for remuneration and taxation)

Process for Adding Foreign Shareholders

1. Determining the Investment Route

Identify the appropriate investment route:

• Automatic Route: No prior government approval required for sectors with 100% FDI permission
• Government Route: Prior approval from relevant ministries is needed for restricted sectors

2. KYC Documentation

Foreign shareholders must provide:

• Passport copies (notarized)
• Proof of address
• Tax identification documents from their home country
• Bank account details

3. Structuring the Investment

• Determine whether the investment will be through equity shares, preference shares, or debentures
• Ensure compliance with pricing guidelines prescribed by the RBI

4. Filing Requirements

• File the FC-GPR form with the Authorized Dealer Bank within 30 days of issuing shares
• Update the Register of Members
• Report to the RBI through Annual Return on Foreign Liabilities and Assets

5. Post-Investment Compliance

• Issue share certificates
• Reporting foreign investment in annual filings
• Ensure compliance with ongoing FEMA regulations