Here are a few things that an investor should keep in mind when considering whether to become a director of an Indian company.
The appointment process of becoming a director in India requires obtaining a Digital Signature Certificate (DSC) and a Director Identification Number (DIN). Obtaining a DSC and DIN involves hard copy paperwork to be filed with the Ministry of Corporate Affairs in India, including notarized and apostilled copies of identity proof documentation. Once an individual has procured the DSC and DIN, the director will have to be nominated by the board and a routine filing will have to be made notifying the Ministry of Corporate Affairs of the appointment. The process of gathering and submitting this information can easily take 1-2 weeks and sometimes longer.
Individuals that are appointed to a board in an Indian company solely as a nominee of an investor in the company would typically be designated specifically as “non-executive”, “nominee” directors only. These are designations recognized by statute and it ensures that they are not held to certain higher standards of conduct applicable to directors who are executive directors and involved in the day-to-day operations of the company.
Duties of a Director
The duties owed by directors of an Indian company are broadly similar to the duties owed by directors of a Delaware corporation. Both Delaware and Indian law require similar standards of conduct and punish similar types of misconduct. The primary difference between the two systems is that India has codified specific fines and penalties for specific acts.
The main duties of a director in Indian company include:
- Directors shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for protection of environment. Similar to the duty of loyalty to act in the interest of the Company and its shareholders – except, this refers to a wider, stakeholder centric model of corporate governance (versus the more shareholder-centric Delaware model) where the interests of employees, the community and protection of the environment ought to be considered as well.
- Directors shall exercise their duties with due and reasonable care, skill and diligence and shall exercise independent judgment. Similar to the duty of care in Delaware.
- Directors shall not involve themselves in a situation in which they may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company. Similar to the duty of loyalty in Delaware.
- Directors shall not achieve or attempt to achieve any undue gain or advantage whether to themselves or to their relatives, partners, or associates, and if a director is found guilty of making any undue gain, he or she shall be liable to pay an amount equal to that gain to the company. Similar to the duty of loyalty in Delaware.
In India, since the company and its directors are separate entities, the director (as a general rule) has no personal liability on behalf of the company. However, similar to Delaware, the corporate veil can be “lifted” in extreme cases of director misconduct.
In addition, India has a statutory scheme that imposes fines and penalties for specific instances of director misconduct (e.g.: issuing a prospectus with misleading information, fraudulently inducing a person to invest money, failure to file annual returns failure to hold shareholder meetings, failure to give notice of board meetings and certain related party transactions).
However, only a director who was directly in charge of and responsible to the company for the conduct of the business of the company is deemed to be guilty of the offence. A non-executive director will be held liable, only in respect of such acts of omission or commission by a company which had occurred with the director’s knowledge, attributable through Board processes, and with the director’s consent or connivance or where the director had not acted diligently. And the Ministry of Corporate Affairs has recently clarified that non-executive directors are not responsible for filing records, maintaining corporate registers or attending to other statutory compliances under Indian corporate law.
And generally, personal liability may attach in cases of fraud. Directors may also be held liable for tortious acts: (i) where they commit the tort themselves; (ii) where they assume personal liability; and (iii) they procure and induce the company to commit the tort.
Indian laws do not distinguish between resident and non-resident directors in so far as imposition of liability is concerned. Note that the conduct which violates many of the statutory provisions in India would likely also result in liability in the US.
[Note: the information in this article is current as of July 23, 2020 and refers primarily to private limited companies. Please consult with Indian counsel for legal advice and further information.]