Summary
The Companies Act, 2013 (“Companies Act”), mandates certain residency requirements for managerial personnel and provides that such personnel must have continuously resided in India for 12 months preceding their appointment, failing which the approval of the Central Government is required. In an era of over-shrinking borders and increased global operations and cross-border management, the requirement appears increasingly misaligned with commercial realities and creates unavoidable regulatory hurdles for appointments and re-appointments.
Residency Requirement under Schedule V
Section 196 of the Companies Act governs the appointment of managing directors, whole-time directors, and managers.[1] Under Section 196(4), any such appointment must first be approved by the board and thereafter ratified by shareholders at the next general meeting.[2] For public listed companies, where the appointment does not satisfy the eligibility conditions set out in Part I of Schedule V, an additional layer of Central Government approval is required before the appointment can take effect. Clause (e) of Part I of Schedule V stipulates that no person shall be eligible for appointment as a managing or whole-time director or manager unless the person is “a resident of India.” The explanation to the clause defines “resident in India” to include a person who has been staying in India for a continuous period of not less than 12 months immediately preceding the date of appointment as a managerial person, and who has come to stay in India to take up employment in India or to carry on a business or vocation in India.[3]
Does the Residency Condition Remain Fit for Purpose in a Transformed Economic Landscape?
The residency condition for managerial appointments traces its introduction back to Schedule XIII, Part I, Clause (e) of the Companies Act, 1956,[4] the direct predecessor to the present Schedule V, Part I, Clause (e) of the Companies Act, which similarly required that the appointee be a resident in India, as a condition of eligibility for managerial appointment. When the Companies Act was enacted, this condition was carried forward verbatim, without material amendment to either its substance or its definition of “resident,” despite the fundamentally different economic and commercial context in which the 2013 Act operates.
As early as 2005, the J.J. Irani Committee recommended removing the requirement of Central Government approval for appointing a non-resident as managing director or whole-time director, so that companies could choose the person “best suited for the job”.[5] This was not carried into the Companies Act, which retained the 12-month residency condition unchanged. In 2016, the Companies Law Committee, reached the same conclusion, noting that this requirement prevents a foreign national from being a managing director or whole-time director unless having stayed in the country for a year and recommended removing this requirement to tap into the global talent pool, subject to other regulatory clearances.[6] Despite two expert committees agreeing a decade apart, neither recommendation was implemented, and the provision remains in force today.
Rigidity of the Requirement: Lessons from Recent ROC Orders
In the matter of ADF Foods Limited,[7] the Registrar of Companies (“ROC”) found that Central Government approval had not been obtained for the managing director’s previous five-year term. The appointee was outside India for 109 days during the preceding 12-month period on business travel across Europe, North America, the Middle East, and Australia. The company contended that the appointee qualified as a “person resident in India” under Section 6 of the Income Tax Act, 1961,[8] having stayed in India for more than 182 days in the relevant financial years. The ROC rejected the submission. The company thereafter filed an appeal before the regional director, Ministry of Corporate Affairs, Ahmedabad, who set aside the ROC’s order on the grounds that the appointee was a person resident in India and that the ROC had erred in treating the appointee as a non-resident.[9] Although the regional director’s order does not expressly clarify this point, the statutory filings made by ADF Foods Limited indicate that the managing director was a citizen of India[10] and, accordingly, an assessment of the person’s continuous stay in India to determine qualification as a resident of India for the purposes of Clause (e) of Part I of Schedule V was not relevant. Nevertheless, it is important to note that the ROC, in its order, treated the person’s absence from India for an aggregate of 109 days across different periods as a condition that requires Central Government approval under Explanation 1 to Clause (e) of Part I of Schedule V to the Companies Act.
In the matter of SML Isuzu Limited,[11] an ROC examination of a re-appointment application similarly revealed that Central Government approval had not been obtained for the whole-time director’s preceding term. The appointee was outside India for 57 days during the 12 months immediately preceding the commencement of the initial term of appointment.
Conclusion
The nature of modern corporate management, particularly in companies with cross-border operations, joint ventures, or foreign parent entities, requires that senior management travel internationally for board meetings, shareholder reporting, regulatory compliance in multiple jurisdictions, procurement negotiations, and strategic planning. Such travel is not an exception but routine to running a globally connected business.
The MCA needs to clarify whether “continuous period of not less than twelve months” mandates literal, unbroken physical presence or permits reasonable interruptions for bona fide business purposes. In the absence of such clarification, companies and officers remain exposed to penalties for what is, in substance, ordinary corporate conduct. More fundamentally, both the J.J. Irani Committee and the Companies Law Committee (2016) have, time and again, recommended that this condition be reformed or removed altogether.
For further information, please contact:
Bharath Reddy, Partner, Cyril Amarchand Mangaldas
[1] Section 196, Companies Act, 2013.
[2] Section 196(4), Companies Act, 2013.
[3] Schedule V, Part I, Clause (e), Companies Act, 2013
[4] Schedule XIII, Part I, Clause (e), Companies Act, 1956
[5] Report of the Expert Committee on Company Law, “Dr. J.J. Irani Report on Company Law,” Ministry of Company Affairs, Government of India, May 2005, Chapter IV, paragraph 6.4
[6] Companies Law Committee, Report of the Companies Law Committee, February 2016, Part I, paragraph 13.14.
[7] Adjudication Order in the matter of ADF Foods Limited, Order No. ROC-GJ/190/ORDER U/S-454/ADF FOODS/2023-24, dated 20 February 2024.
[8] Section 6, Income Tax Act, 1961.
[9] Order of the Regional Director, North-Western Region, Ministry of Corporate Affairs, Ahmedabad, in the matter of ADF Foods Limited, Order No. 454(5)/ADF Foods Ltd./196/F94642949/2023-24/3320, dated 5 November 2024
[10] ADF Foods Limited shareholding pattern for quarter ending June 30, 2017 accessible here.
[11] Adjudication Order in the matter of SML Isuzu Limited, Order No. ROC-CHD/2024-25/Sec.450/5516/488, dated 21 August 2024.
