Nominee Director Relevance For Company Setup in India

• Taxation
• ||
• January 7, 2025

Are you a foreign investor looking to expand your business or set up a new company in India?

Indian regulations require specific mandatory steps, one of which is appointing at least two directors for any new company. One of these directors must be an Indian resident who has lived in India for a minimum of 182 days in the year.

For foreign investors, meeting this requirement can sometimes be challenging for their company formation in India. Finding a suitable Indian resident director might not always be straightforward, but the appointment of a nominee director is an effective solution.

What is a Nominee Director?

A nominee director is appointed to meet Indian legal requirements during the company setup process. This role provides foreign business owners with a local director to help fulfill ROC compliances and other regulatory duties.

Nominee directors, sometimes referred to as “shadow directors,” “compliance directors,” or “resident directors,” may not always be actively involved in company operations. Still, they do hold legal responsibilities, and their decisions can influence the company within the limits set by the board.

Many companies setting up in India prefer to appoint a nominee director to streamline legal processes and maintain compliance. Shareholders or the company itself can appoint a nominee director. To avoid the difficulty of finding one yourself, outsourcing nominee director services is an option for ensuring compliance and local representation.

Is the Nominee director an independent director?

No, the Nominee director is not an independent director as they are appointed to act on behalf of the company nominated by them and the interests of legal requirements for the company as it is appointed by the others for their own interests.

Even if the company appoints itself, they have the full right to decide how much authority and power a nominee director should get.

Key points to be noted while appointing a nominee director-

• The company may hold 100% of its shares with its shareholders or by the company in the case of a subsidiary.
• The company must ensure that it abides by the country’s laws while appointing the nominee director.
• The company must have a minimum of 2 directors and a maximum of 15, including the nominee director.
• The appointment by the company must comply with the Articles of Association; if it is not included, then the article has to be amended in order to include the provisions for the appointment.
• The company has the power to decide the scope of the roles of the nominee director, which is customized as per their requirements.
• The company is suggested to have 2 directors and an additional nominee director to ensure the major hold is in the hands of the company itself.
• The company does not need to transfer the ownership to the nominee director.

Eligibility Criteria: Nominee Director

As per Indian legislation, if there is a need to appoint a nominee director to set up a company in India, the person needs to be –

• A citizen of India,
• Physically present in India for at least 182 days or more than in a tax year,
• Must be above 18 years of age, and
• Must have a transparent civil and criminal background.

Additionally, companies must ensure that the individual appointed as a nominee director holds an active director identification number (DIN).

Roles and Responsibilities / Expectations from the Nominee Director

Here are a few significant roles for which the nominee director is responsible.

• Compliance with legal requirements- One of the main reasons a nominee director is legally appointed is for legitimate reasons like completing the legal requirement and legal guidance while setting up the business in India.
• Confidentiality- The nominee director has access to the information shared by the directors as the company keeps transparency. A nominee director is expected to maintain the confidentiality of sensitive information related to the organization.
• Authority & Fiduciary Duties—The Company has the full right to decide how much authority and power to give to the nominee director. The nominee director has a fiduciary duty to act in the best interests of the company and its shareholders.

Approval and Requirements for Appointing the Nominee Director

The process for appointing the nominee director requires the following documents.

Procedure for Appointment of Nominee Director

1. Ensure AOA of the company – The article of association of the company should have provisions to appoint the nominee director. If there is any procedure to be followed in the article of association, then the procedure must be followed that is mentioned. If the article of association does not have a provision, then it should be amended to include the provision of the article of association of the nominee director.
2. Nomination letter– It is a formal document for the nominee director that outlines the person who has been nominated for the director. The main purpose of the nomination letter is to determine why the nominee director should be appointed and contribute to the organization.
3. DIN & Digital Signature Certificate- 

• • DIN stands for director identification number received on behalf of the central government containing 8-digit letters
  • The person shall appoint a digital signature from the certifying authority
  • The application of DIN is to be countersigned by the director, and a copy of the resolution approving the proposal of appointment is to be submitted in the form DIR-3
  • Documents For DIR-3-

4. Appointment of Nominee 

• • Resolution in the Board meeting

                                           or

• • Resolution through circulation 

5. Form DI-R8—The proposed director must submit Form DI-R-8 to the company before or during the board meeting.
6. Form DIR-12—This form is required to notify the Registrar of Companies (RoC) about a director’s appointment. It should be filed within 30 days of the appointment.
7. Form MBP-1: If the nominee director has any interest in a contract or arrangement with the company, Form MBP-1 should be filed to disclose the interest. This form should be approved by the board of directors.
8. Conduct compliance checks- Ensure that the nominee director meets the eligibility criteria specified in the Companies Act, including not being disqualified from holding the position of director. Conduct background checks, if necessary, to confirm the nominee director’s eligibility.
9. Maintain corporate governance: The appointed nominee director should adhere to the company’s corporate governance practices, including attending board meetings, participating in strategic decision-making, and fulfilling their fiduciary duties.
10. Notify regulatory authorities: Inform regulatory authorities, such as the RoC, about the appointment of the nominee director by filing the necessary forms and updating the company’s records.

Resignation and Removal of Nominee Director

A nominee director may be required to resign at the request of the appointing party or may be removed by a majority vote of the board of directors. In such cases, the nominee director is responsible for facilitating a smooth transition and handing over relevant duties and responsibilities to their successor.

The removal of a nominee director can only happen in 3 circumstances-

• Voluntarily exit
• Termination from the post of director
• Removal by an ordinary resolution subject to compliance with Section 169

Steps of Removal of a Nominee Director

Step 1: Receipt and Sending of Special Notice- A special notice proposing to pass an ordinary resolution for the removal of the director or to appoint another director in place of a director needs to be prepared. A copy of it needs to be sent to the nominee director at least 14 days before the meeting at which the resolution is to be moved.

Step 2: Notice of Board Meeting—As prescribed in Section 173 (3) of the Companies Act 2013, a notice shall be issued to conduct the board meeting.

Step 3: Convening Board Meeting- To consider the notice received and to pass a resolution for the removal of the director, the day, date, and time of the meeting needs to be fixed.

Step 4: Facts of Representation and Copy of Notice-As per Section 118 of the Companies Act 2013 and Secretarial Standard 1, the draft minutes should be prepared and circulated to all directors for their review and comments within 15 days from the conclusion of a board meeting.

Step 5: Presence of Quorum- As per Section 103 of the Companies Act 2013 and Secretarial Standards 2, there is a requirement for a quorum. In the case of a private company, a quorum of 2 members personally present2 members personally present.

Moreover, the chairman needs to preside over the meeting. In case the Chairman is not available within 15 minutes of the time decided to hold the meeting, the Directors attending the meeting shall choose one of the Directors among themselves as the Chairman of the meeting.

Along with the quorum, if necessary, the proxies can be appointed by members who are eligible to attend the meeting and carry voting rights. Also, a Proxy is not required to be a member of the Company. Proxies are not considered when considering the quorum for the meeting.

Step 6: Voting and Passing the Resolution

The resolution to remove the nominee director needs to be voted and passed. Once done, the company must file E-Forms MGT 14 (wherever applicable) and DIR-12 with the Registrar of Companies (RoC) within 30 days of passing the resolution for removal of the director, along with the necessary fees and supporting documents.

Documents Required for Removal of Nominee Director

1. Copy of special notice from members
2. Proof of dispatch of the special notice to the director
3. Notice of board meeting and copy of board resolution
4. Notice of extraordinary general meetings with explanatory statements
5. Proof of dispatch of the notice of EOGM to the director
6. A certified copy of the ordinary resolution passed at the general meeting

It’s important to note that the director who is being removed has the right to receive a notice of the general meeting where their removal will be considered and to be heard at the meeting. The process of director removal necessitates thorough legal and secretarial advice and documentation following the Companies Act 2013.

At Mercurius, we understand the importance of having a reliable nominee director to fulfill the legalities while setting up your company in India. Our team of experts can provide guidance and support in appointing a nominee director, ensuring that all legal requirements are met and that your company’s interests are protected.

We offer a range of other solutions to help foreign companies establish and grow their presence in India. From legal advice to market entry strategies, we have the expertise and experience to support your business throughout the process.

If you have any questions or wish to know more about setting up business in India, kindly contact us.