Be very conscious when assigning titles and positions in your Indian private limited company.
Three important points in advance:
- The Resident Director and the Managing Director clothe in the Indian Pvt. Ltd. Company legally have fundamentally different positions with different rights and obligations and should therefore not be confused or unconsciously equated.
- The person who manages the day-to-day business does not necessarily have to be “Member of Board Director“and may therefore be held liable.
- Someone who runs the business and at the same time holds the position of “Directors"holds, does not have to"Managing Director“, i.e. the highest-ranking manager in the company.
- Don’t be too quick to appoint someone as “Managing Director“, but better first to “General Manager"Or"Head of India“, because the position of “Managing Director” has extremely far-reaching legal powers.
- The title "Director“ always signals “Member of the Board” with significant legal and factual consequences.
Typical difficulties that arise from ignorance or confusion
The ignorance of Western companies about the usual titles and designations of the individual management positions in the Indian Pvt. Ltd. Company and the legal consequences and powers attached to these positions repeatedly lead to serious difficulties on numerous levels.
- When searching for personnel, there are always irritations because German “HR managers” often associate the titles of potential Indian applicants with incorrect decision-making skills and authority.
- The position of “Resident Director” is confused with “Managing Director”, a mistake with far-reaching legal consequences. The “Managing Director” is the highest position in the Pvt. Ltd. Company, similar to the German CEO. He has extensive legal powers, whereas the “Resident Director” only plays a subordinate role, even if his position is the only one required by law. The position of “Resident Director” does not even have to be held by an employee of your own company, but can also be held by an external service provider, for example your local notary.
- If you need a resident director, please feel free to contact us. We can of course provide you with one [Link to personnel search]
- Western companies prematurely assign the title of “director” based on their own corporate matrix, not knowing that this position has relevant legal consequences such as power of attorney or high hurdles in the event of termination.
On the one hand, the title “Director” always implies “Member of the Board of Directors” and thus extensive powers. Indians are aware of this connection. This can not only have very undesirable legal and actual consequences for you as a European parent company, but in the worst case scenario it may also make you vulnerable to blackmail. Furthermore, “Directors” cannot simply be dismissed, but must be dismissed by the shareholders’ meeting if they do not resign by mutual consent - with the associated formal requirements, such as compliance with notice periods (possibly 21 days), etc.
In other words: You can fire a “General Manager” or “Head of India” in real time, but not a “Director”.
On the other hand, membership in the “Board of Directors” also comes with liability, which you as a company can of course consciously wish and use. The liability of a general manager to his company is significantly more limited than that of a “director”. It can therefore make sense to promote the “General Manager” to “Director” after a few years in order to make him responsible for his day-to-day actions.
We have actually experienced in practice that some managers have deliberately caused compliance violations in the company in order to then use these as a means of exerting pressure against them in the event of a dispute with the European parent company.
You can also use the title of “Director” for personnel management by awarding this position as an incentive and thus building trust in
and document appreciation for your employee's work.
- Would you like to find out more ways to retain employees or discuss the topic with a third party? Just get in touch with us.
- Western companies are often under the misconception that their company absolutely needs a “Managing Director”. In our experience, this position of the highest-ranking “Director” with its extensive powers is usually only required by corporations, but not by a German medium-sized company. Especially when setting up a new Pvt. Ltd. In our company, we (usually) actively advise against awarding this position. Feel free to appoint the person responsible for managing the business as “General Manager” or “Head of India”, but rightly be wary of prematurely awarding the extremely powerful and reputation-laden position of Managing Director. You should not only be wary of the legal consequences of such an appointment, but also the interpersonal consequences that often arise from such an appointment. The high social expectations that are linked to such a prestigious position as “Managing Director” rub off on the person who receives this position. We have often observed that the appointment of the “Managing Director” was accompanied by a change in the attitude of the entire company. The German parent company was demoted to a pure service provider and regulations were less respected.
- Likewise, European customers have often negotiated certain things with supposed decision-makers at Indian companies at business events, not knowing that their position in the company does not include such powers.
Cultural differences in clearing up misunderstandings
Even if your Indian counterpart notices these misunderstandings, they will most likely not proactively clear them up. In Indian culture, direct reference to mistakes is uncommon and the tone is much more subtle. If you have offended your Indian counterpart with your ignorance, he will not show it; if you have falsely enhanced his status, he will silently find the increase in his own status flattering. As a “worst case” scenario, we have also experienced Indian employees exploiting the external appearance unwittingly created by Western companies, for example in the context of financial transactions, for their own benefit, even to the point of blackmailing the German parent company.
The key leadership positions in Indian Pvt. Ltd. Company
In general, Indian corporate law is less hierarchical than one would not only know from German law, for example, but would also assume in India given the extremely hierarchical society. Shaped by the desire to be seen as prominently as possible internally and externally, Indian executives are therefore particularly creative in inventing and designing titles.
It can be embarrassing externally if your managers adorn themselves with titles that suggest the size of a local corporation, but in reality there is only a sales office with 10 employees...
The most important titles and their legal consequences at a glance:
- CEO
The specific position of CEO (“Chief Executive Officer”) is not provided for in the Indian Companies Act, 2013 and is therefore not associated with a director position. However, it is used by larger companies for a person who has the top management role for the overall development of the company. However, this designation only makes sense externally if similar other functions (CFO, COO, etc.) have been filled in the company, which is why smaller/medium-sized companies tend to refrain from using this title.
- Managing Director
The Managing Director is the highest-ranking manager with the most comprehensive responsibility for the management and management of mostly larger companies or corporations. He can - within the scope of the powers granted to him - partially manage the business alone and has special powers under the Companies Act that place him above the other directors. The position of Managing Director is expressly not mandatory!
- General Manager or Country Head
From an Indian perspective, the general manager or country head is seen as a “classic” managing director, who does not necessarily sit on the board of directors. This signals that although he has operational responsibility, he does not have the same rights and obligations under corporate law as a director. A general manager or country head also gives the impression that he is more hands-on, i.e. close to operational practice, than, for example, a CEO who tends to “hover over” things and take care of important strategic decisions. The position of General Manager is therefore ideal for new hires at medium-sized companies.
- Executive Director (= Managing Director)
The Executive Director is a full-time director who performs a paid, full-time job in the company, for example as a managing director or CEO. If this position is held by a foreigner, they may also need a valid work visa. The Executive Director is actively involved in the company's daily operational decisions and has primary responsibility for implementing the company's strategy.
In addition, Indian law provides for the following positions:
- Non-Executive Director
The Non-Executive Director does not receive a salary from the company and is not involved in the day-to-day operations of the company. He provides more strategic direction and oversight to the company, but does not actively participate in the operational management of the company. Non-executive directors can be independent professionals or representatives of shareholders. If the Board of Directors were also staffed by employees of the (foreign) parent company for the purpose of representing interests, exerting influence and controlling, which we strongly recommend, these would be non-executive directors.
- Resident Director
Resident Director is mandatory for every Indian company. It is a person who is resident in India for more than 182 days in the financial year. Any of the above-mentioned directors may, subject to this regulation, act as a resident director and therefore the local representative of the company. He is responsible for interacting with government agencies and other relevant institutions in India. Due to this residency requirement, it is possible that the Indian Pvt. Ltd. is managed exclusively by foreign people, but not exclusively from abroad.
- “Board of Directors”
The Pvt. Ltd. Company from the so-called “Board of Directors”, whose members are appointed and dismissed by the “Shareholders”. It usually consists of 3-5 “directors” (although 2-15 directors would be legally possible) and meets at least four times per financial year; recorded digital meetings are possible.
- “Shareholders”
As owners of the company, the shareholders hold their shares, have the right to participate in shareholder meetings, vote on important company matters and receive dividends. They appoint the so-called “directors” and also have the right to remove them.
