Security Clearance Mandatory for some Directors who are Foreign Nationals

Indian Government has recently mandated that foreign nationals from a few countries, before they are confirmed as directors on boards of Indian companies, need to go through security clearance. Read the article for complete details.

On 1 June 2022, the Ministry of Home Affairs (MHA) issued a notification which amends the Companies (Appointment & Qualification of Directors) Rules, 2014 (Rules). In accordance with the amendment, it is mandatory to obtain security clearance for all individuals from countries that share a land border with India, i.e., China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan before they are confirmed as directors on boards of Indian companies.

The Ministry of Corporate Affairs (MCA) has brought this change into the Companies (Appointment & Qualification of Directors) Amendment Rules, 2022 and is applicable from 1 June 2022.
 

Key Amendments


Following are the three major amendments in the Rules:

  • First Proviso of Rule 8: Along with the consent of the person seeking appointment as a director on the board of a company, necessary security clearance from the MHA, Government of India is required if the person is from any of the countries mentioned above, i.e., sharing a land border with India.
  • Rule 10: No application to be generated for a Director Identification Number (DIN) if the person is from a country sharing a land border with India, unless the security clearance from the MHA, Govt. of India accompanies the application for the DIN.
  • New Insertion in Annexure form DIR 2 & DIR 3 under Declaration/Verification: ‘I further declare that – I am not required to obtain the security clearance from the Ministry of Home Affairs, Government of India before seeking appointment as director…’ OR I am required to obtain the security clearance from the Ministry of Home Affairs, Government of India before seeking appointment as director and the same has been obtained and is attached…’
 

Impact of changes

  • The changes are mainly brought in to restrict Chinese takeovers in India. According to MCA data, there are about 490 foreign nationals registered as directors in India companies, 30% of whom are Chinese.
  • This provides better security, especially under the presence of Chinese influence and companies and their ability to take over foreign businesses.
  • This would create an extra layer of checking and scrutinization for Chinese companies operating in India through subsidiaries and keep them in check.
  • Clampdown on other bordering nations from taking control of Indian businesses through unfair means.
  • Clampdown on private equity flow from Hong Kong, a Chinese controlled territory.
 

Relation of amendments with Press Note 3 of 2020 (PN-3)

  • The Department for Promotion of Industry & Internal Trade (DPIIT), in April 2020, issued a notice – PN-3 – regarding Foreign Direct Investment (FDI). With this notification, the Government made its approval for foreign investments mandatory from any country that shares a land border with India to discourage takeovers and other unfair activities influenced from such countries seeking to take advantage of the Pandemic, which was at its peak in 2020. Therefore, FDI proposals from China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan require Government approval.
  • Before PN-3, Government approval was not mandatory and the countries mentioned in the notification were only Bangladesh and Pakistan. While most companies continue to grapple with PN-3, the new 2022 amendments are certain to increase applications from neighbouring nationals. This will create an administrative burden, as both FDIs and Foreign Directors now seek permission for operating in India. Thus, PN-3 and the 2022 notification are complimentary to each other.
 

Conclusion


The current notification, in collaboration with PN-3, has tried to ensure that Indian businesses are secure from hostile takeovers from foreign powers, especially China. An additional layer of check involving the MHA will ensure authenticity of any foreign directors trying to be on the board of an Indian company. The step is definitely in the right direction, although it might create longer application and approval procedures that may increase the administrative burden.

 

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