Govt clearance must for companies to appoint Chinese directors on board

According to an MHA notification, it will be mandatory for companies to seek clearance from the government before appointing directors from land-border sharing nations on their boards

The Ministry of Home Affairs issued a notification on June 2, stating that citizens from land-border sharing nations need security clearance from the government before they are appointed as directors on boards of Indian companies, according to reports.

The government has notified the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022  to amend the Companies (Appointment and Qualification of Directors) Rules, 2014. 

In effect, this amendment will make it mandatory for the companies to seek clearance from the government before appointing directors on boards.

What has changed?

In Rule 8, the following proviso has been inserted: “Provided further that in case the person seeking appointment is a national of a country which shares land border with India, necessary security clearance from the Ministry of Home Affairs, Government of India shall also be attached alongwith the consent.”;

In Rule 10, the following proviso has been inserted: “Provided that no application number shall be generated in case of the person applying for Director Identification Number is a national of a country which shares land border with India, unless necessary security clearance from the Ministry of Home Affairs, Government of India has been attached alongwith application for Director Identification Number.”.

What's the likely impact?

This decision will directly impact Chinese companies the most. According to various reports, this change has been made after it was discovered that China and Hong Kong investors were finding alternate ways to bypass April 2020 restrictions on foreign investments from neighbouring countries.

For example, a Chinese company would create a US or Cayman Islands-based entity and use it to route the investment without any restrictions. The company then would appoint senior Chinese executives as directors to gain control, said a report in the Economic Times.

According to the data from the Ministry of Corporate Affairs, 490 foreign nationals are registered as active directors in India as of February. However, the data doesn’t mention the nationality of these directors. Experts estimate that 30 per cent of these directors are from China or Hong Kong, said the ET report.