Update On Mandate To Obtain Security Clearance Before Appointing Directors In Indian Companies

Posted On - 30 June, 2022 • By - Rohan Chinnappa

The Ministry of Corporate Affairs (“MCA”), through its notification[1] dated June 1st 2022, has imposed stringent compliance requirements on the appointment of directors from countries which share a land border with India. The changes in this regard will be reflected in the Companies (Appointment and Qualification of Directors) Rules, 2014 (“Appointment of Directors Rules”) and these changes may impact the appointment of directors, especially from countries such as the People’s Republic of China, Pakistan, Bangladesh, etc.

India-China relations have been at an all-time low since the 2020 border skirmishes today. The Government of India has taken stern retaliatory policies to reduce Chinese influence in India; the Foreign Exchange Management Act (Non-Debt Instruments) Rules, 2019 brought about changes in the manner in which foreign investments from countries which share a land border with India would take place. It was made mandatory that all investments from such countries must occur through a Government approval route. But despite the limitations imposed, it was noticed that investments were routed through other countries and Chinese nationals were granted a place on the board of directors in the position to indirectly influence companies in India.

Taking further action to avoid the appointment of directors in this manner, the new Appointment of Directors Rules have been brought into effect, explained as follows:

  1. In Rule 8 of the Appointment of Directors Rules: Currently, under this rule, any person being appointed as a director has to provide consent on or before the appointment to act as director of the company in the form of DIR – 2. Subsequently, the company in which the person is appointed has to file consent with the MCA through DIR – 12.

With the amendment of Rule 8 of Appointment of Directors Rules, it is now mandatory for a director who is a national from a country sharing its land border with India to obtain security clearance from the Ministry of Home Affairs (“MHA”) and the consent will have to be attested along with DIR- 2 to DIR-12 prior to its filing to the portal of the MCA.

  1. In Rule 10 of the Appointment of Directors Rules: Every individual who wishes to become a director in a company in India will have to obtain a Director’s Identification Number (“DIN”).

With the amendment of Rule 10(1) of the Appointment of Directors Rules, it is clear that no DIN would be allotted to nationals from bordering countries unless security clearance from the MHA is obtained.

In light of the above-mentioned changes, it is to be noted that the MCA has also amended the E-Forms such as DIR-2, DIR-3 and DIR-12 as of June 3rd 2022.

[1] https://egazette.nic.in/WriteReadData/2022/236214.pdf