On MCA amending aspects of Director Appointment

The Ministry of Corporate Affairs (MCA) vide its notification dated June 01, 2022, has notified the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 (“Amendment”) which would have immediate effect, i.e, from June 01, 2022. The changes made are as follows:

Addition of proviso to Rule 8 of Companies (Appointment and Qualification of Directors) Rules, 2014.

Rule 8 relates to the consent to act as Director, which has to be furnished in Form DIR-2 along with the fees. The company has to file such consent with the Registrar within 30 days of appointment as director.

The new proviso states that in case a person seeking appointment is a national of a country sharing land border with India (i.e, Pakistan, Afghanistan, Bangladesh, China, Nepal, Bhutan, Myanmar) in an Indian Company, he/she shall before appointment, obtain and attach necessary security clearance from the Ministry of Home Affairs (MHA), Government of India along with consent.

Addition of proviso to Rule 10(1) of Companies (Appointment and Qualification of Directors) Rules, 2014.

Rule 10 refer to the allotment of Director Identification Number (DIN). An application number shall be generated by the system automatically upon submission of Form DIR-3 and payment of fees. The new proviso states that in case such an application is made by a person belonging to the above-mentioned category of countries, then no DIN will be allotted until and unless necessary security clearance has been obtained from the MHA, which has to be attached along with the application for DIN.

Further, a declaration that such applicant does not require such approval, or does require approval and has secured such approval, has to be submitted in Form DIR-2.

This appears to be a control-related governance measure by the Government of India to possibly pro-actively understand the Chinese influence. According to some reports, this Amendment was introduced after it was found that investors from China and Hong Kong were finding ways to bypass the restrictions introduced in April 2022 on foreign investments by neighboring countries: For example, a Chinese company would used a US-based entity to enter into India and appoint senior Chinese executives as directors to gain control. Experts estimate that about 30% of foreign nationals (total of 490 no.s) who are directors in Indian companies, are from China and Hong Kong. Such an appointment would now require security clearance by the MHA, meaning that they would have to be satisfied by the credentials, qualifications and intentions of such a director after due consideration of his background.

By Siddharth. V. V

The author is a student of Government Law College, Mumbai, and an intern with HS Law & Associates. Any views are his own.