Background:
The Ministry of Corporate Affairs (“MCA”), vide notification dated June 1, 2022, notified the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 (“2022 Amendment Rules”), which amended the Companies (Appointment and Qualification of Directors) Rules, 2014 (“Appointment and Qualification Rules”).[1] This amendment states the security clearance requirements needed to hold directorship position in an Indian company, if an individual is a national of a country which shares land border with India.
This change follows a familiar theme of protectionism, which was earlier observed through the issuance of Press Note No. 3 (2020 Series), dated April 17, 2020, (the “Press Note 3”). On April 17, the Department for Promotion of Industry and Internal Trade (under Ministry of Commerce and Industry), issued Press Note 3 to review foreign direct investment (“FDI”) policy. By virtue of Press Note 3, prior government approval is required for FDI made by (i) any entity based in any bordering country of India; or (ii) any beneficial owner of the investment situated in or is a citizen of any bordering country of India. The intention underlying this is clear – to curb opportunistic takeovers/ acquisitions of Indian companies due to the COVID-19 pandemic and any consequent impact.[2]
Thereafter, the MCA also notified the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2022, dated May 30, 2022, and inserted a new sub-rule (3) to Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, and new Form No. CAA 16 related to declaration in terms of Rule 25A.[3] Through this amendment, in case of a compromise or an arrangement or merger or demerger between an Indian company and a company/ body corporate, which has been incorporated in a country sharing land border with India, a declaration through Form No. CAA 16 would be required at the stage of submission of application under Section 230 of the Companies Act, 2013 (“Companies Act”), stating whether prior approval under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, is required or not.
MCA and other regulators appear to have initiated investigations into potential non-compliances by Indian companies that are subsidiaries or associated with countries that share a land border with India. News reports suggest that the government is considering winding up such entities.[4]
Thus, taking the theme of protectionism one step further, through the 2022 Amendment Rules, restrictions on countries sharing land borders with India has been extended beyond investments to cover management of Indian companies to now include nationals who hold or seek to hold directorship positions in Indian companies. In this blog post, we analyse the key implications of this amendment.
Consent to act as a director
Rule 8 of the Appointment and Qualification Rules requires individuals to provide their consent to act as a director wherein every person who is appointed as director must on/ before the appointment provide his consent in writing in Form DIR-2. Further, the consent must also be filed with the Registrar of Companies in Form DIR-12. Through the 2022 Amendment Rules, after the proviso to 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 along with the consent.”
Further, in Form DIR-2, the directors are also required to declare whether he/ she are required to obtain security clearance from the Ministry of Home Affairs or not.
This change will impact companies that want to appoint or reappoint nationals from a country that shares a land border with India on their board of directors (“Board”). These nationals will now have to obtain and attach necessary security clearance from the Ministry of Home Affairs, along with their consent in writing in Form DIR-2 and declare the same. This amendment acts as an entry barrier in obtaining directorship positions on the Boards of Indian companies. Further, this change might deter Indian companies that urgently need to fill vacant directorship positions from appointing nationals from the countries that share a land border with India. In such instances, companies may be forced to choose Indian nationals/ nationals from other countries to fill these positions, given that security clearances might take time and may not be forthcoming.
Allotment of Director Identification Number (“DIN”)
Any individual who is in the process of being appointed as a director of an Indian company must first obtain a DIN, a one-time registration with the MCA. Through the 2022 Amendment Rules, in Rule 10(1), 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 along with application for Director Identification Number.”
Further, in the application for DIN (Form DIR-3), under the heading verification, the person applying for it must declare whether they are required to obtain security clearance from the Ministry of Home Affairs or not.
Thus, through this change, the government has mandated nationals wanting to apply for DIN and belonging to countries that share a land border with India, to obtain required security clearances. Given that this is the first step towards obtaining a directorship position in an Indian company, any individual who is a national of a country that shares land border with India, will have to go through this additional step. The intention of the government appears to be to make the appointment/ entry of such persons on the Boards of Indian companies restrictive and stringent.
Conclusion:
As per the Companies Act, private and public companies must have a minimum of two and three directors, respectively. Further, as per Section 149(3) of the Companies Act, every company must have at least one resident director who has stayed in India for a total period of at least 182 days during the financial year. Hence, Indian companies can have numerous foreign nationals as directors on their Board, which indicates that they can play a crucial role in the functioning and management of a company and can assert significant influence on the decisions of the company.
From a practical standpoint, it is essential for companies to recalibrate and review their existing Board composition, particularly those companies which have nationals from a country that shares land borders with India on their Board. In the event the directorship term of a person belonging to a country that shares land borders with India is nearing expiry, then such companies must act quickly to ensure that security clearance is obtained or find replacements.
Thus, pursuant to Press Note 3 and the recurring theme of protecting Indian companies against opportunistic takeovers, the amendment is a strong move to ensure that countries that share land borders with India do not get a backdoor entry/ indirect control over the management of Indian companies by virtue of their nationals being on the Board.
For further information, please contact:
Bharath Reddy, Partner, Cyril Amarchand Mangaldas
bharath.reddy@cyrilshroff.com
[1] https://egazette.nic.in/WriteReadData/2022/236214.pdf
[2] https://dpiit.gov.in/sites/default/files/pn3_2020.pdf
[3] https://www.mca.gov.in/bin/ebook/dms/getdocument?doc=MTEwNjc1OTYz&docCategory=Notifications&type=open
[4] https://economictimes.indiatimes.com/news/company/corporate-trends/govt-mulls-winding-up-companies-with-chinese-links/articleshow/91355239.cms
