Appointment of International Citizen as Director of Indian Company

The Ministry of Corporate Affairs (MCA) has notified an amendment for a situation when a person who belongs to a neighboring land border sharing country seeks an appointment in an Indian company as a Director or demands obtaining a Director Identification Number (DIN).
The Companies Act, 2013 was passed with the purpose to renew the Indian corporate governance establishment. In furtherance of this, the Ministry of Corporate Affairs timely notifies changes by way of amendments and introduction of various rules.
Recently, by exercising its powers MCA has notified two amendments on the 1st of June 2022 and the 10th of June 2022 respectively. This Article discusses the notified amendment and its impact on the corporate sector.

Abstract

The Government of India has introduced strict terms and conditions for individuals from neighbor countries who seek the appointment as a Director on the board of an Indian Company.
The countries which share the border with India will now have to mandatorily obtain security clearance from the Ministry of Home Affairs, delegated authority of the Government of India.
These Amendments have been made in pursuant to rules pertaining to the Appointment and the Qualification of Directors under the Companies Act, 2013.
With a press note, the Government of India has made it clear that approval is mandatory before any foreign investments can be placed from countries that share the land border with India. This decision is made to curb unethical takeovers of the domestic enterprises which was observed during the period of pandemic (COVID-19).
The Countries that will require prior approval from now on are; China, Pakistan, Bangladesh, Bhutan, Myanmar, Nepal and Afghanistan.
According to the decision, foreign direct investment proposals from these countries require prior government approval before investing in any sector in India.

Recent Notification

Ministry of Corporate Affairs has introduced a recent amendment through The Companies (Appointment and Qualification of Directors) First Amendment Rules, 2022 and the Companies (Appointment and Qualification of Directors) Second Amendment Rules, 2022.

The notification dated June 1, 2022 stated that “A security clearance shall be mandatory from the Ministry of Home Affairs, Government of India, in case the individual seeking appointment as a director in an Indian Company is a citizen of a neighboring country which shares a land border with India, along with their written consent through DIR-2 Form on or before their appointment.

Extracts of the Notification

The Government of India has framed strict rules along with adding some guidelines to be followed before receiving access to a domestic firm.

Countries like Bangladesh, Pakistan, Myanmar, Bhutan, China, Afghanistan and Nepal shall from now on will have to adduce approval from the Ministry of Home Affairs along with their own written consent to act within such identity as a director.
Apart from this, the amendment introduces several changes in the appointment of directors. The notification is hereby made simpler to understand by these listed extracts;

• When nationals of border-sharing countries apply to obtain a DIN, they will require to submit the necessary security clearance from the home ministry along with the application,
• Written consent in the Form DIR-2 is also now required by the person seeking a DIN, on or before their appointment,
• Information such as the number and qualification of independent directors, compliance requirements for a person that is to be appointed as an independent director, and the allotment of DIN (Director Identification Number) are now going to be governed by the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022,
• The rules governing arrangements, compromises, and amalgamations were amended,
• Amendments are also made in respect to the allotment and prospectus of securities

Directors of a Company

The term “Directors” refers to a person who is a part of the Board of Directors. Such a person is in charge of managing, overseeing, and directing the operations of the Company.
Directors serve as trustees for the property and funds of the Company. They also act on behalf of the company as their agents in the transactions that are made by the company.

Companies (Appointment and Qualification of Directors) Amendment Rules, 2022: Introduction

If a national of a country that shares a border with India seeks an appointment in an Indian Company, they will have to take security clearance from the Ministry of Home Affairs. According to the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022, written consent of such person would also be required to be attached with such mandatory security clearance on or before their appointment as director in the Indian company.

Companies (Appointment and Qualification of Directors) Rules, 2014: Amendment

The Amendment has added several new terms and provisions to the Company Rules, 2014 relating to the Appointment and Qualification of Directors. These additions to the rules can be understood as follows;

In Rule 8

“Obtaining a security clearance from the Ministry of Home Affairs is required and along with it the written consent of person to further act as a director must be attached. Such written consent must be made in Form DIR-2.
This has to be done, in case the person who is seeking an appointment as a director in an Indian Company is a citizen of a country that shares its land border with India”

In Rule 10

In sub-rule (1) of Rule 10, the additions that have been made are;
“For obtaining Director Identification Number (DIN), necessary security clearance must be attached with the mentioned application otherwise no application number shall be generated. The Ministry of Home Affairs shall issue such security clearance.
The DIN would not be allotted unless necessary security clearance from the concerned authority has been attached along with the application for obtaining DIN”

In FORM DIR-2

Under the Declaration, the concerned persons shall require to declare that they have followed necessary guidelines before applying for the appointment as a Director by clarifying that;

• They fit in the requirement of obtaining the security clearance from the Ministry of Home Affairs, Government of India, and
• They have adequately obtained and attached such clearance before seeking an appointment as director.

In FORM DIR-3

The concerned person would be required to checklist that either they are not required under sub-rule (1) of rule 10 to obtain the security clearance from the Ministry of Home Affairs, Government of India before applying for DIN, or
That if they are required under sub-rule (1) of rule 10 to obtain the security clearance from the Ministry of Home Affairs, Government of India before applying for DIN, they have necessarily attached the same.
Apart from it, the company must also file Form DIR-12 with the Registrar of Companies within 30 days of the appointment of the director. The requisite fee must also be paid in accordance with the Companies (Registration Offices and Fees) Rules, 2014.

Impact of Amendment on Existing Directors

The Ministry of Corporate Affairs has made the changes through the amendment which will also affect the status of directors that are already holding a valid DIN.
From now on, the directors that are currently holding a valid DIN would require their reappointment after the current DIN expires.
This amendment will impact the management of existing investors from land-sharing border nations, who wholly own subsidiaries. This amendment also raises questions about the reappointment of foreign citizens after the expiry of their term and DIN.

Previous Rules of Director Identification Number

Previously the provision envisaged in the Companies (Appointment and Qualification of Directors) Rules, 2014 provided that;

• For obtaining a Director Identification Number (DIN), the enterprise must first register the Form DIR-3 on the portal of the Ministry of Corporate Affairs and pay the requisite fee online, and
• Then the system shall generate an application number when the form is successfully submitted

Changes in the Rule of Director Identification Number

Recent changes have added new terms in the rule of allotting Director Identification Number. Before applying for a Director Identification Number (DIN), the foreign national (of land border sharing country) would necessarily require to attach security clearance with the application.
If no security clearance is attached to the application, an application number would not be generated further. Such security clearance will be issued by the Ministry of Home Affairs, Government of India.
If the allotment of DIN is required security clearance from the concerned authority should be attached with the application for Director Identification Number (DIN).

Conclusion

Earlier in April 2020, DPIIT (Department for Promotion of Industry and Internal Trade) had also issued press notes regarding foreign investments.
The Ministry of Home Affairs has this time mandated strict guidelines and security clearance to be followed whenever a person who is a national of a land border sharing country would seek appointment in an Indian company as a Director.
However, the First Amendment Rules introduce obligation before obtaining a security clearance from the Ministry of Home Affairs, but they still do not clarify the scope of discretion that is granted to the Ministry of Home Affairs for granting such clearance.
The said amendments are made following the possibility of threats on the domestic firms by the neighboring countries but this step is also likely to increase the delay in the process of appointment of directors in a company.