Neighbouring countries investments: MCA stipulates security clearance for foreign director appointments

K.R. Srivats | Updated on: Jun 02, 2022

New stipulation will increase compliance burden, say legal experts; Foreign investors may now seek observer seat in Indian Boards

 

Continuing with its spate of restrictions on investments from neighbouring countries sharing land borders , the Corporate Affairs Ministry (MCA) has now stipulated that the nationals of such countries should obtain Home Ministry’s security clearance, if they are appointed Directors of Indian companies. 

Also, no application number can be generated if a person applying for the Director Identification Number (DIN) is a national of a country that shares land border with India unless the Home Ministry’s security clearance is attached with the DIN application, MCA said in its latest rule change.

The MCA’s move is in sync with the Government’s restrictions on investments flowing from countries sharing land border with India, under press Note 3 of 2020. It maybe recalled that the government had in 2020, placed all the foreign direct investment from the border countries under approval route to curb opportunistic takeovers during the pandemic. It was primarily aimed at preventing Chinese investors from taking control of Indian companies.

Legal experts take

Legal experts see the latest MCA move placing restrictions on Directors’ appointments by foreign investors (from countries that share land border with India such as China, Pakistan and Bangladesh) would increase the compliance burden, given that the Home Ministry’s clearance is a time consuming exercise.

In the wake of this MCA restriction on directors, it will not be practical  for an investor from a neighbouring country to negotiate appointment as a director on the board of the investee entity., said Pritika Kumar, Founder - Cornellia Chambers, a law firm. 

“Alternatively, seeking an observer seat may be an option to consider for such an investor. Also, the amendment mandates the proposed foreign director to satisfy the requirement of the security clearance personally and this is not a compliance for the investee entity”, she added.

Atul Pandey, Partner, Khaitan & Co, said that the latest MCA move is in line with restrictions being imposed by the government on investments from countries sharing a land border with India. 

He highlighted that the Registrar of Companies, Ministry of Corporate Affairs has been recently investigating multiple complaints against many companies with Chinese directors. 

“However, it would be important to note that the new rules do not clarify as to how, such security clearance from the MHA is to be received. In addition, given that security clearance from the MHA is a time consuming affair, this would substantially increase the compliance burden for companies proposing to engage directors from countries sharing a land border with India”, Pandey added.

Namita Chadha, Managing Partner, Chadha & Co, said that the latest stipulation on directors increase the compliance burden on foreign nationals, although in line with other measures taken by the MCA to establish a robust mechanism to scrutinise investments from bordering countries. “While several such measures have been introduced in the past few years, the government must continue to balance necessary security concerns with legitimate business needs to ensure that bona fide FDI continues with minimal hindrance”, Chadha added.

Ruby Singh Ahuja, Senior Partner, Karanjawala & Co said that the amendment to the rules wherein it will be essential for a director who is a foreign national to obtain Home Ministry’s security clearance is an important amendment since the director is privy to company’s important decisions. Having said that, the process of clearance must be done expeditiously so that people are not reluctant to come forward for the said appointments, she added.

The latest MCA move on directors comes on the heels of the recent rule changes that required furnishing of FEMA compliance declaration at the time of companies’ incorporation involving investments from countries which share land border with India. Also, this declaration of FEMA compliance has been mandated for inbound mergers at the time of seeking approval for such transactions before National Company Law Tribunal (NCLT). 

Published on June 02, 2022
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