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Chinese nationals need government nod before joining any Indian board

Chinese nationals need security clearance from the governement if they want to be appointed as a director on the board of an Indian company.

board meeting empty chairs

What’s the news? Starting June 1, any national from a country that shares a land border with India must seek security clearance from the Ministry of Home Affairs if they wish to be appointed as a director on the board of an Indian company, a notification issued by the Ministry of Corporate Affairs stated.

Why is this important? While the notification appears to target all neighbours that share a land border with India—China, Pakistan, Bhutan, Myanmar, Afghanistan, Nepal and Bangladesh—it is, in practice, largely going to affect Chinese nationals the most because the country has far more investments in Indian companies than the other neighbours. This requirement is in line with Press Note 3 of 2020, which mandates government approval for foreign investment coming from countries sharing land borders with India.

Why was this law introduced? According to Economic Times, this requirement has been imposed after it was found that Chinese and Hong Kong investors were circumventing the restrictions imposed in 2020 on foreign investments from neighbouring countries. “In some instances, it was found that a Chinese company would create a US or Cayman Islands-based entity through which it routed the investment without any restrictions. It would subsequently appoint senior Chinese executives as directors to exercise control,” the report explained. Speaking to Hindu Business Line, Atul Pandey, Partner, Khaitan & Co said that the Ministry of Corporate Affairs has recently investigated multiple complaints against many companies with Chinese directors, hinting at another possible reason for this new requirement.

Why was the 2020 law introduced? The 2020 law was introduced at a time when there were growing concerns that China is using its financial might to buy distressed assets across the globe. Prior to Press Note 3, investments from Chinese companies in India could proceed unimpeded in the “automatic route.”

What else? The notification, titled Companies (Appointment and Qualification of Directors) Amendment Rules, 2022, also states that no application number can be generated if a person applying for the Director Identification Number (DIN) is a national of a country that shares a land border with India unless the Home Ministry’s security clearance is attached with the application.

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