Curbing Takeovers: India's answer to protecting Nationalistic Interests.

Recently, the Ministry of Corporate Affairs notified the  Companies (Appointment and Qualifica-

tion of Directors) Amendment Rules, 2022 ("2022 Amendment Rules"). It amended the Compa-
nies (Appointment and Qualification of Directors) Rules, 2014 ("Appointment and Qualification
Rules"), thereby laying down the requirements needed to hold a directorship position in an Indian
company. 

According to the new Company Rules, anyone who is a national of a country bordering India on
land must now get the required security clearance from the Ministry of Home Affairs (MHA) before
being designated a director in any Indian company. Additionally, even for applications seeking Di-
rectors' Identification Numbers (DIN), the notification now demands security clearance from the
MHA.

Consent to Act as a Director:

Every person appointed as a director is required to give his or her written consent in Form DIR-2 on
or before the appointment under Rule 8 of the Appointment and Qualification Rules. The consent
must additionally be submitted in Form DIR-12 to the Registrar of Companies. By way of the 2022
Amendment Rules, the proviso, in addition to Rule 8, states that any person who is a national of a
country which shares a land border with India must attach necessary security clearance from the
Ministry of Home Affairs to seek an appointment. Additionally, directors must indicate on Form
DIR-2 whether they need to apply for security clearance with the Ministry of Home Affairs or not.

The amendment's selective application concerning security clearance from MHA thus limits itself to
nationals of China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan, which are the
countries bordering India by land. Therefore, any person who is a national of any of these countries
will have to obtain and attach the necessary security clearance from the Ministry of Home Affairs to
seek an appointment as a Director in any Indian Company. These nationals must attain the requisite
security clearance from the Ministry of Home Affairs, attach it to Form DIR-2 with their written ap-
proval, and declare it.

Companies that intend to appoint or reappoint members who are citizens of a nation that borders In-
dia on land to their Board of directors ("Board")may be impacted by this move. The amendment
serves as a barrier to employment for directors on the boards of Indian corporations. Additionally,
this move could discourage Indian companies from choosing citizens of nations bordering India on
land when they urgently need to fill vacant directorship posts. Since security clearances may take
months to obtain or may not be forthcoming, businesses may be forced to select Indian nationals or
nationals from other nations to fill these posts.

Allotment of Director Identification Number ("DIN" ):

Any person applying to become a director of an Indian corporation must first register once with the
MCA for a DIN or Director Identification Number.
Rule 10(1) provides for the generation of an application number post submission of Form DIR-3 on
the Ministry of Corporate Affairs(MCA) portal. However, a clear distinction has been drawn in the
case of Directors who are nationals of countries that shares a land border with India.

Rule 10(1) of the 2022 Amendment Rules now incorporates into the proviso and reads that no appli-
cation number will be generated if the person applying for a director identification number is a citi-
zen of a nation that shares a land border with India unless the necessary security clearance from the
Ministry of Home Affairs has been attached to the application.

Additionally, the applicant for a DIN (using Form DIR-3) must indicate on the verification page
whether or not they have received a security clearance from the Ministry of Home Affairs.
Therefore, no Director Identification Number (DIN) will be issued until and unless the required se-
curity clearance from the Ministry of Home Affairs has been attached to an application for DIN if it
is made by a person who is a national of a country that shares a land border with India (i.e., China,
Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan). 

Due to this modification, the government has made it mandatory for residents of countries that bor-
der India to obtain the required authorizations before applying for a DIN. This additional step is the
prerequisite for obtaining a directorship position in an Indian company, and everyone who is a citi-
zen of a country having a land border with India must go through it. Therefore, it appears that the
government wants to make it difficult and restrictive for these individuals to be appointed to or ad-
mitted to the Boards of Indian corporations.

Previous Trends: Why was the Amendment brought?

This revision reflects a common theme of protectionism that was first noted in a notification by The
Ministry of Commerce and Industry's Department for Promotion of Industry and Internal Trade in
the form of Press Note No. 3, which revised certain aspects of the foreign direct investment ("FDI")
policy. By virtue of Press Note 3, prior government clearance was made necessary for Foreign Di-
rect Investment by any entity based in any country bordering India or any beneficial owner of the
investment who resides in or is a citizen of any such country. The purpose behind such a move thus,
became obvious, that is, to deter opportunistic takeovers and acquisitions of Indian companies as a
result of the COVID-19 pandemic and any of its subsequent effects.

In essence, the amendment attempts to address the growing issue where investors from foreign (par-
ticularly neighbouring) countries are utilising special purpose vehicles to get around the limitations
on foreign direct investment. Following the rerouting of investments, these investors would appoint
members of their nationality to the Board of Directors in an effort to obtain control of the company,
potentially opening the door to hostile and opportunistic takeovers.

Following Press Note 3, the MCA also issued the Companies (Compromises, Arrangements and
Amalgamations) Amendment Rules, 2022 bringing in a new sub-rule (3) to the Companies (Com-
promises, Arrangements and Amalgamations) Rules, 2016. A new Form No. CAA 16 was also in-
troduced, which relates to declarations made in conformity with Rule 25A. By way of this amend-
ment, it would be necessary to submit a declaration via Form No. CAA 16 at the time of submitting
an application under Section 230 of the Companies Act, 2013 ("Companies Act"), stating whether
prior approval under the Foreign Exchange Management (Non-Debt Instruments) Rule is necessary
in the case of a compromise, an arrangement, a merger, or a demerger between an Indian company
and a company/body corporate that has been incorporated in a country sharing land border with In-
dia.

Thus, it can be inferred that the MCA and other authorities seem to have started looking into possi-
ble infractions by Indian firms that are affiliated with or have subsidiaries in countries that border
India on the land. To further the theme of protectionism, restrictions on nations sharing land borders
with India have been expanded through the 2022 Amendment Rules beyond investments to cover
management of Indian companies as well as citizens who currently hold or seek to hold directorship
positions in Indian companies.
The said amendment has some key impacts in terms of the general practice that is usually followed
in the industry. Thus, the said implications need to be looked into to understand the purpose behind
the amendment better.

Probable Impacts of the Amendment:

A company must have “at least three directors in the case of a public company, two directors in the
case of a private company, and one director in the case of a one-person company,” as per Section
149(1) of the Companies Act. In addition, every company must have at least one resident director
who has spent a minimum of 182 days in India throughout the previous calendar year. As a result,
many foreign nationals can serve as directors on the Boards of Indian corporations, indicating that
they can exert a large amount of influence over the operations and administration of a company.

The amendment is a solid step to ensure that nations that share land borders with India do not gain a
backdoor entry or indirect control over the management of Indian companies by virtue of their na-
tionals under Press Note 3 and the recurring theme of protecting Indian companies against oppor-
tunistic takeovers.

A company's Board of directors is a crucial component of the managerial hierarchy, especially in

high-stakes scenarios where the company's senior management is called upon to participate and
contribute. Thus, choosing to appoint someone to the Board has to be carefully considered.

From a pragmatic standpoint, companies must reevaluate and assess their current Board of Direc-
tors, especially those with board members who are citizens of a nation that borders India on land.
Companies having Directors from countries bordering India must take prompt action to ascertain
that security clearance is secured or identify replacements if a director's term is about to expire.