The Companies Act, 2013 was passed in 2013 with the aim to revamp the Indian corporate governance regime. The new act superseded the erstwhile Companies Act, 1956 and is based upon the three pillars of liberalization, globalization and privatization.
In exercise of its power under the relevant provisions of the Companies Act, 2013, the Central Government notified the Companies (Appointment and Qualification of Directors) Rules, 2014 (hereinafter referred to as the “Principal Rules“). Several requisite details such as the number of independent directors, qualifications for independent directors, compliance requirement for a person to be appointed as an independent director, allotment of Director Identification Number (DIN), etc. are governed by the Principal Rules.
More recently, the Ministry of Corporate Affairs has on 1st June 2022 and 10th June 2022 respectively, notified two amendments to the Principal Rules, namely the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022 (“First Amendment Rules“) and the Companies (Appointment and Qualification of Directors) Second Amendment, Rules, 2022 (“Second Amendment Rules“).
- Companies (Appointment and Qualification of Directors) Amendment Rules, 20221
The First Amendment Rules focus specifically on ascertaining and checking the background of certain directors to be appointed and puts in place a stricter framework for appointment of directors who are nationals of countries sharing a land border with India. The First Amendment Rules mandate that a security clearance from the Ministry of Home Affairs (MHA) is required for individuals from countries sharing land borders with India, to be appointed as directors on the board of Indian companies. In effect, these amendments apply only to the nationals of Afghanistan, China, Pakistan, Nepal, Bangladesh and Myanmar.
Additionally, the First Amendment Rules stipulate that a director identification number will not be generated unless the MHA security clearance is obtained. The said clearance needs to be attached with the application for issuance of DIN.
Press Note 3 of 20202
The First Amendment Rules align the Principal Rules with changes made to the Foreign Direct Investment (FDI) policy, by Press Note 3 of 2020. Press Note 3 of 2020 stipulated that government approval is required for any foreign direct investments made from countries sharing land borders with India. In April 2020, during the initial days of the pandemic, as an immediate reaction to the concerns of Indian companies being vulnerable to opportunistic takeovers, Press Note 3 of 2020 was passed. It necessitated that the following investments be brought under the approval route:
- FDI from entities based in countries sharing a land border with India; and/or
- Where the beneficial owner of the investment is situated in or is a citizen of a country sharing a land border with India.
Preceding Press Note 3, only FDI proposals from Bangladesh and Pakistan required the approval of Government of India. The change made by the Government of India directs that FDI would be allowed from all neighbouring countries to India (with whom India shares a land border) only after obtaining approval of the Government of India, even in sectors where “automatic” clearances were formerly permitted.
- Companies (Appointment and Qualification of Directors) Second Amendment, Rules, 20223
Another change brought about to the Principal Rules, vide the Second Amendment Rules is in relation to independent directors. The Principal Rules state that every individual whose name is included in the data bank for independent directors is required to pass an online proficiency self-assessment test conducted by the institute within a period of two years from the date of inclusion of his or her name in the databank, failing which resulted in removal of the individual’s name from the databank. The individuals whose names were so removed, were required to apply afresh for inclusion of their names.
The Second Amendment Rules provide an opportunity to the individuals to restore their names to the databank subject to a payment of fees of ₹1000/- after which their name will be shown in a separate restored category for a period of one year. Thereafter, the individual must also pass the online proficiency self-assessment test within this year. On passing of this test, the individual’s name will be removed from the restored category and included in the databank. In case the individual fails the test, his or her name will be removed from the databank and a fresh application for inclusion is required to be made.
While the First Amendment Rules place an additional obligation for obtaining a security clearance from the Ministry of Home Affairs on persons from the countries sharing land border in India, it does not talk about the scope of discretion granted to the MHA for granting such security clearance. The amendments are also likely to increase delays in appointment of such directors.