In today’s globalized business landscape, it is not uncommon for foreign nationals to serve as directors of companies operating in countries other than their own. However, with the increasing emphasis on national security, some governments have started requiring mandatory security clearance for foreign national directors. In some cases, foreign nationals may have ties to other countries or organizations that could compromise their loyalty and allegiance to the host country. Moreover, some industries, such as defense or critical infrastructure, require higher levels of security clearance due to the nature of the work.
The Ministry of Home Affairs (MHA) of India issued a notice on June 1, 2022, amending the Companies (Appointment & Qualification of Directors) Regulations, 2014 Rules. According to the amendment, all persons from countries that share a land border with India, including China, Bangladesh, Pakistan, Bhutan, Nepal, Burma, and Afghanistan, must acquire security clearance before being confirmed as directors on boards of Indian enterprises. The Ministry of Corporate Affairs (MCA) has also included this amendment in the Companies (Appointment and Qualification of Directors) Amendment Rules, 2022, that has been effective from June 1, 2022.
Major Amendments-
1. The first proviso of Rule 8 states that, in addition to the consent of the person seeking appointment as a director on the board of a company, necessary security clearance from the MHA, Government of India, is also required if the person is from any of the countries listed above, i.e., sharing a land border with India.
2. Rule 10 specifies that, no application for a Director Identification Number (DIN) would be created if the individual is from a nation that shares a land border with India unless accompanied by a security clearance from the MHA, Govt. of India.
3. New Declaration/Verification Annexure Form DIR 2 & DIR 3 Insertion: The applicant is required to declare as follows, ‘I further certify that I am not obliged to get a security clearance from the Ministry of Home Affairs, Government of India, before being appointed as director…’ or ‘Before seeking employment as director, I am obliged to secure a security clearance from the Ministry of Home Affairs, Government of India, which I have got and which is attached…’
The nomination of foreign nationals to corporate boards of directors may be beneficial to the corporate structure in the long run. Others argue that having a foreign director will lead to improved compliance with corporate governance norms and more transparency and financial accountability. Lately, studies have indicated that foreign directors contribute to environmental accountability, consistent with India’s stakeholders’ approach to directors’ obligations. As a result, making a broad case in favour of fostering on-board diversity, including colour, ethnicity, and country, is not unfounded. When appropriate, adequate constraints based on, for instance, the proportionality of participation inspired by the US model might be implemented.
In conclusion, while the mandatory security clearance for foreign national directors may be necessary to protect national interests, it also has the potential to create significant obstacles for businesses and foreign investment.
