In a bid to prevent Chinese companies from circumventing Indian laws to do business in the country, the government has come up with a notification that requires land border-sharing nations' citizens who are appointed as directors on boards of companies to obtain a security clearance.

 

According to a notification issued by the Ministry of Home Affairs on June 1, if a person from countries that share a land border is seeking an appointment in an Indian company, "necessary security clearance from the Ministry of Home Affairs will also be needed along with the consent form". The MHA notification seeks to amend the Companies (Appointment and Qualification of Directors) Rules, 2014.

 

The latest decision would majorly impact Chinese companies that operate in India through their subsidiaries. The notification was issued after the government learnt that Chinese and Hong Kong investors were able to bypass the restriction on foreign investments from neighbouring nations. 

 

The April 2020 guidelines required mandatory government approval for foreign investment coming from countries sharing land borders with the country. Previously, only investments from Pakistan and Bangladesh faced such restrictions.

 

The measure, at that time, was seen as largely blocking Chinese companies from acquiring Indian companies due to the pandemic.

 

The government later set up a committee to provide case-by-case security clearance for such investments in compliance with the new rule. It was found that Chinese companies managed to route investment in India without any restrictions as they were able to bypass the rule by creating an entity outside their home country. These companies later appointed Chinese nationals as senior executives to control the operations. 

 

"It is a prudent step as it will greatly reduce backdoor entry by Chinese investors and enterprises in India. It will clamp down on international entities taking control over Indian businesses through unfair means," Ridhima Kansal, Director, Rosemoore, said.

 

"Nothing is more important than the security of the nation. This is a prudent step. Foreign companies must comply with the government norms... The decision could adversely impact Chinese investments as well as private equity investment inflow from Hong Kong," Raghunandan Saraf, founder & CEO, Saraf Furniture, said.

 

Going by the Ministry of Corporate Affairs (MCA) data as of February, there are 490 foreign nationals in the country who are registered as directors in various companies. It is believed that around 30 per cent of them are Chinese or Hong Kong nationals. 

 

The MHA's latest notification aims to restrict the backdoor entry of such Chinese companies or investors into India.