MHA Clearance required for Chinese nationals' appointment as directors

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

• The Govt of India has issued a notification requiring nationals of land border-sharing nations who are appointed as directors on boards of corporations to receive a security clearance in order to prevent Chinese enterprises from evading Indian rules in order to do business in the country.
• As per the notification published by the MHA with effect from 1 June 2022, "necessary security clearance from the Ministry of Home Affairs would also be required along with the consent form" if a person from a country with a land border is seeking a job in an Indian enterprise. The Companies (Appointment and Qualification of Directors) Rules, 2014 are being amended by the Ministry of Home Affairs notification.
• The recent ruling will have a significant impact on Chinese firms that have subsidiaries in India. The government issued the notice after learning that Chinese and Hong Kong investors were able to circumvent the ban on foreign investment from neighbouring countries.
• Foreign investment from nations sharing land boundaries with the country was needed to receive mandatory government permission under the April 2020 rules. Previously, only Bangladeshi and Pakistani investments were subject to such limitations.
• Due to the pandemic, the regulation was perceived as substantially preventing Chinese firms from acquiring Indian industries at the time.
• In order to comply with the new requirement, the government formed a committee to offer case-by-case security approval for such investments. It was discovered that Chinese firms were able to invest freely in India because they were able to circumvent the ban by forming a company outside of their own country. These corporations then hired Chinese nationals to run their operations as senior executives.
• "This is a wise move since it will significantly decrease backdoor infiltration by Chinese investors and businesses into India." It would take action against multinational entities that use unfair ways to gain control of Indian enterprises."
• "Nothing is more vital than the nation's security." This is a wise decision. Government regulations must be followed by foreign enterprises.
• According to Rajput Jain & Associates, The decision, "may have a negative impact on Chinese investments as well as private equity investment inflow from Hong Kong."
• According to data from the Ministry of Corporate Affairs (MCA), there are 490 foreign nationals registered as directors in various companies in the country as of February. Around 30% of them are Chinese or Hong Kong natives, according to estimates.
• The MHA's latest notification attempts to prevent such Chinese enterprises or investors from entering India through the backdoor.

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