In an apparent attempt to check Chinese control over Indian companies, the ministry of home affairs (MH) has issued a notification specifying the amendment of the Companies (Appointment and Qualification of Directors) Rules of 2014.

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According to the new Companies (Appointment and Qualification of Directors) Amendment Rules of 2022, companies would be mandated to seek clearance from the government before appointing citizens from land-border sharing nations as directors.

Countries that share land borders with India include China, Pakistan, Bhutan, Myanmar, Afghanistan, Nepal, and Bangladesh.

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As part of the amendment, one new provision has been inserted in Rule 8 and 10 of the previous law. The provision inserted in Rule 8 says -- "Provided further that in case the person seeking appointment is a national of a country which shares the land border with India, necessary security clearance from the ministry of home affairs, Government of India shall also be attached alongwith the consent."

Similarly, the new provision inserted in Rule 10 states -- "Provided that no application number shall be generated in case of the person applying for Director Identification Number is a national of a country which shares the land border with India, unless necessary security clearance from the ministry of home affairs, government of India has been attached alongwith application for Director Identification Number."

While the amended rule takes all land border-sharing nations into consideration, experts say the change has been especially made keeping China in mind. In April 2020, the government had put restrictions on foreign investments from neighbouring countries to keep Chinese investments into Indian companies in check. However, the Chinese were able to bypass this.

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Market watchers say that Chinese companies started creating a US or Cayman Islands (tax heaven)-based entity and used it to route the investment without any restrictions. After making heavy investments, Chinese companies would appoint senior Chinese executives as directors to gain control.

Therefore, the central government has now made it mandatory for companies to seek permission before appointing any person from a land border-sharing nation as the director of a company.

Till February this year, 490 foreign nationals were registered as active directors in India, revealed data from the ministry of corporate affairs. While the data didn't reveal how many among these 490 foreign nationals were from China, estimates suggest that 30 percent of these directors are from China or Hong Kong.

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