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Companies (Appointment and Qualification of Directors) Amendment Rules, 2022

June 28, 2022
corporate

In 2013, the Parliament of India passed the Companies Act, 2013 which aimed at overhauling the corporate governance regime in India. The new act superseded the erstwhile Companies Act, 1956, and was touted to be in consonance with the changing economic order based upon the three pillars of liberalization, globalization, and privatization.

In 2014, the Government of India in the exercise of its powers under the relevant provisions of the Companies Act, 2013 notified the Companies (Appointment and Qualification of Directors) Rules, 2014[1] (hereinafter referred to as ‘Rules’). These rules elaborated upon numerous necessary details, namely, 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.

Most recently, the Ministry of Corporate Affairs, Government of India, on June 1, 2022, via a notification[2] published in the Gazette of India notified the latest amendments to the said Rules.

The New Amendments

The latest amendment to the Rules focuses specifically on ascertaining and checking the background of to be-appointed directors belonging to a specific set of countries. More specifically:

  • Addition of a proviso to the already existing proviso to Rule 8.

Rule 8 elaborates upon ‘consent to act as director’ and stipulates filling of Form No. DIR-2 giving consent for appointment as a Director, provided that the company should file the said consent with the registrar (Form 12) within 30 days of appointment of the Director.

The newly added proviso further stipulates that if the person, who is to be appointed as a Director, is a national of any country which shares a land border with the territory of India, has to obtain a security clearance from the Ministry of Home Affairs, Government of India. The said clearance will be attached with the consent form.

  • Addition of a proviso to Rule 10, in sub-rule (1),

Rule 10 elaborates upon allotment of a provisional DIN on filling Form DIR-3 on the portal and payment of the requisite amount of fees through online mode. However, the provisional DIN cannot be used until the Central government confirms it.

The newly added proviso stipulates that that no identification number will be generated for the Director if he/she is a national of any country which shares a land border with the territory of India, unless, he/she obtains necessary security clearance from the Ministry of Home Affairs, Government of India. The said clearance will be attached with the application for issuance of Director Identification Number.

  • The amendments to the rules also amend the aforementioned consent form (Form DIR 2) and provisional DIN form (Form DIR 3). The amendments add the following:
  • Form No. DIR-2

Under the heading Declaration, the existing paragraph, shall be numbered as paragraph

(i) thereof and after the paragraph (i) as so numbered, the following shall be inserted, namely:-

“(ii) I further declare that –

I am not required to obtain the security clearance from the Ministry of Home Affairs, Government of India before seeking appointment as director;

I am required to obtain the security clearance from the Ministry of Home Affairs, Government of India before seeking appointment as director and the same has been obtained and is attached. ”;

  • Form No. DIR-3

under the heading Verification, after serial number 3, the following serial

number shall be inserted, namely:-

“3A. I am not required to obtain the security clearance from the Ministry of Home Affairs, Government of India under sub-rule (1) of rule 10 before applying for director identification number;

or I am required to obtain the security clearance from the Ministry of Home Affairs, Government of India under sub-rule (1) of rule 10 before applying for director identification number and the same has been obtained and is

attached. ; and ”.

Effect of the New Amendments

On the surface, these amendments seem to ensure better and diligent vetting of directors that are due to be appointed. However, the stipulation that such stringent vetting would be done for directors who are nationals of those countries that share a land border with India points towards a strategic decision at ensuring the safety of corporate entities in India. In effect, these amendments apply only to the nationals of Afghanistan, China, Pakistan, Nepal, Bangladesh and Myanmar; with Pakistan and China being openly hostile and others being part of China led CPEC, careful vetting by the Ministry of Home Affairs assumes profound significance.

[1] The Companies (Appointment and Qualification of Directors) Rules, 2014 as notified by

Ministry of Corporate Affairs vide Notification No. G.S.R. 259 (E) dated: 31.03.2014

[2] CG-DL-E-01062022-236214, WEDNESDAY, JUNE 1, 2022

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