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Security Clearance Must For Indian Companies Before Appointing Chinese Directors


After finding that China and Hong Kong investors were devising alternate structures to circumvent April 2020 restrictions on foreign investments, the government has made it mandatory for Indian companies appointing Chinese nationals and those from Hong Kong as directors to get security clearance before making such appointments, according to an ET report. A government notification regarding this was issued on June 1.

If a person seeking appointment is a national of a country that shares a land border with India, necessary security clearance from the Ministry of Home Affairs will also be needed along with the consent form, according to the Companies (Appointment and Qualification of Directors) Rules, 2014, released on June 1.

These rules will largely impact Chinese manufacturing companies that have subsidiaries in India and China.

The foreign investment guidelines issued in April 2020 had required government approval for foreign investment coming from countries sharing land borders with India. A committee was set up to provide case-by-case security clearance for such investments. The measure was seen as largely targeted at Chinese investment following border clashes.

In 2020 also, the Cabinet also cleared a proposal to secure telecom infrastructure by designating a “trusted source” for the purchase of equipment by service providers.

“Considering the need to ensure India’s national security, the Cabinet has accorded approval for the National Security Directive on Telecommunication Sector,” then Law, Telecom and IT Minister Ravi Shankar Prasad had said then while announcing the decision.

Under the provisions of this directive, the government declares a list of trusted sources and trusted products for installation in the country’s telecom network. The directive has provisions to qualify telecom gears made by domestic players in the trusted category. The list of the trusted source and product is decided based on the approval of a committee headed by the deputy national security advisor.

Now, Chinese telecom gear makers Huawei and ZTE are struggling to meet requirements under the security directive on the supply of network equipment. Both Huawei and ZTE have yet to complete paperwork to seek trusted sources approval, according to a recent ET report.

In 2020, India had also banned the import of equipment from China for use in sectors ranging from telecom to power citing national security reasons. These bans were driven by concerns such as spyware or malicious software – known as “malware” – being embedded in the imported equipment.

In 2019, the government had banned imports of Chinese handsets without the International Mobile Equipment Identity, or IMEI, number, again citing security reasons such as the use of stolen handsets to make terror or hoax calls.

The IMEI number of a mobile phone is a 15-digit number unique to every mobile handset. It prevents stolen handsets from making calls and allows security agencies to track down a specific user.

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