Companies Act Section 165

Limitations on the Number of Directorships Under the Companies Act Section 165

1. Restriction on the Number of Companies a Person Can Be a Director In

To ensure effective corporate governance and prevent conflicts of interest, the Companies Act places a restriction on the maximum number of directorships a person can hold simultaneously.

General Limit: No individual is permitted to hold the office of a director, including alternate directorships, in more than twenty (20) companies at any given time. This applies to both executive and non-executive directorships.
Public Company Limit: Within this overall limit, an individual cannot be a director in more than ten (10) public companies.
This restriction is designed to prevent individuals from spreading their responsibilities too thin, thereby ensuring that directors can provide adequate time and attention to the companies they are associated with.

2. Clarifications on How the Directorship Limit Is Counted

To avoid ambiguity in the interpretation of the directorship limits, the Act provides further clarifications:

Inclusion of Private Companies That Are Holding or Subsidiary Companies of a Public Company: While private companies are generally not counted towards the public company limit, an exception exists for private companies that are either holding companies or subsidiaries of a public company. Such directorships will be included in the public company limit of ten.
Exclusion of Dormant Companies: If a person serves as a director in a dormant company (a company that has been granted dormancy status due to inactivity under the Companies Act), that directorship will not be included in the total count of twenty companies.
3. Special Provisions Allowing Companies to Impose Stricter Directorship Limits

Although the Act prescribes a general limit on directorships, individual companies have the discretion to impose stricter limitations.

By passing a special resolution, the members of a company can specify a lower limit on the number of companies in which a director of that company may serve as a director.
This provision allows companies to ensure that their directors are not overcommitted and can effectively discharge their duties.
4. Transition Rules for Directors Holding Excess Directorships Before the Commencement of the Act

When the Companies Act was implemented, certain directors may have already been serving on boards that exceeded the prescribed limits. To ensure a smooth transition, the Act allowed such directors a grace period of one year from the commencement of the Act to comply with the new regulations.

During this transition period, affected directors were required to:

Select the companies where they wished to continue as a director, ensuring that the total number did not exceed the permissible limits.
Resign from the excess directorships in companies that were beyond the prescribed limit.
Inform all relevant companies and the Registrar of Companies about their decision regarding the companies they chose to continue with and the companies they were resigning from.
5. Effectiveness of Resignation from Excess Directorships

Once a director resigns from companies exceeding the limit, the resignation becomes effective immediately upon its dispatch to the respective company. There is no waiting period for acceptance or approval, ensuring that compliance is swift and legally binding.

Additionally, from the moment of dispatching the resignation or after the one-year grace period (whichever comes first), the person must ensure that they do not act as a director in more than the specified number of companies.

6. Penalties for Violating the Directorship Limit

The Act imposes financial penalties on any individual who accepts a directorship in excess of the prescribed limit.

If a person accepts an appointment as a director in violation of these restrictions, they will be subject to a penalty of INR 2,000 per day for each day the violation continues.
The penalty is capped at a maximum of INR 2,00,000.
This penalty serves as a deterrent, ensuring that directors and companies adhere to the established limits to promote good corporate governance.