RESTRICTION ON NUMBER OF DIRECTORSHIPS

(Companies Act 2013, Chapter 11. APPOINTMENT AND QUALIFICATIONS OF DIRECTORS.

Section 165 : Number of directorships

With an intention to make certain that directors provide bona fide attention and do justice to the position of directorship in all the companies on which they are directors, a maximum ceiling on the number of directorships has been stipulated by the government.

Section 165 says:

(1) No person, after the commencement of this Act, shall hold office as a director , including any alternate directorship, in more than twenty companies at the same time:

Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten.

Explanation I.— For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included.

Explanation II.—For reckoning the limit of directorships of twenty companies, the directorship in a dormant company shall not be included.

(2) Subject to the provisions of sub-section (1), the members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors.

(3) Any person holding office as director in companies more than the limits as specified in sub-section (1), immediately before the commencement of this Act shall, within a period of one year from such commencement,—

(a) choose not more than the specified limit of those companies, as companies in which he wishes to continue to hold the office of director;

(b) resign his office as director in the other remaining companies; and

(c) intimate the choice made by him under clause (a), to each of the companies in which he was holding the office of director before such commencement and to the Registrar having jurisdiction in respect of each such company.

(4) Any resignation made in pursuance of clause (b) of sub-section (3) shall become effective immediately on the dispatch thereof to the company concerned.

(5) No such person shall act as director in more than the specified number of companies,—

(a) after dispatching the resignation of his office as director or non-executive director thereof, in pursuance of clause (b) of sub-section (3); or

(b) after the expiry of one year from the commencement of this Act, whichever is earlier.

(6) If a person accepts an appointment as a director in contravention of sub-section (1), he shall be liable to a penalty of five thousand rupees for each day after the first during which such contravention continues .

EXPLANATION:

  • The maximum number of directorships, including any alternate directorship, a person can hold is 20.
  • At the same time, a person cannot be a director of more than 10 public companies.
  • For the purpose of counting such directorship in public company, the directorship in private companies that are either holding or subsidiary of a public company shall be included.
  • Alternate directorship shall also be included while calculating the directorship of 20 companies.
  • Section 8 company will not be counted for the purpose of a maximum number of directorship.
  • Further, the members of a company may restrict above mentioned limit by passing a special resolution for its own directors.
  • For reckoning the limit of directorships of twenty companies, the directorship in a dormant company shall not be included.
  • If a person accepts an appointment as a director in contravention of above-mentioned provisions, he shall be punishable with a penalty of five thousand rupees for each day after the first during which such contravention continues.

In case of listed companies, they have to comply with Regulation 26 of Securities and Exchange Board of India (Listing Obligations and Disclosures Requirements) [SEBI-LODR] that is the obligations with respect to employees including senior management, key managerial persons, directors and promoters.

It states that:

26.(1) A director shall not be a member in more than ten committees or act as chairperson of more than five committees across all listed entities in which he is a director which shall be determined as follows:

(a) the limit of the committees on which a director may serve in all public limited companies, whether listed or not, shall be included and all other companies including private limited companies, foreign companies and companies under Section 8 of the Companies Act, 2013 shall be excluded;

(b) for the purpose of determination of limit, chairpersonship and membership of the audit committee and the Stakeholders’ Relationship Committee alone shall be considered.

EXPLANATION

Additionally for listed entities SEBI vide recent notification provides that the board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities (with effect from April 1, 2020) shall comprise of not less than six directors.

The top 1000 and 2000 entities shall be determined on the basis of market capitalization as at the end of the immediate previous financial year.

No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of seventy-five years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.

With effect from April 1, 2020, the top 500 listed entities, shall ensure that the Chairperson of the board of such listed entity shall – (a) be a non-executive director; (b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013: Further it is provided that this sub-regulation shall not be applicable to the listed entities which do not have any identifiable promoters as per the shareholding pattern filed with stock exchanges.

The top 500 entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year.

It is also provided that the Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019, and the Board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020. The top 500 and 1000 entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year.

Disclaimer – Author has exercised utmost care while writing this article, but still this article may contain some error or mistake and no part of this article/writing should be construed or considered as any advice or consultancy whether professional or otherwise.

The author may be reached at reachpreethi86@gmail.com

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4 Comments

  1. Karapattu subramanian Ravichandran says:

    What is a dormant company? Why directorship of such a company should be excluded? Why holding company of public company should be included?

    1. cspreethi says:

      As per Section 455 of Companies Act, 2013

      Subsection:
      (1) Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.
      Explanation.—For the purposes of this section,—
      (i) “inactive company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed a financial statement and annual returns during the last two financial years;
      and

      Subsection
      (5) states that A dormant company shall have such minimum number of directors, file such documents and pay such annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may become an active company on an application made in this behalf accompanied by such documents and fee as may be prescribed.

      In view of the above explanation by the Companies Act, 2013, directors are required by dormant companies only for the purpose of compliance. They need not exercise their expertise in the affairs of the company and thus are not diverted with this directorship responsibility.

      Hence the directorship in dormant companies is excluded.

      The scenario is entirely different when it comes to the directorship in a holding company of a public company. Therefore it is included in calculating the restrictions.

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