Introduction

Section 275 of the 1956 Act prohibited a director from holding the office of a director in more than fifteen companies. Initially the limit specified was twenty which was subsequently reduced to fifteen by the Companies (Amendment) Act, 2000. The number of directorship had to be calculated in terms of section 278 of the companies Act, 1956.

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Section 276 of the 1956 Act contained provisions relating to making of choice where a director held office as a director in more than fifteen companies. Section 277 of the 1956 Act dealt with the provisions of choice by a person becoming director more than fifteen companies after the commencement of the Companies (Amendment) Act, 2000. Consequential changes were made in sections 276 and 277 of the 1956 Act pursuant to the Companies (Amendment) Act, 2000 which reduced the ceiling to fifteen companies. Section 278 of the 1956 Act dealt with the exclusion of directorship in certain types of companies and other forms of organization for ascertaining if a person has directorship in more companies than permitted. The section provided that for calculating the number of companies, for deciding whether or not a person holds directorship in more than fifteen companies, the following companies were included:

  • Every public company,
  • Every private company which is subsidiary of a public company,

Directorship in 1) private companies, 2) unlimited companies and 3)Association not carrying on business for profit or which prohibited payment of dividend as well as 4) alternate directorship were excluded while calculating the ceiling limits. Being a director or member of an executive committee or governing body of a Chamber of Commerce, or other Association coming under section 25 of the 1956 Act, was to be excluded from the calculation. However If he was a manager of a company then the same was not be counted for the purpose of reckoning the ceiling of fifteen companies. Section 279 of the 1956 Act prescribed the penalty for holding directorship in more companies than the permitted ceiling limit. The Companies (Amendment) Act, 2000 reduced the ceiling on number of companies from twenty to fifteen and enhanced the penalty amount from 5,000 rupees to 50,000 rupees under section 279 of the 1956 Act. There was a legislative slip since the section 279 of the 1956 Act was not amended to reflect the amended ceiling (from fifteen to twenty) for purposes of breaching the ceiling on the number of directorships.

Number of directorship

Section 165 of the 2013 Act stipulates that no person can be a director of more than 20 companies at any given point of time. The Companies (Amendment) Act 2000 had reduced the number from 20 companies to 15 companies under the 1956 Act which has now been restored by 2013 Act. However, unlike the 1956 Act which did not take into account alternate directorship in the count of 15, under the 2013 Act, the number 20 includes even alternate directorships. While the 1956 Act also exempted directorships in private companies simplicter, unlimited companies and in associations which were not carrying on business for profit or which prohibited payment of dividends, such exemptions have been removed in the 2013 Act. In 2013 Act, while directorship in a maximum of 20 companies is allowed, it is also to be ensured that out of these 20, the number of public companies should not exceed 10 and this count of 10 takes into consideration even a private company which is a holding or subsidiary of a public company. However, in view of use of the word ‘companies’, it would appear that directorships in bodies corporate incorporated outside India which are not companies for purposes of 2013 Act, are excluded. If a private company converts itself into a public company and consequent thereto the limit of ten directorships in public companies is breached, there is no time limit prescribed by when the director will be required to regularize his directorships which were earlier compliant and fall foul of the provision only due to altered circumstances. Section 165(6) of the 2013 Act uses the words “accepts appointment” and not “holding office or acting as director” which was used in section 279 of the 1956 Act. Similarly, in case a private company is a subsidiary of a foreign company and if shares of the foreign entity (holding company) are transferred to an Indian company which is a public company then directorship in this private company will be counted for the limit of ten directorships in public companies. As per revised listing agreement which came into effect from 1st October, 2014, a person cannot be a director in more than seven listed entities and in case a director is in whole time employment then he cannot be a director in more than 3 listed companies. It is pertinent to note that due to section 40 of the 2013 Act, a private company may also be a listed company. Although shares of a private company cannot be offered to the public, there is no bar on listing other securities of a private company. Section 40 of the 2013 Act can be contrasted with section 73 of the 1956 Act.

Fixing lesser number of companies by special resolution

A new provision is introduced in section 165(2) of the 2013 Act which provides flexibility to a company to fix the number of companies lesser than twenty in which a person can be a director by means of a special resolution passed by the members.

Directorship in more companies then permitted

Section 165(3) of the 2013 Act provides that any person who is a director in more than 20 companies at the commencement of the 2013 Act is required to decide within one year from such commencement as to which are the 20 companies in which he wishes to continue as director and to resign from the rest. Earlier under the 1956 Act a time period of 2 months was given for effecting such regularization. Once the decision is taken, a resignation letter will have to be all such companies from which he relinquishes his directorship and such resignations will be effective with immediate effect from the time of its dispatch. This is in contrast to what is provided under “resignation of a director” in section 168 of the 2013 Act where the resignation takes effect only no receipt of notice by the company. He is also required to intimate his choice of 20 companies to each of the companies in which he was a director prior to the commencement of the 2013 Act as also to the Registrar within whose jurisdiction each of such companies fall. Unlike the 1956 Act, no intimation to the Central Government is required.

Prohibition on directorship in more companies then twenty

Section 165(5) of the 2013 Act prohibits a person from continuing to act as a director of more than 20 companies after dispatching the letter resigning his office as director or after the expiry of one year from the commencement of 2013 Act, whichever is earlier. A point to be noted is that 1956 Act did not totally prohibit a person from being appointed as a director to more than 15 companies. In fact, section 277 of the 1956 Act provided a time frame of 15 days from the date of appointment during which the person could vacate his office from any of the previous companies failing which his new appointment would be treated as void. As there is no such provision in 2013 Act, it is to be presumed that 2013 Act does not give any scope for a person to even accept a directorship of a company beyond the specified number of 20. Section 165 of the 2013 Act specifies that a person shall not be a director of more than 20 companies at any given point of time. The legislative intent in fixing the upper limit in this section appears to be to give an impetus to corporate governance by ensuring that a person is able to give quality time to the companies in which he is a director and that he does not take on more than what he can effectively handle.

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