In the current dynamic environment where businesses are operating, it is a common occurrence to find entrepreneurs and other professionals associated with multiple businesses at a particular given time. Being a director of multiple businesses offers a person an opportunity to diversify and take part in other ventures. However, the freedom that comes with it remains limited.
The Indian government has realized the need of proper balance in managing and running a company and thus has imposed restrictions on the number of directorships an individual can simultaneously accumulate. The restrictions are imposed on the grounds of ensuring proper and diligent discharge of functions.
This blog will prove to be an exhaustive legal explanation of the eligibility of an individual to be in multiple director positions in companies; limitations of the same as per the Companies Act of 2013; exclusions and penalties. This blog will not only discuss the legal aspects of the subject but will also emphasize the importance of professional advice during planning.
Legal Provision Governing Directorship Limits
The first and foremost provision related to the subject is Section 165 of the Companies Act 2013. In this section, there is clear mention of the maximum numbers of companies where an individual can be a director.
Apparently, Section 165 seeks to create a fine balance by providing room for entrepreneurial freedom while still holding individuals accountable in corporate governance. Apparently, the section acknowledges the fact that while holding several directorships is allowed, holding too many directorships undermines the will to comply on the one hand, as well as the interests of the stakeholders on the other.
Maximum Number of Companies a Person Can Be a Director In
1 Overall Directorship Limit
Further, as per the Companies Act, 2013, under Section 165(1), a person can hold the offices of director in a maximum of 20 companies simultaneously. This restriction would equally apply to appointments which may be of an executive, non-executive, or independent nature.
The law provides that the directors have adequate time and capacity to undertake their duty of care, such as participating in board meetings, ensuring compliance with the law, and acting faithfully to the interests of the shareholders.
2 Limit on Public Companies
Out of the total number of companies, i.e., 20, not more than 10 companies can be public companies.
Another crucial aspect to be made clear under the said provision of the Act is the explanation regarding how the limit of this provision can be evaded as far as the holding companies of the public company are concerned. Holding companies of public companies incorporated as private companies are treated as public companies for the assessment of the aforementioned limit.
Companies Excluded from Directorship Limits
The Companies Act makes certain exclusions to attract entrepreneurship, non-profit activities, and dormant business structures. The following companies are excluded while computing the limit of 20 companies:
- Section 8 Companies: Non-Profit or Charitable Entity
- Dormant Companies explained under Section 455
These exclusions reflect the fact that such entities would normally have limited business activities or social goals and thus do not create the same governance burden as active business corporations.
Time Limit for Compliance with Section 165
The law allows a reasonable transition period, during which a person holding directorships in excess of the permitted limit may align affairs in case he already holds more than permissible directorships. He shall have to resign from the excess companies within one year from the date of appointment or from the date when the limit becomes applicable:
The director must carefully decide on the companies that they would want to actually resign from during this period and also see proper filing of resignation forms with the ROC for retiring directors to avoid complications in the future.
It is as if our whole intelligence is set aside for the reception of this information.
Penalty for Exceeding the Prescribed limit
Non-compliance with the provisions of Section 165 shall incur a monetary penalty. If an individual persists in an office as a director beyond the prescribed limit:
- A penalty of ₹2,000 per day for each company is levied
- Subject to a maximum penalty of ₹2,00,000
Even as the nature of the penalty may appear financial, the ramifications of the non-compliance, particularly for a professional, independent director, or a promoter, far outweigh the consequences.
The Practical Implications of Holding Multiple Directorships
Furthermore, having directorships of several companies extends beyond mere numbers that meet compliance norms. There are practical and theoretical responsibilities involved.
The responsibilities include compliance with legal filings, financial disclosures, norms for board level governance, as well as ethics. Non-compliance by a company, say, regarding the filing of annual returns, trading statements, etc., would attract disqualification under Section 164, thereby discrediting him/her in other companies also.
In addition, a number of directorships can lead to conflicts of interest, difficulty attending meetings, and increased personal accountability. It is imperative to strategically assess situations and get advice on how to proceed with having a number of directorships.
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At the same time, we offer expert advice by providing timely and accurate information with regard to the Companies Act, 2013.
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Conclusion
An individual can be a director for more than one company, depending on the limits set by the Companies Act, 2013, as per Section 165. The rationale behind this is important so as to avoid any kind of penalty.
A critical factor is good planning and compliance in discharging directorships, effective resignation at the required times, and compliance support, whereby a business and professional individual can access a wealth of experience and reassurance through My Legal Business LLP to enable them to have a number of directorships and still always be legally compliant.
FAQs on Directorship in Multiple Companies
1. Can an individual hold the directorial post in more than one company in India?
Yes, the Companies Act, 2013 provides for a person to act as a director in multiple companies, as long as the constraints are fulfilled as prescribed in Section 165.
2. What is the maximum number of companies in which a person can be a director?
An individual can be director of up to 20 companies at the same time, across private companies and public companies.
3. How many public companies can a person be a director of?
Out of the 20 companies, a person cannot be a director in a total of 10 companies at a given time.
4. Do private companies count individually from public companies?
Yes, private companies are reported separately, but a private company that is a subsidiary or holding company of a public company is reported as a public company.
5. Are One Person Companies included in the directorship limit?
Yes, directorship in One Person company is included while determining the directorship that extends the limit under Section 165.
6. Does the limit calculation include Section 8 Companies?
No, as section 8 companies are excluded as being non-profit organizations.
7. Do dormant companies count towards the directorship limit?
No, dormant companies are not included in the formula unless they have been formally recognized under the Act.
8. Does alternate directorship constitute towards the total limit?
Yes, alternate directorship is defined as a directorship and included while computing the number of companies.
9. Does independent directorship count in this limit?
Yes, even independent director positions will be calculated since Section 165 does not distinguish between any particular basis of eligibility.
10. What happens if a person exceeds the permissible directorship limit?
The person has to resign from the excess companies within the given timeframe. If not, financial sanctions can be imposed under the Companies Act.
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