Directorships – Section 165 of Companies Act, 2013

The governance and management of a company largely depend upon its directors. Directors constitute the Board of Directors, which acts as the central decision-making body of a company. The Board supervises operations, frames policies, and ensures that the company complies with legal and regulatory requirements. Given the importance of this role, the law regulates not only the appointment and duties of directors but also the number of companies in which a person can serve as a director.

The Companies Act, 2013 introduces a structured framework governing directorships. Section 165 specifically deals with the maximum number of directorships that an individual can hold at a given time. This provision ensures that directors are able to discharge their responsibilities efficiently and devote adequate time to each company.

This article provides a detailed analysis of Section 165, including its scope, limitations, exceptions, transitional provisions, and penalties for non-compliance.

Concept of Directorship under the Companies Act, 2013

A company acts through its Board of Directors, which is a collective body responsible for managing its affairs. Every company must have directors from the time of incorporation.

The minimum number of directors required varies depending on the type of company:

• A One Person Company must have at least one director
• A private company must have at least two directors
• A public company must have at least three directors

The maximum number of directors that a company can appoint is fifteen. However, this limit can be increased by passing a special resolution.

Directors are entrusted with significant responsibilities, including decision-making, compliance management, and safeguarding stakeholder interests. Therefore, the law imposes certain restrictions to ensure that directors do not overextend themselves across multiple companies.

Meaning and Scope of Section 165

Section 165 of the Companies Act, 2013 regulates the number of directorships that an individual can hold simultaneously. The provision aims to maintain a balance between allowing professional expertise across companies and preventing excessive concentration of responsibilities.

The section applies to all individuals holding directorships in companies incorporated under Indian law. It also includes alternate directorships, thereby broadening the scope of the provision.

Maximum Number of Directorships

Overall Limit

Section 165(1) provides that a person shall not hold office as a director, including any alternate directorship, in more than twenty companies at the same time.

This overall limit includes:

• Private companies
• Public companies
• Section 8 companies (as per general inclusion in the limit of 20)

However, certain exclusions and qualifications apply, which affect the calculation of this limit.

Limit on Public Companies

Out of the total limit of twenty companies, a person cannot hold directorship in more than ten public companies simultaneously.

For this purpose:

• Directorships in private companies that are either holding or subsidiary companies of a public company are also counted as public company directorships.

This ensures that individuals do not bypass the restriction by holding positions in private entities closely linked to public companies.

Exclusions from the Limit

While calculating the number of directorships, certain categories are excluded:

Foreign Companies

Directorships in companies incorporated outside India are not included in the limit of twenty companies. Section 165 applies only to companies governed by Indian company law.

Dormant Companies

Directorships in dormant companies are excluded from the calculation. Since dormant companies are inactive and do not carry out significant business operations, they do not impose the same level of responsibility on directors.

Purpose of Limiting Directorships

The restriction under Section 165 is not merely procedural but is rooted in sound governance principles.

A director plays a crucial role in the functioning of a company. Responsibilities include strategic planning, regulatory compliance, financial oversight, and risk management. Holding directorships in an excessive number of companies may result in:

• Lack of adequate attention to individual companies
• Ineffective decision-making
• Increased risk of non-compliance
• Reduced accountability

The limitation ensures that directors can devote sufficient time and effort to each company and perform their duties effectively. It promotes better corporate governance and enhances the overall efficiency of company management.

Reduction in Number of Directorships by Company

Section 165(2) empowers companies to impose stricter limits on their directors.

A company may, through a special resolution passed by its members, specify a lower number of companies in which its directors can hold directorships. This number must be less than twenty.

For instance, if a company resolves that its directors can hold directorships in a maximum of ten companies, then all its directors must comply with this reduced limit. Even though the Act permits up to twenty directorships, the internal restriction becomes binding.

This provision allows companies to maintain higher standards of governance and ensure that their directors remain sufficiently committed.

Transitional Provisions under Section 165

Sections 165(3), 165(4), and 165(5) deal with transitional arrangements for directors who held multiple directorships before the commencement of the Companies Act, 2013.

Position under the Companies Act, 1956

Under the earlier law, the calculation of directorships did not include certain categories such as private companies and unlimited companies. As a result, many individuals held directorships in a large number of companies.

Adjustment under the 2013 Act

The Companies Act, 2013 expanded the scope by including private companies within the limit of twenty. Therefore, individuals who were already holding directorships exceeding this limit were required to comply with the new provisions.

Time Limit for Compliance

Such individuals were given a period of one year from the commencement of the Act to:

• Reduce the number of directorships to twenty
• Select the companies in which they wished to continue as directors

Resignation from Excess Companies

After making the selection, the director was required to:

• Resign from the remaining companies
• Send resignation notices to those companies

The resignation becomes effective immediately upon dispatch of the notice.

Intimation Requirement

The director must also inform:

• The Registrar of Companies
• The companies concerned

about the choice of the twenty companies.

Restriction after Compliance Period

Section 165(5) provides that a person shall not act as a director in more than twenty companies after:

• Dispatching resignations, or
• Expiry of one year from commencement of the Act,

whichever occurs earlier.

Penalty for Contravention

Section 165(6) prescribes penalties for violation of the provisions relating to the number of directorships.

If a person holds directorship in excess of the prescribed limit:

• A penalty of ₹2,000 per day is imposed for each day during which the contravention continues
• The maximum penalty is capped at ₹2,00,000

This penalty provision was strengthened to discourage individuals from accepting multiple directorships beyond permissible limits.

The imposition of a daily penalty reflects the seriousness of the violation and ensures continuous compliance.

Interaction with Listing Requirements

In addition to statutory limits, listed companies are subject to further restrictions under regulatory frameworks such as Clause 49 of the Listing Agreement.

These additional limits include:

• A person cannot serve as an independent director in more than seven listed companies
• If a person is a whole-time director in a listed company, the number of independent directorships is restricted to three listed companies

These restrictions are designed to enhance the effectiveness and independence of directors in listed entities, where governance standards are more stringent.

Conclusion

Section 165 of the Companies Act, 2013 plays a crucial role in regulating the number of directorships held by individuals. By limiting the number of companies in which a person can serve as a director, the law ensures effective management, accountability, and better corporate governance.

The provision strikes a balance between allowing professional expertise across multiple companies and preventing over-commitment. It also empowers companies to impose stricter limits where necessary, thereby enhancing governance standards.