Can a government employee be a director in a private company?

This article will talk about the role of a director. This article will discuss the conditions and restrictions under which a government employee can be a director in a private company.
Estimated Reading Time: 9 minutes

Introduction

Every company which is formed under the Companies Act is mandatory to appoint a director. The act also provides a qualification of the directors who should be appointed. Good corporate governance requires the directors to be trustworthy and dutiful. Therefore, a person who is already holding an office of profit cannot be a director in any company. A government employee is a person employed by the central or state of local government. If a government employee is appointed as a director of a private company then he is holding two offices of profit. This article will talk about the role of a director. This article will discuss the conditions [1]and restrictions under which a government employee can be a director in a private company.

Meaning of Board of Director

As per section 149 of Indian Companies Act 2013, every company registered under the act is required to appoint a board of directors. It provides the qualification such as the director should be a person of integrity and possesses expertise and experience. Another mandatory condition is a person who wants to be a director in a company must have Director Identification Number (DIN). A director manages the affairs of a company. He is responsible for taking major decisions like a merger, acquisition, remuneration of key managerial personnel. He also represents the interests of the shareholders and conducts the operations of the company in a manner that will benefit the shareholders. A director is also a recruiter of top-level officers of the company. He is responsible for executing all the necessary documents on behalf of the company. A director plays three kinds of roles in a company: as a trustee of the company; as an agent of the company; as an officer of the company. Director is entrusted with the assets of the company. He must utilize the assets in the best interest of the company. Thus, he acts as a trustee of the company. A director is also an officer because he provides his skills and labour in exchange of remuneration. A company is an artificial juristic person, it cannot act on its own. Directors are also categories on the basis of their working pattern or hours, a director who is not working full-time in the company is known as the Non-executive director and the director who is present as well as working for whole-time in the company is known as Whole time Director. Therefore, directors are appointed who runs the company to fulfil the aim and purpose stated in the memorandum of association of the company. Thus, director has a vital role in the success of a company.

Can a Government Employee be a Director in a private company

Now when we think about the appointment of a government employee as a director of a private company, we must know some facts. It is necessary to know the seriousness of public service jobs. A government employee is a servant of public therefore he needs to be responsible. The government employees are respected and honoured for their commitment to the service. A government employee is a person who is employed as a public servant by the central or state or local government. The Central Civil Services (Conduct) Rules, 1964 defines the term ‘government servant’ as any person appointed by the Government to any civil service or post in connection with the affairs of the Union and includes a civilian in a Defence Service. Explanation under this states that a government servant whose services are placed at the disposal of a company, corporation, organization or a local authority by the Government shall, for the purpose of these rules, be deemed to be a Government servant serving under the Government irrespective of the fact that his salary is drawn from sources other than the Consolidated Fund of India.[2]As per Rule 3 of Central Civil Services (Conduct) Rules, 1964, a government servant must maintain absolute integrity and devotion to duty. He must not do anything which is inappropriate for a government servant.

Legal Provisions governing government employees

Rule 15 sub-rules 1 of Central Civil Services (Conduct) Rules, 1964 prohibits the government employee from involving in private trade or employment. The rule stipulates that only after the grant of permission by the government, a government servant shall:[3]

  1. Engage him directly or indirectly in any trade or business.
  2. Apply for or undertake any other employment.
  3. Hold an elective office whether incorporated or not, or campaign for a candidate or candidates for an elective office.
  4. Advertise any business of insurance agency, commission agency, etc., owned or managed by any member of his family.
  5. Participate in the registration, promotion or management of any bank or other company registered or required to be registered, under the Companies Act, 1956or any other law for the time being in force, or of any co-operative society for commercial purposes. Though he can do such as in the discharge of his official duties.
  6. Participate or involved in any manner in the making of:
  7. A sponsored media (radio or television) programme.
  8. A media programme commissioned by Government media but produced by a private agency.
  9. A privately produced media programme including video magazine.

Proviso under this sub-rule states that no previous permission is necessary in the case where the Government servant participates in a programme produced or commissioned by Government media in his official capacity[4]

Sub-rule 2 of Central Civil Services (Conduct) Rules, 1964 provides that a government employee may without the previous permission of the government involve in following acts:[5]

  1. He can carry out honorary work of a social or charitable nature.
  2. He can carry out occasional work of a literary, artistic or scientific character.
  3. He can participate in sports activities as an amateur.
  4. He can participate in the registration, promotion or management (but cannot hold an elective office) of a literary, scientific or charitable society or of a club or similar organisation, the aims or objects of which relate to promotion of sports, cultural or recreational activities, registered under the Societies Registration Act, 1860, or any other law for the time being in force.
  5. He can participate in the registration, promotion or management (but cannot hold an elective office) of a co-operative society substantially for the benefit of Government servants, registered under the Co-operative Societies Act, 1912, or any other law for the time being in force.

Proviso under this sub-rule states that:[6]

  1. He should stop taking part in such activities, if so directed by the Government.
  2. His official duties shall not suffer if he is engaging himself in any activity under clause (d) or clause (e) of this sub-rule. He shall, within a period of one month of his taking part in such activity, report to the Government giving details of the nature of his participation.
  3. Every Government servant has to report to the Government if any member of his family is engaged in a trade or business or owns or manages an insurance agency or commission agency.
  4. No Government servant may accept any fee for any work done by him for any private or public body or any private person without the sanction of the prescribed authority. Though he can accept such fee if he is allowed to do so by general or special orders of the Government,

Sub-rule 1 of Rule 15 by the government has restricted the government servant from engaging directly or indirectly in any kind of trade of business. They cannot start a business in their name as long as they are serving the public under anybody of government. Any family member can run any business with their name but the government officer shall not use his/her authority to aid that business. Central Civil Services (Conduct) Rules, 1964 prohibit a government employee from holding the office of the director of a private company. Clause 5 of Sub-rule 1 of Rule 15 prohibits a government employee from being a part of the management of a private company. The rationale behind this rule is a person who is employed by the government for the service of the public must not divert his focus and attention from his job. A person cannot concentrate on two jobs at the same time. He cannot spend his focus, attention, and expertise in two jobs simultaneously and achieve excellence at both the jobs. Another reason behind this rule is both the jobs of director and government servant pays remuneration. A government employee cannot hold two office of profit at the same time. Therefore, this rule prohibits a government employee from being a director in a private company.

Also, when we read sub-rule 2 it is evident that a government employee can engage in charitable work or recreational activity. They can manage any charitable or recreational society. They do not need the permission of the government for such kind of works. Thus, it suggests that a government employee cannot be involved in any private company but can be a part of any social or charitable activity.

Another rule which prohibits the government employee to be a director in a private company is Rule 13 Sub-rule (g) of THE ALL INDIA SERVICES (CONDUCT) RULES, 1968. It provides no government employee shall involve or engage himself in the registration, promotion, management of other kinds of activities of any non-Governmental organization if the same is aided by the Central Government, State Government or an international organization or agency.[7] Thus, a government employee is completely banned from involving in any other job than the position held by him under the government. He cannot even manage a non-government organization which is aided by the government in any manner. Due to this rule, every way has been closed, from which the government employee could become the director of the private company.

A government employee can only become a director of a company with the previous sanction of the government. Every person who is a government employee must first get permission from the government and then only he can become a director of a private company. He has to vacate the office of profit he is holding under the government. An individual cannot hold two offices where both of them are the office of profit. Also, the government needs their employee to be totally devoted to the service of the public. A government employee must maintain his integrity while providing his service. Therefore, any distraction is prohibited whether it is serving in any private company or starting own business.

Conclusion

It is apparent that a director is one who manages the everyday affairs of the company. The job of the director is burdensome. He is entitled to remuneration from the company for the labour he devotes to the company. A director plays threefold role in the organisation. Also, we saw that a government employee cannot be a director in a private company unless he has obtained the permission of the government to be so. The rationale behind these rules is the job of government employees requires extreme focus and commitment because they are serving the public of our country. So, they are prohibited from involving themselves in any other activity which will divert their focus and concentration from their job under the government. Another intention of the government behind this rule is a person should not obtain an excessive advantage by holding two offices of profit. If a government employee is director of a private company then he can avail salary from government job and remuneration from the private company along with the sitting fees. The law does not allow a person to hold two office of profit. Also, if he is holding two positions simultaneously then he might not be able to focus on the jobs appropriately. Therefore, it can be concluded that a government employee cannot be a director in a private company due to the prohibition imposed by the service rules of the government. But after obtaining the permission of the government and vacating the officer he is holding under the government a person can become the director of a private company.

Also read Can a Government Employee be a Director in a Private Company?


[1] Rule 2 sub-rule (b) of Central Civil Services (Conduct) Rules, 1964.

[2] Explanation under Rule 2 of Central Civil Services(Conduct) Rules, 1964.

[3] Rule 15 of Central Civil Services (Conduct) Rules, 1964, https://dopt.gov.in/forewordnotification#7

[4] Ibid.

[5] Rule 15 sub-rule 2 Central Civil Services (Conduct) Rules, 1964.

[6] Rule 15 sub-rule 2 of Central Civil Services (Conduct) Rules, 1964

[7] Rule 13 sub-rule g of ALL INDIA SERVICES (CONDUCT) RULES, 1968. https://dopt.gov.in/sites/default/files/Revised_AIS_Rule_Vol_I_Rule_10.pdf

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