Section 16 of the Banking Regulation Act, 1949: Prohibition of Common Directors
Section 16 of the Banking Regulation Act, 1949 regulates overlapping directorships involving banking companies incorporated in India. Its purpose is to reduce conflicts of interest and preserve independent governance in banking companies.
Meaning of Section 16
In simple terms, a person who is already a director of one banking company incorporated in India cannot ordinarily be appointed as a director of another banking company. The section also deals with directors connected with companies exercising significant voting rights in a banking company and contains an exception for a director appointed by the Reserve Bank of India.
Text of Section 16 - Prohibition of common directors
(1) No banking company incorporated in India shall have as a director in its Board of directors any person who is a director of any other banking company.
(1A) No banking company referred to in sub-section (1) shall have in its Board of directors, more than three directors who are directors of companies which among themselves are entitled to exercise voting rights in excess of twenty per cent. of the total voting rights of all the shareholders to that banking company.
(2) If immediately before the commencement of the Banking Companies (Amendment) Act, 1956 (95 of 1956), any person holding office as a director of a banking company is also a director of companies which among themselves are entitled to exercise voting rights in excess of twenty per cent. of the total voting rights of all the shareholders of the banking company, he shall, within such period from such commencement as the Reserve Bank may specify in this behalf -
(a) either resign his office as a director of the banking company; or
(b) choose such number of companies as among themselves are not entitled to exercise voting rights in excess of twenty per cent. of the total voting rights of all the shareholders of the banking company as companies in which he wishes to continue to hold the office of a director and resign his office as a director in the other companies.
(3) Nothing in sub-section (1) shall apply to, or in relation to, any director appointed by the Reserve Bank.
Key requirements under Section 16
- No common banking-company director: A banking company incorporated in India cannot ordinarily have a director who is also a director of another banking company.
- Voting-rights safeguard: Sub-section (1A) limits the number of directors who also serve companies that collectively exercise voting rights above the statutory twenty per cent. threshold in the banking company.
- Historical transition rule: Sub-section (2) provided a mechanism for resolving certain overlapping directorships existing around the commencement of the 1956 amendment.
- RBI-appointed director exception: The restriction in sub-section (1) does not apply to a director appointed by the Reserve Bank of India.
Why Section 16 matters
The provision is part of the Banking Regulation Act's corporate-governance framework. It seeks to prevent excessive overlap between boards of banking companies and to reduce situations in which common directorships may create divided loyalties, concentration of influence or conflicts of interest.
Related provisions
Section 16 should be read with other governance and prudential provisions of the Act, including Section 17 on reserve fund, Section 20 on restrictions on loans and advances, Section 21 on RBI control over advances and Section 22 on licensing of banking companies.
Legislative notes
Section 16 was substituted by Act 95 of 1956, section 5, with effect from 14-1-1957.
Sub-section (1) was later substituted by Act 20 of 1994, section 7.
Sub-section (3), concerning directors appointed by the Reserve Bank, was inserted by Act 58 of 1968, section 4, with effect from 1-2-1969.
Official legal sources
For authoritative reference, consult the India Code entry for the Banking Regulation Act, 1949 and the Reserve Bank of India.
Last reviewed: 14 September 2026.