Companies Act Section 178 — Nomination and Remuneration Committee and Stakeholders Relationship Committee
CHAPTER XII MEETINGS OF BOARD AND ITS POWERS
Commercial / Corporate
Summary
Sub-section (1) requires the Board of Directors of every listed public company, and any other class of companies as may be prescribed, to set up a Nomination and Remuneration Committee. This committee must have three or more non-executive directors, and at least half of them must be independent directors. The chairperson of the company, whether executive or non-executive, may be a member of this committee but cannot chair it.
Sub-section (2) states that the Nomination and Remuneration Committee must identify people who are qualified to become directors or to be appointed to senior management, based on set criteria. It must recommend to the Board their appointment and removal, and must specify how the performance of the Board, its committees, and individual directors will be evaluated, whether by the Board, the committee itself, or an independent external agency, and must review how that evaluation is implemented and complied with.
Sub-section (3) requires the Nomination and Remuneration Committee to create criteria for determining a director's qualifications, positive attributes, and independence. It must also recommend to the Board a policy on remuneration for directors, key managerial personnel, and other employees.
Sub-section (4) sets out what the committee must ensure when formulating the remuneration policy under sub-section (3). Under clause (a), the level and composition of remuneration must be reasonable and sufficient to attract, retain, and motivate directors of the quality needed to run the company successfully. Under clause (b), the relationship between remuneration and performance must be clear and meet appropriate performance benchmarks. Under clause (c), remuneration for directors, key managerial personnel, and senior management must balance fixed and incentive pay, reflecting both short-term and long-term performance objectives suited to the company's working and goals. The proviso to this sub-section adds that this policy must be placed on the company's website, if one exists, and the salient features of the policy and any changes to it, along with the web address of the policy, must be disclosed in the Board's report.
Sub-section (5) requires the Board of Directors of a company that has more than one thousand shareholders, debenture-holders, deposit-holders, or any other security holders at any time during a financial year to constitute a Stakeholders Relationship Committee. This committee must have a chairperson who is a non-executive director, and such other members as the Board decides.
Sub-section (6) states that the Stakeholders Relationship Committee must consider and resolve the grievances of the security holders of the company.
Sub-section (7) requires the chairperson of each committee constituted under this section, or in their absence, any other member of the committee authorised by the chairperson, to attend the general meetings of the company.
Sub-section (8) provides that if there is any contravention of the provisions of section 177 and this section, the company shall be punishable with a fine of not less than one lakh rupees but which may extend to five lakh rupees. Every officer of the company who is in default shall be liable to a penalty of five lakh rupees, and every officer of the company who is in default shall be liable to a penalty of one lakh rupees. The proviso states that the inability to resolve or consider any grievance by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this section.
The Explanation clarifies that the expression senior management means personnel of the company who are members of its core management team, excluding the Board of Directors, and includes all members of management one level below the executive directors, including the functional heads.
Official Text
(1) The Board of Directors of 3[every listed public company] and such other class or classes of companies, as may be prescribed shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors:
Provided that the chairperson of the company (whether executive or non-executive) may be appointed as a member of the Nomination and Remuneration Committee but shall not chair such Committee.
(2) The Nomination and Remuneration Committee shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and 1[shall specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance].
(3) The Nomination and Remuneration Committee shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees.
(4) The Nomination and Remuneration Committee shall, while formulating the policy under sub-section (3) ensure that—
(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;
(b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and
(c) remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals: 2[Provided that such policy shall be placed on the website of the company, if any, and the salient features of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the Board's report.]
(5) The Board of Directors of a company which consists of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at anytime during a financial year shall constitute a Stakeholders Relationship Committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the Board.
(6) The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company.
(7) The chairperson of each of the committees constituted under this section or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.
(8) In case of any contravention of the provisions of section 177 and this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be 3[liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of one lakh rupees]:
Provided that 4[inability to resolve or consider any grievance] by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this section.
Explanation.—The expression “senior management” means personnel of the company who are members of its core management team excluding Board of Directors comprising all members of management one level below the executive directors, including the functional heads.