Chapter-XII (Section 173–195) of the Companies Act, 2013 (CA 2013) deals with the provisions related to meetings of board of directors of a company and its powers. Section 178 of CA 2013 specifically provides for Nomination and Remuneration Committee and Stakeholders Relationship Committee. Section 178 come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014.
Recently, we have discussed the provisions of section 177 of the Companies Act, 2013 and come to know about the Audit Committee of a company. Today, we shall discuss about the provisions of section 178 i.e. Nomination and Remuneration (NR) Committee and Stakeholders Relationship (SR) Committee. You should read section 178 of CA 2013 with the Companies (Meetings of Board and its Powers) Rules, 2014.
Nomination and Remuneration (NR) Committee
Formation of Nomination and Remuneration Committee:
A Nomination and Remuneration (NR) Committee shall be constituted by the Board of Directors of:
- Every Listed Company; and
- Such other Class or Classes of Companies, as may be prescribed.
The Central Government has now prescribed such other Class or Classes of Companies that shall constitute Nomination and Remuneration Committee of the Board. As per Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, the following companies required to constitute Nomination and Remuneration committee of the Board:
- All public companies with a paid-up capital of 10 Crore rupees or more;
- All public companies having turnover of 100 Crore rupees or more;
- All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 Crore rupees or more.
As per explanation the paid-up share capital or turnover or outstanding loans, or borrowings or debentures or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken into account for the purposes of Rule 6.
That means all companies that shall constitute an Audit Committee under section 177 of CA 2013, shall also require to constitute Nomination and Remuneration committee of the Board.
Composition of Nomination and Remuneration Committee:
The Nomination and Remuneration Committee shall consist of THREE or more non-executive directors out of which not less than ONE-HALF shall be independent directors.
As per proviso of section 178(1), the Chairman of the company (whether executive or non-executive) shall not chair the NR Committee. However, he may be appointed as a member of such NR Committee of the Board.
The chairperson of NR Committee or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.
In compliance with the provisions of sub-section (2) and sub-section (3) of section 178, 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 shall carry out evaluation of every director’s performance;
- 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.
While formulating the policy relating to the remuneration, the Nomination and Remuneration Committee shall ensure that—
- 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;
- Relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and
- 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:
Note that such policy shall be disclosed in the Board’s report.
In accordance with the explanation given under section 178, 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.
Stakeholders Relationship (SR) Committee
As per section 178(5) of CA 2013, the Board of Directors of a company which consists of more than 1000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship (SR) Committee.
SR Committee shall consist of a chairperson who shall be a non-executive director and such other members as may be decided by the Board. SR Committee shall consider and resolve the grievances of security holders of the company.
The chairperson of SR Committee or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.
Punishment for Not Complying Section 178
In case of any contravention of the provisions of section 178:
- The Company shall be punishable with fine of ₹1,00,000 – ₹5,00,000; and
- Every officer of the company who is in default shall be punishable with:
i) Up to 1 year imprisonment; or
ii) Fine of ₹25,000 – ₹1,00,000; or
Non-consideration of resolution of any grievance by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this section.
Exemption to Govt and Public Companies
However, the provisions of section 178 shall not apply in case of Section 8 (Non-profit) Companies vide Notification No. G.S.R. 466(E) dated 5th June, 2015.
Further, the specified IFSC public companies are also exempted from complying the provisions of section 178 vide Notification No. G.S.R. 08(E) dated 4th January, 2017.
Whereas, sub-sections (2), (3) and (4) of section 178 shall not apply to Government company except with regard to appointment of ‘senior management’ and other employees vide Notification No. G.S.R. 463(E) dated 5th June, 2015.