Amended and updated notes on section 178 of Companies Act 2013. Detail discussion on provisions and rules related to Nomination and Remuneration Committee and Stakeholders Relationship Committee.
Chapter XII (Sections 173–195) of the Companies Act, 2013 (CA 2013) deals with the provisions related to meetings of board and its powers. Section 178 of CA 2013 provides for Nomination and Remuneration Committee and Stakeholders Relationship Committee.
Recently, we have discussed in detail section 177 (Audit Committee) of CA 2013. Today, we learn the provisions of section 178 of Companies Act 2013.
The provisions of section 178 are effective from 1-April-2014. You may refer Notification No. S.O. 902(E) issued dated 1-04-2014. In this article, you will learn detail of the provisions of section 178 of the Companies Act 2013 read with the Companies (Meetings of Board and its Powers) Rules, 2014.
| Name of Act | The Companies Act 2013 |
|---|---|
| Enacted by | Parliament of India |
| Administered by | Ministry of Corporate Affairs (MCA) |
| Number of Chapters | 29 |
| Number of Sections | 484 (470-43+57) |
| Number of Schedules | 7 |
| You are reading: | |
| Chapter No. | XII |
| Chapter Name | Meetings of Board and its Powers |
| Section No. | 178 |
| Section Name | Nomination and Remuneration Committee and Stakeholders Relationship Committee |
| Monthly Updated Edition | Company Law PDF |
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
iii) Both.
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.
Section 178 of Companies Act 2013: Nomination and Remuneration Committee and Stakeholders Relationship Committee
Section 178 shall come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014.
(1) The Board of Directors of 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 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:
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 any time 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 punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both:
Provided that 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.
Exception/ Modification/ Adaptation:
1) 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. – Notification No. G.S.R. 463(E) dated 5th June, 2015.
2) In case of Section 8 (Non-profit) Companies, section 178 shall not apply. – Notification No. G.S.R. 466(E) dated 5th June, 2015.
3) In case of specified IFSC public company, section 178 shall not apply. –Notification No. G.S.R. 08(E) dated 4th January, 2017