Companies Act Section 178

Companies Act Section 178: Nomination and Remuneration Committee and Stakeholders Relationship Committee

1. Establishment of the Nomination and Remuneration Committee

Under the provisions of Section 178 of the Companies Act, it is mandated that the Board of Directors of every listed public company, as well as other prescribed classes of companies, must establish a Nomination and Remuneration Committee. This committee must consist of at least three or more non-executive directors, with at least half of the members being independent directors.

Additionally, while the Chairperson of the company, whether executive or non-executive, may be appointed as a member of the Nomination and Remuneration Committee, they are prohibited from acting as the Chairperson of this committee to ensure objectivity in decision-making.

2. Responsibilities and Functions of the Nomination and Remuneration Committee

The Nomination and Remuneration Committee is entrusted with various key responsibilities, which include:

(a) Identification of Qualified Candidates: The committee is responsible for identifying individuals who are qualified to be appointed as directors and those who may assume senior management roles within the company. These appointments must align with the prescribed criteria for qualifications and competency as laid down by the company’s governance policies.

(b) Recommendation for Appointment and Removal: The committee evaluates and recommends the appointment and removal of directors and senior management personnel, ensuring alignment with corporate governance practices and business objectives.

(c) Performance Evaluation: The committee is also responsible for establishing an effective framework for the evaluation of performance of the Board, its committees, and individual directors. This evaluation process may be conducted by the Board itself, the Nomination and Remuneration Committee, or an independent external agency, and the committee must oversee the implementation and compliance of the evaluation results.

(d) Formulation of Qualification and Remuneration Criteria: The committee must define the criteria for determining:

The qualifications required for directors and senior executives.
The positive attributes and skills necessary for board members.
The independence standards for independent directors.
(e) Policy on Director and Employee Remuneration: The committee is tasked with recommending a remuneration policy for directors, key managerial personnel (KMPs), and other employees. The policy should ensure that:

The level and composition of remuneration is fair and sufficient to attract, retain, and motivate high-caliber individuals to lead the company successfully.
The remuneration structure is linked to performance metrics and clearly defined benchmarks.
There is an appropriate balance between fixed and variable pay, considering both short-term and long-term company objectives.
(f) Disclosure Requirements: The company must publish the remuneration policy on its official website, if available. Additionally, the Board’s report must include a disclosure of key highlights of the policy along with the web address for easy reference by stakeholders.

3. Establishment of the Stakeholders Relationship Committee

In addition to the Nomination and Remuneration Committee, companies that have more than one thousand shareholders, debenture-holders, deposit-holders, or any other security holders at any given time during a financial year must also establish a Stakeholders Relationship Committee.

This committee is composed of members decided by the Board, with the Chairperson being a non-executive director.

4. Functions and Responsibilities of the Stakeholders Relationship Committee

The primary function of the Stakeholders Relationship Committee is to ensure prompt resolution of grievances raised by security holders. These grievances may include issues related to:

Transfer and transmission of shares.
Non-receipt of dividends, interest, or redemption proceeds.
General concerns raised by shareholders and investors regarding corporate governance or financial disclosures.
5. Attendance and Governance of Committee Meetings

The Chairperson of each committee constituted under this section is required to be present at the general meetings of the company. In cases where the Chairperson is unable to attend, another committee member who has been duly authorized shall attend in their place.

6. Penalties for Non-Compliance

Any company that fails to comply with the provisions outlined under Section 177 (Audit Committee) or Section 178 (Nomination and Remuneration Committee and Stakeholders Relationship Committee) will be subject to financial penalties as follows:

The company shall be liable for a fine ranging from INR 1 lakh to INR 5 lakh.
Every officer of the company in default shall be subject to a penalty of INR 5 lakh.
However, an exception is provided in cases where the Stakeholders Relationship Committee is unable to resolve a grievance in good faith due to genuine constraints. In such cases, the inability to resolve the concern shall not be considered a contravention of the Companies Act.

7. Definition of Senior Management

For the purpose of this section, senior management includes all personnel who are part of the core management team, excluding Board of Directors. This category comprises individuals one level below the executive directors, including functional heads.