Section 178 deals with the Nomination and Remuneration Committee (NRC) and Stakeholders Relationship Committee (SRC) under Companies Act 2013. The Following article is an detailed explanation of Nomination and Remuneration Committee, Duties of Nomination and Remuneration Committee, Nomination and Remuneration Committee under the Listing Agreement along with the Stakeholders Relationship Committee under the Companies Act 2013.
The Companies Act, 2013 and corresponding rule, Companies (Meetings of Board and its Powers) Rules, 2014 has mandated the constitution of Nomination and Remuneration Committee and Stakeholders Relationship committee for certain classes of Companies, which was already recommendatory under clause 49 of the Listing agreement.
The Board of Directors of every listed company and other prescribed class of Companies (Same Prescription as per Audit Committee shall constitute a nomination and remuneration committee constituting of not less than 3 non-executive director out of which not less than half shall be Independent Director.
The Board of Directors of the company which consist more than 1000 shareholders/debenture holders/deposit holder/any other security holder at any time during financial year shall constitute stakeholders relationship committee with Chairman as non-executive Director.
Nomination and Remuneration Committee (NRC)
The Nomination and Remuneration Committee helps the Board of Directors in the preparations relating to the election of members of the Board of Directors, and in handling matters within its scope of responsibility that relate to the conditions of employment and remuneration of senior management, and to management’s and personnel’s remuneration and incentive schemes. The responsibilities of the Remuneration and Nomination Committee are defined in its policy document.
Except for certain large listed companies, the importance of constitution of the Nomination and Remuneration Committee has not been realised fully in India.
The Board of directors of following companies shall constitute Nomination and Remuneration Committee of the Board :
- Every listed Companies; or
- The following class of companies –
- all public companies with a paid up capital of ten crore rupees or more;
- all public companies having turnover of one hundred crore rupees or more;
- all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more.
The committee shall consist of three or more non-executive directors out of which not less than one-half shall be independent directors.
The chairperson of the company may be appointed as member, but shall not chair such committee.
The Committee shall identify the person qualified to become directors and may be appointed in senior management and recommend their appointment and removal and also carry out evaluation of every director.
The Committee shall formulate the criteria, for determining qualifications, positive attributes and independence of a director and recommend to the Board the policy relating to remuneration for directors, KMPs and other employees.
While formulating its policy, the Nomination and Remuneration Committee shall ensure that
- The level and composition of remuneration is reasonable and sufficient to attract, retain and motivate the directors
- Relationship of remuneration to performance is clear and meets appropriate performance benchmarks and
- Remuneration to Directors, KMP and senior management involves a balance between fixed and incentive pay reflecting short and long term performance objectives which are suited to the working of the company and its objectives.
The Nomination and Remuneration Committee shall, while formulating the policy under sub-section (3) 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:
Provided that such policy shall be disclosed in the Board’s report. Be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders.
Duties of the Nomination and Remuneration Committee
The duties of the Nomination and Remuneration Committee have now been specified. They include
- identifying 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;
- 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, KMP and other employees.
Nomination and Remuneration Committee under the Listing Agreement
In terms of the recently amended Clause 49 of the Listing Agreement which will take effect from October 1, 2014, companies are required to constitute Nomination and Remuneration Committee.
The provisions with regard Nomination and Remuneration Committee is as under:
A. The company shall set up a nomination and remuneration committee which shall comprise at least three directors, all of whom shall be non-executive directors and at least half shall be independent. Chairman of the committee shall be an independent director.
B. The role of the committee shall, inter-alia, include the following:
- Formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration of the directors, key managerial personnel and other employees;
- Formulation of criteria for evaluation of Independent Directors and the Board;
- Devising a policy on Board diversity;
- Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the Board their appointment and removal. The company shall disclose the remuneration policy and the evaluation criteria in its Annual Report.
C. The Chairman of the nomination and remuneration committee could be present at the Annual General Meeting, to answer the shareholders’ queries. However, it would be up to the Chairman to decide who should answer the queries.
The Stakeholders Relationship Committee
Section 178(5) of the Companies Act, 2013 provides for constitution of the Stakeholders Relationship Committee.
The Board of a company that has more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year is required to 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.
The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company.
Who can attend the general meeting of the company on behalf of committee constituted under this section?
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.
Penalty for Contravention
The company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees. 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 not less than rupees twenty five thousand but which may extend to one lakh rupees or with both.
The non-consideration of resolution of any grievance by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this section.
Schedule IV under Section 149(7) of the Act contains the Code for Independent Directors. Under Sl. No. II (5) of the Code, Independent Directors are mandated to safeguard the interest of all stakeholders, especially the Minority Shareholders and balance the conflicting interests of the stakeholders.
It may be noted that listed companies are presently governed by the provisions of the Listing agreement executed with the various stock exchange(s). The provisions of Section 49 of the Listing Agreement mandate a mechanism for redressal of shareholder grievances.
Section 49 (IV) (G) (iii) of the Listing Agreement provides as under:
A board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall be designated as ‘Shareholders/Investors Grievance Committee’.
Further, Listed Companies are also required to include the following information in the report on Corporate Governance forming part of their Annual Report:
- Name of non-executive director heading the committee;
- Name and designation of compliance officer;
- Number of shareholders’ complaints received so far;
- Number not solved to the satisfaction of shareholders;
- Number of pending complaints.
With regard to investor redressal relating to Listed Companies, SEBI has also launched SCORES (SEBI Complaints Redress System) enabling investors to lodge and follow up their complaints and track the status of redressal of such complaints online from the above website from anywhere.
This also enables the market intermediaries and listed companies to receive the complaints online from investors, redress such complaints and report redressal online. All the activities starting from lodging of a complaint till its closure by SEBI would be online in an automated environment and the complainant can view the status of his complaint online.
An investor, who is not familiar with SCORES or does not have access to SCORES, can lodge complaints in physical form at any of the offices of SEBI. Such complaints would be scanned and also uploaded in SCORES for processing.
The requirement for a Stakeholders Relationship Committee is an interesting one. Relationships with stakeholders can be critical, and balancing the contending interests of different stakeholder groups and building mutually beneficial relationships with stakeholders are hallmarks of the effective board.
Again minimum compliance would be to establish a committee and hope it does not get in the way or prove a distraction. More benefit might be derived from using such a provision as a catalyst to identify and/or reassess the nature, interests and priorities of different stakeholder groups, the current state of relationships with them and how these might be improved.
Direction should be seen as a separate but complementary activity to management, rather than as a route to elevated status and higher earnings. Directors need to look beyond functional considerations and work for the best interests of the company and its stakeholders. Their perspective should be strategic rather than departmental.
Directors must reconcile the concerns of various stakeholder groups, and respect views of colleagues who may have a different perspective. Non-financial considerations need to be taken into account.
All the above information based on the Companies Act 2013. The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. So better understanding kindly cross-check the relevant Sections and rules under the Companies Act,2013.
- 1 Introduction
- 2 Nomination and Remuneration Committee (NRC)
- 3 The Stakeholders Relationship Committee
- 4 Penalty for Contravention
- 5 Section 49 (IV) (G) (iii) of the Listing Agreement provides as under:
- 6 Conclusion