Section 178 of Companies Act 2013: Nomination and Remuneration Committee and Stakeholders Relationship Committee
Section 178 of the Companies Act, 2013 provides the statutory framework for the Nomination and Remuneration Committee and the Stakeholders Relationship Committee. It deals with committee composition, selection and evaluation of directors and senior management, remuneration policy, security-holder grievances and penalties for non-compliance.
Meaning and purpose of Section 178
The Nomination and Remuneration Committee, commonly called the NRC, supports the Board in identifying suitable directors and senior management personnel, setting objective criteria for appointments and independence, overseeing the manner of performance evaluation, and recommending a remuneration policy. The Stakeholders Relationship Committee, commonly called the SRC, focuses on the interests and grievances of security holders.
- Sub-section (1): constitution and composition of the Nomination and Remuneration Committee.
- Sub-sections (2) to (4): appointment criteria, performance evaluation and remuneration policy.
- Sub-sections (5) and (6): constitution and functions of the Stakeholders Relationship Committee.
- Sub-section (7): attendance of the committee chairperson or authorised member at general meetings.
- Sub-section (8): monetary penalties for contravention, subject to the statutory good-faith protection relating to stakeholder grievances.
Nomination and Remuneration Committee under Section 178(1)
The Board of every listed public company and such other prescribed classes of companies must constitute a Nomination and Remuneration Committee. The committee must consist of three or more non-executive directors, of whom not less than one-half must be independent directors.
The chairperson of the company, whether executive or non-executive, may be a member of the NRC but cannot chair the committee.
Functions of the Nomination and Remuneration Committee
Identification and recommendation of directors and senior management
Under Section 178(2), the NRC identifies persons qualified to become directors and persons who may be appointed in senior management according to the criteria laid down by the committee. It recommends their appointment and removal to the Board.
Performance evaluation
The NRC must specify the manner for effective evaluation of the performance of the Board, its committees and individual directors. The evaluation may be carried out by the Board, by the NRC or by an independent external agency. The NRC must also review implementation and compliance with the evaluation process.
Qualifications, positive attributes and independence
Section 178(3) requires the NRC to formulate criteria for determining the qualifications, positive attributes and independence of a director and to recommend to the Board a policy relating to remuneration of directors, key managerial personnel and other employees.
Remuneration policy under Section 178(4)
While formulating the remuneration policy, the NRC must ensure that the level and composition of remuneration are reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully. The relationship between remuneration and performance should be clear and should meet appropriate performance benchmarks.
The remuneration structure for directors, key managerial personnel and senior management should maintain an appropriate balance between fixed and incentive pay and should reflect short-term and long-term performance objectives suited to the company and its goals.
The policy must be placed on the company's website, if it has one. The salient features of the policy and changes to it, together with the web address of the policy where applicable, are to be disclosed in the Board's report.
Stakeholders Relationship Committee under Section 178(5)
A company that has more than one thousand shareholders, debenture-holders, deposit-holders and other security holders at any time during a financial year must constitute a Stakeholders Relationship Committee. Its chairperson must be a non-executive director, with other members as decided by the Board.
Functions of the Stakeholders Relationship Committee
Under Section 178(6), the SRC must consider and resolve grievances of security holders of the company. For listed entities, Regulation 20 of the SEBI LODR Regulations contains additional requirements concerning the constitution and role of the Stakeholders Relationship Committee.
Attendance at general meetings
Section 178(7) requires the chairperson of each committee constituted under the section, or in the chairperson's absence another member authorised for this purpose, to attend the general meetings of the company.
Penalty under Section 178(8)
For contravention of Section 177 or Section 178, the company is liable to a penalty of Rs. 5,00,000 and every officer of the company who is in default is liable to a penalty of Rs. 1,00,000. The earlier criminal punishment language was replaced by the Companies (Amendment) Act, 2020 with effect from 21 December 2020.
However, inability of the Stakeholders Relationship Committee to resolve or consider a grievance in good faith does not by itself constitute a contravention of Section 178.
Meaning of senior management
For Section 178, "senior management" means personnel who are members of the company's core management team, excluding the Board of Directors, and includes members of management one level below the executive directors, including functional heads.
Related rules and SEBI requirements
| Provision | Relevance |
|---|---|
| Section 178, Companies Act, 2013 | Core statutory provisions governing the NRC and SRC. |
| Rule 6, Companies (Meetings of Board and its Powers) Rules, 2014 | Addresses classes of companies required to constitute the Audit Committee and NRC, read with the prescribed framework. |
| Regulation 19, SEBI LODR Regulations | Additional composition, meeting, quorum and role requirements for the NRC of listed entities. |
| Regulation 20, SEBI LODR Regulations | Additional composition, meeting and role requirements for the Stakeholders Relationship Committee of listed entities. |
Practical compliance points
Companies covered by Section 178 should periodically verify committee composition, independence requirements, Board-approved terms of reference, performance-evaluation procedures, the remuneration policy, website and Board-report disclosures, records of stakeholder grievances and committee attendance. Listed entities should separately verify the latest SEBI LODR requirements because those requirements operate in addition to the Companies Act framework.
This article is a general legal reference. Applicability can depend on the type of company, listing status, prescribed thresholds and amendments in force on the relevant date.