Who Picks Directors and Sets Their Pay? The NRC and Stakeholders Committees Under Section 178

Boards that appoint their own successors and set their own pay invite an obvious question: who is watching? Section 178 of the Companies Act, 2013 answers it with two committees. The Nomination and Remuneration Committee (NRC) finds directors, designs how the board is evaluated and recommends the pay policy. The Stakeholders Relationship Committee (SRC) resolves the grievances of security holders once a company's holder count crosses a threshold. This guide covers the people-and-pay half of the committee structure. The audit committee under section 177 is the money-and-controls half. The two sections share one penalty provision.

Legal basis: Companies Act, 2013, s.178, read with rule 6, Companies (Meetings of Board and its Powers) Rules, 2014.

What this means for a company

Three questions decide whether section 178 applies to you and what you must do:

Is the company a listed public company, or in a class prescribed by the Rules? If yes, it needs an NRC.
Does the company have more than one thousand security holders (shareholders, debenture-holders, deposit-holders and any other security holders) at any time in a financial year? If yes, it needs an SRC.
If either committee exists, can the board show a written paper trail: constitution, criteria, pay policy, website publication, and committee chairs at the general meeting?

Who must have an NRC

The Act says 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 (s.178(1), Companies Act 2013). The prescribed classes sit in rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, which names listed companies and certain classes of public companies defined by paid-up capital, turnover and outstanding loans, borrowings, debentures or deposits. The test is applied to the figures in the last audited financial statements (rule 6).

The rule's monetary limits are not repeated in this guide. Because these limits are set by subordinate legislation, read the current text of rule 6 on the official portal, or ask your Company Secretary, before you conclude that a public company falls inside or outside the net. The classes named in rule 6 are public companies; a private company should still check its articles and any investor agreement, which may require an NRC by contract.

NRC composition: three or more, all non-executive, half independent

The committee must consist of "three or more non-executive directors out of which not less than one-half shall be independent directors" (s.178(1), Companies Act 2013). Three points follow.

Minimum size is three, and every member must be non-executive. Executives never sit on the committee that decides executive pay.
At least half the members must be independent directors. With three members, that means two.
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" (proviso to s.178(1)). Membership is allowed; chairing is forbidden. The NRC therefore needs its own chair, drawn from the independent or non-executive members.

What the NRC does

Section 178 gives the NRC four jobs.

1. Identify and recommend. The 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" (s.178(2)). It is the front door for director appointments and for removal proposals.

2. Design the evaluation. The same sub-section requires the NRC to "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" (s.178(2)). The committee does not have to carry out every evaluation itself, but it must choose who does, record how, and review whether it happened.

3. Set the criteria. The NRC "shall formulate the criteria for determining qualifications, positive attributes and independence of a director" (s.178(3)).

4. Recommend the pay policy. The NRC recommends to the Board "a policy, relating to the remuneration for the directors, key managerial personnel and other employees" (s.178(3)). The Board then adopts or revisits it.

"Senior management" in this section 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" (Explanation to s.178). That is the layer the NRC watches beneath the board itself.

The appointment itself remains a matter for the Board and the members under the appointment provisions of the Act. The NRC identifies and recommends; it does not appoint.

The three tests every pay policy must meet

While formulating the policy, the NRC must "ensure that" (s.178(4)):

(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) the 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.

In practice, a policy that sets pay without stating a performance link, or that is all fixed or all variable with no explanation of the horizon, will struggle against these tests. The policy document should visibly address (a), (b) and (c) one by one.

Publication is mandatory

The proviso to s.178(4) requires that the 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." Two actions follow every adoption or amendment of the policy: update the website, and carry the salient features, any changes and the web address in the Board's report for that year.

The Stakeholders Relationship Committee

An SRC is needed where a company "consists of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at anytime during a financial year" (s.178(5), Companies Act 2013). Three consequences:

The count covers every class of security holder, not only equity shareholders, added together.
The test is "at anytime during a financial year". Crossing the line even briefly in the year engages the duty. Do not rely on the year-end register alone.
The chair must be a non-executive director; the other members are "as may be decided by the Board" (s.178(5)).

The SRC's function is stated in one line: it "shall consider and resolve the grievances of security holders of the company" (s.178(6)). Typical matters are delayed transfers, unpaid dividends, and late debenture interest.

The Act protects good-faith effort. The proviso to s.178(8) says that "inability to resolve or consider any grievance" by the SRC "in good faith shall not constitute a contravention of this section." A committee that genuinely considered a grievance and could not resolve it is not in breach for that reason alone. Keep the minutes that show it considered the matter.

Committee chairs must attend general meetings

"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" (s.178(7)). The NRC chair and the SRC chair should be on the AGM attendance plan. A member may ask the NRC chair why a pay policy looks as it does or ask the SRC chair about a stuck grievance. Where the chair cannot attend, record the written authorisation of another member.

What a contravention costs

Section 178(8) deals with contraventions of section 177 and section 178 together: "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 is also exposed to a penalty under the same sub-section. The printed wording of the officer limb in the consolidated Act has a drafting repetition following a 2020 amendment (Act 29 of 2020, s.36), so this guide states the company fine, which is clear, and does not quote an officer figure. Check the current officer amount on the official text before quoting it to a client.

The effect of the joint penalty is practical: a company that builds the audit committee but ignores the NRC or the SRC is exposed under the same sub-section.

A worked flow: appointing an independent director

Take a public company that falls within the prescribed class and needs an independent director.

The NRC applies its criteria on qualifications, positive attributes and independence (s.178(3)) and identifies candidates (s.178(2)).
It recommends the chosen candidate to the Board (s.178(2)).
The NRC records how the new director, the board and the committees will be evaluated, and who will conduct the evaluation (s.178(2)).
The pay policy under s.178(4), including any sitting fee or commission, is checked against the three tests.
The Board's report carries the salient features of the policy and any change, with the website address, and the policy is on the website.
At the general meeting, the NRC chair or an authorised member attends and can answer questions on the choice and the pay (s.178(7)).

A board that hires without this record has an appointment its members cannot easily verify and a policy the website does not show.

Reading sections 177 and 178 as one machine

The audit committee watches money and truth: financial statements, auditors, related party transactions and internal controls. The NRC watches people and pay. The SRC watches holders and their grievances. All three draw on the same Board's report and the same general meeting, and s.178(8) prices a failure in either section in one sentence. Constituting one committee and deferring the others leaves the structure incomplete.

What to do now

Next step: Check whether the company is a listed public company or falls in a class prescribed by rule 6, Companies (Meetings of Board and its Powers) Rules, 2014 (s.178(1)). Check the number of security holders at any time in the financial year against the SRC trigger (s.178(5)).
If required: Constitute the NRC with three or more non-executive directors, at least half independent, and a chair who is not the company's chairperson (s.178(1)). Have the Board adopt a criteria and pay policy that meets the three tests (s.178(3), (4)), publish it on the website, and carry its salient features in the Board's report (proviso to s.178(4)).
Deadline: Section 178 does not itself prescribe a calendar date. Plan the committee constitution and the policy publication before the Board's report is finalised.
Consequence: Contravention of section 177 or 178 attracts a company fine of one lakh to five lakh rupees, plus exposure for officers in default (s.178(8)). Good-faith inability of the SRC to resolve a grievance is not a contravention (proviso to s.178(8)).

Have a CA review your facts before you act or file.

FAQ

Which companies need an NRC?
Every listed public company, and the classes prescribed by rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 (s.178(1)). The committee needs three or more non-executive directors, with at least half independent.

Can the chairperson of the company chair the NRC?
No. The company's chairperson may be a member but "shall not chair" the committee (proviso to s.178(1)).

What must the pay policy satisfy?
Reasonable and sufficient pay, a clear performance link with benchmarks, and a balance of fixed and incentive pay across short and long-term objectives (s.178(4)). It must be on the company's website, if any, with salient features in the Board's report.

When is an SRC required?
When the company has more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year (s.178(5)). It must be chaired by a non-executive director.

What happens if the SRC cannot resolve a grievance?
Inability to resolve or consider a grievance in good faith is not a contravention (proviso to s.178(8)).

What does a contravention cost?
A company fine of one lakh to five lakh rupees, with officers in default also liable under the same sub-section (s.178(8)).

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