This article is written by Mansi Dixit and pursuing a Diploma in General Corporate Practice: Transactions, Governance, and Disputes.  This article has been edited by Prashant Baviskar (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Introduction

The nature of corporate governance in India is obligatory and not voluntary. It provides for companies to be the ‘gateways of good behaviour’. It is accountable, regressive and even finger-pointing.  The Committees of the Board of the company is one of the pillars of this corporate governance mechanism which not only enables the Board in its tasks but also keeps a check and balance on the workings of the company. The Nomination and Remuneration Committee (“NRC”) is one of the four committees. The NRC helps the Board in handling matters within its scope of responsibility that relate to the appointment, conditions of employment, remuneration, and incentive schemes of senior management. The responsibilities of the NRC are defined in the Nomination and Remuneration Policy or terms of reference of the Nomination and Remuneration document. 

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This article discusses the NRC under the Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) versus Companies Act, 2013 (“Act”).

Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

Under the LODR Regulations, every listed entity shall constitute an NRC in compliance with the provisions under Regulation 19.  As per Regulation 19(1), the NRC shall comprise of at least three directors; with all the directors on the committee being non-executive directors; and at least two-thirds of the directors on the committee shall be independent directors. Further, as per Regulation 19(2), the chairperson of the NRC shall be an independent director, provided that the chairperson of the listed entity, whether executive or non-executive, may be appointed as a member of the NRC and shall not chair such committee.

The quorum for a meeting of the NRC shall be either two members or one-third of the members of the committee, whichever is greater, including at least one independent director in attendance and the NRC shall meet at least once a year.

As per Regulation 19(3), the chairperson of the NRC may be present at the annual general meeting, to answer the shareholders’ queries; however, it shall be up to the chairperson to decide who shall answer the queries.

Role of NRC under the LODR Regulations

As per Regulation 19(4), the role of the NRC shall be as specified as in Part D of Schedule II. The following points cover the role of the NRC under the LODR Regulations: 

  • Formulation of the criteria for determining qualifications, positive attributes and independence of a director and recommend to the board of directors a policy relating to, the remuneration of the directors, key managerial personnel and other employees;
  • For every appointment of an independent director, the NRC shall evaluate the balance of skills, knowledge and experience on the Board and on the basis of such evaluation, prepare a description of the role and capabilities required of an independent director. The person recommended to the Board for appointment as an independent director shall have the capabilities identified in such description. To identify suitable candidates, the Committee may: 
  • Use the services of external agencies, if required; 
  • Consider candidates from a wide range of backgrounds, having due regard to diversity; and 
  • Consider the time commitments of the candidates.
  • Formulation of criteria for evaluation of the performance of independent directors and the board of directors; 
  • Devising a policy on diversity of the Board; 
  • Identifying persons who are qualified to become directors and who may be appointed in senior management following the criteria laid down, and recommend to the board of directors their appointment and removal;
  • Whether to extend or continue the term of appointment of the independent director, based on the report of performance evaluation of independent directors; and 
  • Recommend to the board, all remuneration, in whatever form, be payable to senior management.

Companies Act, 2013

Section 178 of the Act read with Rule 6 of Companies (Meetings of Board and its power) Rules, 2014, provides for the constitution of the NRC by the following classes of companies:

  1. Every listed Public Company; or 
  2. All public companies with a paid-up capital of ten crore rupees or more; or 
  3. All Public companies having turnover of one hundred crore rupees or more; or 
  4. All public companies, having in aggregate, outstanding loans, debentures and deposits exceeding fifty crore rupees.

Although as per Notification dated 5th June 2015, the provisions of Section 178 shall not apply to section 8 companies. In the case of a Government company, sub-sections (2), (3) and (4) of Section 178 of the Act, shall not apply except concerning the appointment of senior management and other employees as per Notification dated 5th June 2015.

Additionally, in the case of Specified IFSC Public Company, Section 178 of the Act shall not apply as per Notification dated 4th January 2017. 

As per Section 178(1) of the Act, the NRC shall consist 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 NRC but shall not chair such committee.

Section 178(2) enlists the role of the NRC under the scope of the Act. The NRC shall identify persons who are qualified to become directors and who may be appointed in senior management following the criteria laid down, recommend to the Board their appointment and removal and shall specify the manner for effective evaluation of the performance of Board, its committees and individual directors to be carried out either by the Board, by the NRC or by an independent external agency and review its implementation and compliance.

Also, the NRC 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.

Section 178(4) of the Act sets the ambiance for the NRC while undertaking the role specified under Section 178(3) of the Act –

  • 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;
  • The 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.

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.

Section 178(8) provides that in case of any contravention of the provisions of Section 178, the company shall be liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of one lakh rupees.

Observatory remarks

The LODR Regulations apply to all listed entities while the Act applies to certain classes of public companies. Coming to the composition of the NRC, both, the LODR Regulations and the Act put the onus on the shoulders of the independent directors. 

Earlier, like the Act, the LODR Regulations also provided for there to be at least fifty per cent of independent directors in the composition of the NRC, but with effect from 1st January 2022, the LODR Regulations provide that there should be at least two-thirds of independent directors in the NRC. Also, the LODR Regulations take it a step further and provide that all the directors in the NRC shall be non-executive.

The LODR Regulations also provide for the quorum for the meeting of the NRC and also prescribe the number of times the meeting of the NRC needs to be conducted, whereas the Act does not provide anything regarding the quorum or the number of occurrences of the meeting of the NRC.

The LODR Regulations provide that the chairperson of the NRC may be present at the annual general meeting, to answer the shareholders’ queries; however, it shall be up to the chairperson to decide who shall answer the queries. Additionally, the role of the NRC is more comprehensively given under the LODR Regulations making its scope much wider than the Act.

To sum up the discussion in the article it can be said that the LODR Regulations not only have a wider scope than the Act but also that the LODR Regulations pave the further path for the Act, hence, making the regime of corporate governance in India even more circumspect.  

Conclusion

Both the LODR Regulations and the Act lay down provisions that are to be complied with by the companies to become a bonafide example of corporate governance and there is a penalty for every unlawful action and inaction to maintain a check and balance.

The Act applies to all companies although the LODR Regulations apply only to a certain class of companies which makes it a conditional provision that is only applicable to companies that fulfil those conditions. The Act on the other hand is a mandatory provision, applicable to the companies on the condition of just being a company and is a more stellar initiative to maintain good corporate governance even though the Regulations are more in-depth. 

References

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