1. The Board of Directors of every listed company and such other class or classes of companies, as may be prescribed shall constitute the Nomination and Remuneration Committee consisting 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 Nomination and Remuneration Committee but shall not chair such Committee.
2. The Nomination and Remuneration 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 and shall carry out evaluation of every director's performance.
3. The Nomination and Remuneration Committee 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.
4. The Nomination and Remuneration Committee shall, while formulating the policy under sub-section (3 ) ensure that:—
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. 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:
Provided that: such policy shall be disclosed in the Board's report.
5. The Board of Directors of a company which consists of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall 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.
6. The Stakeholders Relationship Committee shall consider and resolve the grievances of security holders of the company.
7. 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.
8. In case of any contravention of the provisions of section 177 and this section, 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 shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both:
Provided that: non-consideration of resolution of any grievance by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this section.
Explanation.- — The expression "senior management" 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.
Legal Commentary & Landmark Judgments: Section 178
Section 178 governs the constitution of the Nomination and Remuneration Committee (NRC) to evaluate director appointments and compensation policies, and the Stakeholders Relationship Committee (SRC) to resolve investor grievances.
Sub-section (5) mandates that companies having more than one thousand shareholders, debenture-holders, or deposit-holders shall constitute a Stakeholders Relationship Committee headed by a non-executive director to resolve security holder grievances.
Section 178 aligns Indian board governance with global best practices. The NRC's remuneration policy must ensure that executive compensation is balanced, performance-benchmarked, and competitive without promoting excessive risk-taking. In institutional shareholder proxy battles, the NRC's evaluation matrices and justification for executive payouts are subject to intense investor scrutiny.