Constitution, role of nomination and remuneration committee - Dr S. Chandrasekaran - Article published in Business Advisor, dated December 10, 2014 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

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Constitution, role of nomination and
remuneration committee
Dr S. Chandrasekaran
The Companies Act, 1956 (the old Act) had not
mandated any committee relating to the appointment,
nomination or remuneration of a director. However,
there was a provision where public companies having
no profits or inadequate profits and would like to
remunerate the directors has to constitute a
remuneration committee and such committee shall
approve such remuneration to directors. If the
remuneration recommended by the committee is over
and above the ceiling fixed in Schedule XIII of the old Act, then it was
required to be approved by Central Government.
The Companies Act, 2013 (the Act) has introduced the provision of
constitution of Nomination and Remuneration Committee, (hereinafter
referred as ―Committee‖) which would identify persons who are qualified to
become directors. The Act has introduced such new concept to be applicable
with effect from 1st April, 2014 for all listed companies and all public
companies
a) With a paid up capital of ten crore rupees or more; or
b) Having turnover of one hundred crore rupees or more; or
c) Having in aggregate, outstanding loans or borrowings or debentures
or deposits exceeding fifty crore rupees or more.
It has been explained that the paid up share capital or turnover or
outstanding loans, or borrowings or debentures or deposits, as the case may
be, as existing on the date of last audited financial statements shall be
taken into account for the purposes.
All companies which satisfy the said conditions have to comply with the
constitution of such committee within one year from the commencement of
the said rules or appointment of independent directors, whichever is earlier.
Any public company which satisfies any one of the above said conditions
during this financial year shall take all steps to constitute Nomination and
Remuneration Committee so that the company is in compliance of such
provisions from the beginning of next financial year.

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Constitution of nomination and remuneration committee
The Board of directors shall constitute the committee. It 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 (whether
executive or non-executive) may be appointed as a member of the committee
but shall not chair such committee. It is to be noted that if the chairperson
is executive then such committee shall have other three minimum non-
executive directors.
The amended clause 49 of the listing agreement effective from 1st October,
2014 has been amended to be in line with the provisions of the Act.
However, it was provided that the chairperson shall be an independent
director, which has been dispensed with. Now, it has been left open to be
decided by the committee which may even appoint the chairman who is a
non-executive director.
Role of nomination and remuneration committee
The committee shall identify who are qualified to become directors. It has to
formulate the criteria for determining qualifications, positive attributes and
independence of a director. It has also to formulate a policy relating to the
remuneration for the directors, key managerial personnel and other
employees.
The committee while formulating the policy should ensure that:
a) The level and composition of remuneration is reasonable and
sufficient to attract, retain and motivate the directors of the quality required
to run the company successfully;
b) Relationship of remuneration in performance is clear and meets
appropriate benchmarks; and
c) Remuneration to directors, key managerial personnel and senior
management involves a balance between fixed and incentive pay reflecting
The committee shall identify who are qualified to become
directors. It has to formulate the criteria for determining
qualifications, positive attributes and independence of a
director.

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short and long term performance objectives to the working of the company
and its goals.
The committee shall also evaluate performance of director. There being no
condition attached to convene the meetings of nomination and
remuneration committee, where there is no agenda for any consideration for
appointment of a director, it is suggested that the said committee meet at
least once in six months to evaluate the performance of directors and key
managerial personnel.
Disclosure in directors’ report
The Act requires that the nomination and remuneration policy as
recommended by the said committee shall have disclosure in the directors‘
report. The listing agreement on corporate governance requires extensive
disclosure in the directors‘ report relating to remuneration of directors. The
following are such disclosures:
a) All pecuniary relationship or transactions of the non-executive
directors vis-à-vis the company.
b) Besides, the section on corporate governance shall include:
i) All elements of remuneration package of individual directors
summarised under major groups such as salary, bonuses, stock options,
pension etc. It would also be better to include all other benefits extended to
a director;
ii) Details of fixed component and performance linked incentive, along
with the performance criteria;
iii) Service contracts, notice period, severance fees;
iv) Stock option details, if any, and whether issued at a discount as well
as the period over which accrued and over which exercisable.
c) The criteria of making payments to non-executive directors.
Alternatively, this may be put on the company‘s website and reference
drawn thereto in the annual report.
d) The number of shares and convertible instruments held by non-
executive directors in the annual report;
e) Non-executive directors shall be required to disclose their
shareholding (both own or held by/for other persons on a beneficiary basis)
in the listed company in which they are proposed to be appointed as

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directors, prior to their appointment. Such details are also to be disclosed in
the notice to the general meeting called for appointment of such director;
f) The details of establishment of vigil mechanism.
Other disclosures
Besides above, there are some more disclosures to be made available to the
shareholders which may part of the nomination and remuneration policy.
They are:
i) The details of establishment of vigil mechanism.
ii) The details of training imparted to independent directors;
iii) The remuneration policy and the evaluation criteria. This is also
required to be complied under the provisions of the Act.
Quorum for committee meetings
The Act does not spell out the requirement of quorum unlike for a Board
meeting. In the absence of any such provision, it may be construed that two
members present shall form the quorum to transact the business. There
being no minimum number of meetings to be held during a financial year,
such meetings can also be held through audio visual means or video
conference.
The fixation of directors‘ sitting stipend for attending board and committee
meetings being part of the policy of nomination and remuneration
committee and all the members of the said committee being interested in
fixation of directors‘ sitting fee, one hopes there is no question of any
interested director for formulating such policy. It is also relevant if any of
non-executive director is interested to any key managerial personnel,
whether he would be eligible to be present while formulating such policy
which includes remuneration to key managerial personnel?
(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Delhi)
The Act does not spell out the requirement of quorum unlike
for a Board meeting. In the absence of any such provision, it
may be construed that two members present shall form the
quorum to transact the business.