Section 178 of the Companies Act, 2013 plays a crucial role in shaping how Indian companies are governed internally. It focuses on two very human aspects of corporate life—who gets appointed to leadership roles and how stakeholders are treated when something goes wrong. This provision mandates the formation of key board-level committees to ensure transparency, fairness, and accountability in decision-making.
From recommending directors and senior management appointments to resolving investor grievances, Section 178 ensures that power is not concentrated unchecked. I’ve seen companies mature significantly once these committees function properly—not just on paper, but in spirit.
What Is Section 178 of the Companies Act, 2013?
At its core, Section 178 mandates companies to form a Nomination and Remuneration Committee (NRC) and, where applicable, a Stakeholders Relationship Committee (SRC).
These committees act as internal safeguards, ensuring that:
- Appointments are merit-based
- Remuneration is fair and justified
- Stakeholder issues don’t get ignored
This provision is not symbolic—it is operational and enforceable.
Companies Covered Under Section 178
Not every company is required to comply with Section 178. The law applies to:
- Listed companies, and
- Other prescribed companies based on paid-up capital, turnover, or outstanding deposits
In practical terms, as companies grow, governance expectations grow with them.
Nomination and Remuneration Committee (NRC): The Backbone
One of the most significant parts of Section 178 is that it mandates companies to form a Nomination and Remuneration Committee.
This committee is responsible for ensuring leadership decisions are thoughtful, unbiased, and aligned with long-term company goals.
Composition of the NRC
The NRC must:
- Consist of three or more non-executive directors
- Have at least half as independent directors
- Be chaired by an independent director
This structure prevents conflicts of interest from influencing decisions.
Role of the Nomination and Remuneration Committee
Section 178 doesn’t just suggest responsibilities—it clearly demonstrates the Nomination Remuneration Committee’s role.
Key functions include:
- Identifying suitable persons for appointment as directors or Key Managerial Personnel (KMP)
- Recommending remuneration policies
- Evaluating performance of directors and senior management
This ensures leadership quality doesn’t depend on personal relationships.
Section 178(4): Where the Real Authority Lies
Section 178(4) requires the Nomination and Remuneration Committee to:
- Formulate criteria for determining qualifications, independence, and performance
- Recommend a clear remuneration policy
- Ensure remuneration attracts talent but avoids excessive payouts
This balance protects both the company and its shareholders.
Remuneration Policy: Transparency Over Guesswork
A well-drafted remuneration policy answers uncomfortable questions upfront:
- Why is a director paid this much?
- How does performance affect compensation?
- Are incentives linked to long-term growth?
From experience, companies that communicate these policies clearly face far fewer disputes internally.
Stakeholders Relationship Committee (SRC): Giving Stakeholders a Voice
Section 178 also mandates the formation of a Stakeholders Relationship Committee when a company has more than 1,000 security holders.
This committee ensures:
- Complaints are tracked
- Grievances are resolved systematically
- Stakeholders feel heard, not ignored
In many companies, this committee quietly builds investor trust over time.
What the SRC Handles
The SRC typically looks into:
- Transfer or transmission of shares
- Non-receipt of dividends
- Dematerialisation issues
- Complaints from debenture holders
It may sound procedural, but timely responses can protect a company’s reputation.
Why Section 178 Matters for Corporate Governance
Section 178 reinforces three pillars of governance:
- Fair leadership selection
- Responsible pay structures
- Stakeholder accountability
Without these committees, decisions risk becoming opaque and reactionary.
A Practical Insight
I once advised a mid-sized listed company that treated NRC meetings as a formality. Over time, unresolved pay disparities caused senior-level resignations. Once the NRC began functioning seriously, clarity returned—not overnight, but steadily. Governance isn’t flashy, but its absence is always felt.
Non-Compliance: Not Just a Technical Risk
Ignoring Section 178 can lead to:
- Regulatory penalties
- Adverse audit remarks
- Loss of investor confidence
In governance matters, silence often speaks louder than mistakes.
Conclusion
Section 178 of the Companies Act, 2013 is about people, trust, and balance.
By mandating the Nomination and Remuneration Committee and the Stakeholders Relationship Committee, the law ensures leadership decisions are fair and stakeholder voices are respected.
Good governance doesn’t slow companies down—it steadies them.
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