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Environmental, Social and Governance (ESG) - Principles and Practice · Board Committees

Nomination and Remuneration Committee under Section 178

Updated 11 October 2026 · Fact-checked

The Nomination and Remuneration Committee (NRC) is a board committee under Section 178 of the Companies Act, 2013. It has three or more non-executive directors, at least half independent. It finds qualified directors and senior managers, sets the evaluation manner, and recommends the remuneration policy to the Board.

Understand Nomination and Remuneration Committee

A board cannot fairly decide its own appointments and pay. The Nomination and Remuneration Committee (NRC) solves this. A small group of non-executive, mostly independent directors does the groundwork and recommends to the Board.

Section 178(1) requires the Board of every listed public company, and other prescribed classes of companies, to constitute the NRC. It must have three or more non-executive directors, of whom not less than one-half are independent directors. The chairperson of the company, executive or non-executive, may be a member but cannot chair the committee.

The NRC has two broad jobs. The first is nomination: it identifies persons qualified to become directors or to be appointed in senior management, as per the criteria laid down, and recommends their appointment and removal to the Board. The second is evaluation: it specifies the manner of effective evaluation of performance of the Board, its committees and individual directors, and reviews its implementation and compliance. The evaluation itself may be carried out by the Board, by the NRC, or by an independent external agency.

The third job is remuneration. The NRC formulates the criteria for qualifications, positive attributes and independence of a director. It recommends to the Board a policy on remuneration for directors, key managerial personnel (KMP) and other employees. The Board decides; the NRC recommends.

Senior management means members of the core management team excluding the Board, comprising all members of management one level below the executive directors, including functional heads. Know this definition, as questions often test it.

Key rules to remember

Size and independence (Section 178(1))
Members ≥ 3, all non-executive; independent directors ≥ 1/2 of members
Applies to every listed public company and other prescribed classes. Half is enough; it need not be a majority.
Chairperson rule (proviso to Section 178(1))
Company chairperson may be a member but shall not chair the NRC
Applies whether the company chairperson is executive or non-executive.
Functions (Section 178(2) and (3))
Identify and recommend directors and senior management; specify evaluation manner and review it; formulate criteria; recommend remuneration policy
The NRC recommends. The Board takes the decision.
Policy tests (Section 178(4))
(a) reasonable and sufficient pay; (b) clear link of pay to performance; (c) balance of fixed and incentive pay, short and long term
These three conditions apply to directors, KMP and senior management.
Disclosure (proviso to Section 178(4))
Policy on website, if any; salient features, changes and web address in Board's report
Website disclosure applies where the company has a website.
Penalty (Section 178(8))
Company: fine ₹1,00,000 to ₹5,00,000; each officer in default: penalty ₹1,00,000
Section 178(8) also covers contravention of Section 177.
Attendance at general meetings (Section 178(7))
NRC chairperson, or a member authorised by him, attends general meetings
Applies to the chairperson of each committee under Section 178.

How to solve Nomination and Remuneration Committee questions

Most questions give a company fact pattern and ask whether the NRC is validly formed or whether it acted correctly. Use this method.

  1. 1Identify whether the company is a listed public company or another prescribed class. If not, say the NRC mandate may not apply.
  2. 2Count the members. Check there are at least three and all are non-executive directors.
  3. 3Check independence: at least one-half of the members must be independent directors.
  4. 4Check who chairs the NRC. The company chairperson may be a member but cannot chair it.
  5. 5Identify the function in issue: nomination, evaluation or remuneration policy. Quote the relevant sub-section of Section 178.
  6. 6For a remuneration question, test the policy against the three conditions in Section 178(4) and the disclosure proviso.
  7. 7Apply the facts, then conclude clearly: compliant or not, the consequence under Section 178(8), and the corrective step.
  8. 8 Add a practical point: minutes, Board approval of the recommendation, and disclosure in the Board's report.

Quickest way: Four-check scan for NRC questions

When to use it: Use it for short-answer or case questions when time is tight.

  1. Check type of company: listed public company or prescribed class.
  2. Check numbers: three or more, non-executive, half independent.
  3. Check chair: not the company chairperson.
  4. Check function and disclosure: recommend, not decide; policy on website and in Board's report.

Common mistakes in Nomination and Remuneration Committee

  • Saying at least two-thirds or a majority of the NRC must be independent.

    It is mixed up with the Audit Committee, where independent directors must form a majority.

    Fix: Remember: NRC needs not less than one-half independent; Audit Committee needs a majority.

  • Allowing an executive director to sit on the NRC.

    Students focus on independence and forget that all members must be non-executive.

    Fix: Check two things: every member is non-executive, and at least half are independent.

  • Saying the company chairperson cannot be an NRC member.

    The proviso is remembered only as a restriction.

    Fix: The chairperson may be a member but shall not chair the committee.

  • Writing that the NRC fixes the remuneration of directors.

    The word remuneration in the name suggests final authority.

    Fix: Say the NRC recommends a policy to the Board. Approvals needed under other provisions still apply.

  • Stating that the NRC must itself evaluate every director.

    Older wording of the section is remembered.

    Fix: The NRC specifies the manner of evaluation and reviews implementation. The Board, the NRC or an independent external agency may carry it out.

  • Forgetting the disclosure of the policy.

    Students stop at the content of the policy.

    Fix: Add that the policy goes on the company's website, if any, and its salient features, changes and web address go in the Board's report.

Worked examples

Example 1

Surya Textiles Ltd, a listed public company, has an NRC of four directors: the executive chairperson of the company, two independent directors and one non-executive non-independent director. The executive chairperson chairs the NRC. Examine whether Section 178 is complied with.

Show the solution
  1. Provision: Section 178(1) requires three or more non-executive directors, with not less than one-half independent. The company chairperson may be a member but shall not chair the NRC.
  2. Analysis of membership: the executive chairperson is not a non-executive director, so the requirement that all members be non-executive fails.
  3. Analysis of independence: of four members, two are independent. That is one-half, which would satisfy the ratio if the membership were valid.
  4. Analysis of chair: the chairperson of the company is chairing the NRC, which the proviso prohibits.
  5. Conclusion: the constitution breaches Section 178(1). The company is punishable with fine of ₹1,00,000 to ₹5,00,000, and each officer in default is liable to a penalty of ₹1,00,000 under Section 178(8).

Answer: Not compliant. The executive chairperson is not a non-executive director and cannot chair the NRC. Reconstitute with non-executive members only, with an independent director as chair, keeping at least half independent.

Example 2

The Board of Kaveri Pharma Ltd, a listed public company, asks its NRC to prepare a remuneration policy for directors, KMP and senior management. Advise on the content and disclosure of the policy.

Show the solution
  1. Provision: Section 178(3) requires the NRC to formulate criteria on qualifications, positive attributes and independence of a director, and recommend to the Board a policy on remuneration for directors, KMP and other employees.
  2. Content test under Section 178(4)(a): the level and composition of pay must be reasonable and sufficient to attract, retain and motivate directors of the quality required.
  3. Content test under Section 178(4)(b): the relationship of pay to performance must be clear and meet appropriate performance benchmarks.
  4. Content test under Section 178(4)(c): pay to directors, KMP and senior management must balance fixed and incentive pay, reflecting short and long-term performance objectives.
  5. Approval: the NRC only recommends; the Board adopts the policy.
  6. Disclosure: the policy must be placed on the company's website, if any. Its salient features, any changes, and the web address must be disclosed in the Board's report.

Answer: The NRC should draft a policy that meets the three tests in Section 178(4) and recommend it to the Board. After adoption, put it on the website and disclose its salient features, changes and web address in the Board's report.

Exam tips

  • Write the answer in the sequence provision, analysis, conclusion, and quote Section 178 sub-section numbers where you are sure of them.
  • Always contrast the NRC with the Audit Committee: three or more non-executive directors with half independent, versus a minimum of three directors with an independent majority.
  • In evaluation questions, state that the evaluation may be done by the Board, the NRC or an independent external agency.
  • Add a short drafting or compliance point, such as the terms of reference, the minutes recording the recommendation and the Board's report disclosure.
  • Learn the definition of senior management; it is a common one-mark or part-answer item.

Practice questions from Board Committees

Nomination and Remuneration Committee in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Nomination and Remuneration Committee: frequently asked questions

Who must constitute a Nomination and Remuneration Committee?

Under Section 178(1), the Board of every listed public company must constitute it. Other classes of companies may be covered as prescribed. A company outside these classes is not bound by this section.

Can the chairperson of the company chair the NRC?

No. The chairperson of the company, whether executive or non-executive, may be a member of the NRC but shall not chair it. The NRC chair is usually an independent director.

Does the NRC evaluate the Board itself?

The NRC specifies the manner of effective evaluation of the Board, its committees and individual directors, and reviews its implementation and compliance. The evaluation may be done by the Board, the NRC or an independent external agency.

What is the penalty for not constituting the NRC properly?

Section 178(8) provides a fine on the company of not less than ₹1,00,000, extending to ₹5,00,000. Every officer in default is liable to a penalty of ₹1,00,000.