Whether recommendation of Senior Management is role of NRC?
A. Background:-
- The Companies Act, 2013 (hereinafter referred to as “the Act”) and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred to as “SEBI LODR”) as amended from time to time contains provisions for constitution, role and responsibilities of Nomination and Remuneration Committee. In addition to identification of directors, it also plays important role in appointment of Key managerial personnel.
B. The questions which this article is trying to analyse:-
- Whether it is the role of the ‘Nomination and Remuneration Committee’ to even recommend appointment and removal of senior management personnel? Or
- Whether it is the role of the ‘Nomination and Remuneration Committee’ to recommend appointment and removal of senior management personnel who can be qualified as directors?
C. The provision dealing with above question:-
- For identification of directors etc, the exact wording of the provision in the Act and SEBI LODR is as follows:-
- Sub-section (2) of section 178 of the Act :-
“(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 5[shall specify the manner for effective evaluation of performance of Board, its committees and individual Directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance.
b.Schedule II – Part D-of SEBI LODR:-
A. Role of NRC
(4) identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and removal.
D. To find out appropriate view of the questions, we can analyse following :-
- Background behind insertion of provision relating to identification by NRC
- Applying principles of interpretation
- Any order by regulators addressing the issue.
E. Summary of the background behind insertion of section 178 under the Act and SEBI LODR:-
1. Section 198 of the Companies Act, 1956 read with Schedule XIII was having a requirement of approval of Remuneration Committee for remuneration of managerial personnel.
2. Kumar Mangalam Birla Committee on Corporate Governance -1999 recommended certain disclosures in corporate governance report relating to remuneration of managerial personnel.
3. Narayan Murthy Report 2003 also had similar recommendations wr.t. disclosures in Corporate Governance Report.
4. J.J Irani Committee Report 2005 recommended Independent directors in the Committee and Chairman should be independent director.
5. the Companies Bill 2009 first time included that “the Nomination and Remuneration Committee shall identify individuals qualified to become board members consistent with the criteria laid down, recommend to the board the appointment and removal of directors and of senior management and shall carry out evaluation of individual director‘s performance.”
6. The Companies Bill 2011 recommended that instead of two committees there can be only one committee for Nomination and Remuneration.
7. There is no discussion on the insertion of word “Senior management” in the objects of the Bill in 2009 and 2011.
8. Hence, this is not helping us for taking appropriate view for question which this article deals with.
F. Principles of interpretation: –
- Lets look at the language of the relevant sub-section / schedule. Sub-section (2) of section 178 of the Act and Point 4 of Schedule II-Part D of the SEBI LODR has same provision as under:- “Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down…”
- Now here “and” is creating confusion – Whether it means..
- Identifying persons who are qualified to become directors,
- Identifying persons who may be appointed in senior management
Or
Whether it means
a. Identifying persons who are qualified to become directors and who may be appointed in senior management ?
3. We need to understand the meaning of the sentences when the word “and” is used to connect two sentences.
4. Use of word “and” whether it is used as conjunction?
As stated in the Maxwell’s Interpretation of Statutes, in ordinary usage, ‘and’ is conjunctive (that connects words, phrases and clauses in a sentence) and ‘or’ is disjunctive (that separates words, phrases and clauses in a sentence). Thus, ‘and’ connects two or more items and makes a cumulative group of them whereas ‘or’ separates two or more items and makes them alterative to one another. Normally the word “and” should be given its ordinary meaning and should be understood in a conjunctive sense.
The word “and” is always used as a conjunction between the first part of a sentence and the second part of a sentence, and how word “or” is used to denote an alternative in a series of exclusive arrangements.[1]
The expression ‘and’ has generally a cumulative effect, requiring the fulfilment of all the conditions that it joins together and it is the antithesis of ‘or’.[2]
5. If we apply that “and” is acting as conjunction between “Identifying persons who are qualified to become directors” and “who may be appointed in senior management” then fulfilment of both the conditions is necessary. It means only those persons who are qualified to become directors only, NRC recommendation needed for appointment of SMP. If “and” is used as conjunction here, it is giving absurd meaning. If NRC wants to screen for directorship level why it will recommend someone for SMP level and vice versa.
6. It has been held in series of judgements that the word and should be given its ordinary meaning and should be understood in a conjunctive sense, unless it would lead to an absurd situation or an unintelligible result.[3]
7. To carry out the intention of the legislature it may be necessary to read “and” in place of the conjunction “or”, and vice versa”[4]. It is settled law that expression “and” may be read as “or” in order to further the object of the statute and /or to avoid an anomalous situation.[5]
8. If we apply that and is acting as conjunction between “Identifying persons who are qualified to become directors” and “who may be appointed in senior management it is leading to absurdity. Hence we need to read “and” here as “or”, then it is giving correct meaning.
9. One more angle to this statement if “comma” could have been used to separate these two statements as independent. Though punctuation is a minor aid to interpretation, if a “comma” was used before the word “and” it could have separated two sentences. B.K.Mukherjea J,. in Aswini Kumar Ghose V Arabinda Bose AIR 1952 SC 369,p 383 :1953 SCR1.” But it would appear, at any rate, with respect to modern statues, that if the statute in question is found to be carefully punctuated, punctuation, through a minor element, may be resorted to for purposes of construction.
10. These two sentences actually are independent..(a) to identify persons who are qualified to become director (b) to identify person who may be appointed in senior management.
11. Following table shows the correct way of reading sub-section(2) of section 178 of the Act.
| Identify person who are qualified to become director in accordance with the criteria laid down | Recommend to the board their appointment and removal |
| Identify person who may be appointed in senior management in accordance with the criteria laid down | Recommend to the board their appointment and removal |
12. Too many compliances inserted in sub-section (2) of section 178 of the Act. It also contains the provision to specify manner of evaluation of performance of Board, its committees and individual director. This could have been elaborated in separate sub-sections under section 178 of the Act.
G. Lets see if regulator had passed any order clarifying role of NRC in case of SMP appointment.
- Final Order against Ms.Chitra Ramkrishna and others WTM/AB/MRD/DSA/21/2021-22 (National Stock Exchange of India Limited)
- In this case, Mr. Anand Subramanian was appointed as consultant directly by Managing Director Ms. Chitra Ramkrishna without following HR, NRC processes.
- His compensation was more than the KMPs in the Company.
- He got increments which are of highest ratings without following the processes and without any documentation.
- His appointment itself as consultant to MD was questioned by SEBI looking at his background and experience.
- Mr. Anand Subramanian was having substantial executive powers akin to Managing Director, he used to attend board meetings and the various heads of departments reporting to him, it was deemed that Mr. Anand Subramanian was not merely a consultant.
- It was employment in substance.
- The order indirectly depicts the role of NRC that it cannot act as passive committee. It must look at independently for appointment of SMPs, KMPs advisors with executive powers and highly compensated executives.
- NRC should have screened it from following lenses:-
- Why was this person selected?
- Was there a comparative evaluation?
- Was the candidate suitably qualified ?
- Was the designation structured to bypass governance controls?
H. Conclusion
- If we read “and” used in sub-section (2) of section 178 of the Act and Schedule II -Para D (4) of SEBI LODR as conjunction, it is giving absurd meaning.
- If we read “and” as “or” and apply purposive interpretation it is giving us the proper meaning of the provision. The comma before the word “and” could have made it clearer.
- The order passed by SEBI in case of NSE as stated in paragraph F above, makes the role of the NRC clear even to screen, evaluate, identify persons for the core positions included in the definition of SMP.
[1] Indian Medical Association V Union of India 2011 AIR SCW 3469
[2] M. Satyanarayana V State of Karnataka (1986) 2 SCC 512; AIR 1986 SC 1162
[3] Chintalpati Srinivas Raju V Securities and Exchange Board of India AIR 2018 SC 2411
[4] Maxwell on Interpretation of Statutes, 12th edn, page 232
[5] Mobilox Innovations Pvt Ltd V Kirusa Software Pvt Ltd AIR 2017 SC 4532
This article is published on taxmann link below.