Under Section 178(1) of the Companies Act, 2013 (hereinafter "The Act") Listed and other unlisted public companies which fall within the ambit of Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 are required to constitute the NRC of the Board.
Rule 6 does not lay down the criteria for determination of the yardsticks for constitution of the Committee and the Rule has to be read conjointly with Rule 4 of the Companies (Appointment and Qualification of Directors)Rules, 2014 which actually sets out the criteria.
Rule 4 of the above Rules, stipulates that the following classes of companies shall have at least two independent directors, apart from constituting the NRC as also the Audit Committee.
The financial thresholds specified for setting up the NRC by the above classes of companies are as under:
a) A public company which has a paid up share capital of rupees ten crores or more or
b) Apublic company having turnover of rupees one hundred crores or above or
c) A public company which has in aggregate outstanding loans, debentures and deposits exceeding rupees fifty crores .
The above conditions are mutually exclusive and a public company satisfying any one of the above conditions will have to comply with the requirements of setting up the Committee.
Rule4(2) grants an exemption to the following classes of public companies from setting up the Committee:
a) a joint venture
b) a wholly-owned subsidiary and
c) a dormant company as defined under Section 455 of the Act.
Composition of the Committee
Subsection (1) to Section 178 provides, inter alia, that the NRC shall consist of three or more non-executive directors (Emphasis supplied)out of which not less than one half shall be independent directors.
An Executive director has been defined by Rule 2(1)(k) of the Companies (Specification of definitions details) Rules, 2014 to mean a whole-time director as defined in clause(94) of Section 2 of the Act. It, therefore, follows by inference that a non-executive director is one who does not fall within the contours of the definition contained in Section 2(94).
Proviso under sub-section(1) of Section 178 stipulates, however, that the chairperson of the company whether he is holding such a position either in an executive or non-executive capacity may be appointed as a member of the Committee but he shall not act as its chairperson.
Thus whereas the subsection contemplates that the NRC shall be comprised of only non-executive directors, the Proviso carves out an exception to the above by permitting the chairperson of the Board even if he were an executive chairperson to be part of the Committee without being its chairperson.
Purpose of a Proviso in the Statute
In the light of the above, it would be worth our while to examine the function of a Proviso in the Statute.
The normal function of a Proviso as held by the Supreme Court in Kedarnath Jute Manufacturing Co.Ltd v Commercial Tax Officer(AIR 1966SC 12 at Page 14) and in a host of other cases, is to except something out of the enactment or to qualify something enacted therein which but for the Proviso would be within the purview of the enactment.
Justice Lush had articulated on its purpose with the following words while delivering his judgement in Mullins v Treasurer of Survey (1880)5 QBD 170)
"When one finds a proviso to a Section, the natural presumption is that, but for the proviso the enacting part of the section would have included the subject matter of the proviso".
The general rule has also been explained by Hidayattulah J as under:
"As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment and ordinarily, a proviso is not interpreted as stating a general rule."(Shah BhojrajKaverji Oil Mills and Ginning Factory v Subhas Chandra Yograj Sinha AIR 1961 SC 1596 at page 1690).
In the words of Kapur J
"The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were,from the main enactment, a portion which but for the proviso would fall within the main enactment".
From the above observations it is clear that a proviso is intended to provide an exception to what is stated in the main enactment. The moot point,however would be to decide whether the force of the proviso would be such as to displace what is contemplated in the main enactment.
It is important therefore to appreciate how a proviso has been interpreted by the Courts.The above has been illustrated in the context of Section 376(1) of the Indian Penal Code, 1860 before its amendment which provided that in the case of a rape, the minimum punishment shall be imprisonment for a period of seven years but it contained a proviso that the Court may, for adequate and special reasons, to be mentioned in the judgement impose a sentence of imprisonment for a term less than seven years .
Relying on its earlier decisions, the Supreme Court held in State of Rajasthan v Vinod Kumar (2012)6 SCC 770) that a proviso is used to remove special cases from the general enactment and may change the very concept of the intendment of the enactment by insisting on certain mandatory conditions to be fulfilled in order to make the enactment workable. Hence the power under the proviso is not to be used indiscriminately but the Court while exercising discretion thereunder has to record"exceptional reasons"for resorting to the proviso.
Considering the above, one cannot construe that what is carved out as an exception in the proviso will prevailmechanically over what is stated in the main enactment, given that as observed earlier, it is only a general rule to state that an exception is intended to provide an exception to the main enactment.
Will the proviso prevail if there is nothing ambiguous in the main enactment
As observed by the Supreme Court in State of Rajasthan v Vinod Kumar(Supra)the use of a proviso in interpretation cannot be indiscriminate and the Court has to exercise discretion and also record the exceptional reasons for resorting to the proviso.
The application of the proviso has to be restricted to matters where there is some ambiguity in the main enactment thus rendering the use of the proviso to either expand or limit the main enactment wherenecessary.
Where the words in the main enactment are clear and unambiguous, a proviso would have no repercussion on the interpretation of the enacting portion of the section so as to exclude something by implication which is embraced by the clear words in the enactment.(Madras &Southern Maharatta Railway Co.Ltd v Bezwada Municipality (AIR 1944 PC 71).
The Court had observed in the above citation that :
"Where, as in the present case,the language of the main enactment is clear and unambiguous, a proviso can have no repercussion on the interpretation of the main enactment so as to exclude from it by implication what clearly falls within its express terms"
Therefore when on a fair construction the principle provision is clear, a proviso cannot expand or limit it.(Dwarka Prasad v Dwarka Das Saraf(AIR 1975 SC 1758).
Applying the above observations in the context of Section 178(1), it can be stated emphatically that there is nothing ambiguous or esoteric in the plain language used in the Sub-section. The Sub-section simply contemplates that non-executive directors shall constitute the NRC, of whom the majority shall be independent directors.
Considering the above, the proviso to the subsection which allows an executive chairperson also to be a part of the Committee can have no repercussion on the interpretation of the main enactment so as to exclude from it by implication what clearly falls within its express terms.
Drawing an inference based on what is stated by the proviso thereto and postulating that the executive chairperson could be part of the committee would be contrary to the principles enunciated by the Courts as stated above.
Purpose of a proviso is to act as a guide to construction of enactment
As mentioned earlier,if the enacting portion of a Section is not clear, a proviso is added to it to give an indication as to its true meaning.
The above Rule has been elaborated further by Mudholkar J through the following words
"There is no doubt that where the main provision is clear, its effect cannot be cut down by the proviso.But where it is not clear, the proviso, which cannot be presumed to be a surplusage, can properly be looked into to ascertain the meaning and scope of the main provision".(Hindustan Ideal Insurance Co.Ltd v Life Insurance Corporation of India)(AIR 1963 SC 1083).
Proviso is at times added to the Statute to allay fears
When an enactment contains a proviso, the general rule is to construe them together without rendering either of them redundant or otiose. Even in cases where the enacting part is clear, effort is to be taken to give some meaning to the proviso and to justify its inclusion.
Lord Herschell has pointed out as under:
"I am satisfied that many instances might be given where provisions could be found in legislation that are meaningless because they have been put in to allay fears when those fears were absolutely unfounded and no proviso at all was necessary to protect the persons at whose instance they were inserted".(West Derby Union v Metropolitan Life Assurance Society)(1897)AC 647).
Such a construction would be reached only when the operative words of the enactment are abundantly clear.
It is reiterated that the intention of the legislature is manifest when Section 178(1) provides for the inclusion of non-executive directors only in the NRC. That being so there is no need to draw a construction as provided in the proviso to the subsection that an executive chairperson could also be a member of the Committee.
Viewed against the above perspective, what is contained in the proviso has necessarily to be considered as a surplusage .The proviso cannot have the effect of displacing what is contemplated in the subsection which is clear and unambiguous.
In the light of the above it would be necessary to emphatically state that the words contained in the proviso to subsection (1) cannot be used to expand the intent of the main enactment and make it possible for the executive chairperson to be part of the Committee.
The observations made by Mudholkar J quoted above bear relevance to the conclusion that the main enactment provided in this instance by Section 178(1) shall prevail notwithstanding the exception carved out by the proviso thereto.
Allowing the Executive Chairperson to be part of the NRC would also be against the basic tenets of Corporate Governance
The functions of the NRC as laid down in Section 178(2)include identification of persons who are qualified to be made directors and who may be appointed to Senior positions in the corporate hierarchy.
The Committee also sets out the criteria leading up to the appointment/removal of directors.
Further the Committee has to specify the manner for effective evaluation of the Board and its Committees and the individual directors and review its implementation and compliance. The above functions have also been reiterated in Regulation 19 of the SEBI Listing Regulations .
Notwithstanding the postulate that has been made out above on the interpretation of a proviso, given the sensitive nature of the functions that are to be discharged by the Committee, it would be contrary to the principles of corporate governance if the legislature were to allow the executive chairperson to be part of the Committee as he could influence the decisions of the Committee and also vitiate its independent functioning. The presence of the executive chairperson on the Committee could derail potentially the objective of setting up the committee.
The above aspect also fortifies the assertion that an executive chairperson should not be permitted by the law to be a member of the NRC.
Conclusion
We shall conclude this discussion by pointing out that the rule that a proviso to an enactment carves out an exception to the enactment in all cases and that the same may be used to except or extend the scope of the main enactment as articulated above has no universal application without exception. It is submitted that the proviso to subsection (1) of Section 178 has to be considered as otiose and as a surplusage given that there is absolutely no ambiguity in the main enactment provided in Section 178(1). The non-executive chairperson could be accommodated on the Committee as member but surely not as the executive Chairperson.
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