Penalizing by taking a ‘hyper-technical’ view of law on Related Party Transactions

Provision Involved:

Section 188 of the Companies Act, 2013: Section 188 requires a company to obtain approval of the Board and of the members, in certain situations, prior to entering of any transaction or agreement with related party.

Provided that no member of the company shall allowed to vote on such special resolution, if such member is a related party.

Regulation 23 of the SEBI (LODR) Regulations, 2015 also provides similar provision that all material related party transactions shall require approval of the shareholders through resolution and no related party shall vote to approve such resolutions.

Fact of Case:

  • R. T. Exports Limited proposed to enter into a transaction with Neelkanth Realtors Private Limited for purchase of 40,000 sq. ft. of residential space but it was a related party transaction (RPT).
  • Accordingly, a special resolution was approved by R. T. Exports Limited on 15-7-2014 in which related parties were abstained from voting. Thereafter, an Extra-Ordinary General Meeting was convened on 16-12-2016 for rescinding the resolution dated 15-7-2014 in which, the related parties also voted.
  • However, the SEBI initiate the matter on a complaint and issued notice alleging violation of Regulation 23 of the SEBI (LODR) Regulations, 2015. The Adjudicating Officer penalise the present respondents with a sum of Rs. 35 lakhs for the alleged violation.

Decision:

The Apex Court held that the SEBI was unjustified in taking a ‘hyper-technical’ stance imposing a penalty on the company for the related party voting on a resolution rescinding an earlier special resolution authorising entering into a contract with him, where the related party had abstained from the vote on the earlier special resolution in his favour and no ill-intent on part of the company was established.

Rohit Mohar, Audit Associate, SW India

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