Bar on Voting by RPT only at the Time of Entering into the Contract

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 2957 of 2022

SECURITIES AND EXCHANGE BOARD OF INDIA      ……. PETITIONER

Vs

R.T EXPORTS LIMITED & Ors                                         …… RESPONDENTS

On 25th April 2022 the Hon’ble Supreme Court upheld an order passed by the Securities and Appellate Tribunal (SAT) that held that bar on voting by related parties is applicable only at the time of entering into a contract or arrangement. 

A look at the details of the case in brief:  

Facts

  1. R.T Exports Limited (“Company”) is a public company listed on the Bombay Stock Exchange (BSE). The Company proposed to enter into a transaction for purchase of 40,000 sq. ft. of saleable area at consideration of Rs. 40 Crores with Neelkanth Realtors Private Limited, a shareholder / member of the Company. This proposal was treated as material related party transaction under Regulation 23(1) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (“SEBI LODR”). Therefore, this proposal was required to be approved by shareholders of the company. 
  2. Accordingly, a special resolution was passed in an EGM held on 15th July 2014 in accordance with provisions of Section 188 of the Companies Act 2013 read with SEBI (LODR) Regulations. The concerned related parties abstained from voting on this resolution. They did not vote on the said resolution. Thereafter the resolution was approved and passed. 
  3. Thereafter on 16th December 2016 the related party transactions (which were approved on 15th July 2014) were proposed to be rescinded. The related parties who abstained from voting in the 2014 resolution, voted in the 2016 to rescind the resolution. Prior to voting, they took expert legal opinion on the same. 
  4. One of the other shareholders Ms/ Harmony Holdings Limited filed a complaint to SEBI alleging lacunae and seeking relief on few issues. In this complaint, details of approval of related party transactions and subsequent rescinding the resolution was brough to notice of SEBI alleging that related parties voted in rescinding the resolution.
  5. Though the complaint was subsequently withdrawn, SEBI initiated an enquiry on the matter of related party transactions (approved in 2014 and rescinded in 2016) and sought clarification from the Company.

Issue 

Whether respondents were justified in voting on rescinding the resolution dated 15th July 2014 in spite of being related party entities. 

Justification 

Company 

  1. Section 188 of the Companies Act 2013 requires a related party to abstain from voting on a resolution “to approve any contract or arrangement which may be entered into by the company, if such member is a related party”. Such abstinence is only at the time of entering into the contract or arrangement.
  2. Similarly, 23(4) of SEBI LODR stipulate that material related party transactions “shall require approval of shareholders”. This makes it explicitly clear that the bar on participation by related parties is only for approval of a transaction with a related party. There is no provision either under the Companies Act or under LODR Regulations that require a related party to abstain from voting in case of rescission of a contract. This was further confirmed in an opinion provided by Company Law expert.

SEBI

  1. Regulation 23(1) of SEBI LODR defines “material related party transaction” as one which individually or taken together with previous transactions during a financial year exceeds 10% of the annual consolidated turnover of the company as per the last audited financial statements. So, the related party transaction in question falls under the “material related party transaction” category. 
  2. The Company submitted that in the EGM held in 2016, no related party transactions were approved by related parties. On the contrary, the EGM was held for rescinding the resolution of RPT already passed in 2014. The entire promoter and promoter group voted against the rescinding of the related party resolution thereby resulting in continuation of the related party transaction. As per regulation 23(7) of SEBI LODR, all entities falling under the definition are barred from voting on any agenda involving a related party transaction irrespective of whether the entity is party to the particular transaction or not. Therefore, the promoter / promoter group have violated provisions of regulations 23(1), (4) & (7) of the SEBI LODR.
  3. Under regulation 23(4) & (7) of SEBI LODR abstaining from voting during approval on the related party transaction are aimed at ensuring corporate governance by avoidance of conflict of interests. In this case it is even more relevant as the promoters are directors of the Company and as such, they owe fiduciary duties towards the company and its shareholders. Their statutory responsibility of abstaining from voting on resolutions involving related party transaction is more important and crucial from the point of such duty of acting in good faith to promote the objects of the company and interests of all shareholders/stakeholders and not to compromise such duty and obligation for possible personal benefits and gains of the promoters/ directors and a particular shareholder.

On the above grounds, SEBI initiated an inquiry and adjudication. An Adjudication officer (AO) was appointed to inquire and adjudge u/s 15HB of the SBI Act. The AO imposed a total penalty of Rs. 35 lakhs.

Aggrieved, the promoters/ related parties filed an appeal before the Securities Appellate Tribunal (SAT). The Tribunal set aside the order passed by the Adjudicating officer appointed by SEBI.  

Consequently, SEBI preferred an appeal against the order of the SAT, before the Supreme Court.  On perusing the facts of the case, provisions of the Act and SEBI LODR, the apex court observed that section 188 of the Companies Act 2013 as well as Regulation 23 of SEBI LODR does not prohibit related party entities from voting to rescind a resolution which was passed earlier by the Company. In the absence of any such prohibition, it was open to the appellants to participate in the resolution of December 2016. The bar under Section 188 of the Companies Act and Regulation 23(7) of the LODR Regulations is that no related party can vote to approve any contract or arrangement in which he is a related party. 

The apex court was of the view that SEBI was not justified in taking a ‘hyper technical’ stand by imposing penalty on the company for related party(s) voting on a resolution rescinding an earlier special resolution where the related party abstained from voting on the earlier resolution in his favour. No ill intention on the part of the company was established. 

The Apex court upheld the judgment of SAT and held that the appellants did not commit any violation of the Act or SEBI LODR. 

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