2022 (1) TMI 1245 - AT - SEBI

Related party transaction - Company proposed to enter into a transaction with one Neelkanth Realtors Private Limited for purchase of 40,000 sq. ft. of residential space - Extra-Ordinary General Meeting was convened for rescinding the resolution in which, the related parties also voted - violation of Regulation 23 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 - whether the appellants were justified in voting for rescinding the resolution dated 15th July, 2014 inspite of being related party entities? - HELD THAT - From a perusal of Section 188 of the Companies Act it is apparently clear that no member of the Company shall vote on such resolution to approve any contract or arrangement which may be entered into by the Company, if such member is a related party. Admittedly, in the instant case, when the resolution of 15th July, 2014 was passed, the appellants being related party had abstained from voting and, therefore, they had complied with Section 188 of the Companies Act as well as Regulation 23(7) of the LODR Regulations. Section 188 of the Companies Act as well as Regulation 23 of the LODR does not prohibit related party entities from voting for recalling/rescinding 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 16th 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. As per clear provisions in Section 188 of the Companies Act and Regulation 23 of the LODR Regulations, we find that the appellants did not commit any violation. The AO committed an error in holding that they had violated Regulation 23 of the LODR Regulations. The impugned order cannot be sustained and is quashed. The appeal is allowed

Summary

Issues involved:
Violation of Regulation 23 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 by related party entities in a rescinding resolution.

Detailed Analysis:

1. Delay Condonation Application:
The delay in filing the appeal was condoned by the Tribunal, allowing the application.

2. Penalty Imposition:
The appeal was filed against the penalty imposed on the appellants for violating Regulation 23 of the LODR Regulations by the Adjudicating Officer, amounting to Rs.35 lakhs collectively.

3. Background and Material Transaction:
The case arose from a proposed transaction between R.T. Exports Ltd. and Neelkanth Realtors Pvt. Ltd., treated as a material related party transaction requiring shareholder approval. A special resolution was passed on 15th July, 2014, and later rescinded on 16th December, 2016.

4. SEBI Notice and Allegations:
SEBI issued a notice alleging the appellants' violation of Regulation 23 of the LODR Regulations, leading to the penalty imposition by the Adjudicating Officer.

5. Legal Representation and Hearing:
Legal representatives for both parties presented arguments before the Tribunal, discussing the compliance with Section 188 of the Companies Act and Regulation 23 of the LODR Regulations.

6. Controversy and Legal Provisions:
The main issue was whether the appellants, as related party entities, were justified in voting for rescinding the resolution despite being related parties, as per Section 188 of the Companies Act and Regulation 23 of the LODR Regulations.

7. Judicial Interpretation and Decision:
The Tribunal analyzed the relevant legal provisions and concluded that the appellants did not violate the regulations by participating in the rescinding resolution. The impugned order was quashed, and the appeal was allowed with no costs.

8. Digital Signing and Compliance:
Due to the Covid-19 pandemic, the order was digitally signed, and parties were directed to act upon the digitally signed copy for compliance purposes.

This detailed analysis covers the issues, legal provisions, arguments, and the Tribunal's decision regarding the violation of Regulation 23 of the LODR Regulations by related party entities in the rescinding resolution.