Penalising by taking a ‘hyper-technical’ view of law on Related Party Transactions not justified: SC

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  • Last Updated on 2 May, 2022

Related Party Transactions; SEBI;

Case Details: Securities and Exchange Board of India v. R.T. Agro (P.) Ltd. - [2022] 137 496 (SC)

Judiciary and Counsel Details

    • Dinesh Maheshwari and Aniruddha Bose, JJ.
    • S. Niranjan Reddy, Sr. Adv. Abhishek BaidAnup JainAshok Kr. Jain and Praneet Das, Advs. for the Appellant. 
    • Pesimodi, Sr. Adv. Neville LashkariMs. Samriti Ahuja, Advs., Lakshmeesh S. Kamath and Joby Mathew, AOR for the Respondent.

Facts of the Case

In the instant case, a company ‘R. T. Exports Limited’ proposed to enter into a transaction with ‘Neelkanth Realtors Private Limited’ for the purchase of 40,000 sq. ft. of residential space. This proposal was treated as a related party transaction and was required to be approved by the shareholders of the Company.

Accordingly, a special resolution was approved by R. T. Exports Limited. In terms of Section 188 of the Companies Act, 2013, the related parties abstained from voting on this special resolution. Thereafter, an Extra-Ordinary General Meeting was convened for rescinding the resolution in which, the related parties also voted.

However, the appellant-SEBI took up the matter on a complaint and issued notice alleging violation of Regulation 23 of the SEBI (Listing Obligations and disclosure Requirements) Regulations, 2015. The Adjudicating Officer, ultimately, proceeded to penalise the present respondents with a cumulative sum of Rs. 35 lakhs for the alleged violation of the said Regulation 23.

The Securities Appellate Tribunal dismissed the order passed by the Adjudicating Officer and allowed the appeal holding that the bar of voting as per Section 188 of the Companies Act, 2013 on related parties operated only at the time of entering into a contract or arrangement, i.e., when the resolution was passed; and therein the said related parties indeed abstained from voting. The Appellate Tribunal found no fault in the said parties voting in the recalling/rescinding of the said resolution.

Supreme Court Held

On further appeal, the Apex Court held that the SEBI was not justified 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.

The Court held that the view taken by SAT in the given facts and circumstances of the case is to be upheld as it appeared to be a plausible view of the matter since no ill-intent on the part of the respondents (company) was established. It was held that the SAT had rightly disapproved of the hyper-technical stance of SEBI. SEBI’s present appeal failed and therefore be dismissed.

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