XYZ Ltd. proposed to enter into a transaction with PQR Private Ltd. for the purchase of 40,000 sq. ft. of residential space. This proposal was treated as related party transaction and was required to be approved by the s

The given facts are similar to the case of SEBI v. R.T Agro (P.) Ltd. (2022) 137-456 (SC) dated 25th April, 2022 . Background of the 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, 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 proceeded to penalise the company with a cumulative sum of ₹ 35 lakhs for the alleged violation of the said Regulation 23. The Securities Appellate Tribunal (SAT) dismissed the order passed by the Adjudicating Officer and allowed the appeal, holding that the bar on 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. SAT 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 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 the 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 SAT had rightly disapproved of the hyper-technical stance of SEBI. SEBI's appeal failed and was dismissed. Subsequent Amendment: However, the Securities Exchange Board of India has amended Regulation 23 vide SEBI (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021, w.e.f. 1.4.2022 . According to amended Regulation 23(4) of SEBI (Listing Obligations and Disclosure Requirements), 2015 , all material related party transactions and subsequent material modifications as defined by the audit committee under sub-regulation (2) shall require prior approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not. Conclusion: (i) In view of the amendment, it can be said that the proposal of purchase of 40,000 sq. ft. of residential space was treated as a related party transaction and it was approved by the shareholders of the Company in the special resolutions. However, further resolution for rescinding the earlier resolution being in the nature of "subsequent material modification" in terms of amended Regulation 23(4) also requires the approval of shareholders and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not. (ii) Accordingly, the action of SEBI in penalising XYZ Limited with a fine of ₹ 35 Lakh is justified under the amended regulation.