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Securities Appellate Tribunal (SAT): Coram of Justice Tarun Agarwala, (Presiding Officer), Justice M. T. Joshi (Judicial Member), and Dr. C. K. G. Nair (Member), dismissed an appeal filed by ITC Ltd. against the proposed sale transaction of the substantial assets of Hotel Leelaventures Ltd. (Leela) for which the impugned Postal Ballot Notice (PB Notice) was issued and allowed the appeal filed by JM Financial Asset Reconstruction Co. Ltd. (JMF ARC).

“Leela” under financial distress, had decided to restructure its debts under the Corporate Debt Restructuring (CDR) mechanism. The majority lender institutes agreed for the same. On 20-09-2012 the CDR package of Leela was approved. Thereafter, a Master Restructuring Agreement was executed on 25-09 2012 between Leela and State Bank of India (SBI) and other lenders on the other hand. Under the said Master Restructuring Agreement, Leela was to comply with certain terms and conditions, which it could not.

Thereafter, on 25-06-2014, a Trusteeship Agreement under the SARFAESI Act was executed between JMF ARC and the lenders under which a Trust was created named as JMF ARC-Hotels June 2014-Trust. This Trust had issued security receipts to these Joint Lenders and also offer documents were issued for the private placement of the said receipts. Eventually, the CDR package was declared as failed and on 30-06-2014, majority lenders had assigned Rs.4150.14 crore of debt to the Trust. JMF ARC paid Rs.865 crores upfront and issued security receipt worth Rs.3200 crores. It filed disclosures under Regulation 29(2) of the Takeover Regulations on 25-10-2017. JMF ARC later filed a corporate insolvency resolution process before the National Company Law Tribunal Mumbai Bench (NCLT), the proceedings for which are pending.

Due to initiative of JMF ARC, a proposal was received from Brookfield for the “Asset Sale Transaction” of the Company’s assets and the additional transactions between Brookfield and some of the promoters. On 18-03-2019, the Board of Directors of Leela approved the framework agreement comprising the Asset Sale Transaction and PB Notice was issued. On 22-04-2019, the appellant ITC filed a Company Petition before the NCLT complaining of oppression and mismanagement, which too is pending before the NCLT. ITC argued that they were not allowed to obtain a copy of the Framework Agreement but could only take notes.

ITC objected that all the transactions were related party transactions which could not be generally put for the vote including the Promoters, Directors being related parties as also JMF ARC. Further, JMF ARC acting as a Merchant Banker Leela was also to gain a remuneration of Rs 70 cores besides its resolution of debt assigned to it by the lenders. Further, JMF ARC had acquired 26% of the equity of Leela against the provisions of the Takeover Regulations, 2011 it should have been prohibited by SEBI from participating in the voting under the provisions of Regulation 32 of the Takeover Regulations.

SEBI had held that the transactions in question were not related party transactions. They stated that in acquiring 26% of the equity shares of the Leela by JMF ARC, only a technical breach has occurred which could be exempted.

Aggrieved by this order of not restraining Promoters/Directors of Leela and JMF ARC from voting, ITC filed an appeal before SAT.

All the respondents submitted that the appellant was a rival company which was trying to scuttle the transaction only to compel Leela to undergo the debt resolution under the Insolvency and Bankruptcy Code. The appellant, on the other hand, submitted that the Directors and the Promoters of Respondent Leela were pushing ahead with their personal agenda of pocketing an amount of Rs 300 crores through the additional transaction.

The Tribunal answered the following issues:

  • Whether the disputed transactions were related party transactions limiting the voting rights of the directors, promoters of the Leela and of JMF ARC?
  • Whether JMF ARC could be completely prevented from voting in view of the Takeover Regulations?

The Tribunal was of the view that it was not required of them to asses the proposed transaction to find as to whether it is in the interest of the investors. In view of objection to the voting rights or limitations on the voting rights of the directors/promoters of the respondents, the reliefs can be modified in terms of the relevant regulations. The appeal filed by ITC Ltd. was dismissed by the Tribunal citing the following regulations:

Takeover Regulations:

  1. In view of the Takeover Regulations of 2011 an acquirer acquiring 25% or more shares, voting rights or control in a listed Company has to adopt the route as provided by the Takeover Regulations subject to certain exemptions. JMF ARC acquired 26% of the shares of the Company by claiming exemption as provided by Regulation 10 of the Takeover Regulations. SEBI in the impugned order held that the said acquisition was only a technical breach of the Regulations fit for exemption and did not exercise its power to issue directions as provided by Regulation 32 of the Takeover Regulations.
  2. Corporate debt restructuring scheme was announced by the Reserve Bank of India through various circulars from time to time for the purpose of restructuring the debt of financially distressed companies in an attempt to revive such Companies. The circulars provided a basic framework. Specific plans were to be worked out for a Company inter alia regarding interest moratorium, plans of payment, etc. to be worked out in the agreement which would be approved by the Empowered Group of CDR scheme. In the event of default, the agreement can provide for certain contingencies. Clause 7.2 of the Master Restructuring Agreement provided for remedy upon default. Therefore, the covenant regarding conversion right would come into picture only when the CDR scheme fails i.e. default is made by the borrower in pursuance of the CDR scheme.

LODR Regulations: Related Party Transactions:

  1. The appellant had objected the exercise of PB Notice asking all the shareholders including the respondents who are the promoters/directors of the in view of the fact that the proposed Asset Sale Transaction of the Company with Brookfield was a composite transaction to be consummated only when additional transactions with the promoters personally are also agreed. It was submitted that as the nature of the transaction was, the same would be a related party transaction attracting the provisions of Regulation 23 of the LODR Regulations.
  2. Therefore, the entire transaction was held to be a composite transaction. Further, the additional transaction between Brookfield and ITC cannot also be termed as related party transactions and, therefore, the provisions of Regulation 23 of the LODR Regulations would not be attracted.[ITC Ltd. v. SEBI, 2019 SCC OnLine SAT 185, decided on 26-09-2019]
Experts CornerGaurav Pingle and Associates

The provision relating to “related party transactions” have been incorporated for the first time in the Indian Company Law. The provisions are prescribed in Section 188 of the Companies Act, 2013 (Act). Under the Companies Act, 1956, there was no explicit provision as “related party transaction”, however, it can be said that Section 297 of the Companies Act, 1956 slightly corresponds to Section 188 of the Act. The scope and nature of transactions, number of related parties involved, compliances and disclosure requirements contemplated have significantly been enhanced under the provisions of Section 188 of the Act.

This article is a compilation and analysis of the relevant provisions relating to related party transactions. The article also contains the checklist on ensuring compliance of relevant provisions relating to related party transactions.

Following is the basic checklist for identifying the applicability of Section 188 of the Act:

(1) Transactions with company— It is necessary that a company is a party to the said transactions. The company can either provide or avail the necessary services or the company can sell or purchase or supply of any goods or materials.

(2) Identification of prescribed transaction— It is necessary that the company enters into a prescribed transaction [as provided in sub-section (1) of Section 188 of the Act], which includes: (i) sale, purchase or supply of any goods or materials; (ii) selling or otherwise disposing of, or buying, property of any kind; (iii) leasing of property of any kind; (iv) availing or rendering of any services; (v) appointment of any agent for purchase or sale of goods, materials, services  or property; (vi) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and (vii) underwriting the subscription of any securities or derivatives thereof, of the company.

(3) Identification of prescribed “related party”— It is necessary that the company enters into a prescribed transaction with a “related party” [as provided in sub-section (76) of Section 2 of the Act]. Some of the related parties are: director, relative of director, key managerial personnel, relative of key managerial personnel, firm in which director or director’s relative is a partner, private company or public company in which director or manager is interested [as prescribed in Section 2(76) of the Act], subsidiary company, holding company, associate company, investing company, venturer company (as defined).

If all the three conditions are satisfied, then it is necessary to proceed with the approvals, compliances and disclosures under the provisions of Section 188 of the Act. The checklist for the identified related party transactions is as follows:

(1) Approval of Audit Committee (under Section 177 of the Act)— The Audit Committee shall approve the related party transactions or approve any modification to the related party transactions. The Audit Committee can also give an omnibus approval to certain related party transactions. The Committee shall consider two factors while specifying the criteria for making omnibus approval, namely, (i) repetitiveness of the transactions (in part or in future); and (ii) justification for the need of omnibus approval. Such omnibus approval for the related party transactions shall be obtained on annual basis [Rule 6-A of the Companies (Meetings of Board and its Powers) Rules, 2014]. Such omnibus approval shall be valid for a period not exceeding 1 financial year and shall require fresh approval after expiry of such financial year. Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

(2) Approval of the Board of Directors (under Section 188 of the Act)— The Board of Directors shall give consent to the related party transactions at its meeting only. Such meeting can be held in person or through video conferencing or other audio-visual means as may be prescribed. Such consent of the Board of Directors cannot be obtained by passing a circular resolution or by any other mode (as prescribed in Section 175 of the Act). Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides for the requisite disclosures to the Board of Directors in agenda of the meeting at which the resolution is proposed to be moved. The director interested in any contract or arrangement shall not be present at the meeting during discussion on such subject- matter of the resolution relating to such contract or arrangement.

(3) Approval of the shareholders (under Section 188 of the Act)— Prior approval of the shareholders by ordinary resolution shall be required if the company is entering into a contract or arrangement with a related party if the transaction(s) exceeds the prescribed limits [i.e. as prescribed in Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014]. The said rule has prescribed monetary threshold for each type of prescribed transaction. The limits specified shall apply for transaction(s) to be entered into either individually or taken together with the previous transactions during a financial year. The said rule provides for the disclosures in the explanatory statement to be annexed to the notice of general meeting. Following are some important points relating to approval of shareholders:

  (i) Member of the company shall not vote on the ordinary resolution approving related party transaction if such member is a related party (this provision is not applicable to private companies. MCA Notification dated 5-6-2015).

  (ii) Approval of the shareholder is not applicable in the cases where 90% or more members (in number) are the relatives of promoters or are related parties (applicable to private company and public company, both).

  (iii) In case of wholly-owned subsidiary company, the ordinary resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between the wholly-owned subsidiary company and the holding company, subject to the condition that the accounts of the subsidiary company are consolidated with holding company and placed before shareholders at the general meeting for its approval.

  (iv) Certain exemptions are applicable to government company (MCA Notification dated 5-6-2015).

(4)Exemption from the compliances of Section 188 of the Act— Consent of the Board of Directors and prior approval of the shareholders is not required when such related party transaction is in the ordinary course of its business and on arm’s length basis. The Act has not defined “ordinary course of its business”. For this purpose the Board of Directors is required to exercise their judgment. However, the Act has defined transaction on arm’s length basis. It means a transaction between two related parties that is conducted as if they were unrelated so that there is no conflict of interest. There is no exemption for obtaining the approval of the Audit Committee.

(5)Disclosures in Board’s report— Every contract or arrangement entered into by the company shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement [Section 188(2) of the Act]. Pursuant to Section 134(3) of the Act, the Board’s report shall include particulars of contracts or arrangements with related parties in prescribed form (Form AOC-2).

(6)Register of contracts or arrangements in which directors are interested— According to Section 189 of the Act, the company shall maintain a register (Form MBP-4) for related party transactions. After entering the particulars in the register, such register shall be placed before the next Board meeting and signed by all directors present at the meeting. The entries in the register shall be made at once, whenever there is a cause to make entry, in chronological order and shall be authenticated by the Company Secretary of the company or by any other person authorised by the Board for the purpose. Such register shall be kept at the registered office of the company. The register shall be preserved permanently and shall be kept in the custody of the Company Secretary of the company or any other person authorised by the Board for the purpose.

(7)Other important checkpoints— Section 188 (3) of the Act provides for ratification of the related party transaction entered into by a director or any other employee without consent of the Board of Director or approval of shareholders in general meeting. Ministry of Corporate Affairs (by its Circular dated 17-7-2014) has exempted companies from the compliance of Section 188 of the Act, arising out of compromises, arrangements and amalgamations dealt under the specific provisions of the Companies Act.

The provisions relating to related party transactions are one of the most amended provisions under the Act. In my view, “related party transactions” is one of the critical tests of corporate governance. The above checklist relates to related party transactions by private companies or unlisted public companies. In case of listed companies, the provisions of Section 188 of the Act and Regulation 23 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, both shall be complied with.

* Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at