WHETHER ORDINARY RESOLUTION PASSED WITH 51% BY A PARENT COMPANY WITH 20% OF HOLDING COMPANY SHARES TO APPROVE A RELATED PARTY TRANSACTION IS VALID ONE? DOES SECTION 188 OF COMPANIES ACT 2013 AND REGULATION 23(4) OF SEBI LODR HAS A LOOPHOLE?

 WHETHER ORDINARY RESOLUTION PASSED WITH 51% BY A PARENT COMPANY WITH 20% OF HOLDING COMPANY SHARES TO APPROVE A RELATED PARTY TRANSACTION IS VALID ONE?

DOES SECTION 188 OF COMPANIES ACT 2013 AND REGULATION 23(4) OF SEBI LODR HAS A LOOPHOLE?

FACTS OF THE CASE

Imagine a listed company — for example, Tata Steel Limited — places a resolution before its shareholders in the General Meeting to approve the termination of a construction contract entered into with Tata Sons Private Limited (its Promoter Group entity and Related Party).

The company secures the Ordinary Resolution with 51% votes in favour. However, out of this, Tata Sons (holding 20%) also voted in favour of the termination.

IS THIS ORDINARY RESOLUTION VALID?

Does Section 188 of Companies Act 2013 and Regulation 23(4) of SEBI LODR has a loophole?

This question  dives right into the intersection of Companies Act, 2013 (Section 188) and SEBI LODR Regulations (Regulation 23), both of which govern related party transactions (RPTs).

KEY LEGAL PROVISIONS

SECTION 188(1), COMPANIES ACT, 2013:

Certain related party transactions require Board approval and, in some cases, shareholder approval.

SECOND PROVISO TO SECTION 188(1):

If shareholder approval is required, related parties cannot vote to approve the resolution.

REGULATION 23(4), SEBI LODR:

 For listed companies, all material related party transactions must be approved by shareholders, and all related parties are prohibited from voting to approve such resolutions, regardless of whether they are interested in that transaction.

HOW IT APPLIES?

·       Tata Steel Limited is a listed company.

·       The resolution concerns termination of a contract with Tata Sons Pvt Ltd, a promoter group entity and related party.

·       Tata Sons holds 20% shares and voted in favour.

·       The resolution passed with 51% votes in favour, but this includes Tata Sons’ 20%.

·       Problem: Since Tata Sons is a related party, its votes must be excluded when calculating whether the resolution has passed.

·       Excluding Tata Sons’ 20%, the effective votes in favour are only 31%.

·       That means the resolution fails, because it does not secure a majority of the non-related party shareholders.

IS THERE A LOOPHOLE?

Not really. Both Section 188 and Regulation 23(4) are clear: related parties cannot vote to approve their own transactions. SEBI has tightened this further by requiring exclusion of related party votes even if they are not directly interested.

So, in this scenario:

·       The resolution is invalid because Tata Sons’ votes should not have been counted.

·       There is no loophole — the law anticipates this exact situation and prevents promoter group entities from pushing through RPT approvals with their own votes.

KEY TAKEAWAYS

The ordinary resolution passed with 51% including Tata Sons’ votes is not valid. For compliance, Tata Steel must re-run the resolution and secure majority approval excluding Tata Sons’ 20% stake.

#YOUR COMPLIANCE PARTNER R V SECKAR, FCS, LLB 79047 19295,