Misplaced exemptions in the RPT framework for HVDLEs
Nitu Poddar, Partner | corplaw@vinodkothari.com
After over two years of implementing CG norms for HVDLE on a ‘comply or explain’ basis, a new Chapter VA has been inserted in the LODR on March 28, 2025, governing CG norms for pure HVDLEs. Among other things, the new chapter outlines the requirements relating to board and committee composition, subsidiary governance, RPT framework for HVDLEs, etc.
As regards the RPT framework, the one for HVDLE (reg 62K) introduces an additional requirement: consent from debenture holders through NOC from the debenture trustees.
This criteria has been added to fix the “impossibility of compliance” (of getting approval from unrelated shareholders for material RPTs) in case of HVDLEs as most of these have either nil or negligible unrelated shareholders. This also underscores the requirement to protect the interest of the lenders, particularly the debenture holders – aligned with s. 186(5) of the Companies Act, 2013.
However, there are a few practical implementation issues and inconsistencies, possibly arising from the CG norms (prior to the LODR 3rd Amendment in 2024) for an equity listed entity (chapter IV) being the drafting template for this new chapter. This article highlights these issues, particularly those affecting 62K, given the structure of HVDLEs.
Structural difference between HVDLE and an equity listed company
Before beginning to list such inconsistencies, it is important to highlight the structural difference between an HVDLE and an equity listed company – the very reason why a separate chapter for CG has been rolled out for an HVDLE!
HVDLEs are mostly closely held companies with all or close to all shareholders being related parties, approval from unrelated shareholders often becomes an impossibility. Further, considering that the funding to HVDLEs is by the debenture holders, protection of their interest becomes paramount. Accordingly, approval from the debenture holders have been made mandatory for undertaking any material RPTs by a HVDLE.
13.3.3 Since, both banks and debenture holders are lenders to the borrowing entity, it is felt that a similar approach should be adopted for debenture holders. This provides a layer of protection to the debenture holders who might be at risk of unfair treatment due to some RPTs which may also have an impact on the repayment capability of an entity. It is noted that the debenture holders’ interest is intended to be safeguarded by a debenture trustee [SEBI Consultation Paper date October 31, 2024]
Present exemptions – some extra; some missing
Lets now discuss the inconsistencies that needs to be fixed:
- Grant of exemptions w.r.t transaction between holding company and its wholly-owned subsidiaries and among WOS does not place well with HVDLEs.
The shareholders of the holding and its WOS are effectively the same and any benefit / resources, if at all transferred to the WOS, in case of an RPT between a holding and WOS, is to consolidate in the holding company and remain within the enterprise. Therefore, such transactions are exempted u/r 23(5). But this theory holds correct in case of an equity listed company only where the interest of equity shareholders needs to be protected.
However, in a debt-listed structure, the concern shifts from the ‘enterprise’ to the individual ‘entity’. The exposure of debenture holders is required to be protected. A debenture holder may have exposure only to the WOS, not the holding company. In such case, exempting RPTs between the holding company and its WOS (or between two WOS) overlooks the distinct legal and financial obligations of each entity. The interest of debenture holder can be considered only by seeking “their” approval for a RPT. The relationship of holding company and WOS between the transacting company does not ensure any protection to the debenture holders. The exemption in 62K(7), mirroring 23(5), places debenture holders at the mercy of equity shareholders in the holding company – contradicting the spirit of the rest of Regulation 62K, which otherwise mandates their approval.
Think of a situation where a WOS (which has issued the debentures) upstreams value to its parent. While equity shareholders in the parent may remain unaffected, the WOS may be left with insufficient resources to repay its debenture obligations. Debenture holders cannot claim recourse against the parent; their exposure is limited to the WOS.
- Exemptions in reg 23 brought through LODR 3rd amendment viz. w.r.t remuneration to KMPs and SMPs who are not promoters etc is missing in Reg 62K
Remuneration paid to KMP and SMP who are not promoters, payment of statutory dues, transactions between PSU and CG / SG which are exempted for an equity listed entity have not been replicated under 62K. There is no reason why these exemptions which are provided to an equity listed entity, shall not be provided to an HVDLE, when the underlying intent of these exemptions aligns with an HVDLE.
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