The right of a shareholder to receive dividends is conferred under Section 123(5) of the Companies Act, 2013 (‘CA, 2013’). The corresponding obligations on the company are elaborated in Chapter VIII of the Act (Sections 123 to 127), read with the Companies (Declaration and Payment of Dividend) Rules, 2014. For listed companies, Regulations 42 and 43 of the Listing Regulations, 2015 further prescribe a few procedural requirements for declaration and payment of dividend.
However, neither the CA, 2013 nor the Listing Regulations, 2015 recognise a shareholder’s unilateral right to waive the dividend declared by the company.
Waiver by a shareholder – whether dependent on other shareholders
Although the statutory framework does not provide for a waiver, the relationship between the company and its shareholders can, to an extent, be governed by a contract, so long as such contract is not ultra vires the CA, 2013. It is a settled position that the Articles of Association (AoA) of a company form a contract between the company and its members and also inter-se among the members (see Naresh Chandra Sanyal v. Calcutta Stock Exchange Association1).
Subject to the provisions of the Companies Act the Company and the members are bound by the provisions contained in the Articles of Association. The Articles regulate the internal management of the Company and define the powers of its officers. They also establish a contract between the Company and the members and between the members inter se. The contract governs the ordinary rights and obligations incidental to membership in the Company
As per the Indian Contract Act, 1872 (‘Contract Act’), a proposal becomes a promise, only when it is accepted by the counterparty. A promise takes the form of an agreement which, if enforceable under law, becomes a contract. Therefore, there has to be assent from both the parties, in order to constitute a contract. Where one party only proposes, and the other does not accept, there is no question of a promise/agreement/contract.
Further, when a shareholder intends to waive his rights as to dividend – such a dividend foregone can be construed as a gratuitous transfer to the kitty of other shareholders – in essence, a gift. Under the settled principles of common law and as per section 122 of Transfer of Property Act, 1882, a gift is valid only when accepted by the recipient.
122. “Gift” defined.—“Gift” is the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee
XX
Therefore, for a waiver to operate as a gift benefiting others, it must be accepted by the general body of shareholders who stand to receive this “gift”. Therefore, without the express consent by other shareholders, a request of waiver of dividend by one shareholder cannot be acceded to.
Binding nature of promises under Contract Law
Section 37 of the Contract Act mandates that parties to a contract must perform or offer to perform their respective promises, unless such performance is excused under the Act or any other applicable law. Where under articles of association, a company agrees to declare and pay the dividend, the shareholders agree to receive the same in accordance with the provisions of the articles. Therefore, once a dividend is declared, the company is under a legal obligation to pay it and the shareholder is obligated to receive it. The shareholder cannot unilaterally waive this right unless such dispensation is as per law.
Here, it might also be relevant to discuss the peripheries of section 63 of the Contract Act, which provides that a promisee may waive or remit performance wholly or in part. But the spirit of this provision is to release the promisor of an obligation, not to impose an additional burden. In Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd.2 it was held that a promisee may extend the time for the performance of the promise u/s 63 of the Contract Act. However, the promisor may choose not to accept the extended time if it will hamper the performance of his promise. Therefore, a promisor is not bound to accept any waiver of the promisee, he is allowed to weigh-in his/her own interests.
Therefore, section 63 does not operate without any boundaries.
Implications of unilateral waiver on the company
Dividend declaration is a strategic financial decision taken by the Board after considering multiple factors such as growth strategy, return on equity, share price impact, liquidity needs, and need for reserves. If a company provides this right to one shareholder, it may have to provide the same right to other shareholders. Therefore, a unilateral waiver by a shareholder could distort this delicate balance in several ways, as it may affect the equitable treatment of shareholders and also impact the company’s policy on retained earnings/general reserves.
Rebutting section 127 concerns
One may argue that Section 127 of the CA, 2013 which allows shareholders to give directions regarding the “manner of payment” of dividend, empowers them to waive their dividend. However, this is a misreading of the provision. Section 127 pertains to mode and timeline of payment, not the right to forgo the dividend altogether. Refusing to entertain a waiver does not constitute a violation of this section.
Closing thoughts
Thus, what appears to be an act of generosity might actually prejudice other shareholders and strain the company’s governance framework. Therefore, in our view, a shareholder seeking waiver of dividends may have a generous intent – however, that cannot happen without the approval of the general body of shareholders.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-05-30 14:28:492025-05-30 17:57:03Waiver of dividend by shareholder: Whether generosity can become atrocity?
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-04-29 18:58:562025-04-29 21:44:01Presentation on a Can of "Cannots": Redefining Secretarial Audits
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.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-04-29 15:12:402025-04-29 17:26:35Misplaced exemptions in the RPT framework for HVDLEs
Enterprise Level v/s Entity Level: Paradox of a Wholly owned Subsidiary
Wholly owned Subsidiaries (WoS) form a particular paradox in corporate laws with two contradictory positions – (a) the transactions entered into between the holding company and its WoS are viewed as transactions within a group, thus, permitting a seamless flow of resources between the two without any objection, looking at an “enterprise” level whereas, (b) limiting the access of the shareholders and creditors of the holding company and the WoS to the respective entity’s resources, thereby separation of the two at an “entity” level.
Disregarding ‘entity’ concept over ‘enterprise’ concept: exemptions w.r.t. WoS
Section 185 of CA 2013 exempts any financial assistance to the WoS from the compliance requirements under the section, and the limits on loans, guarantees, investments or provision of security under section 186 do not apply for transactions with WoS. Section 177(4)(iv) and 188 of CA 2013, pertaining to RPT controls, also extend certain exemptions for transactions with WoS. Reg 23(5) of SEBI LODR also exempts transactions with WoS as well as between two WoS from approval requirements, at both the Audit Committee and shareholders’ level. Reg 37A of SEBI LODR contains an exemption from shareholders’ approval requirements for sale, lease or disposal of an undertaking to the WoS. In each of the aforesaid provisions, the underlying presumption remains the same – the accounts of the WoS are consolidated with that of the holding company, and hence, the flow of resources remain within the same ‘enterprise’, despite change of ‘entity’. Thus the law takes an ‘enterprise’ wide view instead of an ‘entity’ level view while providing for such exemptions.
Factors reinforcing the concept of separation of entity
On the other hand, the outreach of shareholders of a company is limited at an ‘entity’ level, that is to say, the shareholders of the holding company do not have access to the general meetings of the WoS. Similarly, the creditors of each entity do not have any recourse against the other entity. For instance, where the holding company has outstanding dues, but there are resources at the WoS level, can the creditors reach to the assets of the WoS? The answer is no. Similarly, a vice versa situation is also not possible. In fact, under the Insolvency and Bankruptcy Code too, the assets of the subsidiary are kept outside the purview of the liquidation estate of the holding corporate debtor [Section 36(4)(d)].
Further, the board of a WoS is different from its holding company. The board of the holding company does not have any rights over the board of the subsidiary. Therefore, under these situations, transactions between the holding company and its WoS, though between companies that are 100% belonging to the same group, cannot be viewed as completely seamless or free from any corporate governance concerns.
RPTs between holding company and WoS: can the ‘enterprise’ approach be taken?
The aforesaid discussion makes it clear that while an ‘enterprise’ wide approach is taken in granting exemptions to WoS, the separation of legal entities cannot be completely disregarded, because the outreach of the shareholders, creditors and the board of directors remain limited. Now from the point of view of related party transactions, can it be argued that the transactions between a holding company and WoS are without any restraint altogether? For example, does the concept of arm’s length has no relevance in case of a transaction between a holding company and WoS?
Concept of arm’s length and relevance in transactions with WoS
A light touch regulation or inapplicability of certain controls or approvals does not mean that arm’s length precondition becomes unnecessary. If such a view is taken, then the flow of resources between the holding company and the WoS will be completely without any fetters, thus breaching the concept of corporate governance at an entity level. For instance, can the board of directors of the holding company be absolved from its responsibilities to safeguard the assets of the holding company where the same flows to the subsidiary without any consideration? The answer surely is a no. Both ‘entity’ level and ‘enterprise’ level are significant, and hence, one cannot disregard the separation of legal entities, particularly, in the context of protection of assets of the entity (also see discussion under Role of Board below).
As regards the concept of arm’s length, the same is omnipresent – required to be ensured in transactions with related parties as well as unrelated entities. The meaning of arm’s length transaction, as defined under SA 550 pertaining to Related Parties, is as follows:
A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.
Therefore, ‘independence’ and ‘own interests’ are important elements of an arm’s length transaction. If compromised in RPTs with WoS, absence of arm’s length criteria could lead to uncontrolled flow of wealth from the holding company to WoS, and may also lead to abusive RPTs.
Are WoS structures immune from abuse?: Deploying WoS as a stop-over for abusive RPTs
The exemptions w.r.t. transactions with WoS make the same prone to misuse, through use of the WoS as a conduit or a stop-over for giving effect to arrangements with non-exempt RPs. For instance, a listed entity in the FMCG sector is required to provide financial assistance to its upstream entities (promoter group entities). There may be a lack of business rationale and commercial justification for such a transaction, and therefore, it is highly unlikely that such a transaction would get the approval of the AC. Therefore, in order to give effect to the transaction, the company may route the same through its WoS, and thus escape RPT controls at its AC level. The WoS may, in turn, pass on the benefit to the promoter group entities, through a series of transactions, in order to cover the real character of the transaction (see figure below).
A guidance note published by NFRA also, requires identification of indirect transactions, including through ‘connected parties’. In order to ensure no such indirect transactions have occurred, the management is expected to establish procedures to identify such transactions, and to obtain periodic confirmations from the directors, promoter group, large shareholders and other related parties that there are no transactions that have been undertaken indirectly with the listed company or its subsidiaries or its related parties.
Role of board
The role of the board towards avoiding conflicts of interests is deep-rooted under the corporate laws and securities laws, under various applicable provisions. For instance, the directors have a responsibility towards safeguarding the assets of the company and for preventing and detecting fraud and other irregularities [Section 134(5)(c) of CA 2013]. Section 166 of CA 2013 specifies the duties of directors. These include, among others, the duty to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company [Section 166(2)].
The key functions of the board, as contemplated under Reg 4 of LODR, also includes monitoring and managing potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions.
Scope of Exemption under Applicable Laws
As stated above, Reg 23(5) of SEBI LODR exempts RPTs entered into between a holding company and its WoS from the approval requirements of both the AC and the shareholders.
Apart from Reg 23 of LODR, the RPT provisions are contained under Section 177 and 188 of CA 2013. Under section 177(4)(iv) of CA 2013, all RPTs require approval of the AC. The fourth proviso to the said sub-section exempts RPTs entered into with WoS from AC approval requirements. However, the said exemption is not absolute. The proviso reads as follows:
Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.
Thus, the exemption for RPTs with WoS does not apply in case of a transaction referred u/s 188 of CA 2013. In other words, where an RPT with WoS triggers approval requirements u/s 188, the same will also be required to be approved by the AC u/s 177 first.
Meaning of “a transaction referred to in section 188”
Section 188(1) of CA 2013 provides a list of 7 types of transactions. The list is wide enough to cover almost all types of transactions, except financial assistance in the form of loans etc. However, section 188 becomes applicable, only, in cases where any one or more of the two most crucial elements of a transaction are missing – (i) ordinary course of business and (ii) arm’s length terms. In cases where a transaction does not meet the ordinary course of business or the arm’s length criteria, the same is referred to the board of directors u/s 188 of CA 2013, and requires prior approval of the board.
The fifth proviso to section 188(1) also contains an exemption for RPTs between the holding company and its WoS. Note that the said exemption is applicable only with respect to the approval of the shareholders, the approval of board is still required for RPTs that lack one of the two elements stated above, even though with WoS.
Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution:
XXX
Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval:
The conditional exemption given u/s 177 and the absence of any exemption from board’s approval u/s 188 clearly confirms the requirement of ensuring arm’s length terms in transactions with WoS.
Expectations from AC
The AC is the primary decision-making authority in respect of matters relating to related party transactions. NFRA, the audit regulator of the country, has published the Audit Committee – Auditor Interactions Series 3 dealing with audit of Related Parties. The guidance sets out potential points on which the AC may interact with the auditors in the context of RPTs. Where a company avails exemptions w.r.t. AC and shareholders’ approval, the guidance note requires documentation of the rationale for not obtaining Audit Committee’s and Shareholders’ approvals.
Thus, the AC is expected to be the scrutinising authority in ensuring that the terms on which a transaction is proposed to be entered into with a WoS are at an arm’s length, which, in turn, would require bringing the transaction before the AC, if not for approval, then for a pre-transaction scrutiny and information.
Disclosures in financial statements
Ind AS 24 pertaining to Related Party Disclosures require disclosures to be made in the financial statements that the RPTs were made on terms equivalent to those that prevail in arm’s length transactions. However, such disclosure can be made only if such terms can be substantiated. Note that the Ind AS 24 does not contain any exemption for WoS. In the absence of a strict scrutiny of RPTs with WoS for satisfaction of arm’s length basis of the terms of the transaction, such an assertive statement in the financial statements for arm’s length of the terms is not possible.
Dealings with WoS: the suggested approach
In view of the expectations from the AC, board and the auditors, and the potential risks of abusive RPTs using WoS as an intermediary, the following approach may be undertaken before entering into a transaction with WoS:
A pre-transaction scrutiny may be conducted by the AC for RPTs to be entered into between the holding company and its WoS. This should include all the necessary details as may be required by the AC, such as, nature of transaction, terms of the transaction, total expected value of the transaction etc.
Based on such scrutiny, the AC may give its comments or recommendations where the same has any concerns. Necessary modifications may be carried out to address the comments of the AC, in order to make the transaction commercially viable for the holding company.
Where the proposed transaction is not in (a) ordinary course of business or (b) not at an arm’s length basis, the same will require approval of the AC. The AC will refer the transactions to the board for approval u/s 188.
Every RPT entered into between the holding company and its WoS should, as a part of the quarterly review, be reported back to the AC. Any alteration in terms or value of the transactions should be brought to the notice of the AC.
As required under Reg 23(9) of the LODR, the transactions with WoS to be reported to the SEs on a half-yearly basis.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-04-28 15:14:372025-04-28 17:27:10RPTs: Wholly-owned but not wholly- exempt
Through the updated SEBI FAQs on LODR Regulations rolled out on April 23, 2025, SEBI has yet again clarified that listed entities are required to disclose the names of all entities forming part of promoter / promoter group (P/PG), irrespective of any shareholding in the listed entity in the quarterly reporting of shareholding pattern to the stock exchanges. (FAQ no. 19 of section II)
Regulation 31(4) of LODR (inserted via SEBI (LODR) (Sixth Amendment) Regulations, 2018) clearly mandates all entities falling under promoter and promoter group to be disclosed separately in the shareholding pattern. However, inspite of this clear mandate, as a matter of practice, India Inc seemingly has decided to disclose names of only such PGs who have shareholding in the company. With this reiteration of regulators expectation in its FAQ, this is the sign for the listed entities to buckle up and collate the entire list of PGs, irrespective of shareholding, for disclosure in the shareholding pattern (next disclosure due in June, 2025)
It should be noted that a complete list of P/PG complements the listing of related parties as one of the elements of the definition of related party is “any person or entity forming a part of the promoter or promoter group of the listed entity”.
SEBI’s persistence requiring disclosure of complete list of PG
Since the longest time now (first through reg 31A and then through reg 31(4) among others), SEBI has been stressing in every way the requirement of disclosing the complete list of PG, irrespective of their shareholding. Below are the instances where SEBI has identified the practice / clarified its position, over and over again.
Consultative Paper on re-classification of P/PG entities and disclosure of promoter group entities in the shareholding pattern dated Nov 23, 2020
While Reg 31 of SEBI (LODR) Regulations, 2015 mandates that all entities falling under promoter and promoter group shall be disclosed separately in the shareholding pattern, there have been cases where listed companies have not been disclosing names of persons in promoter(s)/ promoter group who hold ‘Nil’ shareholding. There is therefore a need for further clarification in this regard to the listed companies
NSE FAQs on Disclosure of holding of specified securities and Holding of specified securities in dematerialized form dated Dec 14, 2022
Q6. Can the name of the promoter be removed from the Shareholding Pattern during the Quarter in case the Shares are transferred/sold?
The name of the promoter can be removed only after seeking approval of Reclassification from the Exchange. Meanwhile Companies are requested to show the promoters/promoter group with nil shareholding till the approval for Reclassification is granted from Exchange.
SEBI Circular on disclosure of holding of specified securities in dematerialized form dated March 20, 2025
Table II of the shareholding pattern has been amended as under: i. A footnote has been added to the table II that provides the details of promoter and promoter group with shareholding “NIL”
Getting re-classified to stop disclosure – the only way
In the matter of Jagjanani Textiles Limited, upon transferring the entire shareholding, the name of a PG entity was not disclosed in the P/PG category; rather disclosed in the public category. SEBI observed this as a violation of Reg 31(4). [See para 12 of the Order]
“12. It is observed that the promoter group entities of Noticee 1 i.e. Noticee 5 and 3 had acquired 2,94,000 shares and 5,51,424 shares during the quarter ended March 2013 and March 2014 respectively and since then both the Noticee 5 and 3 had been the shareholders of the Noticee 1 till the date of filing of DLoF i.e. April 10, 2023 except during the quarter ended September 2014 to June 2015 w.r.t the Noticee 5 where she ceased to be the shareholder. In this regard, it is observed that in terms of Regulation 31(4) of LODR Regulations, all entities falling under promoter and promoter group are required to be disclosed separately in the shareholding pattern appearing on the website of all stock exchanges having nationwide trading terminals where the specified securities of the entities are listed, in accordance with the formats specified by the Board. It is therefore alleged that both the Noticee 5 and 3 had been wrongly disclosed as Public shareholder during the aforesaid period. Further, it is observed that the Noticee 1 had confirmed to rectify the error in the shareholding pattern filed for the quarter ended June 30, 2023”
Where an entity not holding any shares in the listed entity wants to stop disclosing its name in the shareholding pattern – the only way is to apply for reclassification u/r 31A and get such approval from the stock exchange. Until such approval is obtained, one needs to disclose its name in the P/PG category.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-04-25 11:24:252025-04-25 17:48:08NAME THEM ALL: SEBI reiterates mandatory disclosure of all promoter group entities in shareholding pattern, regardless of shareholding
– SEBI brings ratification provisions for RPTs skipping prior AC approval
– Jigisha Aggarwal, Executive and Sourish Kundu, Executive
The laws governing related party transactions (RPTs) in India mandate seeking prior approvals for RPTs. The law has also provided for a rescue in the name of ‘ratification’ where prior approval could not be taken or taking prior approval was not feasible for various reasons. This article explains the meaning of ratification, consequences of failure to ratify either due to lapse of the time limit or exhaustion of the monetary limit, and reinforces the need for companies to tighten their process of RPT approvals. In particular, this article becomes pertinent in view of the recent amendments in Reg. 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”) inserting express provisions for ratification of RPTs by Audit Committee (“AC”).
The ratification provision serves as a remedial measure, offering companies a chance to address regulatory lapses. This naturally raises several critical questions:
Does ratification effectively rectify non-compliance arising from the failure to obtain prior approval?
What happens if the required conditions for ratification by the AC are not fulfilled?
Can material RPTs be ratified by shareholders or does the violation remain unresolved?
These questions and other related concerns are analyzed, explored and discussed in detail in this article.
Meaning of Ratification
In simple terms, ratification means giving formal consent to an act, deed, contract, or agreement that initially lacked the required approval, thereby making it valid. It involves granting consent to an action that has already taken place.
The Latin maxim “Omnis ratihabitio retrorahitur et mandato priori aequiparatur” translates to “every ratification is retroactively placed on equal footing with an act performed with prior authority.” This applies when someone acts on behalf of another without prior consent—if the concerned person later ratifies it, the act is treated as if it had been authorized from the start.
Ratification can be seen as a counterpoint to Admiral Grace Hopper’s well-known saying, “It is better to ask forgiveness than permission.” While this principle supports fast decision-making in large organizations, ratification should remain an exception rather than the norm for post-facto approvals.
The Supreme Court, in the matter of National Institute Of Technology & Anr v. Pannalal Choudhury & Anr [AIR 2015 SC 2846], traced back the meaning of the term “ratification” to a succinctly made definition by the English Court in the matter of Hartman v Hornsby [142 Mo 368 : 44 SW 242 at p. 244 (1897)] as follows:
“Ratification’ is the approval by act, word, or conduct, of that which was attempted (of accomplishment), but which was improperly or unauthorisedly performed in the first instance.”
“The High Court was right when it held that an act by a legally incompetent authority is invalid. But it was entirely wrong in holding that such an invalid act cannot be subsequently ‘rectified’ by ratification of the competent authority. Ratification by definition means the making valid of an act already done. The principle is derived from the Latin maxim ‘Ratihabitio priori mandato aequiparatur’ namely ‘ a subsequent ratification of an act is equivalent to a prior authority to perform such act’. Therefore ratification assumes an invalid act which is retrospectively validated.”
firstly, the person whose act is ratified must have acted on behalf of another person;
secondly, the other person on whose behalf the act was performed must be legally competent to perform the act the question and must continue to be legally competent even at the time of ratification; and
thirdly, the person ratifying the act does so with full knowledge of the act in question.
As is understood from the jurisprudence around, the following are the broad principles of ratification –
An act which is ultra-vires the company cannot be ratified.[2]
An act which is intra-vires the company but outside the scope of an authority in the company may be ratified by the company in proper form.[3]
There can be no ratification without an intention to ratify.[5]
The person ratifying the act must have complete knowledge of the act.
Ratification relates back to the date of the act ratified i.e., has retrospective effect.[6]
Ratification cannot be presumed, i.e., overt steps should have taken for the act of ratification.[7]
Global framework on ratification of RPTs
Ratification of RPTs is not a unique affair prevalent only in the Indian context. Even in the global parlance, regulatory references exist around the same, however, there is no concrete evidence of conditionalities around the same:
The newly notified UK Listing Regulations UKLR-8 (notified w.e.f. 29th July, 2024) requires the companies to take prior approval of the board before entering into an RPT, however, does not elaborate on the manner of seeking ratification if prior approval has not been taken. Further, pursuant to UKLR-8, the shareholders’ approval requirements for RPTs under LR-11 has been substituted with a notification requirement.
Article L225-42 of the French Commercial Code deals with the cancellation of transactions referred to in Article L225-38 (understood to be equivalent to related party transactions) without prior authorisation of the board of directors, if such transactions have prejudicial consequences for the company. However, such transactions, entered into without prior authorisation of the board, can still be ratified by shareholders through a vote in a general meeting, based on the special report obtained from the auditors on setting out the circumstances due to which the required approval process was not followed. No interested party can vote on such a matter.
Chapter 2E of the Corporations Act, 2001 of Australia deals with RPTs that require prior shareholders’ approval. Where such approval is not obtained, penal provisions may attract on the persons involved in such violation, although the same does not impact the validity of such contract or transaction except by way of an injunction granted by a court to prevent the company from giving benefit to the related party.
Circumstances that may result in requiring ratification
Practically, there may be genuine cases where the transaction could be blessed with prior approval and therefore be at the mercy of ratification, few cases:
Subsequent identification of a related party: Companies maintain a related party list to identify RPTs and ensure necessary controls, including prior approvals. However, an entity/person may sometimes be overlooked / become a related party subsequently, leading to transactions occurring without prior approval.
Increase in contract value due to market changes: Market fluctuations can cause price revisions, potentially breaching the ceiling limit of an existing omnibus approval. Until the AC approves an enhancement in the omnibus approval value, any transactions exceeding the OA limit would require ratification.
Oversight of transactions: Manual RPT controls are prone to oversight, where a business team may enter into a related party transaction without verifying whether prior approval has been obtained.
Exigency of business: In rare cases, an unanticipated but necessary transaction may arise in the company’s interest. Following the legal approval process beforehand might result in lost opportunities or financial losses.
While strong internal controls, automation, and strict monitoring can mitigate most of these issues, obtaining prior AC approval in every case may not always be feasible—especially for large listed entities with numerous RPTs. In such instances, ratification serves as a remedial mechanism.
Ratification of RPTs by Audit Committee
Section 177(4) of the Companies Act, 2013 explicitly allows ratification of RPTs undertaken without prior AC approval for all companies [third proviso to clause (iv) of Section 177(4)]. However, before the LODR (Third Amendment) Regulations, 2024 (effective from December 13, 2024), no such provision existed for listed entities under the Listing Regulations.
With the recent amendment, Reg. 23(2)(f) now extends ratification provisions to listed entities. However, this is not unconditional, as specific criteria must be met, which are discussed in detail later.
The following section examines the differences between ratification provisions under the Listing Regulations and the Companies Act..
Ratification of RPTs by the Audit Committee – Listing Regulations vis-a-vis Companies Act, 2013
Basis
Listing Regulations
Companies Act, 2013
Governing Provision
Reg. 23(2)(f)
Section 177(4)
Authority to ratify
Independent directors forming part of the AC
All members of the AC
Permitted value
Rs 1 crore, aggregated with all ratifiable transactions during a FY
Rs 1 crore per transaction
Prescribed timelines
Earlier of: – 3 months from date of transaction – Next AC meeting
Within 3 months from the date of transaction
What if the value / timeline is exceeded
Transaction shall be voidable at the option of the AC
Disclosure requirements
Details of ratifications to be disclosed along with the half-yearly disclosures of RPTs under Reg. 23(9)
No additional disclosures prescribed
Ratification of material RPTs
AC does not have the authorisation to ratify material RPTs
NA
Consequences of not getting AC approval for RPT
The concerned director(s) shall indemnify the company against any loss incurred by the company concerned, if: i. The transaction is with the related party to any director, or ii. The transaction is authorised by any director
Conditions for ratification of RPTs under Listing Regulations
The trail of AC ratifying an RPT is represented below:
Each condition is discussed in detail below:
Authority to ratify
Only those members of the AC who are IDs, can ratify RPTs.
Rationale: This is to ensure that the authority to ratify is in sync with the authority to approve. In terms of Reg. 23(2), only those members of AC who are IDs are authorised to approve RPTs, and hence, the power of ratification also vests with them only.
Given their role and responsibilities, Independent Directors (IDs) are least likely to have a “conflict of interest”, which is the primary concern behind RPT regulations.
SEBI’s penalty order in the LEEL Electricals case underscores the importance of IDs, as penalties were imposed on them for failing to fulfill their AC duties in overseeing RPTs. The company was penalized for fund diversion involving certain related parties.
Timeline
Earlier of:
3 months from the date of the transaction, or the next meeting of the AC.
Rationale: This is intended to aid in timely decision-making and minimizing the chances for undue delay in scheduling AC meetings. While recommendations were made to keep the provision as later of the two, in view of the probable misuse of such provision by causing deliberate delay in conducting AC meetings, the timeline has been kept at earlier of the two [refer SEBI BM Agenda].
In practice, this does not impose an additional compliance burden, as Reg. 18(2) of the Listing Regulations mandates at least four AC meetings per financial year. Given the AC’s quarterly responsibilities, meetings are typically held within a three-month gap. Thus, a ratifiable RPT is unlikely to fail due to delayed placement, except in cases where weak internal controls cause a significant delay in identifying the lapse in prior approval.
Maximum value permitted for ratification
An aggregate threshold of Rs. 1 crore has been laid down, for ratified transaction(s) with a related party, whether entered into individually or taken together, during a financial year.
Rationale: A low threshold has been specified to prevent misuse of the provision [refer SEBI BM Agenda].
The provision refers to (a) all ratified transactions, (b) in a financial year, (c) with a related party. Hence, all instances of ratification are to be aggregated for the complete financial year, on a per related party basis, and the same should not exceed the value of Rs. 1 crore.
Anonymous omnibus approval vis-a-vis ratification of RPTs
Reg. 23(3)(c) of the Listing Regulations allows the AC to grant anonymous omnibus approval for unforeseen RPTs, with a maximum limit of ₹1 crore per transaction. This approval does not require details like the related party’s name, transaction amount, period, or nature and remains valid for up to one year.
This creates an implied exemption for RPTs up to ₹1 crore per transaction, as they can proceed under the omnibus framework without fresh AC approval. However, unlike this per-transaction limit, ratification limits apply on an aggregated basis for all transactions with a related party in a financial year.
This raises a key question: Does the anonymous omnibus approval provision make ratification redundant?
The aforesaid question can be discussed in two contexts –
for unforeseen RPTs covered by the limit of Rs. 1 crore per transaction, and
for foreseen RPTs for which an OA limit is approved by the AC
The relevance of ratification in each case can be understood with the help of specific examples.
i. Ratification for unforeseen RPTs
If an anonymous omnibus approval (OA) allows up to Rs. 1 crore per transaction, an unforeseen RPT of Rs. 80 lakhs falls within this limit and does not require ratification, as the OA serves as prior approval for such cases.
However, if an unforeseen RPT of Rs. 1.9 crores occurs, only Rs. 1 crore is covered under the OA, and the excess Rs. 90 lakhs requires ratification.
In a case where the transaction is Rs. 2.5 crores and the OA is Rs. 1 crore, the excess amount (1.5 cr) exceeds ratification limits and therefore is voidable at the option of the AC.
Another example, where the foreseen RPT is for 1 cr – can this be included under the unforeseen RPTs? The answer should be No. Where the details of the RPT were available, irrespective of the value, they require prior approval of the AC after placing the requisite information before the AC.
ii. Ratification of foreseen RPTs
If the AC grants an omnibus approval for Rs. 100 crores for a specific transaction type with a particular RP, and the company undertakes an RPT of Rs. 101 crores, the excess Rs. 1 crore can be ratified by the AC, provided all specified conditions are met.
However, if a transaction of Rs. 105 crores is undertaken under the same approval, the excess increases to Rs. 5 crores, making ratification unavailable. This falls under “Failure to seek ratification,” discussed in detail below.
Transaction should not be material
Reg. 23(1) sets the materiality thresholds for RPTs as the lower of Rs. 1,000 crores or 10% of the listed entity’s annual consolidated turnover. Transactions crossing this limit require prior shareholder approval.
Rationale: Ratification authority lies with the approving authority. Since AC cannot approve material RPTs, it also cannot ratify them. The authority to ratify remains with shareholders, who must approve such transactions in advance.
Listing Regulations do not explicitly allow shareholder ratification if materiality thresholds are breached. Failure to obtain prior approval leads to penalties, as seen inPremier Polyfilm Limited, where a fine was imposed despite later ratification.
If prior approval is missed, shareholders’ ratification may still be sought. While it does not remove the breach’s consequences, delayed compliance is better than non-compliance.
Rationale to be placed before the AC
Ratification applies only when prior approval was not obtained, serving as a remedy for exceptional cases. It is crucial to present a proper rationale before the Audit Committee, explaining the inability to seek prior approval.
A key principle of ratification is the intent to ratify, as established in Sudhansu Kanta v. Manindra Nath [AIR 1965 PAT 144]. In Premila Devi v. The Peoples Bank of Northern India Ltd [(1939) 41 BOMLR 147], it was held that ratification requires both intent and awareness of illegality. The ratifying authority must have full knowledge of the breach, its reasons, and a justified basis for approval.
Disclosure
The details of ratification shall be disclosed along with the half-yearly disclosures of RPTs under Reg. 23(9) of the Listing Regulations.
Pursuant to SEBI Implementation Circular dated 31st December, 2024 the format for half-yearly disclosures of RPTs has been revised to include a column: “Value of the related party transaction ratified by the audit committee” to effectuate the disclosure of ratified RPTs.
Rationale: This is to promote maintenance of adequate transparency of substantial information, with the investors and shareholders.
Failure to Seek Ratification: Meaning & Consequences
A proviso to the newly inserted Reg 23(2)(f) specifies the consequences of a “failure to seek ratification”. The failure to seek ratification refers to a situation where the post-facto approval of AC could not be sought in accordance with the conditions laid down for ratification.
The failure to seek ratification may occur on account of one or more of the following:
(a) lapse of timelines for seeking ratification, or
(b) value of ratifiable transactions exceeding the limit of Rs. 1 crore in a FY, or both.
Here, it is important to note that in such an event, the AC may render such RPT voidable, and not necessarily void. Further, if it considers appropriate, it may seek indemnification from the concerned director(s), if any, for any loss incurred by the Company as a result of entering into such a transaction.
Differentiating between ‘voidable’ or ‘void’
Voidable means something that can bemade invalid or nullified, and void means something that is invalid or null.
“The word ‘void’ in its strictest sense, means that which has no force and effect, is without legal efficacy, is incapable of being enforced by law, or has no legal or binding force, but frequently the word is used and construed as having the more liberal meaning of ‘voidable. The word ‘void’ is used in statutes in the sense of utterly void so as to be incapable of ratification, and also in the sense of voidable and resort must be had to the rules of construction in many cases to determine in which sense the Legislature intended to use it. An act or contract neither wrong in itself nor against public policy, which has been declared void by statute for the protection or benefit of a certain party, or class of parties, is voidable only.”
If a company fails to seek ratification, the transaction does not automatically become void unless explicitly declared so by the approving authority, usually the AC. The AC has the discretion to either:
Adopt the transaction with or without modifications, or
Cancel the transaction entirely, rendering it void.
Indemnification by director(s):
If the transaction is deemed invalid, indemnification may be sought from the concerned directors if:
The transaction involves a related party of any director, or
A director authorized the transaction without obtaining the necessary approval.
Conclusion
With the introduction of ratification provisions in the Listing Regulations, the AC’s responsibility for RPT ratification has increased. This underscores the need for stronger internal control mechanisms to ensure efficiency and proactiveness. Automation of RPT controls should also be considered to reduce human errors and streamline compliance for better detection of RPTs. While ratification serves as a fallback in case of lapses, it should never be seen as a substitute for obtaining prior approvals.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-04-18 13:39:002025-04-19 01:44:16Ratification of RPTs: a rescue ship or an alternative to compliance?
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-04-16 19:36:012025-04-16 23:12:48Presentation on CG Norms for HVDLEs
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-04-07 20:48:502025-04-08 17:17:12Webinar on CG Norms for HVDLEs
Notifies amendment as COREX timeline set to expire
– Team Corplaw | corplaw@vinodkothari.com
March 28, 2025 | Team Vinod Kothari & Company
Just before the expiry of the ‘Comply or Explain’ timeline of March 31, 2025 for HVDLEs, SEBI notified SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2025 inserting a separate chapter viz. Chapter VA: Corporate Governance Norms for a Listed Entity which has listed its Non-Convertible Debt Securities effective from March 27, 2025. The proposal for amendments were made in the Consultation Papers of October 31, 2024 and February 8, 2023, and was approved by SEBI in the board meeting held on December 18, 2024. A summary of the changes notified, comparison of the new compliance requirements vis-à-vis the earlier norms have been captured in this write-up.
HVDLEs: Meaning, Applicability, Sunset Clause
The only criteria for being categorized as an HVDLE is the amount of outstanding value of listed non-convertible debt securities, which has now been revised from Rs. 500 crores or more to Rs. 1,000 crores or more. This upward revision is aligned with the criteria for being identified as a Large Corporate, i.e. outstanding long-term borrowing amounting to Rs. 1,000 crores or more, and has been introduced with the dual objective of tightening the regulatory regimes for debt listed entities while simultaneously promoting ease of doing business in the corporate bond market.
The provisions of the Chapter VA, a chapter exclusive to entities having listed only their non-convertible debt securities, the outstanding value of which is exceeding Rs. 1,000 crores, and not specified securities, shall apply with effect from April 1, 2025. Explanation(1) appended to Regulation 62C clarifies that HVDLEs shall be determined on basis of value of principal outstanding of listed debt securities as on March 31, 2025, irrespective of the date of notification of this amendment.
A doubt may arise arise with regards the applicability of this chapter to an entity whose outstanding value of NCDs exceeds the threshold during the year, i.e. after March 31, 2025 – the Explanation(2) to the same regulation makes it clear that such entity shall ensure compliance with the provisions of Chapter VA within six months from the date of such trigger and the disclosures of such compliance may be made in corporate governance compliance report on and from third quarter, following the date of the trigger.
However, the earlier conception of “Once an HVDLE, always an HVDLE” has now been removed with the introduction of a sunset clause, in Regulation 62C(2), which specifies that the provisions of this chapter shall cease to be applicable, after three consecutive years of the value of outstanding NCDs being below the Rs. 1,000 crores threshold, as determined on March 31 of any given year.
Related Party Transactions by HVDLEs
While the scope of RP and RPTs continue to be the same as defined in regulation 2(1) (zb) and (zc) respectively, the present amendment introduces a revised RPT approval regime for HVDLEs particularly for Material RPTs. The restriction for related parties to not vote to approve the material RPT, provided under regulation 23, resulted in impossibility of compliance for HVDLEs as most HVDLEs were closely held companies. Accordingly, SEBI introduced a two step approval process for material RPTs with first obtaining NOC from the debenture holders (of listed debt securities issued on or after April 01, 2025) not related to the issuer and holding at least more than 50% of the debentures in value, on the basis of voting including e-voting, followed with approval of shareholders through ordinary resolution. The provisions of Reg. 62K is applicable to RPTs entered into on or after April 1, 2025. Refer to our FAQs to understand the implications and manner of seeking approval.
While the other requirements are similar to corresponding requirements under regulation 23 for equity listed entities (for e.g., framing of policy, prior approval of audit committee, half yearly disclosures etc.), recent amendments made in December, 2024 in relation to ratification of RPTs and exemption from approval requirements of audit committee and shareholders have not been inserted in reg. 62K.
Prior to this amendment, so long the debt was continued to be serviced and the terms and conditions of borrowing was met, the debenture holders were not required to intervene in the regular operations of the company. If there was a covenant to that effect in the debenture subscription agreement or Debenture Trust Deed or terms of issue, in that case, irrespective of whether the RPT is material or immaterial, the borrowing entity was required to comply. With this amendment, the debenture holders will also have a say in corporate governance, especially in case of material RPTs pursuant to a provision of law. Other lenders extending term loan and other facilities, and who have a larger exposure on such companies, will not have this opportunity.
Differing requirements under CG norms for an HVDLE vis-a-vis an equity listed entity
The provisions of Reg. 16 to 27 of Chapter IV have been suitably modified and inserted in the context of HVDLEs in Chapter VA. While largely the flow of the provisions and requirements are aligned, there exists certain gaps in certain provisions. The tabular comparison below highlights the same (excluding those differences that are linked with market capitalization related requirements/ outstanding SR equity shares related requirements that only apply to equity listed entities):
Particulars
Reqt. under Chapter IV for equity listed entities
Reqt. under Chapter VA for HVDLEs
Remarks
Meaning of IDs
Defined under Reg. 16(1)(b)
Reg. 62B (1) (b) refers to definition in Chapter IV and additionally provides for considering the NEDs other than nominee directors, in following listed entities: A body corporate mandated to constitute its board as per the law under which it is constituted; or Set up under public private partnership [PPP] model
In the case of the PPP model, the composition of the board is pre-decided or mutually decided between the public authority and private entity, hence the exemption. Further, for HVDLEs that are private limited companies, having IDs as per the criteria given under Chapter IV, becomes explicit.
Timeline for obtaining shareholders’ approval for board appointments
Reg. 17 (1C) To be obtained within 3 months from appointment or ensuing general meeting, whichever is earlier. Carve outs: Time taken for obtaining approval of regulatory, government or statutory authorities, shall be excluded.Provisions not applicable to appointment or re-appointment of a person nominated by a financial sector regulator, Court or Tribunal to the board of the listed entity
Reg. 62D To be obtained within 3 months from appointment or ensuing general meeting, whichever is earlier. Both the carve outs are not available for HVDLE.
The corrections made to corresponding provision in Reg. 17 (1D) vide LODR Third Amendment Regulations, 2024 have not been made in Chapter VA. The carve out under Reg. 62D (4) pertains to that sub-regulation and not the entire Reg. 62D.
Continuation of director on the board subject to shareholders’ approval once in every five years
Carve outs provided in provisos to Reg. 17 (1D): To the director appointed pursuant to the order of a Court or a Tribunal or to a nominee director of the Government on the board of a listed entity, other than a public sector company, or to a nominee director of a financial sector regulator on the board of a listed entity.To a director nominated by a financial institution registered with or regulated by RBI under a lending arrangement in its normal course of business or nominated by a SEBI registered DT under a subscription agreement for the debentures issued by the listed entity.
Carve outs in Reg. 62D (4) are broadly similar. Reg. 62D (4) additionally exempts director appointed under the public private partnership model/structure.
As composition is pre-decided or is as per mutual terms between the public authority and private entity.
Nature of listed entities considered and limits for maximum no. of directorships
Reg. 17A- LEs shall be cumulative of those whose equity shares are listed on a stock exchange and HVDLEs. Director in not more than 7 LEsID in not more than 7 LEsIf WTD/ MD in any LE, ID in not more than 3 LEs Further, to give sufficient time to all the listed entities to ensure compliance with the provision, a period of 6 months or till the time AGM is held from the date of applicability of the provision to the entity, whichever is later, has been provided.
Reg 62E provides the same limits. LEs shall be cumulative of those whose equity shares are listed on a stock exchange and HVDLEs. Carve out for directorships in PSUs and entities set up in PPP arrangements are not to be included.
In order to ensure that directors devote adequate time to listed entities including HVDLEs and in the interest of investor protection.
Composition of NRC, SRC and RMC
Reg. 19, 20 & 21:Each of the committees viz. Nomination and Remuneration Committee, Stakeholders Relationship Committee and Risk Management Committee (top 1000 based on market cap) are required to be constituted.
Reg. 62G – The functions of NRC may either be discharged by the board or by NRC.Reg. 62H – The functions of SRC may either be discharged by the board or by SRC.Reg. 62I – The functions of RMC may either be discharged by the board or by audit committee or by RMC.
In order to avoid the constitution of multiple committees by HVDLEs.
Exemption from prior approval of AC of the holding LE, in case, provisions of Reg 23 is applicable to the subsidiary
Reg 23(2)(d): Prior approval of the audit committee of the listed entity shall not be required for a related party transaction to which the listed subsidiary is a party but the listed entity is not a party, if regulation 23 and sub-regulation (2) of regulation 15 of these regulations are applicable to such listed subsidiary.
Reg 62K: Identical provisions, however, position is not clear where the subsidiary is also an HVDLE.
The exemption should be available even in case of an HVDLE subsidiary, as such a subsidiary will be required to independently comply with Regulation 62K, similar to that provided in Reg. 62K(6).
Exemption from approval of AC w.r.t. remuneration and sitting fees paid to Director, KMP and SMP (non-promoter)
Reg 23(2)(e): remuneration and sitting fees paid by the listed entity or its subsidiary to its Director, KMP and SMP (non-promote, shall not require approval of the audit committee provided that the same is not material.
No such carve out in Reg. 62K (3)
The amendments made in Reg. 23 vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62K.
Ratification of RPT
Reg 23(2)(f): The members of the audit committee, who are independent directors, may ratify related party transactions subject to the certain conditions and timelines
No such provisions are included in Reg. 62K (3)
The amendments made in Reg. 23 vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62K.
Omnibus approval proposed to be undertaken by subsidiary companies
Reg 23(3): Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity or its subsidiary subject to the certain conditions
Reg 62K: Identical provisions, However, subsidiary companies of HVDLE are not included in the ambit of omnibus approval provisions for HVDLE
The amendments made in Reg. 23 vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62K.
Approval regime for material related party transactions
Reg 23(4): All material related party transactions and subsequent material modifications shall require prior approval of unrelated members.
Reg 62K(5): All material related party transactions and subsequent material modifications shall require prior NOC from the DT and the DT shall in turn obtain No-Objection/approval from the unrelated DH who hold atleast > 50% of the debentures in value, on the basis of present and voting including e-voting. 62K(6): approval of shareholders shall be required after obtaining NOC from DT, however, no restriction has been placed on shareholders that are RPs from voting to approve the resolution.
Several HVDLEs are closely held companies, holding a negligible portion of the equity or none at all, in which case the entity was not able to transact such RPTs because of ‘impossibility of compliance’ with the provisions of LODR Regulations. Therefore, taking cue from Sec. 186 (5), SEBI tried to address this issue by mandating NOC from debenture holders.
Exemption from Material RPT approval in case of listed subsidiaries
Reg 23(4): Available if regulations 23 and 15 (2) are applicable to such listed subsidiaries.
Reg 62K(6): Prior approval of the shareholders and NOC by DT of a HVDLE, shall not be required for a RPT to which the listed subsidiary is a party but the listed entity is not a party, if regulation 62K of these regulations is applicable to such listed subsidiary, however, position is not clear i.r.t. Listed subsidiary, if reg 23 is applicable to such subsidiary.
This situation is inverse for obtaining audit committee approval in case of HVDLE. In the context of equity listed entities, the exemption is not available in case of Material RPTs undertaken by an HVDLE subsidiary.
Exemption from AC & S/h approval requirements for certain RPTs
Reg 23(5): Following transactions are exempt from the applicability of approval provisions: (a) transactions entered into between two public sector companies;(b) transactions entered into between a holding company and its WOS (c) transactions entered into between two WOS of the LE(d) transactions which are in the nature of payment of statutory dues, statutory fees or statutory charges entered into between an entity on one hand and the Central Government or any State Government or any combination thereof on the other hand. (e) transactions entered into between a public sector company on one hand and the Central Government or any State Government or any combination thereof on the other hand.
Reg 62K(7): The exemptions are not identical:(i) under point (a) exemption available for government companies and not public sector companies;(ii) point (b) and (c) are identical(iii) point (d) and (e) are excluded.
The amendments made in Reg. 23 vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62K.
CG requirements with respect to subsidiary
Requirements of Reg. 24 apply to unlisted subsidiaries.Reg 24 (1) – appointment of atleast 1 ID of the parent listed entity on the board of the unlisted material subsidiary (whoseturnover or net worth exceeds 20% of the consolidated turnover or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year) Reg 24(2): Review of financial statements of the unlisted subsidiary by the audit committee of the listed entity.Reg 24(3): Review of board minutes of the unlisted subsidiary by the board of the listed entity. Reg 24(4): Review by the board of significant transactions/arrangements entered into by the unlisted subsidiary.Reg 24 (5): Shareholders’ approval for disposal of shares of material subsidiary whoseturnover or net worth exceeds 10% of the consolidated turnover or net worth respectively, of the listed entity) resulting in reduction to less than or equal to 50% or cessation of control.Reg 24 (6): Shareholders’ approval for sale, disposal and leasing of assets of material subsidiary (whoseturnover or net worth exceeds 10% of the consolidated turnover or net worth respectively, of the listed entity)
Reg 62L: All requirements apply only to unlisted material subsidiary (whoseincome or net worth exceeds 20% of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year)
CG requirement pertaining to subsidiary is relaxed for HVDLE in comparison to that of equity listed entity
Secretarial Audit and Secretarial Compliance (ASC) Report
Reg 24A: LE and its material unlisted Indian subsidiaries ((whoseturnover or net worth exceeds 10% of the consolidated turnover or net worth respectively, of the listed entity) to undertake Secretarial audit by Peer Reviewed Secretarial Auditor. Further, the regulations also deal with tenure of appointment, rotation of secretarial auditors, eligibility, qualifications and disqualifications for appointment of a secretarial auditor, and prohibited services prescribed w.r.t Secretarial Auditors of the listed entity. ASC report to be submitted within 60 days from the end of FY by the listed entity.
Reg 62M: HVDLEs and its Indian material unlisted subsidiary (no definition provided) to undertake secretarial audit and annex the report in annual report. Further, HVDLEs to submit ASC report within 60 days. The requirement of peer reviewed CS to conduct Sec audit or issue ASC, tenure of appointment, rotation of secretarial auditors, eligibility, qualifications and disqualifications for appointment of a secretarial auditor, and prohibited services prescribed w.r.t Secretarial Auditors etc not applicable.
The amendments made in Reg. 24A vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62M. Further, the scope of material subsidiary is not provided as the definition under Reg. 16 and Reg. 62L may not apply unless expressly indicated.
Agreement pertaining to profit sharing or in connection with dealings in securities of the company
Reg 26(6): Any agreement entered into by the employees, KMP/director/promoter for himself/herself or on behalf of any other person with regard to compensation or profit sharing in connection with dealings in the securities of listed entity, requires prior approval by the board and public shareholders by way of ordinary resolution. Interested persons involved in the transaction are required to abstain from voting.
Reg 62O(5): The regulation is similar to that provided in Reg. 26(6) with the exception that there is no restriction for voting by the interested persons.
The amendments made in Reg. 26(6) vide LODR Third Amendment Regulations, 2024 have not been made in Reg. 62O.
Other Amendments
Related Party Transactions by SME Listed entities
A listed entity which has listed its specified securities on the SME Exchange are not required to comply with the CG norms otherwise applicable to a Main Board listed entity which have either paid up capital exceeding Rs. 10 crore or net worth exceeding Rs. 25 crore). In order to plug the risk of siphoning of funds to related parties, as observed by SEBI in certain instances, the present amendment harmonizes and aligns the RPT norms applicability by extending it to SME listed entities other than those which have paid up capital not exceeding Rs. 10 crores and net worth not exceeding Rs. 25 crores. Further, considering the size of SMEs, the threshold limit for Material RPTs have been set to Lower of INR 50 Cr or 10% of annual consolidated turnover as per last audited financial statements. Where the provisions become applicable at a later date, SMEs will have 6 months time to ensure compliance. The provisions shall continue to apply till both the conditions w.r.t equity share capital and networth falls below the threshold and remains below the threshold for 3 consecutive FYs.
Business Responsibility and Sustainability Reporting
Regulation 34(2)(f) of the Listing Regulations so far required assurance of the BRSR Core Report, which has now been modified to term it as ‘assessment or assurance of the specified parameters’ to prevent unwarranted association with a particular profession (specifically audit profession). Assessment defined as third-party assessment undertaken as per standards notified by the Industry Standards Note on BRSR Core, developed in consultation with SEBI.
Similar modification has been reproduced for obtaining BRSR Core Report from Value Chain Partners of the Listen Entity, and a clause of voluntary disclosure of the same for HVDLEs has been added in Regulation 62Q(3).
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-03-28 17:53:292025-04-19 09:58:57Bo[u]nd to ask before transacting: High value debt issuers bound by stricter RPT regime
