Archive for category: LODR

– 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:

1. Does ratification effectively rectify non-compliance arising from the failure to obtain prior approval?
2. What happens if the required conditions for ratification by the AC are not fulfilled?
3. 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.”

Further, the Apex Court, in the matter of Maharashtra State Mining Corporation v Sunil S/O Pundikaro Pathak [2006 (5) SCC 96] reiterated the principle of ratification:

“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.”

As explained by the Bombay High Court in Pravinkumar R. Salian v. Chief Minister and Minister of Co-operation, Mumbai [2004(2)MHLJ12],^[1] The essential conditions for a valid ratification include the following:

• 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 –

1. An act which is ultra-vires the company cannot be ratified.^[2]
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]
3. Acts can be ratified by passing a resolution.^[4]
4. There can be no ratification without an intention to ratify.^[5]
5. The person ratifying the act must have complete knowledge of the act.
6. Ratification relates back to the date of the act ratified i.e., has retrospective effect.^[6]
7. 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:

1. The SEC Regulations do not prescribe the requirements with respect to approval, review or ratification, however, companies are required to have policies and procedure in place for dealing in RPTs, viz., approval, review and ratification of RPTs [Item 404(b)(1) of SEC Regulation S-K], to be disclosed as a part of non-financial reporting.  
2. 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.
3. 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.
4. 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:

1. 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.

2. 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.

3. 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.

It should be noted that w.e.f. April 1, 2025, pursuant to the Industry Standards Note on minimum information to be placed before the Audit Committee, Minimum Disclosures as prescribed therein is required to be placed before the Audit Committee.

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, the entire Rs. 1.9 crore would require ratification, and the cover of Rs. 1 crore under the OA cannot be claimed.

In a case where the transaction is Rs. 2.5 crores and the OA is Rs. 1 crore, the entire amount (2.5 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.

4. 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 in Premier 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.

5. 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.

6. 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 31^st 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 be made invalid or nullified, and void means something that is invalid or null. 

In Pankaj Mehra v. State of Maharashtra [2000 (2) SCC 756], the Supreme Court drew a distinction between “void” and ‘voidable’:

“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.

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^[1] (2004) 2 MahLJ 12.

^[2] Rajendra Nath Dutta and Ors. V. Shibendra Nath Mukherjee and Ors., (1982) 52 CompCas 293 Cal.

^[3] Rajendra Nath Dutta and Ors. V. Shibendra Nath Mukherjee and Ors., (1982) 52 CompCas 293 Cal.

^[4] Bulland Leasing & Finance Pvt. Ltd. v. Neelam Miglani, Delhi District Court, CC No.: 470664/16, 2018,

^[5] Sudhansu Kanta v. Manindra Nath, AIR 1965 Pat 144.

^[6] Parmeshwari Prasad Gupta v. Union of India, 1973 AIR 2389.

^[7] New Fleming Spinning And Weaving Company Ltd. v.  Kessowji Naik, (1885) ILR 9 Bom 373.

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