Can Promoters, Promoter Groups, or Related Parties Vote on Material Related Party Transactions Under Regulation 23 of SEBI LODR Regulations, 2015?

The answer is: Yes, they can vote.

However, does this imply that all such votes are valid? While it may seem so at first glance, this assumption is incorrect. To fully understand the nuances, let us closely examine the regulation.

Understanding Regulation 23(4) of SEBI LODR Regulations, 2015

Regulation 23(4) explicitly states:

"All material related party transactions and subsequent material modifications as defined by the audit committee under sub-regulation (2) shall require prior approval of the shareholders through a resolution, and no related party shall vote to approve such resolutions, whether the entity is a related party to the particular transaction or not."

At first reading, one might assume that the regulation imposes a blanket prohibition on related parties participating in the voting process. However, this is not the case. The regulation does not explicitly bar related parties from voting altogether. Rather, it specifies that no related party shall vote in favor of approving such resolutions.

This distinction is crucial. It means that:

• Related parties are allowed to participate in the voting process.
• Votes cast against the resolution by related parties are considered valid and are counted.
• Only votes cast in favor of the resolution by related parties are invalid and will not be taken into account.

KEY IMPLICATIONS:

1. Participation vs. Validity: While related parties can technically vote, their participation is subject to the condition that their votes must not approve the resolution. If they choose to vote against, such votes are entirely valid.
2. Safeguard Against Bias: The restriction ensures that material related party transactions are approved by non-related shareholders, thereby safeguarding the process from undue influence or conflict of interest.
3. Compliance Check: Companies must ensure compliance with these provisions by reviewing voting patterns and validating the eligibility of votes during the approval process for material related party transactions.

PRACTICAL CONSIDERATIONS:

• Companies and their secretarial teams must carefully monitor voting during such resolutions to ensure that votes cast in favor by related parties are excluded from the count.

• Shareholders, especially those in promoter groups or identified as related parties, should be informed of these regulatory nuances to avoid inadvertent non-compliance.

CONCLUSION:

• In summary, promoters, promoter groups, and related parties are permitted to vote on resolutions concerning material related party transactions under Regulation 23 of SEBI LODR Regulations, 2015. However, only votes cast against the resolution are valid. Any votes cast in favor are considered invalid and excluded from the resolution approval process.
• This distinction emphasizes the importance of shareholder independence in the approval of such transactions, promoting transparency and fair governance practices.

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From the desk of CS Sharath