Sale of a Plant to a Promoter Entity: Section 188 and LODR Approvals
Nirvaan Chemicals Ltd is a listed company with consolidated turnover of ₹4,800 crore and net worth of ₹1,900 crore. Its board proposes to sell one specialty-chemical plant to Nirvaan Promoter Holdings Pvt Ltd, a private company in which two promoter directors and their relatives hold 100% of the equity, for ₹145 crore. The plant contributed 3% of consolidated turnover last year. The audit committee has three director members-two independent directors and the executive finance director; the CFO attends. The independent directors obtained a valuation report and approved the transaction as being at arm’s length. One independent director abstained and asked that her dissent be recorded, but the CFO recorded the decision as unanimous. The CFO tells the company secretary that no shareholder approval is needed because the sale is at arm’s length and in the ordinary course of business, and that Section 188 is inapplicable. The company secretary must prepare the board resolution and the stock-exchange disclosure for the board meeting on 12 June 2024.
1. Determine the approvals required under the Companies Act, 2013 and SEBI (LODR) Regulations, 2015 for the proposed sale. Is the CFO correct that Section 188 is inapplicable and that no shareholder approval is needed?
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Framework. Section 188 applies to contracts or arrangements with a related party with respect to the sale or purchase of property. The exemption for transactions in the ordinary course of business applies only if the transaction is both in the ordinary course and at arm’s length. A sale of an entire specialty-chemical plant is a capital transaction and is not in the ordinary course of a chemicals business, even if the price is supported by a valuation. Section 188 is therefore attracted.
Board approval. The board must approve the Section 188 transaction by resolution at a board meeting. The two promoter directors are interested and must disclose their interest under Section 184 and abstain from discussion and voting. The resolution must be passed by disinterested directors.
Shareholder approval. For sale of property, the Rule 15(3) threshold is 10% of net worth: ₹190 crore. The consideration is ₹145 crore, or 7.6% of net worth, so no ordinary resolution is required under Section 188. Section 180(1)(a) is also not triggered because the plant is not substantially the whole undertaking; ₹145 crore is 7.6% of net worth and 3% of turnover.
LODR. Regulation 23(2) requires prior audit committee approval for all related-party transactions, even if not material. Materiality under Regulation 23 is the lower of ₹1,000 crore or 10% of consolidated turnover: ₹480 crore. The transaction is below that, so no shareholder approval under Regulation 23(4) is required. The audit committee approval is valid if two of three members approved, but its record must show the abstention.
Conclusion. The CFO is wrong that Section 188 is inapplicable and wrong to ignore audit committee approval. He is right only that no shareholder approval is required, but for the threshold reason, not because the sale is ordinary-course.
2. What should the company secretary do about the audit committee record and the abstention? What are the consequences if the minutes are signed as unanimous?
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The minutes must be a fair and accurate record of the meeting. Section 118 requires minutes to be prepared within 30 days and to record the proceedings, including dissent. Recording an abstention as unanimous approval is a misstatement, not a harmless drafting choice. The company secretary should:
- Correct the draft before signature and record that one independent director abstained and asked for her dissent to be recorded.
- Place the correction before the audit committee chairman and the board; if the minutes were already signed, seek board approval to correct the record.
- Preserve the valuation report, attendance, voting records and any email from the abstaining director.
If the minutes are signed as unanimous, the company secretary risks being treated as an officer in default and as a party to falsification of records. Section 118(11) provides a penalty for failing to comply with the minutes requirements. A false record can also mislead the board, the secretarial auditor and the stock exchange, and may attract fraud provisions if done knowingly. The clause ‘unanimous’ should not be used when the record shows otherwise.
3. The stock exchange asks why the transaction was not disclosed under Regulation 30. Draft the company secretary’s response, addressing materiality and the disclosure actually required.
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The response should not claim that Regulation 30 is automatically attracted by every related-party transaction. Regulation 30 applies to material events. The company should apply its board-approved materiality policy and the quantitative and qualitative tests: the plant is 3% of consolidated turnover and the consideration is 7.6% of net worth, below the usual 10% thresholds. On those facts, the sale may not be a material event requiring a Regulation 30 disclosure.
However, the company must still comply with Regulation 23(9): related-party transactions must be disclosed half-yearly in the prescribed format, with the audit committee approval and the basis for the arm’s-length determination. The board resolution and the Section 188 approval must be on record. If the sale is part of a larger restructuring or affects the company’s operations qualitatively, the company should reassess materiality and disclose promptly, generally within 24 hours of the material event.
The reply should therefore say: no Regulation 30 disclosure was made because the transaction did not cross the company’s materiality threshold; the transaction is being disclosed under Regulation 23(9); the audit committee approved it; and the Section 188 board approval was obtained. It should avoid stating that the transaction is ‘ordinary course’ because the plant sale is not ordinary course.