Related Party Transactions (RPTs) are a normal part of business, especially in closely held companies and corporate groups. A company may purchase goods from a director’s relative, take an office on rent from a group entity, provide services to a subsidiary, or enter into other commercial arrangements with entities connected to its directors or management.<\/p>\n
However, because these transactions involve a potential conflict of interest, the Companies Act, 2013 places specific approval, disclosure and record-keeping requirements on companies.<\/p>\n
The central provision is Section 188 of the Companies Act, 2013, supported by provisions relating to related parties, Board approval, disclosures and maintenance of registers.<\/p>\n
A Related Party Transaction is broadly a contract or arrangement between a company and a related party.<\/p>\n
Under Section 2(76) of the Companies Act, the definition of “related party” includes, among others:<\/p>\n
Other entities covered by the statutory definition.<\/p>\n
Therefore, companies should identify related parties before entering into transactions, rather than discovering the relationship during the annual audit.<\/p>\n
Section 188 specifically covers contracts or arrangements with related parties relating to:<\/p>\n
1\ufe0f\u20e3 Sale, Purchase or Supply of Goods<\/p>\n
Example:<\/p>\n
A company purchases raw materials from a private company owned by a director’s relative.<\/p>\n
2\ufe0f\u20e3 Sale or Purchase of Property<\/p>\n
This includes transactions involving the buying or selling of property with a related party.<\/p>\n
3\ufe0f\u20e3 Leasing of Property<\/p>\n
For example, a company takes its office premises on rent from a director or a related entity.<\/p>\n
4\ufe0f\u20e3 Availing or Rendering of Services<\/p>\n
Examples include:<\/p>\n
Accounting services<\/p>\n
Consultancy<\/p>\n
Management services<\/p>\n
IT services<\/p>\n
Marketing services<\/p>\n
5\ufe0f\u20e3 Appointment of Agents<\/p>\n
Appointment of a related party as an agent for purchasing or selling goods, materials, services or property.<\/p>\n
6\ufe0f\u20e3 Office or Place of Profit<\/p>\n
Appointment of a related party to an office or place of profit in the company, subsidiary or associate company.<\/p>\n
7\ufe0f\u20e3 Underwriting<\/p>\n
Underwriting the subscription of securities or derivatives of the company by a related party.<\/p>\n
These categories are specifically listed under Section 188(1).<\/p>\n
Yes.<\/p>\n
As a general rule, a company cannot enter into a Section 188 related-party contract or arrangement without the consent of the Board of Directors through a resolution passed at a Board meeting, subject to the applicable conditions.<\/p>\n
The Board should therefore consider the transaction before it is entered into.<\/p>\n
The approval process should ideally document:<\/p>\n
Name of related party<\/p>\n
Nature of relationship<\/p>\n
Nature of transaction<\/p>\n
Transaction value<\/p>\n
Commercial terms<\/p>\n
Duration<\/p>\n
Pricing basis<\/p>\n
Whether the transaction is at arm’s length<\/p>\n
Business justification<\/p>\n
Board approval alone is not sufficient for certain transactions.<\/p>\n
Where the transaction crosses the prescribed thresholds under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, prior approval of the company by a resolution is required.<\/p>\n
The relevant thresholds depend on the nature of the transaction\u2014for example, sale\/purchase\/supply of goods, property transactions, leasing, services and office\/place of profit.<\/p>\n
Therefore, companies should compare the proposed transaction with the current prescribed thresholds before finalising the approval route.<\/p>\n
Section 188 generally restricts a related party from voting on the resolution approving the transaction.<\/p>\n
However, the Act contains exceptions, including the provision for companies where 90% or more members, in number, are relatives of promoters or related parties.<\/p>\n
This makes it important to identify the related party relationship before conducting the general meeting.<\/p>\n
An arm’s length transaction is a transaction between related parties conducted as though they were unrelated, so that there is no conflict of interest.<\/p>\n
In simple terms:<\/p>\n
The related party should receive substantially the same commercial treatment that an independent third party would receive in a comparable transaction.<\/p>\n
For example, if a company rents an office from a director’s relative, the rent should be commercially justifiable and comparable with market conditions.<\/p>\n
Section 188 specifically recognises the concept of an arm’s length transaction.<\/p>\n
No.<\/p>\n
This is an important point.<\/p>\n
Section 188 requires Board approval for covered transactions, but shareholder approval is triggered where the transaction falls within the prescribed conditions\/thresholds.<\/p>\n
Also, the Act provides an important exception for transactions entered into in the ordinary course of business and on an arm’s length basis. Such transactions are outside the requirement of Section 188(1) approval.<\/p>\n
Example<\/p>\n
A company regularly sells its products to a related party as part of its ordinary business and does so on arm’s length commercial terms.<\/p>\n
Such a transaction may fall outside the Section 188(1) approval requirement.<\/p>\n
However, this does not mean that the transaction can simply be ignored for accounting, disclosure or related-party reporting purposes.<\/p>\n
Companies often make the mistake of checking only one condition.<\/p>\n
For the Section 188 exemption, the transaction generally needs to be:<\/p>\n
Ordinary Course of Business<\/p>\n
AND<\/p>\n
Arm’s Length<\/p>\n
Think of it as:<\/p>\n
Ordinary Course \u274c + Arm’s Length \u2705<\/p>\n
\u2192 Section 188 exemption may not apply.<\/p>\n
Ordinary Course \u2705 + Arm’s Length \u274c<\/p>\n
\u2192 Section 188 exemption may not apply.<\/p>\n
Ordinary Course \u2705 + Arm’s Length \u2705<\/p>\n
\u2192 Section 188(1) approval exemption may apply.<\/p>\n
The specific facts and applicable provisions should always be examined.<\/p>\n
Section 188 also contains a disclosure requirement.<\/p>\n
Contracts or arrangements entered into under Section 188(1) are required to be referred to in the Board’s Report to shareholders along with justification.<\/p>\n
This makes the Board’s Report an important part of RPT compliance.<\/p>\n
The disclosure should allow shareholders and other stakeholders to understand:<\/p>\n
Who the related party is<\/p>\n
What the relationship is<\/p>\n
What transaction took place<\/p>\n
The nature\/value of the transaction<\/p>\n
Why the transaction was entered into<\/p>\n
Companies also need to maintain the prescribed register of contracts or arrangements covered by Section 184(2) or Section 188.<\/p>\n
The register must contain the required particulars and is to be placed before the next Board meeting and signed by the directors present.<\/p>\n
The register is maintained at the company’s registered office and is subject to the inspection requirements specified under Section 189. It is also required to be produced at the commencement of the company’s AGM.<\/p>\n
These provisions are often confused.<\/p>\n So the compliance chain can broadly be understood as:<\/p>\n Director discloses interest<\/p>\n \u2b07\ufe0f<\/p>\n Company identifies related party<\/p>\n \u2b07\ufe0f<\/p>\n RPT is evaluated under Section 188<\/p>\n \u2b07\ufe0f<\/p>\n Required Board\/shareholder approval obtained<\/p>\n \u2b07\ufe0f<\/p>\n Transaction recorded in register<\/p>\n \u2b07\ufe0f<\/p>\n Required financial\/Board Report disclosures made<\/p>\n For companies that are required to have an Audit Committee, related party transactions are also subject to the Audit Committee framework under Section 177 and applicable rules.<\/p>\n The Audit Committee has responsibility for approval or subsequent modification of transactions with related parties, and the Act permits omnibus approvals subject to prescribed conditions.<\/p>\n Therefore, applicable companies may have an additional layer:<\/p>\n Audit Committee \u2192 Board \u2192 Shareholders<\/p>\n depending on the transaction and applicable requirements.<\/p>\n For eligible companies, the Audit Committee may provide omnibus approval for certain related party transactions proposed to be entered into by the company, subject to the prescribed conditions.<\/p>\n This is particularly useful where the company has recurring transactions with related parties.<\/p>\n For example:<\/p>\n Monthly services from group company<\/p>\n Instead of seeking individual approval for every transaction, an eligible company may use the prescribed omnibus approval mechanism.<\/p>\n However, the conditions and limits applicable to omnibus approval must be followed.<\/p>\n Section 188 provides consequences where a transaction is entered into without the required Board\/shareholder approval.<\/p>\n If the required approval is not obtained and the transaction is not ratified by the Board or shareholders, as applicable, within three months from the date of entering into the contract or arrangement, the contract\/arrangement can become voidable at the option of the relevant authority.<\/p>\n Where the transaction is with a related party to a director or was authorised by another director, the concerned directors can also be required to indemnify the company for losses incurred.<\/p>\n Non-compliance with Section 188 can have significant consequences.<\/p>\n The Act provides penalties for directors\/employees who enter into or authorise transactions in violation of the section.<\/p>\n For a listed company, the statutory consequences can include imprisonment of up to one year and\/or a fine ranging from \u20b925,000 to \u20b95 lakh.<\/p>\n For other companies, the Act provides a fine ranging from \u20b925,000 to \u20b95 lakh for the concerned director\/employee.<\/p>\n This is why RPT compliance should be addressed before the transaction is executed, rather than corrected during the year-end audit.<\/p>\n Before entering into a related party transaction, a company should check:<\/p>\n Suppose a company takes its office premises on rent from the wife of a director.<\/p>\n This should immediately trigger an RPT review because the transaction involves a related party.<\/p>\n The company should examine:<\/p>\n \u2b07\ufe0f<\/p>\n Yes.<\/p>\n \u2b07\ufe0f<\/p>\n Check facts.<\/p>\n \u2b07\ufe0f<\/p>\n Obtain appropriate market\/commercial evidence.<\/p>\n \u2b07\ufe0f<\/p>\n Check Section 188 requirements.<\/p>\n \u2b07\ufe0f<\/p>\n If yes, check shareholder approval requirements.<\/p>\n \u2b07\ufe0f<\/p>\n Maintain the required register and make applicable disclosures.<\/p>\n Note: Not every transaction involving a related party is governed exclusively by Section 188. Other provisions, such as Sections 185 and 186, may also apply depending on the transaction.<\/p>\n Not necessarily. The nature and applicable thresholds matter.<\/p>\n Incorrect. The transaction must be evaluated under the applicable provisions.<\/p>\n Arm’s length treatment does not automatically eliminate all disclosure requirements.<\/p>\n Prior approval should be obtained where the law requires it.<\/p>\n Management and the Board remain responsible for statutory compliance.<\/p>\n Section 188 applies to companies generally, subject to the Act, rules and applicable exemptions.<\/p>\n The statutory definition of related party is much broader.<\/p>\n Related Party Transactions are not prohibited under the Companies Act.<\/p>\n The objective of Section 188 is to ensure that transactions involving related parties are properly authorised, commercially justified and transparently disclosed.<\/p>\n The key compliance framework is:<\/p>\n Identify Related Party<\/p>\n \u2b07\ufe0f<\/p>\n Identify Transaction<\/p>\n \u2b07\ufe0f<\/p>\n Check Ordinary Course & Arm’s Length<\/p>\n \u2b07\ufe0f<\/p>\n Audit Committee Approval \u2014 where applicable<\/p>\n \u2b07\ufe0f<\/p>\n Board Approval<\/p>\n \u2b07\ufe0f<\/p>\n Shareholder Approval \u2014 where applicable<\/p>\n \u2b07\ufe0f<\/p>\n Maintain Register<\/p>\n \u2b07\ufe0f<\/p>\n Make Required Disclosures<\/p>\n Is every related party transaction prohibited?<\/p>\n No. Related party transactions are permitted, provided the applicable legal requirements are followed.<\/p>\n Is Board approval mandatory for RPTs?<\/p>\n Section 188 generally requires Board consent through a resolution at a Board meeting for covered transactions, subject to the statutory exceptions.<\/p>\n When is shareholder approval required?<\/p>\n It depends on the nature and value of the transaction and the prescribed thresholds under the applicable rules.<\/p>\n Does an arm’s length transaction need approval?<\/p>\n A transaction that is both in the ordinary course of business and on an arm’s length basis is outside the Section 188(1) approval requirement. However, other disclosure requirements may still apply.<\/p>\n Does the company need to maintain an RPT register?<\/p>\n Yes. Section 189 requires companies to maintain the prescribed register for contracts or arrangements covered by Section 184(2) or Section 188.<\/p>\n Can an RPT be approved after it has already been entered into?<\/p>\n Where the required approval was not obtained, the Act provides a limited three-month ratification mechanism, subject to the applicable authority and conditions.<\/p>\n Related Party Transactions are an important part of corporate governance because they directly involve the risk of conflicts of interest.<\/p>\n Section 188 of the Companies Act, 2013 establishes the core framework for approval of specified transactions with related parties, while Section 189 deals with maintaining the related register and the Companies Act also requires relevant disclosures.<\/p>\n For companies, the best approach is not to wait until the statutory audit to identify RPTs. Instead, companies should maintain an updated related-party master, review proposed transactions in advance, obtain the required approvals and preserve supporting documentation.<\/p>\n Proper RPT compliance ultimately provides greater transparency to shareholders and helps the Board demonstrate that transactions with connected parties have been undertaken on a properly considered and commercially supportable basis.<\/p>\n TAXAJ assists businesses with:<\/p>\n TAXAJ Official Website<\/p>\n","protected":false},"excerpt":{"rendered":" Learn the Section 188 related party transaction rules in India, including Board and shareholder approval, arm’s length transactions, disclosures, RPT register, Audit Committee requirements and penalti<\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[7],"tags":[257,486,488,487],"class_list":["post-923","post","type-post","status-publish","format-standard","hentry","category-secretarial-services","tag-companies-act-2013","tag-related-party-transactions","tag-rpt-compliance","tag-section-188"],"_links":{"self":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/923","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/comments?post=923"}],"version-history":[{"count":3,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/923\/revisions"}],"predecessor-version":[{"id":1594,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/923\/revisions\/1594"}],"wp:attachment":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/media?parent=923"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/categories?post=923"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/tags?post=923"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n\n
\n \nSection<\/th>\n Main Purpose<\/th>\n<\/tr>\n<\/thead>\n \n Section 184<\/td>\n Disclosure of interest by directors<\/td>\n<\/tr>\n \n Section 188<\/td>\n Approval and compliance for related party transactions<\/td>\n<\/tr>\n \n Section 189<\/td>\n Register of contracts\/arrangements in which directors are interested<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n What About Audit Committee Approval?<\/h2>\n
What Is Omnibus Approval?<\/h2>\n
What Happens If Approval Was Not Obtained?<\/h2>\n
Penalties for Non-Compliance<\/h2>\n
Practical RPT Compliance Checklist<\/h2>\n
Identification<\/h2>\n
\n
Transaction Review<\/h2>\n
\n
Approval<\/h2>\n
\n
Documentation<\/h2>\n
\n
Disclosure<\/h2>\n
\n
Example: Rent Paid to Director’s Relative<\/h2>\n
Is the person a related party?<\/h2>\n
Is leasing of property covered under Section 188?<\/h2>\n
Is the transaction in ordinary course?<\/h2>\n
Is the rent at arm’s length?<\/h2>\n
Is Board approval required?<\/h2>\n
Does it cross the prescribed threshold?<\/h2>\n
Record & disclose<\/h2>\n
Common Related Party Transactions<\/h2>\n
\n\n
\n \nTransaction<\/th>\n Example<\/th>\n<\/tr>\n<\/thead>\n \n \ud83c\udfe2 Rent<\/td>\n Company rents office from director<\/td>\n<\/tr>\n \n \ud83d\udcbc Services<\/td>\n Group company provides management services<\/td>\n<\/tr>\n \n \ud83d\udce6 Purchase<\/td>\n Company purchases goods from director’s firm<\/td>\n<\/tr>\n \n \ud83d\udcb0 Loan\/financial arrangement<\/td>\n Transaction involving related group entities, subject to applicable provisions<\/td>\n<\/tr>\n \n \ud83d\ude9a Sale<\/td>\n Company sells goods to group entity<\/td>\n<\/tr>\n \n \ud83d\udc54 Remuneration\/office<\/td>\n Related party appointed to office\/place of profit<\/td>\n<\/tr>\n \n \ud83c\udfe0 Property<\/td>\n Company purchases property from related party<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n 7 Common RPT Mistakes<\/h2>\n
1. “It’s a small transaction, so no approval is required.”<\/h2>\n
2. “It’s with a group company, so it’s automatically exempt.”<\/h2>\n
3. “It’s at market price, so nothing needs to be disclosed.”<\/h2>\n
4. “We can take approval after entering into the transaction.”<\/h2>\n
5. “The auditor will handle RPT compliance.”<\/h2>\n
6. “Only listed companies need to worry about RPTs.”<\/h2>\n
7. “RPT means only transactions with directors.”<\/h2>\n
Key Takeaways<\/h2>\n
Frequently Asked Questions<\/h2>\n
Conclusion<\/h2>\n
Need Help With Corporate Compliance?<\/h2>\n
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