Related Party Transactions Under Section 188 of the Companies Act, 2013
In any company, it is common for promoters, directors, and key executives to be involved in multiple business entities simultaneously. A director may own or control a supplier firm. A promoter may have a family member running a company that provides services to the listed company. These situations are neither unusual nor inherently improper. However, they carry a significant risk: the people negotiating the deal on behalf of the company may have a personal interest in the outcome — creating a conflict of interest.
To address this risk systematically, the Companies Act, 2013 enacted Section 188 — a comprehensive legal framework that regulates all contracts and arrangements between a company and its Related Parties. It mandates prior approvals at the Board level (and in certain cases at the shareholder level), requires specific disclosures in financial statements and Board Reports, and prescribes penalties for non-compliance.
This blog is a complete, practitioner-level guide to Section 188 of the Companies Act, 2013. It covers who qualifies as a Related Party, what transactions are covered, the approval framework, disclosure obligations, exemptions, penalties — and critically, the latest SEBI amendments of 2025 that have significantly recalibrated the RPT regime for listed companies.
Who Should Read This?
- Directors and Promoters of private and public companies |
- CFOs and Finance Controllers |
- Company Secretaries and Compliance Officers |
- Audit Committee members |
- Listed company management |
- Startup founders with group companies or investor-director arrangements
1. What Is a Related Party Transaction?
A Related Party Transaction (RPT) is any contract or arrangement entered into by a company with a person or entity that qualifies as a ‘related party’ under Section 2(76) of the Companies Act, 2013. The defining characteristic of an RPT is that one or both parties to the transaction have the potential to influence the terms in a manner that may not be in the best interests of the company or its minority shareholders.
RPTs are not prohibited — they are regulated. The law recognises that group transactions, inter-company services, and transactions with promoter-linked entities are a normal part of corporate life. The objective of Section 188 is not to eliminate these transactions but to ensure they are conducted at arm’s length (i.e., as if between unrelated parties), with proper approvals, and with full disclosure.
2. Who Is a ‘Related Party’? — Section 2(76) Explained
Section 2(76) of the Companies Act, 2013 defines ‘related party’ with reference to a company. The definition is deliberately broad and covers a wide range of persons and entities. A person or entity is a Related Party of a company if they fall into any of the following categories:
| Category | Description |
| Director or KMP | A director (other than independent director) or Key Managerial Personnel (KMP) of the company |
| Relative of Director/KMP | Any person who is a ‘relative’ of a director or KMP, as defined under Section 2(77) — includes spouse, parents, children, siblings, etc. |
| Firm with Director/Manager | A firm in which a director, manager, or their relative is a partner |
| Private Company — Director as Member | A private company in which a director or manager or their relative is a member or director |
| Public Company — 2% Threshold | A public company in which a director or manager, along with relatives, holds more than 2% of its paid-up share capital |
| Body Corporate under Influence | A body corporate whose Board or MD/Manager habitually acts in accordance with advice, directions, or instructions of a director or manager of the company |
| Person Influencing Management | Any person on whose advice, directions, or instructions a director or manager is accustomed to act (excluding professional advice) |
| Holding Company | The holding company of the company |
| Subsidiary Company | Any subsidiary of the company |
| Associate Company | Any associate company as defined under Section 2(6) |
| Investment Company / Promoter | Any company which is an investment company, or as may be prescribed — also includes any body corporate controlled by promoters |
| Director of Holding Company | A director (other than independent director) or KMP of the holding company, or their relative |
Special Note — Private Companies:
By virtue of MCA Notification No. 464(E) dated 5th June 2015 and subsequent amendment dated 13th June 2017, the second proviso to Section 188(1) (requiring shareholder approval) does NOT apply to private companies — provided the private company has not defaulted in filing its financial statements or annual returns with the RoC. This is a significant relaxation for private companies.
3. Transactions Covered Under Section 188(1)
Section 188(1) lists the specific categories of contracts and arrangements that require compliance when entered into with a related party. A transaction with a related party is subject to Section 188 if it falls under any of the following seven categories:
- (a) Sale, purchase or supply of any goods or materials
- (b) Selling, disposing of, or buying property of any kind
- (c) Leasing of property of any kind
- (d) Availing or rendering of any services
- (e) Appointment of any agent for purchase or sale of goods, materials, services, or property
- (f) Appointment of a related party to any office or place of profit in the company, its subsidiary, or associate company
- (g) Underwriting the subscription of any securities or derivatives thereof of the company
It is important to note that the above categories are specific and exhaustive. A transaction that does not fall within these seven categories — such as a loan given to a director (which is governed by Section 185 instead) — would not be subject to Section 188, though it may be governed by other provisions of the Act.
4. The Key Exemption — Ordinary Course of Business + Arm’s Length
The third proviso to Section 188(1) provides the most important exemption in the entire RPT framework. A transaction with a related party is completely exempt from all requirements of Section 188 (Board approval, shareholder approval, disclosure, everything) if it satisfies BOTH of the following conditions simultaneously:
Condition 1 — Ordinary Course of Business:
The transaction must be in the ordinary course of the company’s business — i.e., it is part of the usual, regular, and routine business activity of the company, not a one-off or extraordinary transaction.
Condition 2 — Arm’s Length Basis:
The transaction must be on an arm’s length basis — meaning it is conducted as if the parties were unrelated strangers dealing at fair market value, with no conflict of interest influencing the terms.
IMPORTANT: Both conditions must be satisfied simultaneously. A transaction in ordinary course of business but NOT at arm’s length does NOT qualify for this exemption.
What Is ‘Ordinary Course of Business’?
The term ‘ordinary course of business’ is not defined in the Companies Act, 2013. It must be determined based on facts, considering factors like the size, volume, frequency, and purpose of the transaction relative to the nature of the company’s primary business activities. Transactions habitually undertaken as part of the normal functioning of the company qualify. One-time or extraordinary transactions — even if beneficial — may not qualify.
What Is an ‘Arm’s Length Transaction’?
An arm’s length transaction is one conducted between two parties as if they were unrelated — at fair market price with no preferential treatment due to the relationship,the concept was defined as an amount at which assets can be exchanged between a willing and knowledgeable buyer and a willing seller, without either being compelled to transact and both acting in their own best interest.
5. The Approval Framework — Board & Shareholder Approvals
5A. Board Approval — Mandatory for All RPTs
Under Section 188(1), every contract or arrangement with a related party (that is not exempt under the ordinary course + arm’s length exception) requires prior consent of the Board of Directors given by a resolution at a duly convened Board meeting. Circular resolutions (passed by circulation) are not sufficient — the approval must be given at a physical or video-conferenced Board meeting.
Further, no related party director may participate or vote in the Board resolution approving a transaction in which they are interested. This is mandated by Section 184(2) read with Section 188.
5B. Shareholder Approval — Based on Monetary Thresholds
In addition to Board approval, certain high-value RPTs require prior approval of shareholders by way of an Ordinary Resolution at a General Meeting, as per Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014. The thresholds triggering shareholder approval are as follows:
| Transaction Type | Threshold Triggering Shareholder Approval | Basis |
| Sale/purchase/supply of goods or materials | 10% or more of Turnover | Audited financials of preceding FY |
| Buying or selling property | 10% or more of Net Worth | |
| Leasing of property | 10% or more of Turnover | |
| Availing or rendering services | 10% or more of Turnover | |
| Appointment of agent for goods/services | 10% or more of Turnover | |
| Office or place of profit — Monthly remuneration | Exceeding Rs. 2.5 lakh per month | |
| Underwriting subscription of securities | Exceeding 1% of Net Worth |
Key Rule on Voting in Shareholder Meetings:
Any member of the company who is a related party to the transaction shall not vote on the resolution approving such transaction. This restriction applies even if the related party holds shares in the company as a member.
5C. Ratification — What If Prior Approval Was Not Obtained?
If a contract or arrangement is entered into without obtaining prior Board or shareholder approval (where required), the transaction must be ratified by the Board or shareholders within 3 months from the date of entering into the contract. If not ratified within this period, the contract or arrangement shall be voidable at the option of the Board. Additionally, if the transaction was entered into by a director or authorised by a director, that director shall be liable to indemnify the company for any loss arising therefrom.
5D. Audit Committee Approval (For Listed Companies)
Listed companies must also obtain prior approval of the Audit Committee for all RPTs — irrespective of the value — as per Regulation 23 of the SEBI (LODR) Regulations, 2015. The Audit Committee may grant omnibus approval for repetitive transactions, valid for one year (or up to the next AGM, whichever is earlier, for approvals obtained at AGM). Omnibus approval is not permitted for transactions involving sale or disposal of undertakings.
6. Disclosure Requirements Under Section 188 & Companies Act
6A. Register of Contracts — Section 189
Every company must maintain a Register of Contracts or Arrangements in which Directors are Interested in Form MBP-4. This register must contain full particulars of every RPT entered into by the company under Section 188. The register must be kept at the registered office and made available for inspection by members and others entitled to inspect it.
6B. Form AOC-2 — Disclosure in Board’s Report
Every company that enters into RPTs during a financial year must disclose particulars of all such contracts and arrangements in the Board’s Report in the prescribed format — Form AOC-2 (as per Section 134(3)(h) read with Rule 8(2) of Companies (Accounts) Rules, 2014). The disclosure must include:
- Names of the related parties and nature of relationship
- Nature, duration, and salient terms of the contracts
- Justification for entering into the transaction
- Date of approval by the Board
- Amount paid as advances, if any
- Date of special resolution, if applicable
Note: Transactions conducted in the ordinary course of business and on an arm’s length basis (i.e., transactions exempted from Section 188 requirements) need not be reported in Form AOC-2.
6C. Disclosure in Financial Statements — AS 18 / Ind AS 24
Irrespective of whether Section 188 applies, companies are required to disclose RPTs in their financial statements as per Accounting Standard 18 (AS 18) for non-Ind AS companies, or Indian Accounting Standard 24 (Ind AS 24) for Ind AS companies. These standards require disclosure of all related party relationships and the nature and amount of transactions during the year, even if they are in ordinary course at arm’s length. The accounting standards’ definition of ‘related party’ is broader than the Companies Act definition.
7. SEBI LODR Regulation 23 — Additional Requirements for Listed Companies
For listed companies, RPT compliance goes significantly beyond the Companies Act. SEBI’s Regulation 23 of the LODR Regulations, 2015 overlays a stricter, more detailed framework on top of Section 188. Listed companies must comply with BOTH regimes simultaneously.
7A. Materiality of RPTs — Revised Thresholds (2025)
Under Regulation 23(1) of the LODR Regulations, an RPT is considered ‘material’ (and requires shareholder approval) if its aggregate value in a financial year exceeds the prescribed materiality threshold. Following the SEBI (LODR) (Fifth Amendment) Regulations, 2025 notified on 19th November 2025, the materiality framework has been significantly revised:
| Category | Materiality Threshold |
| Standard listed entities | Transactions exceeding Rs. 1,000 crore OR 10% of consolidated turnover, whichever is lower |
| SME-listed entities | Transactions exceeding Rs. 50 crore OR 10% of consolidated turnover, whichever is lower |
| Subsidiaries of listed entities | RPTs where listed entity is not a party, exceeding 10% of standalone turnover of the subsidiary |
Major Change — Scale-Based Thresholds Approved (September 2025):
In its Board Meeting of 12th September 2025, SEBI approved a shift to scale-based thresholds for determining material RPTs. The absolute threshold for shareholder approval is proposed to be doubled to Rs. 2,000 crore, with a scalar increase up to Rs. 5,000 crore for larger companies. This is expected to reduce the number of material RPTs requiring shareholder approval by approximately 60% — a significant ease of compliance for large listed companies. Amendment regulations are expected to be notified in 2026.
7B. Audit Committee Requirements — Enhanced (2025)
Following the March 2025 LODR Amendment Regulations:
- Audit Committees must now include
- at least two independent directors to approve all RPTs
- Nomination & Remuneration, Stakeholder Relationship, and Risk Management Committees must be consulted for high-value RPTs
- Material RPTs entered into by unlisted material subsidiaries require review by the parent listed entity’s Audit Committee
- All RPTs must continue to receive prior Audit Committee approval, regardless of value — the enhanced thresholds apply only to the shareholder approval requirement
7C. Omnibus Approval — Validity Rules
The SEBI (LODR) Fifth Amendment Regulations, 2025 have also codified the validity period for omnibus approvals:
- Omnibus approvals obtained at an AGM: Valid up to the date of the next AGM, but not exceeding 15 months
- Omnibus approvals obtained at other general meetings (including postal ballot): Valid for a period not exceeding one year
- Omnibus approval CANNOT be granted for transactions involving sale or disposal of undertakings
7D. Policy on Materiality of RPTs
Every listed company must formulate and publish on its website a Policy on Materiality of Related Party Transactions, duly approved by the Board. The policy must specify the thresholds for determining material RPTs and the framework for approvals. The policy must be reviewed and updated whenever SEBI amendments alter the applicable thresholds.
7E. Disclosure to Stock Exchanges
Listed companies must disclose all material RPTs to the relevant stock exchanges within the timelines prescribed under Regulation 30 of the LODR Regulations. The disclosure must include the names of parties, nature of the transaction, value, and the approvals obtained. This disclosure must also be made in the half-yearly results and the Annual Report.
8. Consequences of Non-Compliance
8A. For the Company
Under Section 188(4) of the Companies Act, 2013, a company that enters into a contract or arrangement in contravention of Section 188 is liable to a fine ranging from Rs. 25,000 to Rs. 5 lakh (as substituted by the Companies Amendment Act, 2020). Additionally, the transaction itself may be declared voidable at the option of the Board.
8B. For Directors and Officers
Any director or employee who authorises or enters into an RPT in contravention of Section 188 is liable to:
- A fine ranging from Rs. 25,000 to Rs. 5 lakh
- Indemnify the company against any loss suffered as a result of the transaction
- Be proceeded against by the company under Section 188(4) for recovery of losses
Important — Imprisonment Removed:
The Companies (Amendment) Act, 2020 substituted the earlier punishment, which included imprisonment, with a fine-only regime. Directors now face financial penalties but are no longer exposed to imprisonment risk for Section 188 violations alone.
8C. For Listed Companies — SEBI Enforcement
For listed companies, non-compliance with Regulation 23 of the LODR Regulations exposes the company and its directors to:
- SEBI enforcement action including warning letters, adjudication proceedings, and monetary penalties
- Mandatory disclosure of non-compliance to stock exchanges
- Potential delisting proceedings in cases of repeated or wilful non-compliance
- Personal liability of directors under SEBI Act, 1992
In SEBI’s August 2024 enforcement action against 27 companies (involving RHFL, an NBFC), SEBI penalised companies for related party transactions involving corporate loans given to entities with weak financials, bypassing customary due diligence — underscoring that SEBI takes a principles-based view of RPT violations that goes beyond mere procedural non-compliance.
9. The Company Secretary’s Role in RPT Compliance
The Company Secretary (CS) is the principal compliance officer for RPT governance. In practice, the CS’s role in managing RPTs spans the entire lifecycle of the transaction:
1. Identification of Related Parties
At the start of each financial year, the CS coordinates with directors and KMPs to update the Register of Related Parties. Directors are required to disclose their interests in Form MBP-1 at the first Board meeting of each financial year and whenever there is any change. The CS reviews these disclosures and identifies all entities and persons that qualify as related parties under Section 2(76).
2. Pre-Transaction Advisory
Before any potential RPT is finalised, the CS advises the management on whether the transaction falls under Section 188, whether it qualifies for the ordinary course + arm’s length exemption, and what approvals are required. This prevents costly ratification issues after the fact.
3. Audit Committee Coordination (Listed Companies)
For listed companies, the CS prepares the agenda and notes for Audit Committee meetings, ensures all RPTs are placed for prior approval, documents the Committee’s deliberations, and obtains omnibus approvals where appropriate.
4. Board Meeting Management
The CS drafts the Board resolution for RPT approval, ensures the interested director recuses from discussion and voting, records the dissent (if any) of independent directors, and maintains a certified copy of the resolution in the company’s records.
5. Shareholder Approval Process
Where shareholder approval is required (for transactions crossing prescribed thresholds), the CS drafts the explanatory statement for the Notice of General Meeting, ensures the voting restriction on related party members is enforced, and verifies the outcome of the resolution.
6. Disclosure Management
The CS prepares Form AOC-2 for inclusion in the Board’s Report, ensures RPT disclosures in financial statements (AS 18 / Ind AS 24) are accurate, maintains Form MBP-4 (Register of Contracts), and (for listed companies) files disclosures with stock exchanges within prescribed timelines.
7. Annual Compliance Review
At year-end, the CS conducts a comprehensive review of all RPTs during the year, verifies that all required approvals were obtained, and addresses any instances of non-compliance through the ratification process before the annual report is finalised.
10. Practical Compliance Checklist — Section 188
Use this checklist before entering into any transaction with a related party:
| # | Compliance Step | Done? |
| 1 | Identify whether the counterparty is a ‘related party’ under Section 2(76) | ☐ |
| 2 | Verify whether the transaction falls under any of the 7 categories in Section 188(1) | ☐ |
| 3 | Check if the transaction qualifies for the ordinary course + arm’s length exemption | ☐ |
| 4 | If not exempt: obtain Director Interest disclosure in Form MBP-1 from interested director | ☐ |
| 5 | Place the transaction before the Board for approval. Ensure interested director recuses | ☐ |
| 6 | Check if transaction crosses shareholder approval threshold under Rule 15(3) | ☐ |
| 7 | If shareholder approval required: convene general meeting, draft explanatory statement | ☐ |
| 8 | For listed companies: obtain prior Audit Committee approval before Board approval | ☐ |
| 9 | Record the transaction in Form MBP-4 (Register of Contracts) | ☐ |
| 10 | Include transaction details in Board’s Report in Form AOC-2 | ☐ |
| 11 | Ensure disclosure in financial statements under AS 18 / Ind AS 24 | ☐ |
| 12 | For listed companies: disclose material RPTs to stock exchanges per Regulation 30 LODR | ☐ |
| 13 | Update RPT Policy if thresholds or parties have changed during the year | ☐ |
| 14 | At year-end: verify all RPTs were approved. Ratify any unapproved transactions within 3 months | ☐ |
11. Common Mistakes to Avoid
- Assuming all transactions with subsidiaries are automatically exempt — they are related parties and Section 188 applies unless both exemption conditions are met
- Obtaining Board approval by circular resolution instead of at a duly convened Board meeting
- Allowing the interested director to participate in Board discussions and vote on the RPT resolution
- Failing to update Form MBP-1 (Director Interest) at the start of each year or on change of interest
- Not disclosing RPTs in Form AOC-2 in the Board’s Report — especially transactions that are exempt from Section 188 but still require disclosure under AS 18 / Ind AS 24
- Listed companies ignoring Audit Committee pre-approval for low-value RPTs — Audit Committee approval is required for ALL RPTs, irrespective of materiality threshold
- Not updating the company’s RPT Policy after SEBI’s 2025 amendments — policies must reflect the revised materiality thresholds
- Entering into RPTs first and seeking ratification later as a routine practice — ratification is intended as a cure for inadvertent omissions, not as standard operating procedure
- Applying accounting standard definitions of ‘related party’ only, and missing entities that qualify under the broader Companies Act definition
12. Frequently Asked Questions
Q. Is a transaction between a company and its wholly owned subsidiary an RPT?
A. Yes. A subsidiary is a related party under Section 2(76). However, in case of a wholly owned subsidiary, the special resolution passed by the holding company shall be sufficient for the purpose of entering into transactions between the wholly owned subsidiary and the holding company (Rule 15(3) proviso). Additionally, the ordinary course + arm’s length exemption may apply if both conditions are satisfied.
Q. Does Section 188 apply to government companies?
A. Section 188 applies to all companies including government companies. However, MCA has issued specific exemption notifications for government companies under Section 462, exempting them from certain provisions of Section 188.
Q. Can a related party transaction be retrospectively approved?
A. Yes. Section 188 allows ratification of unapproved RPTs by the Board or shareholders within 3 months from the date of the transaction. If not ratified within this period, the transaction becomes voidable at the Board’s option.
Q. What is the difference between Board approval under Section 188 and Audit Committee approval under SEBI LODR?
A. Both are mandatory for listed companies but serve different purposes. Audit Committee approval (LODR Regulation 23) is a pre-approval required for all RPTs irrespective of value. Board approval (Section 188) is required for RPTs that are not exempt under the ordinary course + arm’s length exception. Both must be obtained before entering into the transaction.
Q. Are transactions with a related party’s wholly owned subsidiary covered under Section 188?
A. This depends on whether the subsidiary of the related party itself qualifies as a related party under Section 2(76). If a director controls a company, and that company has a wholly owned subsidiary, the subsidiary may qualify as a body corporate under the direction of the director, making it a related party.
Q. What is an omnibus approval?
A. An omnibus approval is a consolidated standing approval given by the Audit Committee for repetitive RPTs. Instead of obtaining separate approvals for each transaction, the Committee approves a maximum aggregate value and per-transaction limit for the year. Omnibus approvals cannot be given for sale or disposal of undertakings and must be renewed annually.
Conclusion
Section 188 of the Companies Act, 2013 is one of the most practically significant provisions in Indian corporate law. Every company — from a small private limited company run by family members to a large listed conglomerate — is likely to have related party transactions. Getting the compliance right is not merely a legal obligation; it is a hallmark of good corporate governance and a signal of trustworthiness to investors, creditors, and regulators.
The compliance framework has grown considerably more sophisticated over the years — particularly with SEBI’s 2025 amendments for listed companies — demanding proactive management rather than reactive paperwork. A Company Secretary who understands the nuances of the ordinary course exemption, the Board approval process, the disclosure obligations, and the evolving SEBI framework is an invaluable asset to any company.
If you are uncertain whether a transaction with a related party is compliant, or if you need to review your company’s RPT framework, reach out to S Choudhary & Co. We will provide a clear, practical assessment — not a lecture in theory.
Need Help with Related Party Transaction Compliance?
S Choudhary & Co. provides end-to-end RPT compliance services — from identifying related parties and advising on the exemption framework, to drafting Board resolutions, preparing Form AOC-2, and managing Audit Committee approvals for listed companies.
✉ sushil@sushilchoudhary.com
