Mastering Related Party Transactions Under Companies Act 2013

Section 188 of the Companies Act, 2013, read with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, governs the rules and procedures related to Related Party Transactions (RPTs) in India. This provision ensures transparency, accountability, and fairness in dealings between companies and their related parties.

This comprehensive guide covers everything professionals need to know about Section 188 compliance, from approval thresholds to penalty provisions.

What is a Related Party Transaction?

A Related Party Transaction (RPT) refers to a transaction between a company and its related party involving transfer of resources, services, or obligations, regardless of whether a price is charged.

What is Section 188 of Companies Act 2013?

Section 188 Companies Act 2013, titled “Related party transactions,” prohibits companies from entering contracts or arrangements with related parties without prior approval, unless otherwise specified. This provision applies to all companies incorporated under the Companies Act, making RPT compliance mandatory across corporate India.

Applicability of Section 188:

Section 188 applies to transactions such as:

Sale, purchase, or supply of goods or materials
Buying or selling of property
Leasing of property
Availing or rendering of services
Appointment of agents
Appointment of related party to office or place of profit
Underwriting subscription of securities

These transactions, if entered into with a related party, must follow the approval mechanism outlined under Section 188.

Understanding Related Party Definitions Under Companies Act 2013

Section 2(76) of Companies Act 2013 defines related parties comprehensively:

Individual Related Parties:

Directors and their relatives
Key Managerial Personnel (KMP) and their relatives
Any person on whose advice, directions or instructions a director or manager is accustomed to act
a director other than an independent director or KMP of the holding company or his relative

Relatives include spouse, parents, children (including their spouse) and siblings

Corporate Related Parties:

Holding companies, subsidiaries, fellow subsidiary and associate companies, investing company and venturer of company
Firms where directors/managers are partners
Private companies in which a director or manager or his relative is a member or director;
Public companies in which a director or manager is a director and holds along with his relatives 2%+ shares
Body corporates whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager.

Section 188 Approval Requirements: Complete Matrix

Transactions Requiring Ordinary Resolution

For selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent:

Value equal to or exceeding 10% of net worth of the company

For sale, purchase, or supply of goods/materials directly or through appointment of agent or leasing of property any kind or availing or rendering of any services, directly or through appointment of agent:

Value equal to or exceeding 10% of turnover of the company

Value of transaction to be taken individually or in aggregate during a Financial Year.

For appointment to any office or place of profit in the company, its subsidiary company or associate company:

At a monthly remuneration exceeding Rs. 2,50,000

For underwriting the subscription of any securities or derivatives thereof:

Remuneration exceeding 1% of the net worth

Board Resolution Sufficient

All related party transactions listed under Section 188 must be approved by the Board of Directors through a resolution at a Board Meeting, unless otherwise provided. Approval via circular resolution is not allowed. Value of transactions which does not breach the threshold limits can be done with Board approval only.

Exemptions

Section 188(2) exemptions:

Transactions in ordinary course of business and at arm’s length
Transactions between holding company and wholly-owned subsidiary
In case of a Private Company, related party can vote on such resolution, in which it is interested.

Rule 15 Companies Meeting Board Powers: Detailed Compliance Framework

Prior Approval Mandate

“No company shall enter into any contract or arrangement with a related party without prior approval of Board or Audit Committee or shareholders, as the case may be.”

Professional Tip: This creates a three-tier approval structure based on transaction value and nature.

Audit Committee’s Central Role

Mandatory Audit Committee Functions:

All RPTs must be placed before Audit Committee
Committee may grant omnibus approval for repetitive transactions
Omnibus approval valid for one year from meeting date
Quarterly review of omnibus approval utilization mandatory

For detailed role of audit committee you may click here.

Board Approval Process

Board Resolution Requirements:

Consider Audit Committee recommendation
Approve by board resolution
Interested directors cannot participate in voting
Quorum calculated excluding interested directors

Meeting Documentation:

Record Audit Committee’s recommendation
Note interested directors’ abstention
Document business rationale for transaction
Specify transaction terms and conditions

Shareholder Approval Mechanics

Special Resolution Process:

Notice must include all material facts
Interested shareholders cannot vote on resolution
E-voting mandatory for listed companies

Disclosure Requirements in Notice:

Names of related parties
Name of the director or KMP who is related, if any
Nature of relationship
Nature, Material terms, value and particulars of transaction

Section 188 Penalties and Consequences

For Director/Employee:

Fine up to ₹25 lakh (in case of listed companies)
Fine up to ₹5 lakh (in case of other companies)

For Company:

If the contract is not ratified by the Board or shareholders within next 3 months, it becomes voidable.
Company may recover any loss or damage from the concerned director or related party.

Practical Examples

A company appoints the brother of a director to a paid position earning ₹3 lakh/month → Board and shareholders’ approval needed.
The company sells machinery worth ₹120 crore to a related party, and its turnover is ₹900 crore → Special resolution required

RPT Compliance Best Practices

Monthly Compliance Activities

Update related party register with new relationships
Monitor ongoing transaction values against approved limits
Track omnibus approval utilization
Review threshold calculations for upcoming transactions

Quarterly Compliance Tasks

Prepare RPT disclosures for financial results
Audit Committee review of all RPT activities
Threshold breach analysis and corrective actions
Board reporting on RPT compliance status

Annual Compliance Requirements

RPT policy review and updates
Omnibus approval renewals before expiry
Compliance training for board and management
External audit coordination for RPT verification

Frequently Asked Questions (FAQs)

Q. How is annual turnover calculated for Section 188 thresholds?

Answer: Annual turnover means standalone turnover as per the latest audited financial statements, not consolidated turnover.

Q. Can omnibus approval cover all types of RPTs?

Answer: Omnibus approval only covers repetitive transactions with specified criteria. One-time or irregular transactions require specific approvals.

Q. What happens if a transaction exceeds approved limits?

Answer: The excess portion requires fresh approval through appropriate resolution (Board/Ordinary/Special) before execution.

Q. Are related party definitions same for all companies?

Answer: Yes, Section 2(76) definitions apply uniformly, but disclosure requirements may vary based on company type.

Q. Can independent directors be held liable for approving a questionable RPT?

Answer: Yes. Even though they are not “interested” in the transaction, independent directors are expected to exercise due diligence. If they fail to question or investigate a suspicious RPT, they could face professional and legal consequences.

Q. How do companies typically justify that a transaction is in the ‘ordinary course of business’?

Answer: Ordinary course of business means it is the business of the Company and not something which usually happens in the business of the Company. So, Company engaged in agriculture business cannot say that giving/ obtaining loan to/ from the related party is ordinary course of business.

Q. Can companies ratify RPTs after entering into the contract?

Answer: Yes, Section 188 allows post-facto ratification by the Board or shareholders within a reasonable time. However, failure to ratify renders the contract voidable at the option of the Board.

Q. How is “office or place of profit” interpreted — can it include consultancy or retainer roles?

Answer: Yes. Any role where a related party receives remuneration beyond directorship, including consultancy, advisory, or part-time roles, can be considered an office or place of profit and fall under Section 188.

Conclusion: Mastering RPT Compliance

Section 188 Companies Act 2013 and Rule 15 Companies Meeting Board Powers create a comprehensive framework for related party transaction compliance in India. Success requires understanding both the substantive requirements and procedural mechanics.

Professional mastery involves treating RPT compliance as a strategic governance tool rather than a regulatory burden. Companies with robust Section 188 compliance demonstrate superior governance standards, attract better valuations, and build stronger stakeholder confidence.

Key Takeaways:

Section 188 establishes approval requirements based on transaction thresholds
Rule 15 provides detailed procedural framework for all approvals
Compliance requires proactive planning and systematic documentation
Professional expertise in RPT management creates significant career opportunities

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