Related-party transactions under the Companies Act, 2013 are mainly governed by Section 188, read with the statutory definition of related party in Section 2(76), director-interest rules in Section 184, and record-keeping under Section 189. For most private and public companies, the real work is not identifying that a transaction exists, but deciding whether it falls within Section 188 at all, whether the ordinary-course and arm's-length exception is available, and whether the board process has been run correctly.
What is a related-party transaction under the Companies Act?
A transaction becomes relevant under Section 188 when a company enters into a contract or arrangement with a related party for one of the specified transaction categories. Section 2(76) defines related party broadly and covers, among others, directors and their relatives, KMP and their relatives, certain firms and companies connected with directors or managers, and certain holding, subsidiary and associate structures.
Section 188 specifically covers these categories:
- Sale, purchase or supply of goods or materials.
- Selling, disposing of, or buying property of any kind.
- Leasing property of any kind.
- Availing or rendering services.
- Appointment of an agent for purchase or sale of goods, materials, services or property.
- Appointment of a related party to any office or place of profit in the company, its subsidiary or associate company.
- Underwriting the subscription of securities or derivatives of the company.
That list matters because not every dealing with a related party is a Section 188 transaction. Start by testing the transaction against the statutory list instead of assuming every connected-party dealing automatically needs the same approval path.
When Section 188 applies, and when it does not
The default rule is straightforward: a company should not enter into a covered transaction with a related party without board consent by resolution at a board meeting, subject to the prescribed conditions.
The most important exception is also in Section 188 itself. The sub-section does not apply to transactions entered into in the company’s ordinary course of business and on an arm's length basis. The Act defines an arm's-length transaction as one conducted as if the parties were unrelated, so that there is no conflict of interest.
This is where practice becomes fact-sensitive. A transaction may involve a related party and still fall outside the Section 188 approval regime if both tests are satisfied:
- The transaction is genuinely part of the company’s ordinary business operations.
- The pricing and terms are comparable to what would be accepted with an unrelated party in similar circumstances.
If either limb is weak, many governance failures start with overconfidence on the exception. The company should be able to explain why the transaction is ordinary for its business model and how pricing or commercial terms were established.
Approval structure in practical company work
| Issue | Current position under verified first-party sources |
|---|---|
| Board approval | Section 188 requires consent of the Board by resolution at a meeting of the Board for covered transactions, unless the ordinary-course and arm's-length exception applies. |
| Member approval | Where prescribed thresholds are crossed, prior approval of the company by resolution is required under the first proviso to Section 188(1). The live numeric thresholds are prescribed in the rules. |
| Voting restriction | A related party member cannot vote on that resolution. There is a statutory carve-out where 90% or more members in number are relatives of promoters or are related parties. |
| Interested director | Under Section 184(2), an interested director must disclose the concern or interest at the board meeting and must not participate in that meeting. |
| Quorum | Section 174(3) modifies quorum where interested directors are numerous; at least two non-interested directors present can form quorum in that situation. |
| Audit committee layer | Where Section 177 applies, approval or subsequent modification of related party transactions also sits with the audit committee, and omnibus approval is permitted subject to prescribed conditions. |
| Late approval | If the transaction is entered into without the required approval and is not ratified within three months, it becomes voidable at the option of the Board or shareholders, as applicable. |
Change-sensitive point: shareholder-approval triggers under Rule 15 are prescription-based. I verified from first-party sources that such thresholds exist and remain legally relevant, but I did not reproduce current numeric thresholds here because I could not verify the live rule text directly from an accessible first-party page during research.
Where board approval is needed, the process quality matters as much as the legal conclusion. The notice, agenda, abstention handling, quorum check, resolution wording, and minutes should be clean. That process is easier to run properly if the company already follows a disciplined board-meeting file and records system; this is where CA and secretarial teams often work together. A more detailed process reference is available in this guide to board meetings under the Companies Act.
Important exceptions that materially change the answer
1. Ordinary course plus arm's length
This is the main exception. If a transaction is both ordinary-course and arm's-length, Section 188 approval requirements do not apply. The burden in practice is evidentiary, not rhetorical. Comparable third-party quotations, transfer-pricing style benchmarking logic, rate cards, prior market contracts, or procurement records often matter more than labels used in the note sheet.
2. Holding company and wholly owned subsidiary
Section 188 states that the requirement of passing the shareholder resolution under the first proviso does not apply to transactions between a holding company and its wholly owned subsidiary if the subsidiary’s accounts are consolidated with the holding company and placed before shareholders at the general meeting for approval.
This is not a blanket exemption from all governance work. It only removes the shareholder-resolution requirement in that specific situation. Companies still need to test board-level and director-interest requirements separately.
3. Related-party member voting carve-out
The general rule is that a related party member cannot vote on the approving resolution. Section 188 also contains a specific carve-out where 90% or more members in number are relatives of promoters or are related parties. For closely held structures, this can materially alter the voting analysis.
Disclosure and records that should not be missed
Section 188(2) requires every contract or arrangement entered into under Section 188(1) to be referred to in the Board's report to shareholders, together with the justification for entering into it.
Separately, the Companies (Accounts) Rules, 2014 require particulars of contracts or arrangements with related parties referred to in Section 188(1) to be included in the Board's report in the prescribed form.
Section 189 adds a separate record-keeping layer. Every company must maintain a register of contracts or arrangements to which Section 184(2) or Section 188 applies, in the prescribed manner. After entries are made, the register is to be placed before the next board meeting and signed by all directors present.
In practice, a file is weak if it only contains the signed agreement. A defensible RPT file usually includes the related-party identification note, the basis for ordinary-course and arm's-length analysis if claimed, approval matrix, abstention note, board papers, signed resolution, register entry support, and Board's report disclosure draft.
Three examples with explicit assumptions
Example 1: routine purchase from a promoter-controlled vendor
Assumptions: A private manufacturing company regularly purchases packaging material. One promoter’s spouse controls a vendor. The company obtains current market quotations from three unrelated vendors, the selected rate is within that range, payment terms match normal procurement terms, and the company has historically bought the same material in the ordinary course.
Likely result: The vendor is a related party, and the transaction type falls within Section 188. But if the company can support both ordinary-course and arm's-length treatment, the Section 188 approval requirement can fall away. The documentation burden remains important.
Example 2: lease of office premises from a director’s private company
Assumptions: A company proposes to lease office space from a private company in which one of its directors is also a director and member. The rent is above the company’s current market benchmark, and the lease includes a large non-refundable security deposit on unusual terms.
Likely result: This is a covered Section 188 transaction. The interested director must disclose the interest and not participate under Section 184(2). Board approval is required unless the exception applies, and if the prescribed Rule 15 threshold is crossed, prior member approval is also required.
Example 3: appointment to an office or place of profit
Assumptions: A listed company proposes to appoint the CFO’s relative as head of procurement in a subsidiary on a compensation package materially above comparable market roles. The role goes beyond sitting fees or director remuneration.
Likely result: This can fall within the Section 188 category dealing with appointment to an office or place of profit. The board process, interest disclosure, audit-committee layer where applicable, and disclosure consequences all need to be checked before appointment documents are finalised.
A workable review checklist for CA and finance teams
- Identify the relationship first under Section 2(76); do not start with the transaction amount.
- Check whether the transaction falls within one of the seven Section 188 categories.
- Test the ordinary-course and arm's-length exception with evidence, not conclusions.
- Map the approval path: board, audit committee if applicable, and member approval if prescribed thresholds are crossed.
- Check director-interest disclosure and abstention under Section 184(2).
- Confirm quorum after excluding interested directors where necessary.
- Prepare board papers that explain commercial rationale, pricing basis, and key terms.
- Update the Section 189 register on time.
- Draft Board's report disclosure and prescribed-form particulars before finalising annual-report timelines.
- If anything was entered into without approval, track the three-month ratification window immediately.
Where professionals usually get the analysis wrong
- Treating every related-party dealing as automatically prohibited instead of analysing whether Section 188 actually applies.
- Using the phrase arm's length without preserving market evidence.
- Forgetting that director abstention under Section 184 is a separate issue from Section 188 approval.
- Ignoring Section 189 register compliance because the transaction was small.
- Assuming the wholly owned subsidiary carve-out removes every other approval requirement.
- Reproducing old threshold numbers from secondary websites without checking the live rule text.
For most companies, the durable approach is simple: identify the relationship accurately, classify the transaction correctly, evidence the exception if claimed, and run the board process cleanly. That prevents most RPT disputes long before the annual report is drafted.
