Related Party Transactions Under Section 188, Companies Act, 2013

Key takeaways

• A related party transaction under Section 188 is a contract between a company and a related party (Section 2(76)) that falls within one of seven categories (Section 188(1)). Related party transactions are regulated, not prohibited.
• Every related party transaction needs prior board approval by resolution at a board meeting, regardless of value.
• Shareholder approval by ordinary resolution is required only above the Rule 15(3) thresholds: 10% of turnover for goods, services, and leasing; 10% of net worth for property; 1% of net worth for underwriting; ₹2.5 lakh monthly remuneration for office of profit.
• A transaction that is both in the ordinary course of business and on an arm's length basis (fourth proviso) falls outside Section 188 entirely.
• Private companies other than a subsidiary of a public company (G.S.R. 464(E)), and companies where 90%+ of members are relatives or related parties (third proviso), are exempt from the related-party voting bar. A wholly-owned subsidiary needs no separate resolution where its accounts are consolidated with the holding company's.
• An unapproved transaction is voidable if not ratified within three months. Violations carry a civil penalty of ₹25 lakh (listed) or ₹5 lakh (other), per the 2020 decriminalisation of Section 188(5). Disclosure runs through Form AOC-2.
• Listed companies must also comply with SEBI LODR Regulation 23, recast by the Fifth Amendment, 2025, and with SEBI's separate insider trading regime.

What is a related party transaction?

A related party transaction is a contract between a company and someone close enough to it to influence the terms, such as a director, a director's relative, or a company under common control. Indian company law does not prohibit these transactions. It regulates them, because a deal with an insider can quietly move value out of the company at the expense of other shareholders.

Section 188 of the Companies Act, 2013 is the provision that governs how a company enters into these transactions. It sets out which dealings are caught, who must approve them, and what the company must disclose afterwards. 

Who qualifies as a related party under Section 2(76)

Section 2(76) of the Companies Act, 2013 defines who counts as a related party in relation to a company.

• A director or their relative. The people running the company, and their close family, are the most direct insiders. "Relative" is defined separately in Section 2(77) and covers a specified set of family members.
• A key managerial personnel (KMP) or their relative. KMP means the company's most senior officers, such as the managing director, chief executive officer, chief financial officer, and company secretary. Their family is included for the same reason as directors' families.
• A firm in which a director, manager, or their relative is a partner. A partnership where an insider has a partner's stake can be used to route value out of the company, so it is treated as related.
• A private company in which a director or manager, or their relative, is a member or director.
• A public company in which a director or manager is a director and holds, with relatives, more than two percent of its paid-up share capital. For a public company, both a board seat and a shareholding above two percent.
• A body corporate whose board or managing director is accustomed to act on a director's or manager's instructions. This captures de facto control that does not show up as a shareholding.
• A person on whose advice a director or manager is accustomed to act. This is the reverse case, a shadow influencer, though advice given in a purely professional capacity (such as a lawyer's or accountant's) is excluded.
• Holding, subsidiary, associate, and fellow-subsidiary companies, and the investing company or venturer. Companies inside the same group are related to each other because a common parent can direct transactions between them.

What Section 188 of the Companies Act regulates about related party transactions

Section 188 applies to every company incorporated in India, private or public, listed or unlisted. It works by naming seven specific categories of dealing and requiring the board to approve any such dealing with a related party before the company enters into it. Above certain size thresholds, the board's approval is not enough and the shareholders must also approve.

The seven categories of transactions covered by Section 188

The seven categories are:

1. Sale, purchase, or supply of any goods or materials. For example, a company buying raw materials from a firm owned by a director's brother.
2. Selling, disposing of, or buying property of any kind. For example, the company selling a warehouse to a promoter-controlled entity.
3. Leasing of property of any kind. For example, renting office space from a director's family company.
4. Availing or rendering of any services. For example, paying management or consultancy fees to an associate company.
5. Appointment of any agent for the purchase or sale of goods, materials, services, or property. This closes the gap where a company routes a caught transaction through an agent instead of dealing directly.
6. A related party's appointment to any office or place of profit. This covers putting a related person into a paid position in the company, its subsidiary, or its associate. The Act defines "office or place of profit" as a role where the holder receives anything beyond ordinary director's remuneration. The practical effect is that a relative placed in a salaried role is caught by Section 188 even where that person holds no directorship, so a company cannot sidestep the section by hiring an insider into an operational job rather than appointing them to the board.
7. Underwriting the subscription of any securities or derivatives of the company. This covers paying a related party to guarantee a securities issue.

When board approval is required for a related party transaction

Every related party transaction in the seven categories requires the prior consent of the board of directors, given by a resolution passed at a board meeting. This is the baseline requirement and it applies regardless of the transaction's value. 

The board cannot approve blind. Rule 15(1) of the Companies (Meetings of Board and its Powers) Rules, 2014 requires the agenda of the board meeting to disclose a defined set of particulars. The agenda must state the name of the related party and the nature of the relationship, the nature and duration of the contract, the material terms including value, any advance paid or received, the method of determining the pricing, and whether all relevant factors have been considered. This means the board is deciding two things at once: whether the transaction is in the company's interest, and whether its terms are defensible against the arm's length standard.

Under Rule 15(2), where a director is interested in the contract, that director cannot be present at the meeting during the discussion on that transaction.

Shareholder approval thresholds for related party transactions under Rule 15(3)

Board approval is always required. Shareholder approval is required only when the transaction crosses a size threshold set in Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014. Below the threshold, the board's resolution is sufficient. 

Transactions are aggregated across the financial year. The Rule 15(3) explanation clarifies that the limits apply to a transaction taken either individually or together with previous transactions with the same related party during the financial year.

The second proviso to Section 188(1) bars a member who is a related party to the specific contract from voting on the resolution approving it. On the other hand, the third proviso to Section 188(1), provides that nothing in the second proviso applies to a company in which ninety per cent or more of the members, in number, are relatives of promoters or are related parties.

The ordinary course of business and arm's length exemption from Section 188

Under the fourth proviso to Section 188(1), the section does not apply to transactions entered into by the company in its ordinary course of business, provided those transactions are on an arm's length basis.

"Arm's length" has a statutory meaning. The explanation to Section 188(1) defines an arm's length transaction as one conducted as if the two parties were unrelated, so that there is no conflict of interest. 

"Ordinary course of business" is not defined in the Act. This is the harder of the two conditions to apply, because the company must judge for itself whether a transaction is part of its usual, regular business activity rather than a one-off. Because the phrase is undefined, a company relying on this exemption should document why a transaction qualifies, so the position can be defended if an auditor or regulator later questions it.

Related party transaction disclosures in the Board's report and register of contracts

The company must also create a visible, auditable record of the transaction after it is approved, through two mechanisms.

Section 188(2) requires every contract or arrangement entered into under Section 188(1) to be referred to in the Board's report to the shareholders, together with the justification for entering into it. This is done through Form AOC-2, which is annexed to the Board's report and records the particulars of every related party contract or arrangement for the financial year, including the parties involved, the nature of the relationship, and the value of the transaction. 

The company must maintain a register of these contracts. Section 189 of the Companies Act requires every company to keep a register, in Form MBP-4 under Rule 16, recording the particulars of all contracts or arrangements to which Section 188 applies. The register must be placed before the next board meeting and signed by the directors present. 

Maintaining an accurate statutory register set is part of the same governance discipline that keeps the rest of a company's corporate records defensible in diligence.

How Section 188 differs from SEBI LODR Regulation 23 for listed companies

Section 188 tests whether a transaction falls into one of seven categories and crosses a turnover or net-worth threshold. SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulation 23 tests whether a transaction is "material" by value and routes approval through the audit committee. A listed company must satisfy both.

FAQs on related party transactions

What does a related transaction mean? 

A related party transaction is a contract or arrangement between a company and a related party, meaning someone positioned to influence its terms, such as a director, a director's relative, or a company under common control. Under Section 188 of the Companies Act, 2013, it becomes a regulated transaction when it also falls within one of seven named categories, such as the sale of goods, leasing of property, or provision of services.

What is the difference between intercompany and related party transactions?

 An intercompany transaction is a dealing between two entities within the same corporate group, such as a parent and its subsidiary. A related party transaction is broader: it includes intercompany dealings but also captures transactions with directors, key managerial personnel, their relatives, and firms in which they hold an interest. Every intercompany transaction between group companies is a related party transaction, but many related party transactions are not intercompany, because the counterparty is an individual insider rather than a group entity.

What are examples of related party transactions? 

Common examples include a company buying raw materials from a firm owned by a director's relative, renting office premises from a promoter's family company, paying management fees to an associate company, and selling property to an entity under common control. Each is a related party transaction under Section 188 because the counterparty is a related party and the dealing falls within one of the seven statutory categories. The body of this post lists all seven categories in full.

What are the SEBI guidelines for related party transactions? 

For listed companies, SEBI regulates related party transactions through Regulation 23 of the LODR Regulations, which is separate from and additional to Section 188. It requires prior audit committee approval for all related party transactions, shareholder approval for material ones, and abstention from voting by all related parties. The materiality thresholds were recast by the SEBI (LODR) (Fifth Amendment) Regulations, 2025; listed entities should confirm current figures against the primary SEBI notification.