Related Party Transactions in India: Section 188, Board Approval, Shareholder Thresholds, Arm’s Length, Director Disclosure & Penalties

Corporate Law • Companies Act 2013 • Board Governance • Director Conflicts • Related Party Transactions

Why related party transactions are a board-level legal risk

Related party transactions are common in promoter-led groups, family businesses, subsidiaries, joint ventures and closely held companies. A company may purchase goods from a promoter-controlled entity, lease property from a director’s relative, obtain services from an associate company, appoint a related person to an office of profit or route business through another group entity.

The legal issue is not that every related party transaction is prohibited. Indian company law permits such transactions, but requires a structured approval and disclosure process so that conflicts are identified, interested directors do not misuse board power, members receive approval rights where prescribed thresholds are crossed, and the company maintains a defensible statutory record.

The principal framework is contained in Sections 177, 184, 188 and 189 of the Companies Act, 2013, read with the Companies (Meetings of Board and its Powers) Rules, 2014 and applicable exemptions or modifications. Listed entities must separately examine the additional SEBI Listing Regulations framework.

Quick legal position

Section 188 regulates specified contracts and arrangements with a related party.
Board approval under Section 188 must be given by a resolution at a meeting of the Board, not casually through an informal management approval.
A transaction in the ordinary course of business and on an arm’s-length basis is outside the operative approval requirement of Section 188(1), but it may still require accounting, audit, Audit Committee or SEBI treatment.
Rule 15 prescribes shareholder-approval thresholds for specified categories of transactions.
Section 184 separately requires directors to disclose specified interests and, under the general rule, abstain from participation in interested contracts or arrangements.
Section 177 requires Audit Committee approval or modification of related party transactions for companies to which the Audit Committee framework applies.
Section 189 requires a statutory register of contracts and arrangements covered by Section 184(2) or Section 188.
An unapproved Section 188 transaction that is not ratified within three months may become voidable at the option of the Board or shareholders, as applicable.
Current Section 188 penalties can reach ₹25 lakh for a listed company and ₹5 lakh for any other company for the director or employee who entered into or authorised the transaction in violation of the section.

Step 1: identify whether the counterparty is a “related party”

Section 2(76) of the Companies Act defines “related party”. The definition captures specified relationships involving directors, key managerial personnel, relatives, firms, companies, bodies corporate, holding companies, subsidiaries, associates and other connected entities.

A proper RPT review should not rely only on the vendor’s name. Finance and legal teams should compare the proposed counterparty against:

directors and their relatives;
key managerial personnel and their relatives;
entities in which directors or KMPs have specified ownership or management links;
holding, subsidiary and associate entities;
promoter and group-company structures;
beneficial ownership information;
director disclosures under Section 184; and
the latest related-party master maintained by finance or company secretarial teams.

The related-party master should be refreshed whenever a director, KMP, promoter relationship, shareholding or group structure changes.

Step 2: identify whether the proposed arrangement falls within Section 188

Section 188(1) applies to contracts or arrangements with a related party concerning:

sale, purchase or supply of goods or materials;
selling, disposing of or buying property of any kind;
leasing of property of any kind;
availing or rendering of services;
appointment of an agent for purchase or sale of goods, materials, services or property;
appointment of the related party to an office or place of profit in the company, subsidiary or associate company; and
underwriting the subscription of securities or derivatives of the company.

Primary statutory source: Section 188, Companies Act, 2013 — India Code.

Not every transaction with a related party is automatically governed by Section 188

The expression “related party transaction” is often used broadly in accounting and governance. Section 188, however, regulates the specific categories listed in sub-section (1).

A transaction outside those categories may still engage:

Section 184 conflict disclosure;
Section 177 Audit Committee review;
Section 166 directors’ fiduciary duties;
accounting-standard related-party disclosure;
SEBI Listing Regulations for listed entities;
Section 185 or 186 in loan, guarantee or investment cases;
transfer-pricing or tax requirements; or
contractual investor-consent rights.

This distinction is important because a company should not conclude “Section 188 does not apply, therefore no governance control applies.”

Step 3: test the ordinary-course and arm’s-length exception

Section 188 contains an important exception. The operative approval requirement does not apply to transactions entered into by the company in its ordinary course of business where the transaction is also on an arm’s-length basis.

Both limbs matter. A transaction can be ordinary course but not arm’s length, or arm’s length but outside the ordinary course. In either situation, the Section 188 exception may not be available.

What is “ordinary course of business”?

The Act does not provide a single mathematical test. Companies should examine substance and consistency with normal operations. Relevant indicators can include:

whether the transaction is part of the company’s stated business;
whether similar transactions are routinely undertaken with unrelated parties;
frequency and recurrence;
size relative to normal operations;
commercial purpose;
whether it is authorised by existing policies and delegations;
whether the transaction is exceptional, one-off or restructuring-related; and
how the company has historically classified comparable transactions.

Documentation should explain why the transaction is ordinary course instead of merely using that phrase in the board note.

What does “arm’s-length transaction” mean?

Section 188 explains an arm’s-length transaction as one between related parties conducted as if they were unrelated, so that there is no conflict of interest.

A defensible arm’s-length file may use:

competitive quotations;
independent market benchmarks;
comparable uncontrolled prices;
registered valuation, where appropriate;
independent rent or property assessment;
transfer-pricing analysis;
cost-plus methodology with evidence;
industry pricing data; and
a written commercial justification.

Merely stating “price is market based” without evidence is weak governance.

Ordinary course and arm’s length do not remove every RPT obligation

Even where Section 188 approval is not required because both tests are satisfied, the company should still examine:

director conflict disclosures under Section 184;
Audit Committee approval under Section 177 where applicable;
accounting disclosure;
Board-report disclosure requirements;
listed-company obligations;
tax transfer-pricing requirements; and
internal policy thresholds.

This is one of the most important distinctions in RPT compliance.

Section 184: disclosure of interest by directors

Section 184 operates alongside Section 188. Every director must make prescribed disclosures of concern or interest at the first Board meeting in which the director participates, at the first Board meeting of every financial year, and when a change occurs.

Where a director is directly or indirectly concerned or interested in a specified contract or arrangement, the director must disclose the nature of the interest at the Board meeting in which the matter is discussed.

Under the general statutory rule, the interested director must not participate in that meeting on the matter. A contract entered into without the required disclosure or with improper participation is voidable at the option of the company.

Section 184 currently provides a penalty of ₹1 lakh for a director who contravenes the relevant disclosure provisions.

Primary source: Companies Act, 2013 — current statutory text.

Private-company modifications: do not apply public-company rules mechanically

Private companies have received specific exemptions and modifications under Section 462 notifications. For example, the 2015 private-company notification modifies the operation of Section 184(2) and exempts the second proviso to Section 188(1), subject to the applicable exemption framework and later conditions.

The practical rule is simple: do not assume that the same interested-director participation or related-member voting rule applies identically to every public and private company. Before relying on a private-company exemption, check the current Section 462 notification, subsequent amendments and whether the company satisfies the conditions for the exemption.

Step 4: Board approval under Section 188

Where Section 188 applies and the ordinary-course/arm’s-length exception is unavailable, the company requires consent of the Board of Directors through a resolution at a meeting of the Board.

The agenda note should contain enough information for directors to assess the transaction instead of presenting only a final contract value.

Rule 15: what the Board agenda should disclose

The Companies (Meetings of Board and its Powers) Rules require disclosure of material information concerning the related party and the proposed transaction. A strong Board paper should include:

name of the related party;
nature of the relationship;
name of the interested director or KMP, if any;
nature, duration and particulars of the contract or arrangement;
material terms;
monetary value;
advance paid or received, if any;
pricing methodology;
whether relevant commercial factors were considered;
ordinary-course analysis;
arm’s-length support;
shareholder-approval threshold analysis;
Audit Committee status, where applicable; and
any other information required for an informed decision.

Interested directors and Board participation

As a general governance rule, a director whose conflict is engaged should disclose the interest and should not influence the approval process. Rule 15 also restricts the presence of an interested director during discussion of the relevant resolution.

Private companies may have statutory modifications under the Section 462 exemption framework. A company should document the legal basis before allowing an interested director to participate.

Step 5: when is shareholder approval required?

Rule 15 prescribes monetary thresholds for the first proviso to Section 188(1). If the relevant transaction reaches the prescribed threshold, prior approval of members by resolution is required, subject to statutory exemptions.

Section 188 transaction	Rule 15 shareholder threshold
Sale, purchase or supply of goods/materials, directly or through agent	10% or more of turnover
Selling/disposal/buying of property, directly or through agent	10% or more of net worth
Leasing of property	10% or more of turnover
Availing or rendering services, directly or through agent	10% or more of turnover
Office or place of profit in company/subsidiary/associate	Monthly remuneration exceeding ₹2.5 lakh
Underwriting subscription of securities or derivatives	Remuneration exceeding 1% of net worth

For the percentage-based thresholds, Rule 15 requires the company to consider the relevant transaction individually or together with previous transactions of the applicable category during the financial year. Turnover or net worth is determined from the audited financial statements of the preceding financial year.

The current thresholds reflect the 2019 amendment that removed the earlier absolute ₹100 crore/₹50 crore caps in specified categories and revised the lease threshold to 10% or more of turnover.

Official amendment source: Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019 — India Code.

Related members and voting on shareholder approval

The second proviso to Section 188(1) generally restricts a related-party member from voting on a resolution approving the relevant contract or arrangement.

However, there are important exceptions and modifications. The Act itself contains an exception where 90% or more members in number are relatives of promoters or are related parties. Private companies also have a Section 462 exemption from the second proviso, subject to the applicable exemption conditions.

For that reason, the notice and voting plan should be legally reviewed before circulation rather than assuming that every related shareholder is automatically disqualified from voting in every company.

Holding company and wholly owned subsidiary exemption

Section 188 contains a specific relaxation for transactions between a holding company and its wholly owned subsidiary where the subsidiary’s accounts are consolidated with the holding company and placed before shareholders at the general meeting for approval.

The Rule 15 framework also contains provisions relevant to wholly owned subsidiary approvals. Group companies should nevertheless maintain proper Board records, conflict disclosures, pricing support and accounting disclosures.

Section 177: Audit Committee approval of related party transactions

For companies required to constitute an Audit Committee under Section 177 and the applicable rules, related party transactions have an additional approval layer.

The Audit Committee’s statutory role includes approval or subsequent modification of transactions with related parties. The law also permits omnibus approval subject to prescribed conditions.

Therefore, an RPT can require multiple sequential approvals:

Audit Committee approval or omnibus approval, where applicable;
Board approval under Section 188, where required; and
member approval under the first proviso to Section 188 and Rule 15, where the threshold is crossed.

These are not interchangeable approvals.

Omnibus Audit Committee approval

Omnibus approval can be useful for recurring RPTs, but should not become a blanket annual approval for unidentified transactions. The Audit Committee should approve criteria, maximum value, nature of transactions, indicative pricing or contractual basis and periodic review in accordance with the applicable rules.

Recurring transactions should be reconciled against the approved ceiling throughout the year so that the company does not discover after year-end that the omnibus limit was exceeded.

Listed companies: Section 188 is not the complete RPT framework

A listed entity must separately comply with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, particularly the related-party framework under Regulation 23 and current amendments.

SEBI’s definition, materiality thresholds, approval architecture and subsidiary-related rules can differ from Section 188. A transaction exempt from Section 188 because it is ordinary course and arm’s length may still require listed-company Audit Committee or shareholder treatment.

Listed entities should therefore maintain a dual compliance checklist: Companies Act plus SEBI Listing Regulations.

Section 189: register of interested contracts and arrangements

Section 189 requires every company to maintain one or more registers containing prescribed particulars of contracts and arrangements to which Section 184(2) or Section 188 applies.

After particulars are entered, the register is to be placed before the next Board meeting and signed by all directors present.

The register is kept at the registered office and is open to inspection in accordance with the statutory framework. Directors and KMPs also have disclosure obligations concerning interests that feed into the register.

Current Section 189(6) provides a penalty of ₹25,000 for every director who fails to comply with the section and the rules made under it.

Primary source: Section 189 — India Code.

MBP-1, MBP-4 and the documentary trail

In practice, related-party governance usually requires coordination of the prescribed director-interest disclosure process and the statutory register. Company secretarial teams commonly maintain:

director disclosure of interest in prescribed form;
related-party master list;
Board and Audit Committee agenda papers;
pricing/valuation support;
member notice and explanatory statement where required;
minutes recording disclosures and abstentions;
register of contracts and arrangements;
signed contracts;
invoices and payment trail; and
financial-statement and Board-report disclosures.

The objective is not merely form completion. The records should demonstrate that the company identified the conflict before entering the transaction and applied the correct approval route.

What happens if approval was missed?

Section 188 contains a ratification mechanism. If a contract or arrangement is entered into without obtaining required Board consent or member approval and is not ratified by the Board or shareholders, as applicable, within three months from the date of the contract or arrangement, it becomes voidable at the option of the Board or shareholders.

If the transaction is with a related party to a director, or was authorised by another director, the directors concerned may be required to indemnify the company for loss.

The company may also proceed against a director or employee who entered into the transaction in contravention of Section 188 for recovery of loss sustained by the company.

Ratification is a cure mechanism, not a routine approval strategy

Companies should not intentionally transact first and seek ratification later. Repeated post-facto approvals are a governance red flag because they indicate that related-party identification is happening after commitment rather than before it.

A strong control blocks purchase orders, contracts or payments where the counterparty is flagged as a related party until the approval status is confirmed.

Penalties under Section 188

Under the current amended Section 188(5), any director or employee who entered into or authorised a contract or arrangement in violation of the section is liable to:

₹25 lakh penalty in case of a listed company; and
₹5 lakh penalty in case of any other company.

The earlier criminal punishment structure was replaced by the present civil-penalty framework. This is why older online articles quoting imprisonment or the earlier fine range can be misleading if they have not been updated.

Penalty under Section 184

A director who contravenes the statutory interest-disclosure requirements under Section 184(1) or 184(2) is currently liable to a penalty of ₹1 lakh. Separately, the affected contract may be voidable at the company’s option where the section is breached.

Board-report and financial-statement disclosure

Related party compliance does not end when the contract is approved. Companies must also examine disclosure obligations under the Companies Act, applicable rules and accounting standards.

Depending on the transaction and company, the disclosure file may include:

Board’s report disclosure of prescribed related-party contracts or arrangements;
AOC-2, where applicable;
financial-statement related-party disclosures;
Audit Committee reporting;
listed-entity stock-exchange disclosures; and
transfer-pricing documentation.

Related party loans are not automatically Section 188 transactions

One common error is to force every promoter or group loan into Section 188. Loans, guarantees and securities may primarily engage Sections 185 and 186, together with Section 184 and other applicable rules.

The company should classify the legal nature of the transaction first. A group transaction may simultaneously engage more than one Companies Act section.

Related party leases: a frequent private-company risk

Promoter-owned premises are commonly leased to operating companies. The RPT file should address:

ownership of the property;
relationship with the lessor;
commercial need for the premises;
independent rent benchmark;
security deposit;
lock-in and escalation terms;
Rule 15 shareholder threshold based on turnover;
interest disclosure;
Board approval; and
tax and accounting treatment.

A long-term promoter lease at above-market rent can become both an RPT-compliance issue and a minority-shareholder governance issue.

Related party services: management fee and consultancy risk

Management, advisory, marketing, technology or consultancy arrangements with group entities should have a measurable scope and pricing basis.

Weak arrangements often contain:

generic descriptions of services;
no deliverables;
no timesheets or output evidence;
percentage-of-revenue fees with no benchmark;
duplicate services already performed internally;
payments to promoter entities with little substance; or
retrospective invoicing.

These are legal, tax, audit and transaction-due-diligence red flags.

Office or place of profit

Section 188 expressly covers appointment of a related party to an office or place of profit in the company, subsidiary or associate. Rule 15 prescribes shareholder approval where monthly remuneration exceeds ₹2.5 lakh.

Companies should test substance rather than job title. Compensation, consultancy fee, commission, perquisite, rent-free accommodation or other benefits may be relevant depending on the structure.

Underwriting by a related party

Section 188 also covers underwriting of the company’s securities or derivatives by a related party. Rule 15 requires shareholder approval where remuneration exceeds 1% of the company’s net worth, calculated from the preceding audited financial statements.

How RPT failures appear in M&A due diligence

Related-party issues are frequently discovered during investment or acquisition diligence. Common red flags include:

promoter leases without Board approval;
group-company services without agreements;
vendor entities linked to directors but not declared;
related-party advances misclassified in accounts;
transactions exceeding Rule 15 thresholds without shareholder approval;
no arm’s-length benchmark;
missing Section 189 register;
unsigned Board minutes;
interested directors participating without documented legal basis;
unratified historical transactions; and
financial-statement disclosures inconsistent with statutory registers.

For a wider transaction review, see M&A Due Diligence Checklist for Private Companies in India.

Why directors should treat RPTs as personal governance risk

Directors are expected to identify conflicts, disclose interests and ensure that company resources are not diverted for private benefit. RPT failures can therefore overlap with:

Section 166 fiduciary duties;
Section 184 disclosure obligations;
Section 188 approval requirements;
indemnity and recovery claims;
oppression and mismanagement allegations;
fraud concerns in serious cases; and
listed-company enforcement.

For the wider liability framework, see Director Liability in India: Legal Risks, Duties and Protection Strategy for Company Directors.

Practical RPT approval workflow

Identify the counterparty. Run it against the current related-party master.
Classify the transaction. Determine whether Section 188 category applies.
Check other sections. Sections 184, 185, 186, 177 and listed-company rules may also apply.
Test ordinary course. Prepare a written commercial analysis.
Test arm’s length. Obtain comparable pricing or valuation support.
Check director interest. Update disclosures and determine recusal/participation rules.
Check Audit Committee requirement. Obtain prior or omnibus approval where applicable.
Prepare Board agenda. Include Rule 15 particulars and supporting documents.
Obtain Board resolution at a meeting.
Calculate Rule 15 thresholds. Use preceding audited turnover/net worth and aggregate relevant transactions for the financial year.
Obtain shareholder approval where required. Apply related-member voting rules and exemptions correctly.
Execute the agreement. Ensure terms match the approved proposal.
Update Section 189 register.
Make financial and Board-report disclosures.
Monitor actual transaction value. Re-approve if the approved ceiling or scope changes.

RPT compliance matrix

Control	Question	Evidence
Related-party identification	Is the counterparty connected under Section 2(76)?	Master list, director/KMP disclosures, ownership data
Section 188 classification	Does the contract fall within clauses (a)–(g)?	Legal classification note
Ordinary course	Is this part of normal business activity?	Historical transactions, business model, policy
Arm’s length	Would unrelated parties transact on comparable terms?	Quotes, valuation, transfer-pricing or market benchmark
Director conflict	Is any director interested?	Section 184 disclosure and minutes
Audit Committee	Does Section 177 apply?	Committee resolution/omnibus approval
Board	Has Board approval been taken at a meeting?	Agenda, notes, resolution, minutes
Member threshold	Does Rule 15 threshold apply?	Turnover/net-worth calculation
Register	Has Section 189 register been updated?	Statutory register
Disclosure	Are financial/Board-report disclosures complete?	AOC-2, financial statements, listed disclosures

Common RPT compliance mistakes

checking related-party status only after invoices are raised;
treating a group company as automatically exempt;
assuming an arm’s-length transaction needs no other approval or disclosure;
using outdated Rule 15 thresholds containing old ₹100 crore or ₹50 crore caps;
failing to aggregate transactions during the financial year;
using current-year turnover instead of preceding audited financial statements for Rule 15;
allowing an interested director to participate without checking the applicable rule or exemption;
assuming a private-company exemption applies without checking Section 462 conditions;
failing to obtain Audit Committee approval;
using post-facto ratification as standard practice;
missing the Section 189 register;
no pricing benchmark;
contract terms differing from approved Board terms;
not revisiting approvals when transaction value increases; and
ignoring SEBI rules for listed entities.

Frequently asked questions

Are related party transactions illegal in India?

No. They are permitted subject to the Companies Act, applicable rules, conflict disclosures, approvals, pricing, registers and other governance requirements.

Does every RPT require shareholder approval?

No. Shareholder approval under Section 188 is triggered for prescribed transactions reaching Rule 15 thresholds, subject to statutory exemptions. Board or Audit Committee approval may still be required below those thresholds.

Does every RPT require Board approval?

Section 188 requires Board approval for covered transactions unless the ordinary-course and arm’s-length exception applies. Other statutory or policy approvals may still apply even where Section 188 does not.

What is the current threshold for purchase or sale of goods?

Rule 15 prescribes 10% or more of turnover, calculated from the preceding audited financial statements and considering the relevant transaction individually or with previous transactions of the category during the financial year.

What is the current threshold for property transactions?

For selling, disposing of or buying property, the Rule 15 threshold is 10% or more of net worth.

What is the threshold for related-party services?

For availing or rendering services, directly or through an agent, the threshold is 10% or more of turnover.

Does ordinary course automatically mean arm’s length?

No. The tests are separate. Both must be satisfied for the Section 188 ordinary-course/arm’s-length exception.

Can an interested director vote at the Board meeting?

The general Section 184 and Rule 15 framework restricts participation. Private companies have specific statutory modifications under Section 462 notifications. The company should check the exact exemption and its conditions before allowing participation.

Can a related shareholder vote on the Section 188 resolution?

The second proviso generally restricts such voting, but statutory exceptions and private-company exemptions can apply. The company should examine its legal status and the current exemption notification.

Can an unapproved RPT be ratified later?

Section 188 provides a three-month ratification window for the required Board or shareholder approval. If not ratified, the transaction may be voidable and directors concerned can face indemnity and penalty exposure.

What is the penalty for violating Section 188?

The current penalty is ₹25 lakh for the director or employee in violation in case of a listed company and ₹5 lakh in case of any other company.

What is the penalty for non-disclosure of director interest?

Section 184 currently provides a penalty of ₹1 lakh for a director contravening the relevant disclosure provisions.

Is a related-party loan covered by Section 188?

Not necessarily. Loans, guarantees and securities may principally fall under Sections 185 and 186, although conflict disclosure, Audit Committee, accounting or listed-company requirements can still apply.

Key takeaways

RPT compliance begins before the contract is signed or purchase order is issued.
Section 188 does not prohibit RPTs; it regulates specified categories through approvals and disclosure.
Ordinary course and arm’s length are separate tests and both matter.
Rule 15 thresholds should be calculated using the preceding audited financial statements.
The old absolute ₹100 crore/₹50 crore caps should not be used for current threshold analysis.
Section 184 director-interest disclosure is a separate compliance obligation.
Audit Committee approval is a separate layer for companies within Section 177.
Section 189 register maintenance is mandatory for relevant contracts and arrangements.
Unapproved transactions should be addressed immediately because the ratification window is three months.
Listed companies must separately comply with the SEBI RPT framework.

Internal corporate-law reading

For connected governance risks, see Director Liability in India and M&A Due Diligence Checklist for Private Companies in India.

Primary legal sources

This article is for general legal education and corporate-compliance information only. It does not constitute solicitation, advertisement or case-specific legal advice. Related-party compliance depends on company classification, applicable Section 462 exemptions, Audit Committee applicability, listed status, transaction structure, current rules and factual relationships.

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