Related Party Transactions under Companies Act: Section 188 Approvals, Registers and Disclosures
Finin2min 2-Minute Summary
- Section 188 covers specified contracts or arrangements with related parties, but the compliance route depends on the nature/value of the transaction, prescribed thresholds, ordinary-course status and arm’s-length conditions.
- A related-party transaction should be screened before commitment, not discovered during annual financial-statement preparation. The approval matrix may involve the Board and, for prescribed cases, members.
- The company should separately test Audit Committee requirements under section 177 where applicable and SEBI LODR requirements for listed entities; Companies Act compliance alone may not complete the approval chain.
- Contracts/arrangements and interested-director disclosures should be supported by a clear register, valuation/benchmark evidence and board/shareholder papers.
1. Identify both the related party and the transaction category
Two tests are required. First, determine whether the counterparty falls within the Companies Act definition of related party. Second, determine whether the proposed contract/arrangement is one of the categories covered by section 188, such as sale/purchase/supply of goods or materials, property transactions, leasing, services, agents, office/place of profit or underwriting arrangements.
A generic ERP flag reading “group company” is not enough. Maintain a related-party master tied to directors/KMP, relatives and entities captured by the statutory definition, and update it when board composition or ownership changes.
2. Ordinary course and arm’s length are substantive conclusions
Section 188 contains an important carve-out for transactions entered into in the ordinary course of business and on an arm’s-length basis. Both elements should be supported. A transaction can be commercially common but not arm’s length; conversely, a market-priced transaction may still be outside the company’s ordinary business.
Use comparable prices, tender data, independent valuations, cost-plus workings or other appropriate evidence. The board paper should state why the benchmark is relevant instead of attaching a valuation with no explanation.
3. Build the approval matrix before signing
Where section 188 approval is required, map the transaction to the prescribed Board/member threshold under the applicable rules. Identify interested directors and voting restrictions/conditions applicable to the case. Do not allow procurement to sign a binding contract while company-secretarial review is still pending.
For companies with an Audit Committee, section 177 can add approval requirements. Listed entities must also check SEBI LODR related-party transaction rules, which use their own definitions, materiality thresholds and approval mechanics.
4. Maintain transaction-level evidence, not only annual disclosure
For each material RPT, keep the proposal, counterparty relationship, commercial rationale, pricing benchmark, approvals, signed contract, invoices and performance evidence. The register under section 189 and board disclosures should be kept consistent with these records.
Annual financial-statement related-party disclosures under accounting standards are not a substitute for corporate-law approvals. Differences between the accounting and Companies Act populations should be understood and documented.
5. Periodic monitoring catches scope creep
A contract approved at Rs 5 crore can grow through change orders, additional services or a longer term. Review actual utilisation against the approved amount and materiality threshold. Also re-test arm’s-length support if pricing changes significantly.
Quarterly certification by finance/procurement to the company secretarial team can surface new counterparties and amendments early. This is more reliable than asking at year-end whether anyone remembers a related-party deal.
Practical checklist
- Identify both the related party.
- Ordinary course and arm’s length.
- Build the approval matrix before.
- Maintain transaction-level evidence, not only.
- Periodic monitoring catches scope creep.
Questions readers usually ask
Does every related-party transaction require shareholder approval?
No. The route depends on section 188, prescribed thresholds, ordinary-course/arm’s-length conditions and the company’s circumstances.
Is “market price” enough to prove ordinary course?
No. Arm’s length and ordinary course are separate tests.
Can accounting related-party disclosure replace section 188 approval?
No. Accounting disclosure and corporate-law approval are distinct compliance layers.
What other law may apply to listed companies?
SEBI LODR related-party rules must be checked separately in addition to the Companies Act.
What should be in the RPT file?
Relationship evidence, transaction category, benchmark/valuation, approval matrix, minutes/resolutions, contract and actual utilisation.
Primary sources
- Companies Act, 2013 - sections 177, 188 and 189 — India Code (current statutory text)
- Ministry of Corporate Affairs — MCA (current rules/forms framework)