Ordinary Course Exemption explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Two conditions, joined by "and". Meeting one of them is meeting neither.
What is exempt
As per Section 188(1) of the CA, 2013, following transactions do not require approval of the shareholders under Section 188 of the CA, 2013:
- Transactions in ordinary course of business and on arm's length basis;
- Transactions between holding company and wholly owned subsidiary company whose accounts are consolidated and laid before shareholders at AGM.
Section 188 exists because a related party transaction is negotiated by people who may be on both sides of it. The exemption identifies transactions where that concern does not arise — and it takes two conditions to get there, because either alone leaves a gap.
Ordinary course of business, but not at arm's length. A company that sells cement sells cement to a director's firm. The activity is entirely ordinary; the price is thirty per cent below what any other customer pays. Nothing about the transaction being routine makes the terms fair — and routine transactions are the easiest place to hide value transfer, because nobody looks twice at an invoice that resembles a thousand others.
At arm's length, but not in the ordinary course. A manufacturing company sells its head office building to a director at an independently valued price. The price is defensible. But the company has disposed of a major asset in a transaction outside anything it normally does, and the shareholders have a legitimate interest in whether that should happen at all — a question the price does not answer.
So both limbs are required, and each closes what the other leaves open. In practice the harder one to establish is arm's length, because it requires evidence: comparable third-party pricing, the same terms offered to unrelated parties, a documented basis.
The wholly owned subsidiary exemption rests on entirely different reasoning. There is no minority — the holding company owns every share, so there is nobody on the subsidiary's side who could be prejudiced. And the condition that the accounts are consolidated and laid before shareholders at AGM means the holding company's own members see the combined position, with intra-group transactions eliminated on consolidation.
What the exemption does not do is remove the section 177 requirement of audit committee approval, which applies to related party transactions generally.
Which approval applies
| Transaction | Board approval | Ordinary resolution |
|---|---|---|
| Ordinary course and arm's length | Not required under section 188 | Not required |
| Not in ordinary course, or not at arm's length | Required | If above the prescribed threshold |
| Holding to wholly owned subsidiary, accounts consolidated | Per the section | Not required |
| Any related party transaction | Audit committee approval under section 177 remains | |
Evidencing arm's length
- Comparable pricing to unrelated customers or suppliers for the same goods or services.
- The same credit terms, discounts and delivery obligations as third parties receive.
- A written basis of pricing approved before the transaction, not reconstructed afterwards.
- A record that the terms were tested, not merely asserted.
- Periodic review, since terms that were arm's length once may cease to be.
Common mistakes
- Treating the ordinary course exemption as satisfied by the ordinary course limb alone.
- Asserting arm's length pricing without comparable evidence.
- Applying the subsidiary carve-out to a subsidiary that is not wholly owned.
- Assuming the exemption also removes audit committee approval.