Related Party Transactions 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.
Almost every serious Indian corporate governance failure has a related party transaction in it somewhere. Not always a fraudulent one — often just a series of ordinary-looking transfers to entities connected to the promoter, each individually defensible, which together moved value out of the listed company.
That's why the approval machinery here is the most layered in company law, and why SEBI restricted RPT approval to independent directors only.
Board approval for the Section 188 transaction types. Shareholder approval where Rule 15 thresholds are crossed, with related parties barred from voting. Transactions in the ordinary course of business and at arm's length are outside Section 188 entirely. For listed entities: every RPT needs prior audit committee approval, given only by the independent directors on it; material RPTs — above ₹1,000 crore or 10% of consolidated turnover, whichever is lower — need shareholder approval.
The Companies Act layer: Section 188
Section 188 requires board consent by a resolution at a meeting for a contract or arrangement with a related party involving:
- sale, purchase or supply of any goods or materials;
- selling, disposing of, or buying property of any kind;
- leasing of property of any kind;
- availing or rendering of any services;
- appointment of any agent for purchase or sale of goods, materials, services or property;
- the related party's appointment to any office or place of profit in the company, its subsidiary or associate;
- underwriting the subscription of any securities or derivatives of the company.
The big carve-out. Section 188 does not apply to transactions entered into by the company in its ordinary course of business that are on an arm's length basis. Both limbs must be satisfied — ordinary course and arm's length.
That exemption does a great deal of work in practice, and it's where most of the judgement sits. "Arm's length" means a transaction as if between unrelated parties. A board that treats the exemption as automatic for anything routine is skipping the analysis the section requires.
When shareholders have to approve
Where the transaction exceeds the Rule 15 thresholds, prior approval of the company by resolution is required in addition to board approval:
| Transaction | Threshold |
|---|---|
| Sale, purchase or supply of goods or materials | 10% or more of turnover |
| Selling, disposing of or buying property | 10% or more of net worth |
| Leasing of property | 10% or more of turnover |
| Availing or rendering of services | 10% or more of turnover |
| Appointment to any office or place of profit | Monthly remuneration exceeding ₹2.5 lakh |
| Underwriting the subscription of securities | Remuneration exceeding 1% of net worth |
No related party member may vote on the resolution. There's a narrow exception where 90% or more of the members, in number, are relatives of promoters or are related parties — a sensible relief for closely held companies where the bar would make approval impossible.
Interested directors are separately dealt with under Section 184: a director must disclose their interest in Form MBP-1, and an interested director cannot participate in the board discussion on that contract.
If approval is missed: under Section 188(3), a contract entered into without consent or approval, and not ratified within three months, is voidable at the option of the Board or, as the case may be, the shareholders. And where the transaction is with a related party of a director or was authorised by a director, that director must indemnify the company against any loss.
Penalty: a director or employee who entered into or authorised a violating transaction is liable to a penalty of ₹25 lakh in a listed company and ₹5 lakh in any other company.
The SEBI layer: Regulation 23
For listed entities, Regulation 23 sits on top and is materially stricter.
Every RPT needs prior audit committee approval. Not just the Section 188 categories — all related party transactions, and any subsequent material modifications.
Only independent directors may approve them. The proviso to Regulation 23(2) restricts approval to those members of the audit committee who are independent directors. A non-independent member can sit in the meeting; they cannot approve.
This is the single most important structural protection in the RPT regime. It means a promoter-connected transaction cannot be cleared at committee level without independent directors affirmatively signing off — which is precisely why Schedule IV imposes a specific duty on independent directors to "pay sufficient attention and ensure that adequate deliberations are held" before approving RPTs.
Materiality. A transaction is material if, individually or taken together with previous transactions during a financial year, it exceeds ₹1,000 crore or 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements, whichever is lower.
Material RPTs need shareholder approval, and no related party may vote — whether or not that party is a related party to the particular transaction. That last phrase is deliberate: it makes material RPT approval a genuine majority-of-the-minority decision.
Omnibus approval is available for repetitive transactions, subject to conditions: the committee lays down criteria, specifies value limits, reviews the transactions actually entered into on a periodic basis, and the approval is valid for a limited period. Omnibus approval cannot be given for transactions that are not foreseeable beyond specified limits.
Exemptions. Regulation 23(5) exempts transactions between two government companies, and between a holding company and its wholly owned subsidiary whose accounts are consolidated and placed before shareholders at the general meeting.
The definition got wider
This is the change most likely to be missing from older material.
Regulation 23's scope was extended in stages:
- From 2022 — an RPT includes a transaction between the listed entity or any of its subsidiaries on one hand, and a related party of the listed entity or of any of its subsidiaries on the other.
- From 2023 — it also includes a transaction between the listed entity or its subsidiaries and any other person or entity, where the purpose and effect is to benefit a related party.
The second extension is the significant one. It is an anti-avoidance provision: routing value to a related party through an unrelated intermediary is now itself an RPT. If your RPT identification process only looks at the counterparty's status, it will miss these.
Disclosure. Listed entities disclose related party transactions on a consolidated basis to the stock exchanges, in SEBI's specified format, alongside the publication of their financial results.
What an independent director should be doing
- Read the arm's length analysis, don't accept the label. Ask what comparable was used and who prepared it.
- Check the aggregation. Materiality is tested cumulatively across the financial year. A series of sub-threshold transactions with the same party is the standard structuring device.
- Ask about purpose and effect, not just counterparty identity — that's the post-2023 test.
- Interrogate omnibus approvals. What was actually transacted against last year's omnibus? Was any of it unforeseeable?
- Watch subsidiary-level transactions. The definition reaches them; board packs often don't.
- Insist on independent valuation for property, business transfers and loans.
- Get your reservations minuted. Schedule IV requires deliberation, and the minute is the evidence it happened.
Key takeaways
- Ordinary course + arm's length takes a transaction outside Section 188 — both limbs required.
- Rule 15 thresholds trigger shareholder approval, with related parties barred from voting.
- Unapproved transactions are voidable if not ratified within three months, with director indemnity.
- Penalty: ₹25 lakh (listed) / ₹5 lakh (other) on the director or employee involved.
- For listed entities, all RPTs need prior audit committee approval — given only by independent directors.
- Materiality: ₹1,000 crore or 10% of consolidated turnover, whichever is lower.
- The definition now reaches subsidiary transactions and transactions whose purpose and effect is to benefit a related party.
Read next
- Audit Committee: Composition, Powers and the Independent Director's Role
- Duties of an Independent Director: Schedule IV Explained
- DIR-2, DIR-8 and MBP-1: The Three Declarations Every Director Signs
- SEBI LODR Corporate Governance Requirements for Listed Companies
Law stated as on 5 September 2026. SEBI's RPT framework and disclosure formats have been revised repeatedly since 2021 — verify the current Regulation 23 text and format before a filing.