Related Party Transactions under 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.
Section 188 regulates transactions between a company and the people who control it.
In a closely held private company — where the shareholders, the directors and the counterparties are frequently the same four people — it's the most routinely engaged governance provision in the Act. Your office lease from a founder, the consultancy fee to a director's firm, the sale of goods to a sister company: all of it lives here.
It's also where the private company exemption is the difference between a workable approval and a permanent deadlock.
Board resolution at a meeting for every covered transaction, unless it's both in the ordinary course and at arm's length. Members' approval above the Rule 15(3) thresholds — 10% of turnover or net worth, mostly. In a private company, a related-party member may vote on that resolution, and interested directors count towards the quorum. Then MBP-4 and AOC-2.
Who is a related party?
Under Section 2(76), in relation to your company:
- a director or their relative;
- a KMP or their relative;
- a firm in which a director, manager or their relative is a partner;
- a private company in which a director, 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 2% of paid-up capital;
- any body corporate whose Board, MD or manager is accustomed to act on the advice or instructions of a director or manager (professional advice excluded);
- any person on whose advice or instructions a director or manager is accustomed to act (same exclusion);
- any holding, subsidiary or associate company; a fellow subsidiary; or an investing company or venturer;
- a director (other than an independent director) or KMP of the holding company, or their relative.
"Relative" means members of an HUF, husband and wife, and — father (incl. step), mother (incl. step), son (incl. step), son's wife, daughter, daughter's husband, brother (incl. step), sister (incl. step).
Notice the asymmetry in the private-company limb. A private company in which your director is merely a member is a related party. One share is enough. Compare the public company limb, which needs directorship and a 2% holding.
That catches far more entities than founders expect. Every dormant private company a director once took a share in is a related party of yours.
Which transactions are covered?
Board consent by resolution at a meeting is needed for any contract or arrangement with a related party for:
- 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 any services;
- appointment of an 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 securities or derivatives.
The arm's-length exclusion
The fourth proviso takes out transactions entered into in the ordinary course of business other than those not on an arm's length basis.
Both limbs have to hold. Ordinary course and arm's length. "Arm's length transaction" means one conducted as if the parties were unrelated, so there's no conflict of interest.
Where it applies, no Section 188 Board resolution is needed. But the transaction still goes into MBP-4 and still gets disclosed. And you should document the arm's-length basis — a transfer-pricing style benchmarking note is the strongest evidence you can have when someone asks two years later.
When do members have to approve?
Above the Rule 15(3) thresholds, you need prior approval of the company by resolution:
| 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 property of any kind | 10% or more of turnover |
| Availing or rendering services | 10% or more of turnover |
| Appointment to an office or place of profit | Monthly remuneration exceeding ₹2,50,000 |
| Underwriting remuneration | Exceeding 1% of net worth |
Limits are computed individually or aggregated with earlier transactions in the financial year — so four separate ₹3% deals with the same party cross the line on the fourth.
Turnover and net worth come from the last audited financial statements.
And note: since the 2015 amendment, an ordinary resolution suffices. Not a special resolution.
The two relaxations that make this workable
One — the interested director can participate. For a public company, Section 184(2) bars an interested director from participating at all, and Section 174(3) excludes them from the quorum. For a private company, the exemption notification modifies both: an interested director may participate after disclosing their interest, and interested directors count towards the quorum.
Without that, a two-director private company where both are interested could never form a quorum and could never approve the transaction. Board quorum rules →
Two — the related-party member can vote. The second proviso to Section 188(1) says no member who is a related party may vote on the resolution. The exemption notification disapplies that proviso for a private company.
This matters more than anything else in the article. In most private companies the related party is the promoter holding 60–100% of the equity. Without the relaxation, the only members entitled to vote would be a minority — or nobody at all — and the resolution could never be carried.
Subject, always, to the condition: the company must not be in default of filing under Section 92 or Section 137. A late annual filing restores the voting bar — and a resolution passed during a default period by a related-party majority is vulnerable to challenge. The exemption conditions →
What the Board agenda must disclose
Rule 15(1) requires the agenda of the Board meeting to set out:
- the name of the related party and the nature of the relationship;
- the nature, duration and particulars of the contract;
- the material terms, including value;
- any advance paid or received;
- how the pricing and other commercial terms were determined — both those in the contract and those outside it;
- whether all relevant factors were considered, and if not, which were not and why;
- any other information relevant to the decision.
That's a real agenda note, not a line item.
AOC-2 and MBP-4
AOC-2 is annexed to the Board's Report under Section 134(3)(h). Two parts:
Part 1 — transactions NOT at arm's length: related party name and relationship, nature of contract, duration, salient terms including value, justification for entering into it, date of Board approval, advances paid, and the date of the resolution under the first proviso.
Part 2 — material transactions AT arm's length: name and relationship, nature, duration, salient terms including value, date of Board approval, advances paid.
Attach a Nil AOC-2 where there's nothing to report. An omitted AOC-2 is a standard ROC query on AOC-4, and answering it costs more than attaching it. AOC-4 filing →
MBP-4 is the register under Section 189. Entries go in immediately after the Board meeting that approved the contract; the register is placed before the next Board meeting and signed by all directors present; it's kept at the registered office and preserved permanently.
Rule 16(2) exempts from entry a contract for sale, purchase or supply of goods, materials or services not exceeding ₹5 lakh in aggregate in a year, and a banking company's bill collection in the ordinary course.
What if you get it wrong?
Section 188(3): a contract entered into without Board consent or the members' resolution, and not ratified within three months, is voidable at the option of the Board or the members.
And where the contract is with a related party to any director, or was authorised by another director, those directors must indemnify the company against any loss.
Section 188(4) lets the company proceed against the director or employee to recover any loss.
Section 188(5) — the penalty:
| Company | Penalty on the director or employee concerned |
|---|---|
| Listed | ₹25,00,000 |
| Any other, including private | ₹5,00,000 |
Note who pays: the director or employee, personally. Not the company.
Compliance checklist
- Maintain a live list of related parties, refreshed at the first Board meeting of each financial year from the MBP-1 disclosures.
- Test each transaction against Section 2(76) and Section 188(1)(a)–(g).
- Test the ordinary course + arm's length exclusion and document the basis.
- Board resolution at a meeting with the full Rule 15(1) agenda disclosures.
- Compute against the Rule 15(3) thresholds, aggregating earlier transactions in the year.
- Above threshold → ordinary resolution of members; related-party members may vote in a private company that isn't in filing default.
- MGT-14 where a special resolution is passed.
- Enter in MBP-4 and place it before the next Board meeting.
- Disclose in AOC-2, annexed to the Board's Report.
- Disclose related-party balances and transactions under AS 18 / Ind AS 24.
Key takeaways
- A private company where your director holds one share is a related party. No threshold.
- Ordinary course AND arm's length — both, or the exclusion doesn't apply.
- Thresholds aggregate across the year. Four small deals can cross the line.
- An ordinary resolution suffices, not a special one.
- The private company relaxations on quorum, participation and voting are what make this operable — and they vanish the moment your filings go late.
- Always attach AOC-2, Nil or otherwise.
- The ₹5,00,000 penalty falls on the individual, not the company.
Read next
- Exemptions and Carve-Outs for Private Companies
- Section 185: Loans to Directors
- Section 186: Loans, Guarantees and Investments
- Statutory Registers a Private Company Must Maintain
- Form AOC-4: Filing Financial Statements
Disclaimer: Positions stated as on 4 September 2026. Related party analysis is fact-specific and the arm's-length determination needs documentation. Take professional advice.