Related Party Transactions Section 188 Companies Act 2013: Approval, Disclosure and Penalties

Section 188 of the Companies Act 2013 regulates transactions between a company and its related parties to prevent self-dealing and protect minority shareholders. All RPTs above prescribed thresholds require prior board/shareholder approval, and details must be disclosed in the financial statements.

Who are "Related Parties"?

• Directors and KMPs of the company and their relatives
• Holding, subsidiary, associate companies and their subsidiaries
• Entities in which a director/KMP/relative holds 2%+ shares
• Entities in which a director/KMP is a partner, director, or director
• Private companies in which director/KMP is a member

Transactions Covered Under Section 188

• Sale/purchase/supply of goods or materials
• Sale, purchase, or lease of property
• Rendering or availing of any services
• Appointment of related party as agent
• Related party's appointment to any office/place of profit
• Underwriting of subscription to securities/derivatives

Approval Requirements

Form AOC-2

Details of all RPTs not at arm's length basis or RPTs above prescribed thresholds must be disclosed in Form AOC-2, which is annexed to the Board's Report in the Annual Report.

Penalty for Violation

• Ratification not obtained: Penalty for each party = lower of Rs. 25 lakh or 5% of annual turnover
• No ratification after 3 months: Voidable at option of Board/affected party
• Director/KMP in default: Penalty of up to Rs. 5 lakh

Arm's Length Standard

RPTs are not automatically prohibited — they are valid if conducted at arm's length (i.e., on terms that would be agreed between unrelated parties). Companies should document arm's length pricing to protect themselves during scrutiny. Audit Committee must review and recommend all material RPTs before board approval.