Related Party Transactions Under explained: this guide covers what Related Party Transactions Under 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.
What Are Related Party Transactions?
A Related Party Transaction (RPT) is any transaction between the company and its 'related parties' — directors, KMPs, their relatives, companies in which they have interest, holding/subsidiary companies, and other entities with whom the company or its directors have a direct or indirect relationship. Section 188 governs these transactions to prevent directors and promoters from siphoning company funds through self-dealing at the expense of minority shareholders and creditors.
The rationale is simple: when a company transacts with a person who controls or influences the company, there is inherent conflict of interest. The transaction may not be at arm's length (fair market terms) — it may be tilted in favor of the related party. Section 188 ensures transparency, Board oversight, and shareholder approval for such transactions.
Who Is a 'Related Party'? — Section 2(76)
The definition is exhaustive and covers 8 categories:
(a) Director or KMP of the company or its holding, subsidiary, or associate company
(b) Relative of director or KMP — spouse, father, mother, son (including stepson), daughter (including stepdaughter), son's wife, daughter's husband, brother, sister
(c) Firm in which a director, manager, or their relative is a partner
(d) Private company in which a director or manager or their relative is a member or director
(e) Public company in which a director or manager holds 2%+ of paid-up share capital
(f) Body corporate whose Board, MD, or manager acts in accordance with the advice, directions, or instructions of a director or manager of the company
(g) Person on whose advice/directions/instructions a director or manager acts (shadow director concept)
(h) Holding, subsidiary, or associate company
What Transactions Require Approval? — Section 188(1)
Seven categories of transactions with related parties require prior Board/shareholder approval:
| Transaction Type | Board Approval Threshold | Shareholder Approval Required If |
|---|---|---|
| (a) Sale, purchase, or supply of goods | All RPTs need Board approval | Exceeds 10% of turnover or Rs. 100 crore (whichever is lower) |
| (b) Selling or disposing of/buying/leasing property | Board approval | Exceeds 10% of net worth or Rs. 100 crore (whichever is lower) |
| (c) Availing/rendering any services | Board approval | Exceeds 10% of turnover or Rs. 50 crore (whichever is lower) |
| (d) Appointment of agent for purchase/sale | Board approval | If remuneration exceeds Rs. 50 lakh per year |
| (e) Appointment of related party to office/place of profit | Board approval | If monthly remuneration exceeds Rs. 2.5 lakh |
| (f) Underwriting subscription of securities | Board approval | If remuneration exceeds 1% of net worth |
| (g) Any other transaction (catch-all) | Board approval | As prescribed |
Approval Process
Step 1: Board Approval
ALL related party transactions under Section 188 require prior approval of the Board of Directors. The interested director (who is related to the counterparty) must disclose their interest (Section 184) and MUST NOT participate in the discussion or vote on the resolution approving the transaction. The non-interested directors approve the transaction.
Step 2: Shareholders' Approval (If Threshold Exceeded)
If the transaction value exceeds the prescribed thresholds (above table): shareholders' approval by ORDINARY resolution is required. The related party (member who is interested) must NOT vote on the resolution. For listed companies under SEBI LODR: material RPTs require approval by shareholders where the related party is excluded from voting.
Step 3: Arm's Length Pricing
All RPTs must be at arm's length price — the price at which the transaction would have been conducted between unrelated parties in an open market. If the transaction is not at arm's length: it may be treated as void, and the director who authorized it can be held personally liable.
Private Company Exemption
MCA notification dated June 5, 2015 grants private companies exemption from Section 188: transactions between a private company and its related parties require ONLY Board approval — shareholders' approval is NOT required regardless of the transaction value. However, the interested director must still abstain from voting. This exemption significantly simplifies RPT compliance for private companies — but does not eliminate the arm's length requirement.
Form AOC-2 — Disclosure in Board Report
All RPTs entered during the financial year must be disclosed in Form AOC-2, annexed to the Board Report under Section 134. AOC-2 requires disclosure of:
(a) Name of related party and nature of relationship
(b) Nature, duration, and salient terms of the transaction
(c) Amount of the transaction
(d) Whether at arm's length — justification
(e) Date of approval by Board/shareholders
Penalty for Non-Compliance — Section 188(3)-(5)
If an RPT is entered WITHOUT proper approval:
(a) The transaction is voidable at the option of the Board/shareholders
(b) If voidable: the related party must indemnify the company for any loss caused
(c) Director who authorized the transaction: fine of Rs. 25,000 to Rs. 5 lakh
(d) If the transaction is found to be NOT at arm's length: the interested director is liable to the company for the difference (make good any loss to the company)
Common RPT Compliance Mistakes
1. Not identifying all related parties: The definition is broad — relatives include 8 categories, and 'private company in which director is a member' catches many cross-entity transactions. Maintain a comprehensive related party matrix updated annually.
2. Not getting prior approval: Section 188 requires PRIOR approval — not ratification after the transaction. Ratification is only permissible if the transaction was urgent and unavoidable (rare in practice).
3. Not documenting arm's length: Simply stating 'at arm's length' without evidence is insufficient. Maintain comparative pricing data, market benchmarks, or valuation reports to justify the pricing.
4. Interested director voting: If the interested director votes on the RPT approval resolution, the resolution is void. Ensure minutes clearly record abstention.
5. Missing AOC-2 disclosure: Every RPT must be disclosed in AOC-2 annexed to the Board Report. Missing disclosure attracts penalty and qualifies as a governance failure in audit reports.