Related Party Transactions Under Companies Act: Disclosure & Approval

Family-run and founder-led businesses routinely transact with entities controlled by the same promoters: a group company leasing office space, a director's relative supplying raw material, or a common vendor shared across group entities. None of that is inherently improper, but the Companies Act 2013 requires these transactions to be approved and disclosed through a specific process, precisely because the people on both sides of the deal are the same people. Section 188 governs how.

What Counts as a Related Party Transaction

Section 188 applies to contracts or arrangements with a related party, a term that covers directors and key managerial personnel, their relatives, firms in which a director or relative is a partner, private companies in which a director is a member or director, and other entities where a director exercises significant influence, among other categories defined under Section 2(76). The covered transaction types include:

• Sale, purchase, or supply of any goods or materials
• Selling or disposing of, or buying, property of any kind
• Leasing of property of any kind
• Availing or rendering of any services
• Appointment of a related party to any office or place of profit in the company, subsidiary, or associate company
• Underwriting the subscription of securities or derivatives of the company

Note that ordinary transactions carried out at arm's length in the company's usual course of business are treated differently under the disclosure rules than transactions not at arm's length, but the disclosure obligation via Form AOC-2 applies to both categories, not just the non-arm's-length ones.

Board Approval: Always Required

Every related party transaction covered under Section 188 requires approval at a properly convened board meeting, regardless of the company's size or the transaction's value. The resolution cannot be passed by circulation; it has to go through an actual board meeting. Any director who is interested in the transaction, whether directly or through a relative, must not be present during the discussion and must not vote on that particular resolution. This is a stricter conflict-of-interest rule than ordinary board business, precisely because the transaction involves the decision-maker's own interest.

When Shareholder Approval Is Also Needed

Once the transaction value crosses the thresholds prescribed under Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, an ordinary resolution of the shareholders is additionally required, before board approval alone is treated as sufficient. The thresholds are expressed as a percentage of turnover, net worth, or a specified rupee value depending on the category of transaction (goods and materials, property, services, and so on), and the lower of the applicable limits generally governs. Related parties (and their votes) are excluded from this resolution, so the approving majority genuinely reflects unrelated shareholders.

Government notifications issued under Section 462 have relaxed the shareholder-approval route for certain private companies in specific circumstances over the years. Because these thresholds and exemptions are amended periodically and depend on the exact transaction category, confirm the currently applicable Rule 15(3) figures and any private-company relaxation against your company's specific facts before relying on them; board approval, in any case, is never dispensed with.

Form AOC-2: Annual Disclosure

Form AOC-2 is filed every year as an annexure to the Board's Report, disclosing particulars of contracts or arrangements with related parties under Section 188: both those not on an arm's length basis, and material contracts on an arm's length basis. The form requires the name of the related party and nature of relationship, the nature, duration, and salient terms of the contract, the amount involved if any, the date of board or shareholder approval where applicable, and any advance paid. A common gap in practice is treating AOC-2 as needed only when a "big" related party deal has happened during the year; it is a standing annual disclosure requirement, filed as a nil or populated annexure regardless.

Consequences of Getting It Wrong

A related party transaction entered into without the required board or shareholder approval is voidable at the option of the board or, in appropriate cases, the shareholders. If the transaction is not ratified within three months of being entered into, the director or authorised person who arranged it becomes personally liable to indemnify the company for any loss it suffers, and to account for any gain made. Separately, non-compliance with Section 188 attracts monetary penalties on the company and on every officer in default, and where the transaction was undertaken fraudulently, the exposure extends further to the fraud provisions of the Act. This links directly to the personal liability exposure directors carry more generally; see our companion piece on director responsibility and liability under the Companies Act.

The practical discipline that avoids most disputes: flag any transaction with a director, KMP, their relatives, or a related entity before it is signed, not after, route it through a board resolution with the interested director recused, check it against the Rule 15(3) thresholds for shareholder approval, and make sure it lands correctly in that year's AOC-2. Getting related party approvals right is also one of the first things reviewed in fundraising due diligence.