You already do these deals — the question is whether you documented them
You rent office space from a building a director owns. You buy raw material from another firm a co-founder runs. Your spouse invoices the company for design work. You put a relative on the payroll in a paid role. None of these is wrong, and most growing companies do at least one of them. But every one is a related party transaction, and the Companies Act has a specific gate — Section 188 — that decides which of them need a board resolution, which need a shareholder vote, and which are exempt. Get the paperwork right and these are ordinary business. Skip it and the transaction is voidable and the officers are exposed to a penalty.
What counts as a related party — and a related party transaction
A "related party" under Section 2(76) is a wide circle: a director or key managerial person and their relatives, a firm in which a director, manager or their relative is a partner, a private company in which a director or manager is a member or director, certain public companies, a body corporate whose board is accustomed to act on a director's instructions, and the company's holding, subsidiary and associate companies. Section 188(1) then lists the seven kinds of transaction that are caught when done with such a party: the sale, purchase or supply of goods or materials; the buying, selling or disposal of property; the leasing of property; the availing or rendering of services; the appointment of an agent for any of these; appointment to any office or place of profit in the company, its subsidiary or associate; and the underwriting of the company's securities. If a deal is both with a related party and in one of these categories, Section 188 applies.
The relief that covers most day-to-day deals
Here is the exemption that keeps normal business moving: Section 188(1) does not apply to a transaction entered into in the ordinary course of business that is on an arm's length basis — meaning a transaction with a related party done on the same terms as you would give an unrelated party, with no conflict of interest baked into the price. A manufacturer that routinely sells to many customers, and sells to a director's company at its standard price, is in the ordinary course and at arm's length, so it does not need Section 188 approval for that sale. The catch is that you must be able to demonstrate both limbs — that it is genuinely your ordinary business and that the price is genuinely arm's length. A one-off deal, or a sweetheart price, fails the test and pulls the transaction back inside Section 188.
When you need a board resolution — and when you need the shareholders too
For a related party transaction that is not in the ordinary course or not at arm's length, the base requirement is the consent of the Board of Directors by a resolution passed at a board meeting, with the interested director disclosing his interest. Above certain sizes, board consent is not enough and you need prior approval of the members by an ordinary resolution as well. Under Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014 the member-approval thresholds are, broadly:
- Sale, purchase or supply of goods or materials, or availing or rendering of services, amounting to 10% or more of the company's turnover.
- Buying, selling or disposing of property amounting to 10% or more of net worth, and leasing of property amounting to 10% or more of turnover.
- Appointment to any office or place of profit at a monthly remuneration exceeding ₹2,50,000.
- Underwriting the company's securities for remuneration exceeding 1% of net worth.
A crucial voting rule attaches to that member resolution: a member who is a related party cannot vote on the resolution approving a transaction with that party. There are two important exceptions — a private company is exempted from that voting restriction by the MCA exemption notification of 5 June 2015, and the restriction also does not apply where 90% or more of the members are relatives of promoters or are related parties. For most closely held private companies, then, the interested member may still vote, but the board and member approvals themselves must be on record.
Disclosure, and what happens if you skip the approval
Every related party transaction under Section 188 must be disclosed in the Board's report to the shareholders, together with the justification for entering into it. And the consequence of getting it wrong is real: under Section 188(3), a transaction entered into without the required consent or approval, and not ratified within three months, is voidable at the option of the Board or the shareholders — and if it was with a related party to any director, that director must indemnify the company for any loss. On penalties, Section 188(5) exposes a director or employee in default of a listed company to imprisonment up to one year or a fine of ₹25,000 to ₹5,00,000 or both, and in the case of any other company to a fine of ₹25,000 to ₹5,00,000. For a private company the exposure is financial, but the voidability of the deal is often the bigger commercial problem.
Where this sits in the company's compliance life
Section 188 is the transactional cousin of Sections 185 and 186 — where those govern lending to directors and group companies, Section 188 governs trading, leasing and hiring with them. All three turn on the same ownership map that decides who your significant beneficial owner is, and the disclosure lands in the same Board's report that accompanies your annual AOC-4 and MGT-7 filings. Related party approvals are event-based items on the Private Limited compliance calendar, and how much you will run into them depends heavily on how you set up your entity structure — founders who trade across several of their own companies meet Section 188 constantly.
How we handle it at RDA, Baner
At RDA Advisory, Baner, we make related party transactions defensible before they happen, not awkward at audit time. We map who your related parties actually are, test each recurring deal against the ordinary-course and arm's-length limbs, put the board and (where the thresholds are crossed) member approvals on record, draft the arm's-length justification for the Board's report, and keep the register — so a director's rent, a group-firm supply arrangement or a spouse's professional fee stands up cleanly when an auditor, an investor or the tax officer looks at it. Office No. 102, Snehraj Apartment, Baner, Pune 411045 · call +91 77570 45059.
Dealing with your own companies or family? Let's paper it right
Paying rent to a director, buying from a group firm, or paying a relative for services? RDA tells you which of your related party dealings are exempt and which need approval, runs the board and shareholder resolutions, and drafts the arm's-length justification — so the transaction is clean rather than voidable. Book a consult at rdatax.in or call +91 77570 45059, or see our ROC and secretarial service. RDA Advisory, Baner, Pune.
Verification note: The requirements described here are based on the Companies Act, 2013 and the Companies (Meetings of Board and its Powers) Rules, 2014, as administered by the Ministry of Corporate Affairs (mca.gov.in). Section 2(76) defines "related party". Section 188(1) requires the consent of the Board of Directors by resolution for the specified categories of transaction with a related party — the sale, purchase or supply of goods or materials; the buying, selling or disposing of property; the leasing of property; the availing or rendering of services; the appointment of an agent for such transactions; appointment to any office or place of profit in the company, its subsidiary or associate; and underwriting the company's securities — and provides that nothing in the sub-section applies to transactions entered into in the ordinary course of business that are on an arm's length basis. Under Rule 15(3), transactions exceeding the prescribed thresholds (broadly 10% of turnover for goods, services or leasing, 10% of net worth for property, monthly remuneration exceeding ₹2,50,000 for an office or place of profit, and remuneration exceeding 1% of net worth for underwriting) require prior approval of the members by an ordinary resolution; the monetary caps in the earlier version of the rule were removed by the Companies (Meetings of Board and its Powers) Amendment Rules, 2019. A member who is a related party may not vote on the resolution, subject to the exemption for private companies under the MCA notification of 5 June 2015 and the exception where 90% or more of members are relatives of promoters or related parties. Related party transactions must be disclosed in the Board's report with justification. Under Section 188(3) a transaction not approved or ratified within three months is voidable at the option of the Board or shareholders. Section 188(5) provides for imprisonment up to one year or a fine of twenty-five thousand to five lakh rupees, or both, for a director or employee in default of a listed company, and a fine of twenty-five thousand to five lakh rupees for any other company. Forms, thresholds, exemptions and penalties are periodically revised by the MCA; confirm the current requirements for your company with your CA or company secretary. This is general information, not legal or professional advice.
