Related Party Transactions – Section 188: Thresholds, Board & Audit Route, Disclosure

Every funded company with more than one group entity runs related party transactions, whether it is a cost-sharing arrangement between a holding company and its operating subsidiary, a services agreement with an ESOP trust, or a founder drawing a consultancy fee from an affiliate. Section 188 of the Companies Act, 2013 does not prohibit these transactions. It regulates how they get approved and disclosed, so that a related party cannot use its influence over both sides of a deal to move value out of the company at the expense of minority shareholders. For a company that has raised institutional capital and operates through two or more entities, getting this approval chain wrong is one of the most common findings in a pre-Series C due diligence or a statutory audit. This article sets out who counts as a related party, which transactions trigger Section 188, when board approval is enough and when shareholder approval and audit committee review are also required, and how disclosure works in the board’s report and Form AOC-2.

When is shareholder approval required for a related party transaction?

Shareholder approval by ordinary resolution is required only when a related party transaction is not in the ordinary course of business or not at arm’s length, and its value crosses the threshold prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014. For goods, property, leasing and services, that threshold is 10 percent of the company’s turnover or net worth as per the latest audited financial statements. Board approval, by contrast, is mandatory for every Section 188 transaction regardless of value.

Who counts as a related party when your company has group entities

Section 2(76) of the Companies Act, 2013 defines a related party in relation to a company. The definition is wider than most founders expect once a group structure is in place. It covers a director or their relative, a key managerial personnel (KMP) or their relative, 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, and a public company in which a director or manager is a director and holds, along with relatives, more than 2 percent of paid-up capital. It also covers any body corporate whose board is accustomed to act on the instructions of a director or manager, and, critically for a group structure, any body corporate that is a holding, subsidiary or associate company, a co-subsidiary of a common holding company, or an investing company or venturer that has significant influence over the company.

Section 2(76): who is a related party, clause by clause

For a funded group, this means the parent and every subsidiary are related parties of each other by default. If the group holds an ESOP trust, or has set up a wholly owned subsidiary in a different jurisdiction for IP or sales, transactions with those entities are related party transactions under Section 188 unless a specific exemption applies. The “relative” test under Section 2(77), read with the Companies (Specification of Definitions Details) Rules, 2014, extends to spouse, parents, siblings and children, which is why payments to a founder’s spouse-run vendor entity, or a consultancy fee to a co-founder’s HUF, routinely gets flagged in due diligence.

One relief specific to group structures: Rule 15(2) provides that where a wholly owned subsidiary enters into a transaction with its holding company, a resolution passed by the holding company is treated as sufficient for the purpose of the transaction, since the shareholder base is identical (Rule 15(2), Companies (Meetings of Board and its Powers) Rules, 2014). This does not remove the board approval requirement at the subsidiary level, only the separate shareholder resolution at the subsidiary.

The seven transaction categories Section 188(1) regulates

Section 188(1) of the Companies Act, 2013 lists seven categories of contracts or arrangements with a related party that require prior board consent:

• Sale, purchase or supply of any 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
• Appointment of the related party to an office or place of profit in the company, its subsidiary or its associate company
• Underwriting the subscription of securities or derivatives of the company

For a group entity, this list captures the transactions that actually happen every quarter: an operating subsidiary paying a management or brand fee to the holdco, a parent company recovering shared payroll or office costs from a subsidiary, an associate company leasing warehouse space from the group, or a related entity supplying software licences. None of these are prohibited. Each one needs to be routed through the approval process the moment it falls within this list, unless the ordinary course and arm’s length exemption applies (covered further below).

How does the board and audit committee route actually work?

Board approval is a floor requirement, not a ceiling. Under Section 188(1), no company can enter into a covered transaction with a related party except with the consent of the board of directors, given by a resolution passed at a board meeting, and this applies irrespective of the transaction’s value. A circular resolution is not sufficient. The transaction must be tabled at a duly convened board meeting, and Rule 15(1) requires the agenda to disclose the related party’s name and relationship, the nature and duration of the arrangement, its material terms and value, any advance paid or received, the pricing basis, and any relevant factors not considered, along with the rationale.

The director who is interested in the transaction cannot vote on the board resolution and, under Rule 15(1)(2), cannot remain present during the discussion of that agenda item. This is read together with Section 184(2), which requires every director to disclose their concern or interest in any contract or arrangement. For a funded company with an investor-appointed board nominee, this creates a second layer worth watching: if the nominee director also sits on the board of a related group entity, or the fund’s affiliate is itself party to the transaction (for example, a bridge loan from an investor-controlled vehicle), that nominee is an interested director for the purposes of that specific resolution and must step out, even though they were appointed to represent the investor’s interest generally.

Where the audit committee fits in. Section 177(1) of the Companies Act, 2013, read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, makes an audit committee mandatory for every listed company, and for every public company with paid-up capital of ₹10 crore or more, turnover of ₹100 crore or more, or aggregate outstanding loans, borrowings, debentures or deposits exceeding ₹50 crore. Section 177(4)(iv) requires the audit committee, where one exists, to approve related party transactions and any subsequent modification. A private limited company that has not converted to a public company and does not cross these thresholds is not legally required to constitute an audit committee. In practice, most Series B and later funded companies run RPT approvals through an audit committee anyway, either because the company has already converted to a public limited company ahead of a future listing, or because the investment agreement requires an audit or risk committee to review intercompany transactions as a governance covenant. Where that committee exists, it should pre-clear the related party transaction before it goes to the full board, and independent directors should form the majority as required under Section 177(2).

A summary of the three approval routes

This is not a hypothetical risk. In February 2024, the Registrar of Companies, Pune, adjudicated a violation of Section 188(1)(f) against Kudos Finance and Investments Private Limited for entering into a related party transaction, an appointment to an office of profit, without holding a board meeting to approve it. The order imposed a combined penalty of ₹20 lakh on the company and four of its directors (Order No. RoCP/ADJ/188/23-24/KUDOS/8(i)/B/2846 to 2851, dated 9 February 2024). The default was procedural, a board meeting that was never convened for that resolution, not a dispute over whether the transaction itself was fair. That is the pattern regulators actually pursue: the approval process, not the commercial merits of the deal. <blockquote>Not approving related party transactions the right way? Let’s talk.</blockquote>

What are the Rule 15 thresholds for related party transactions?

Board approval alone is not the end of the process once a transaction crosses the monetary thresholds prescribed in Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014. Following the Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019, effective 18 November 2019, the earlier fixed rupee caps of ₹100 crore and ₹50 crore were removed, and the thresholds now run purely as a percentage of turnover or net worth as per the latest audited financial statements.

Rule 15(3) thresholds for shareholder approval by ordinary resolution

Two points matter for group structures. First, these limits apply to a transaction or transactions with the same related party taken together during a financial year, not just to a single contract in isolation, so a services agreement that starts small and is supplemented through the year needs to be tracked cumulatively (Explanation to Rule 15(3), Companies (Meetings of Board and its Powers) Rules, 2014). Second, turnover and net worth are computed on the basis of the audited financial statements of the preceding financial year, which means a company that grew sharply in the current year is still tested against last year’s smaller base, and a company approaching a threshold at its last audit should plan the year’s intercompany contracts with that ceiling in mind.

A worked example. Take a funded operating company with turnover of ₹80 crore and net worth of ₹40 crore as per its last audited financials. A services cross-charge to its holding company crosses into shareholder-approval territory once it exceeds 10 percent of turnover, which is ₹8 crore in a financial year. A one-time transfer of office premises to a group entity needs shareholder approval once its value exceeds 10 percent of net worth, or ₹4 crore. A monthly retainer paid to a related party appointed to an office of profit needs shareholder approval the moment it exceeds ₹2.5 lakh a month, regardless of turnover or net worth. Where the second proviso to Section 188(1) applies, the related party member cannot vote on that shareholder resolution, though this restriction does not apply where 90 percent or more of the company’s members, by number, are relatives of promoters or related parties (Notification G.S.R. 464(E) dated 5 June 2015, exempting private companies from the second proviso subject to this condition and to no default in filing financial statements or annual returns).

What is the ordinary course and arm’s length exemption?

The fourth proviso to Section 188(1) carves out transactions entered into in the ordinary course of business that are also on an arm’s length basis. Both conditions must be satisfied together. If either fails, the transaction falls back into the Section 188 approval chain regardless of value. “Arm’s length transaction” is defined in the Explanation to Section 188(1) as a transaction between two related parties conducted as if they were unrelated, so that there is no conflict of interest.

This is where funded companies with group entities most often go wrong. A management fee charged by a holdco to its subsidiary is routine, and therefore feels like it should be “ordinary course.” But ordinary course looks at whether the transaction is part of the company’s usual business activity, not merely whether it recurs. A holding company that exists primarily to hold shares and provide management oversight is not, in most fact patterns, in the ordinary business of selling management services, which means that fee is a related party transaction requiring board approval even if it happens every month and even if the pricing is defensible on transfer pricing grounds. Similarly, a loan from an operating company to its ESOP trust to fund share purchases is common in Indian startup groups, but a loan is not, by itself, exempt merely because every company in the group does it that way. The arm’s length limb also fails quietly: intercompany services priced at cost, with no markup at all, are frequently not arm’s length in the transfer pricing sense, because an unrelated vendor would not work at cost. Treating a below-market or at-cost arrangement as automatically arm’s length is a common documentation gap that surfaces in due diligence.

Omnibus approval for recurring intercompany transactions

For a group that runs several recurring transactions with the same related parties, such as monthly shared services, rent or IT infrastructure cross-charges, taking each instance to the board individually is impractical. Rule 15 permits the audit committee, where the company has one, to grant omnibus approval for related party transactions on an annual basis, after the board has approved the criteria for making such approval. The omnibus approval must specify the maximum aggregate value of transactions permitted in a year, the maximum value per transaction, the extent of disclosure required at the time of seeking approval, and the intervals at which the audit committee will review transactions carried out under the omnibus approval. Where the need for a related party transaction could not be foreseen and the prescribed particulars are not available in advance, the audit committee may still grant omnibus approval, subject to the transaction value not exceeding ₹1 crore per transaction. Omnibus approval is valid for one financial year only and requires fresh approval after the year ends.

A company without a mandatory audit committee cannot use this specific omnibus route in its statutory form, since the mechanism is built around audit committee approval under the rule. In practice, groups without a mandatory committee still set an internal cap and reporting cadence at board level for recurring intercompany transactions, and formalise it through a board policy, so that each recurring cross-charge does not need a fresh board resolution every month, while the underlying board approval and disclosure obligations under Section 188 are still met.

Disclosure: the board’s report, Form AOC-2 and Ind AS 24

Getting the approval right is only half the obligation. Section 188(2) requires every related party contract or arrangement entered into under sub-section (1) to be referred to in the board’s report to shareholders, along with the justification for entering into it. In practice, this is done through Form AOC-2, prescribed under Rule 8(2) of the Companies (Accounts) Rules, 2014, which requires separate disclosure of contracts or arrangements that are not at arm’s length, and of material contracts or arrangements entered into on an arm’s length basis, along with the appointed date, duration, salient terms, advance amount if any, and the date of board or shareholder approval where applicable.

Separately, Section 189 of the Companies Act, 2013 requires every company to maintain a register of contracts or arrangements in which directors are interested, in the prescribed form, and to record particulars of every Section 188 contract entered into. This register is distinct from Form AOC-2 and from the board’s report, and it is one of the first documents a statutory auditor or an incoming investor’s diligence team asks for, since it is meant to be a running log rather than a year-end reconstruction. A group that only prepares its RPT disclosures at the time of the annual filing, instead of updating this register as each transaction is approved, usually finds gaps between what the register shows and what actually happened during the year.

Transactions that are exempt from Section 188 because they are both ordinary course and arm’s length still need to be captured in the company’s financial statements as related party disclosures under Ind AS 24 (or AS 18 for companies not yet on Ind AS), including the nature of the relationship, the amount of the transactions, and outstanding balances at year end. A company can therefore correctly conclude that a transaction does not require board or shareholder approval under Section 188, and still be required to disclose it in the notes to accounts and in AOC-2 for transparency. Groups that only track “approved” RPTs and skip disclosure of exempt ones typically find a mismatch between the board’s report and the statutory auditor’s related party working papers at year end, which becomes a qualification risk in the audit report.

Where a related party transaction is entered into without the required board consent or shareholder ratification, Section 188(3) provides that if it is not ratified by the board, or by the shareholders at a meeting, within three months from the date the contract was entered into, it becomes voidable at the option of the board. If the transaction was with a related party of a director, or was authorised by another director, that director must indemnify the company for any resulting loss. Section 188(4) separately preserves the company’s right to proceed against the director or employee who entered into the contract without authority, to recover any loss sustained.

Does listing change anything for a group entity?

Section 188 and Rule 15 apply to every company under the Companies Act, 2013, listed or not. Once a company in the group is listed, Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 adds a parallel, stricter layer on top, not a replacement. SEBI notified the SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2025 on 18 November 2025, with the related party transaction provisions, including a new Schedule XII, effective 18 December 2025. Under the amended framework, materiality is no longer the flat lower of 10 percent of consolidated turnover or ₹1,000 crore. Schedule XII now runs a graded scale: 10 percent of consolidated turnover for a listed entity with turnover up to ₹20,000 crore, ₹2,000 crore plus 5 percent of turnover in excess of ₹20,000 crore for turnover between ₹20,000 crore and ₹40,000 crore, and ₹3,000 crore plus 2.5 percent of the excess above ₹40,000 crore, subject to an overall cap of ₹5,000 crore.

This matters less for a private funded company today and considerably more for one on an IPO track, since Regulation 23 also tightens the approval framework for subsidiary-level related party transactions and the validity period of shareholder approvals. A group that plans to list within the next few years should build its Section 188 approval discipline, board minute quality and RPT register now, since the listed-entity framework audits backward into the pre-listing period during IPO due diligence, not just from the listing date forward. Confirm the current Schedule XII position and its applicability to your group with the company secretary before relying on these figures for a specific transaction, since SEBI has revised this framework twice within the same year.

Is anything about to change under the Corporate Laws (Amendment) Bill, 2026?

Two provisions this article relies on are under active legislative review. The Corporate Laws (Amendment) Bill, 2026 was introduced in the Lok Sabha on 23 March 2026 and referred to a Joint Parliamentary Committee, which tabled its report backing the Bill on 3 August 2026. As of today, the Bill has not been passed by both Houses of Parliament or received presidential assent, so none of what follows is current law. It is a live proposal worth tracking, not a compliance obligation yet.

Two of its proposed changes touch related party governance directly. First, the director disqualification ground under Section 164(1)(g), which currently applies only on conviction for a Section 188 violation, is proposed to be broadened to cover a director who has been subjected to a penalty for a Section 188 default. Since Section 188(5) has carried only a monetary penalty, not a criminal conviction, since the 2020 decriminalisation, this closes a gap: under the current text, a director penalised under Section 188(5) is not automatically caught by the Section 164(1)(g) disqualification, and the Bill proposes to fix that. Second, the Bill proposes to omit the mandatory annual first-board-meeting disclosure of interest under Section 184(1), replacing it with a disclosure obligation only when a director’s previously disclosed interest actually changes.

If enacted as proposed, the first change raises the personal stakes for directors sitting on related group entity boards, and the second would ease a recurring annual paperwork step without touching the transaction-specific disclosure obligation under Section 184(2) that this article relies on elsewhere. Track the Bill’s progress through Parliament before relying on either position, and revisit your RPT governance policy once it is enacted and a commencement date is notified.

Common mistakes that cost founders time and money

Treating “we always work with them” as ordinary course. Regularity of a transaction is not the legal test. The transaction has to fall within the company’s actual line of business. A holding company charging a brand licence fee to its own subsidiary is a classic case where recurrence gets mistaken for ordinary course.

Missing the audit committee link where one already exists. Companies that convert to a public limited company ahead of a future round or listing often cross the Section 177 thresholds without realising the audit committee’s approval mandate for related party transactions kicks in from that point, not from the date of an IPO.

Not tracking transactions cumulatively across the year. Rule 15(3) tests the aggregate value with the same related party during the financial year. A company that signs three separate ₹3 crore service agreements with the same group entity in one year, each individually under the 10 percent threshold, can still trigger shareholder approval on the aggregate. Companies that approve each contract in isolation without a running RPT register miss this.

Skipping the interested director’s exit from the room, not just the vote. Rule 15(1)(2) requires the interested director to not be present during the discussion, not merely to abstain from voting. Board minutes that record only the vote and not the director’s absence during discussion are a recurring gap flagged in secretarial audits.

Assuming a wholly owned subsidiary exemption applies more broadly than it does. Rule 15(2) only replaces the separate shareholder resolution at the subsidiary level with the holding company’s resolution. It does not remove the board approval requirement at the subsidiary, and it does not apply once the subsidiary is not wholly owned, for instance after an ESOP pool or a minority co-investor sits at the subsidiary level.

FAQ’s on Related Party Transactions under Section 188

Q: Is a related party transaction subject to transfer pricing under the Income-tax Act?
A: For any tax year from 2026-27 onward, this falls under the Income-tax Act, 2025, which replaced the Income-tax Act, 1961 with effect from 1 April 2026. The domestic related party disallowance earlier at Section 40A(2) of the 1961 Act is now Section 36(2) of the Income-tax Act, 2025, letting an assessing officer disallow expenditure to a specified person that is excessive or unreasonable. Cross-border related party transactions are separately subject to transfer pricing documentation, earlier at Sections 92 to 92F of the 1961 Act and now at Sections 161 to 173 of the Income-tax Act, 2025. Get a CA to confirm applicability and current section references for the specific transaction structure, since the renumbering is recent.

Q: How does Treelife typically structure fees for related party transaction compliance?
A: This work is usually scoped as part of recurring secretarial compliance, priced against the number of group entities and the frequency of intercompany transactions, rather than as a one-off exercise, since RPT approval is a recurring board-cycle obligation.

Q: How long does a full Section 188 approval cycle take end to end?
A: Board approval can be completed within the notice period for a board meeting, typically 7 days for a physical meeting under Section 173(3) unless shortened with consent. Where shareholder approval under Rule 15(3) is also required, add the 21-day notice period for a general meeting under Section 101, unless a shorter notice is consented to by the requisite majority.

Q: What documentation does the board need before approving a related party transaction?
A: At minimum, the related party’s name and relationship, the nature and duration of the contract, material terms and value, any advance paid or received, the pricing methodology, and a note on whether all relevant commercial factors were considered, as prescribed under Rule 15(1).

Q: Does Section 188 apply to transactions with a foreign subsidiary or holding company?
A: Yes. Section 2(76) does not distinguish between Indian and foreign related parties. A transaction with an overseas holding company or subsidiary still requires Section 188 approval, and separately needs to be reported for FEMA purposes if it involves cross-border remittance, such as under the relevant FEMA reporting for the transaction type.

Q: Are transactions with a founder’s relative or HUF automatically related party transactions?
A: Yes, if the relative falls within the Section 2(77) definition, which includes spouse, parents, siblings and children, or if the transaction is with a firm or private company in which that relative is a partner, member or director.

Q: Should I plan around the Corporate Laws (Amendment) Bill, 2026 now?
A: Not as binding law yet. It is still a Bill, with a Joint Parliamentary Committee report tabled on 3 August 2026 but no Presidential assent or commencement notification as of today. Its proposed change to director disqualification under Section 164(1)(g) is worth flagging to your board now as a governance risk to watch, but nothing in the Bill changes your current Section 188 or Section 184 obligations.

Q: Does DPIIT startup recognition exempt a company from Section 188?
A: No. DPIIT recognition provides certain income tax and procedural benefits, but it does not create any exemption from Section 188 or Rule 15. Every DPIIT-recognised company that is a company under the Companies Act, 2013 remains fully subject to these provisions.

Q: What happens if a related party transaction is entered into without proper approval?
A: Under Section 188(3), the contract becomes voidable at the option of the board unless it is ratified by the board or shareholders within three months of being entered into. The director who authorised it may also be required to indemnify the company for any loss, and the company can separately proceed against that director under Section 188(4).

Q: Is there a monetary penalty for non-compliance with Section 188?
A: Following the Companies (Amendment) Act, 2020, effective 21 December 2020, imprisonment was removed from Section 188(5). A director or employee who enters into or authorises a non-compliant related party transaction is now liable to a penalty of ₹25 lakh in the case of a listed company, and ₹5 lakh in the case of any other company.

Q: Does SEBI LODR apply to a private funded company that has not listed yet?
A: No, Regulation 23 of the SEBI LODR Regulations, 2015 applies only once an entity is listed. It sits on top of, and does not replace, Section 188 and Rule 15. A group planning a future listing should still build Section 188 discipline early, since IPO due diligence tests the pre-listing period against this stricter framework.

Q: Can an investor’s board nominee vote on a related party transaction resolution?
A: A nominee director can vote unless they are personally interested in that specific transaction, for example where the investor entity itself, or an affiliate of the investor, is the counterparty. In that case, the Section 184 disclosure and abstention requirement applies to that nominee for that resolution.

Q: Do shareholders agreement provisions add anything beyond Section 188?
A: Frequently, yes. Many investment agreements for funded companies require investor consent for related party transactions above a contractually defined threshold, which is typically lower than the Rule 15 statutory threshold. This is a contractual layer on top of the statutory approval chain, not a substitute for it, and both need to be tracked separately.

Q: Is a loan or advance to an ESOP trust a related party transaction?
A: An ESOP trust set up and controlled by the company is typically a related party for the purposes of Section 188, since the company is accustomed to direct its actions. Funding arrangements with the trust should be routed through the same board approval and disclosure process as any other related party transaction.

Q: Does the wholly owned subsidiary exemption apply if there is a minority shareholder at the subsidiary?
A: No. Rule 15(2) applies only where the subsidiary is wholly owned by the holding company. The moment a minority shareholder, including an ESOP pool with vested shares issued at the subsidiary level, holds even a small stake, the exemption from a separate shareholder resolution no longer applies.

Regulatory references

• Section 188, Companies Act, 2013
• Section 189, Companies Act, 2013 (register of contracts or arrangements)
• Section 2(76) and Section 2(77), Companies Act, 2013
• Section 177, Companies Act, 2013
• Section 184, Companies Act, 2013
• Rule 15, Companies (Meetings of Board and its Powers) Rules, 2014
• Rule 6, Companies (Meetings of Board and its Powers) Rules, 2014

External sources

• Ministry of Corporate Affairs
• Income Tax India
• Securities and Exchange Board of India
• Startup India

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Treelife Team | support@treelife.in

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