Related Party Transactions: Companies Act Rules | IncorpX

Q: Who qualifies as a related party under Section 2(76)?

Under Section 2(76) , related parties include directors, key managerial personnel, their relatives, firms in which a director, manager, or relative is a partner, private companies in which a director or manager is a member or director, public companies in which a director or manager is also a director and holds, along with relatives, more than 2% of paid-up share capital, and group entities such as holding, subsidiary, associate, fellow subsidiary, investing company, or venturer relationships [Source: Section 2(76), Companies Act 2013; Section 2(77), Companies Act 2013; Rule 4, Companies (Specification of Definitions Details) Rules, 2014].

Q: Are private limited companies exempt from RPT provisions?

Private limited companies are not exempt from the full RPT framework . They still need to identify related parties, record board-level approvals where Section 188 applies, keep the Section 189 register, and make disclosures; however, MCA Notification G.S.R. 464(E) dated 5 June 2015 exempts private companies from shareholder approval under the first proviso to Section 188(1), subject to the transaction being recorded in board minutes and entered in the Section 189 register [Source: Section 188(1), Companies Act 2013; Section 189, Companies Act 2013; G.S.R. 464(E), MCA, 05-06-2015].

Q: What role does the audit committee play in RPT approval?

Where Section 177 applies, the audit committee reviews related party proposals before they move to the board. For listed entities, Regulation 23(2) requires prior audit committee approval for all related party transactions and later review of the disclosures, terms, and material modifications [Source: Section 177(4)(iv), Companies Act 2013; Regulation 23(2), SEBI LODR].

Dhanush Prabha

Private Limited Company Business Compliance

Set IncorpX as Preferredon Google Search

Related Party Transactions Under Companies Act: Board Approval Rules

Reviewed by Industry Experts & Startup Specialists.

Last Updated: 20 Jul 2026, 12:30 PM

Related party transactions, or RPTs, are routine in closely held businesses, group structures, and listed entities, but they become risky when the board cannot show that the deal is fair, properly approved, and transparently disclosed. The core legal framework sits in Section 2(76), Section 188, Section 184, and Section 189 of the Companies Act, 2013, with Rule 15 setting the shareholder approval thresholds and Form AOC-2 capturing annual disclosure in the board's report [Source: Section 2(76), Companies Act 2013; Section 188, Companies Act 2013; Section 184, Companies Act 2013; Section 189, Companies Act 2013; Rule 15, Companies (Meetings of Board and its Powers) Rules, 2014; Rule 8(2), Companies (Accounts) Rules, 2014].

This article covers who counts as a related party, the seven transaction categories in Section 188(1), the ordinary-course and arm's-length exemption, Rule 15 thresholds, listed-company overlays under Regulation 23 of SEBI LODR, documentation expectations, and the penalty framework for non-compliance [Source: Section 188(1)(a) to (g), Companies Act 2013; Regulation 23, SEBI LODR]. It does not cover sector-specific approvals under RBI, IRDAI, or FEMA, and it does not replace transaction-specific valuation, accounting, or tax advice for unusual structures.

Section 188(1) covers 7 categories of related party transactions, not 6, and the missing seventh category is underwriting the subscription of securities or derivatives of the company [Source: Section 188(1)(g), Companies Act 2013]. If a transaction is both in the ordinary course of business and on an arm's length basis, Section 188 approval is not required, but listed entities still need audit committee approval under Regulation 23(2) [Source: Explanation to Section 188(1), Companies Act 2013; Regulation 23(2), SEBI LODR]. Non-compliance can make the contract voidable and may expose the concerned director or employee to a fine of ₹25,000 to ₹5 lakh, and in the case of listed companies, imprisonment up to one year or both may also apply [Source: Section 188(3), Companies Act 2013; Section 188(5), Companies Act 2013].

An RPT is a contract or arrangement between the company and a counterparty that falls within the related-party definition in Section 2(76), provided the transaction itself falls within one of the heads listed in Section 188(1)(a) to (g) [Source: Section 2(76), Companies Act 2013; Section 188(1), Companies Act 2013]. In practice, that can include buying raw materials from a promoter-controlled entity, leasing office space from a director's family business, appointing a related party as a selling agent, or paying a related party to occupy an office or place of profit in the company or its subsidiary [Source: Section 188(1)(a) to (f), Companies Act 2013].

The law regulates these dealings because the commercial incentive of a related party may differ from the company's interest. When that happens, minority shareholders, lenders, and auditors need a clean approval trail showing who disclosed their interest, how pricing was tested, what the board considered, and whether the company crossed any shareholder or listed-company thresholds [Source: Section 184(1), Companies Act 2013; Section 189, Companies Act 2013; Rule 15(1), Companies (Meetings of Board and its Powers) Rules, 2014]. If you are comparing governance burdens across entity types, the compliance position of a private limited company, a public limited company, and an LLP is not identical, so the entity form matters before you apply the approval matrix.

Related Party Transaction means a contract or arrangement covered by Section 188(1) and entered into with a person or entity that falls within Section 2(76). For financial reporting, related party disclosures are also driven by Ind AS 24 or AS 18, which can capture a wider set of disclosures than the approval triggers in Section 188 [Source: Section 2(76), Companies Act 2013; Section 188(1), Companies Act 2013; Ind AS 24].

The definition in Section 2(76) is broader than many boards initially assume. It covers directors and key managerial personnel, their relatives, firms in which a director, manager, or relative is a partner, private companies in which a director or manager is a member or director, and public companies in which a director or manager is also a director and holds, along with relatives, more than 2% of paid-up share capital [Source: Section 2(76)(i) to (v), Companies Act 2013]. It also extends to holding, subsidiary, associate, and fellow-subsidiary relationships, plus an investing company or venturer of the company [Source: Section 2(76)(viii), Companies Act 2013].

For individuals, the relatives test is not limited to the common list used in board decks. Section 2(77) read with Rule 4 includes members of a Hindu Undivided Family and specified step-relatives such as step-father, step-mother, step-son, step-brother, and step-sister [Source: Section 2(77), Companies Act 2013; Rule 4, Companies (Specification of Definitions Details) Rules, 2014]. That is one reason vendor master reviews, annual MBP-1 disclosures, and director onboarding files should be aligned with your appointment of director process and not treated as separate silos [Source: Section 184(1), Companies Act 2013].

A second practical point is that listed entities must perform a parallel test under the broader SEBI LODR definition. A counterparty may fall outside a narrow Companies Act reading but still need review under Regulation 2(1)(zb) and Regulation 23 if the listed-company definition captures the relationship [Source: Regulation 2(1)(zb), SEBI LODR; Regulation 23, SEBI LODR]. That dual analysis becomes especially important during investor entry, promoter-group restructuring, or share transfer events, where ownership and influence change faster than the annual disclosure cycle.

Which Transactions Are Covered by Section 188(1)?

Section 188(1) lists seven transaction categories. The omission of the seventh category, underwriting, is a common drafting mistake in checklists and board notes [Source: Section 188(1)(a) to (g), Companies Act 2013]. The safest way to analyse an arrangement is to classify it first and only then calculate thresholds or exemptions.

Clause	Transaction head	Typical example	Main approval track
Section 188(1)(a)	Sale, purchase, or supply of goods or materials	Raw materials bought from a promoter-group distributor	Section 188 test, Rule 15 threshold test, and SEBI audit committee test for listed entities
Section 188(1)(b)	Selling or otherwise disposing of, or buying, property	Sale of land, office unit, or warehouse to a related party	Board and, where thresholds are crossed, shareholder approval
Section 188(1)(c)	Leasing of property of any kind	Factory lease from promoter family entity	Board route plus Rule 15 threshold analysis
Section 188(1)(d)	Availing or rendering of services	IT support, logistics, legal drafting, or facility management services	Board route and value-based threshold review
Section 188(1)(e)	Appointment of any agent for purchase or sale	Related party acting as procurement or sales agent	Board route and Rule 15 threshold review
Section 188(1)(f)	Appointment of related party to any office or place of profit	Senior role in company or subsidiary with monthly remuneration	Board route; shareholder test based on monthly remuneration
Section 188(1)(g)	Underwriting the subscription of securities or derivatives thereof	Related party underwriting a rights or securities issue	Board route; Rule 15 threshold of remuneration exceeding 1% of net worth

Loans, guarantees, securities, and inter-corporate investments sit outside this seven-head list and usually require a separate review under Sections 185 and 186 [Source: Section 185, Companies Act 2013; Section 186, Companies Act 2013]. That distinction matters when the same board paper also deals with funding, capital restructuring, or an increase in authorized share capital, because the compliance questions do not collapse into a single Section 188 approval.

From our experience handling RPT documentation reviews, the fastest way to avoid re-drafting a board note is to identify the transaction head first, then attach the matching threshold test and exemption analysis. Many delayed approvals happen because a services contract is described like a goods contract, or a compensation arrangement is treated like a vendor agreement, which changes both the threshold and the disclosure logic.

Ordinary Course and Arm's Length, Why This Exemption Matters

The most important practical exemption appears in the Explanation to Section 188(1). If a transaction is in the ordinary course of business and on an arm's length basis, the approval requirements of Section 188(1) do not apply [Source: Explanation to Section 188(1), Companies Act 2013]. This is a dual test, not an either-or test. Boards therefore need to record both why the transaction fits the company's normal business activity and why the commercial terms match what an unrelated party would have accepted [Source: Explanation to Section 188(1), Companies Act 2013].

Ordinary course is usually supported by the company's objects, past business practice, frequency of similar contracts, and operational need. Arm's length is usually supported by price benchmarking, comparable quotations, independent valuation where relevant, margin comparisons, or a pricing policy already used with non-related counterparties. A generic statement that the deal is fair rarely survives audit or investor review if the supporting file is thin. This is one reason many boards align RPT files with their broader business due diligence and annual compliance review process.

Arm's Length Price means the price and commercial terms that would apply if the same transaction were negotiated between unrelated parties dealing independently in comparable circumstances. Under the Companies Act, the arm's-length concept becomes decisive because the Section 188 approval exemption only works when the transaction is also in the ordinary course of business [Source: Explanation to Section 188(1), Companies Act 2013].

Listed entities do not get to stop the analysis at the Companies Act exemption. Regulation 23(2) requires prior audit committee approval for all RPTs of a listed entity and its material subsidiary framework adds another layer for certain subsidiary transactions [Source: Regulation 23(2), SEBI LODR]. So the practical sequence for listed companies is often: first test the proposal under LODR, then decide whether Section 188 board or shareholder approval is separately needed.

Based on compliance filings processed by our team, the strongest arm's-length file usually contains three items together: comparable third-party pricing, a short note explaining why the related counterparty was commercially chosen, and a clean minute recording that the board reviewed both the commercial rationale and the disclosure trail. When one of these pieces is missing, the transaction may still be valid, but the audit query cycle becomes longer.

Decision Framework, Do You Need Board Approval, Shareholder Approval, or Audit Committee Approval?

The approval path changes with company type, transaction value, and whether the ordinary-course plus arm's-length exemption applies. The table below is a practical decision framework you can use before the contract is signed.

Situation	Board approval under Section 188	Shareholder approval	Audit committee approval	Key notes
Private company, ordinary course and arm's length	No Section 188 approval	No	Only if separately required under Section 177	Keep MBP-1, pricing support, and Section 189 analysis file [Source: Explanation to Section 188(1), Companies Act 2013].
Private company, non-exempt RPT below Rule 15 threshold	Yes	No	Only if Section 177 applies	Check MCA notification reliefs carefully [Source: Section 188(1), Companies Act 2013; Rule 15(3), Companies Rules 2014].
Private company, non-exempt RPT above Rule 15 threshold	Yes	Usually no, due to G.S.R. 464(E), subject to board minutes and Section 189 register entry	Only if Section 177 applies	Do not skip documentation just because shareholder approval is relaxed [Source: G.S.R. 464(E), MCA, 05-06-2015; Section 189, Companies Act 2013].
Unlisted public company, non-exempt RPT above Rule 15 threshold	Yes	Yes, ordinary resolution	Where Section 177 applies	Use audited preceding-financial-year numbers for threshold testing [Source: Rule 15(3), Companies Rules 2014].
Listed entity, any RPT	Depends on Section 188 test	Only if Rule 15 or materiality triggers	Yes, prior approval for all RPTs	Audit committee comes first; listed-company definitions are broader [Source: Regulation 23(2), SEBI LODR; Regulation 2(1)(zb), SEBI LODR].
Listed entity, material RPT or material modification	Depends on Section 188 test	Yes, prior approval with related parties abstaining	Yes	Material threshold is ₹1,000 crore or 10% of annual consolidated turnover, whichever is lower [Source: Regulation 23(1), SEBI LODR; Regulation 23(4), SEBI LODR].

For companies building or updating approval workflows, it helps to align the RPT matrix with the broader private limited company compliance calendar and the ROC annual filing checklist so that board approvals, Section 189 entries, and AOC-2 disclosures are not reconstructed at year end.

Rule 15 Thresholds Under the Companies Rules

Once the transaction falls within Section 188 and the ordinary-course arm's-length exemption is unavailable, the next step is to test whether shareholder approval is triggered under Rule 15(3). The rule uses audited figures from the preceding financial year for turnover and net worth calculations [Source: Rule 15(3), Companies (Meetings of Board and its Powers) Rules, 2014].

Transaction category	Shareholder approval threshold	Statutory anchor
Sale, purchase, or supply of goods or materials	More than 10% of turnover or ₹100 crore, whichever is lower	Rule 15(3)(a)
Selling or buying property	More than 10% of net worth or ₹100 crore, whichever is lower	Rule 15(3)(b)
Leasing of property	More than 10% of net worth or 10% of turnover, whichever is lower	Rule 15(3)(c)
Availing or rendering of services	More than 10% of turnover or ₹50 crore, whichever is lower	Rule 15(3)(d)
Appointment of agent for purchase or sale	More than 10% of turnover or ₹50 crore, whichever is lower	Rule 15(3)(e)
Appointment to office or place of profit	Monthly remuneration exceeding ₹2.5 lakh	Rule 15(3), office or place of profit threshold
Underwriting subscription of securities or derivatives	Remuneration exceeding 1% of net worth	Rule 15(3)(f)

The threshold test should be applied category by category, but boards also need to check whether repeated contracts with the same related party amount to a larger transaction pattern. In practice, companies often aggregate transactions within the same approval note to avoid repeated board circulation, especially when the contract profile is recurring through the year. That same discipline helps when auditors later reconcile the register under Section 189 with the disclosures in AOC-2 and the financial statements [Source: Section 189, Companies Act 2013; Rule 8(2), Companies (Accounts) Rules, 2014].

One recurring file-review issue is the use of management estimates instead of the audited preceding-financial-year figures required by Rule 15(3). If a company has recently completed a capital or restructuring event, teams often rely on projected turnover or updated net worth. That may be commercially sensible, but the Rule 15 test still starts with the audited base unless a specific legal basis says otherwise [Source: Rule 15(3), Companies Rules 2014].

Worked Example, Calculating RPT Approval Thresholds

Assume a company has turnover of ₹500 crore and net worth of ₹200 crore based on the audited financial statements of the immediately preceding financial year [Source: Rule 15(3), Companies Rules 2014]. The threshold calculations under Rule 15 work as follows:

Category	Formula	Threshold amount	Approval implication
Goods or materials	10% of turnover = ₹50 crore; compare with ₹100 crore	₹50 crore	Above ₹50 crore, shareholder approval is triggered for a non-exempt company [Source: Rule 15(3)(a), Companies Rules 2014].
Sale or purchase of property	10% of net worth = ₹20 crore; compare with ₹100 crore	₹20 crore	Above ₹20 crore, shareholder approval is triggered [Source: Rule 15(3)(b), Companies Rules 2014].
Leasing of property	10% of net worth = ₹20 crore; 10% of turnover = ₹50 crore	₹20 crore	Above ₹20 crore, shareholder approval is triggered [Source: Rule 15(3)(c), Companies Rules 2014].
Services	10% of turnover = ₹50 crore; compare with ₹50 crore	₹50 crore	Above ₹50 crore, shareholder approval is triggered [Source: Rule 15(3)(d), Companies Rules 2014].
Agent appointment	10% of turnover = ₹50 crore; compare with ₹50 crore	₹50 crore	Above ₹50 crore, shareholder approval is triggered [Source: Rule 15(3)(e), Companies Rules 2014].
Office or place of profit	Monthly remuneration test	₹2.5 lakh per month	Above ₹2.5 lakh per month, shareholder approval is triggered [Source: Rule 15(3), Companies Rules 2014].
Underwriting	1% of net worth = ₹2 crore	₹2 crore	Above ₹2 crore remuneration, shareholder approval is triggered [Source: Rule 15(3)(f), Companies Rules 2014].

Now apply those figures to three common scenarios. If the company proposes to buy goods worth ₹62 crore from a promoter-group supplier, Section 188 board approval is needed unless the company can fully support the ordinary-course arm's-length exemption, and shareholder approval is triggered because ₹62 crore is higher than the ₹50 crore Rule 15 threshold [Source: Section 188(1)(a), Companies Act 2013; Rule 15(3)(a), Companies Rules 2014]. If the same company proposes to lease a warehouse from a related party for ₹18 crore per year, the lease stays below the ₹20 crore leasing threshold, so board approval may be enough for a non-exempt transaction [Source: Rule 15(3)(c), Companies Rules 2014]. If it appoints a related party to an office of profit at ₹3 lakh per month, shareholder approval is triggered because the monthly remuneration exceeds the ₹2.5 lakh cap [Source: Rule 15(3), Companies Rules 2014].

For a listed entity with the same financials, the material RPT threshold under SEBI is also ₹50 crore, because 10% of annual consolidated turnover is ₹50 crore, which is lower than ₹1,000 crore [Source: Regulation 23(1), SEBI LODR]. That means the ₹62 crore goods transaction would also require prior shareholder approval under LODR, with all related parties abstaining from voting [Source: Regulation 23(4), SEBI LODR]. The ₹18 crore lease would still require prior audit committee approval even if it remains below both the Rule 15 and SEBI materiality thresholds [Source: Regulation 23(2), SEBI LODR].

When boards review threshold calculations, it helps to attach a one-page worksheet showing the audited turnover, audited net worth, formula used, and approval outcome. From our experience handling RPT approval packs, this single worksheet reduces follow-up questions from directors, auditors, and transaction reviewers because everyone sees the same base numbers at once.

Documents, Disclosures, and Board Process

Approval is only one part of RPT compliance. The company also needs a documentation trail proving that the relationship was identified early and the transaction was discussed with adequate information [Source: Section 184(1), Companies Act 2013; Rule 15(1), Companies Rules 2014]. A practical process usually runs in the following order:

Identify the relationship. Update annual MBP-1 disclosures, director onboarding records, and vendor/customer master data so the related-party flag appears before the contract reaches execution [Source: Section 184(1), Companies Act 2013].
Classify the transaction. Map it to Section 188(1)(a) to (g), then test whether the ordinary-course arm's-length exemption is available [Source: Section 188(1), Companies Act 2013; Explanation to Section 188(1), Companies Act 2013].
Prepare the approval note. Include the name of the related party, nature of relationship, material terms, value, tenure, commercial rationale, pricing support, and any advance paid or received, which aligns with the disclosure expectations in Rule 15(1) [Source: Rule 15(1), Companies Rules 2014].
Obtain audit committee approval where applicable. Listed entities do this before the board stage, and companies covered by Section 177 should follow their committee framework [Source: Section 177(4)(iv), Companies Act 2013; Regulation 23(2), SEBI LODR].
Record the board decision and Section 189 register entry. This becomes especially important for private companies relying on the shareholder-approval relaxation in G.S.R. 464(E) [Source: Section 189, Companies Act 2013; G.S.R. 464(E), MCA, 05-06-2015].
Complete annual disclosure. Add the relevant contracts to AOC-2 and keep the accounting disclosures aligned with the statutory record [Source: Section 134(3)(h), Companies Act 2013; Rule 8(2), Companies (Accounts) Rules, 2014; Ind AS 24].

This documentation trail interacts with several other governance workstreams. A board reviewing an RPT often also examines shareholder arrangements, financing documents, and management controls, so it helps to align the file with a shareholder agreement drafting review, a periodic compliance health check, and, where audit observations have changed, a change of auditor transition memo. These linked processes make the RPT file easier to defend if the transaction is later tested during investor diligence or statutory audit.

Omnibus Approval is a standing approval that an audit committee may grant for repetitive related party transactions subject to the conditions in Rule 6A and, for listed entities, Regulation 23(3). It is not a blanket waiver for all future dealings and must still define the party, transaction type, value ceiling, and validity period [Source: Rule 6A, Companies (Meetings of Board and its Powers) Rules, 2014; Regulation 23(3), SEBI LODR].

Common Mistakes in RPT Compliance

Treating the related-party test as a year-end exercise. By the time finance picks up the issue during annual reporting, the contract may already be operating without a clean approval file. The safer approach is to connect director disclosures, procurement onboarding, and board-secretariat review at the start of the contract cycle [Source: Section 184(1), Companies Act 2013; Section 189, Companies Act 2013].
Assuming arm's length alone is enough. The Section 188 exemption works only when the transaction is both in the ordinary course of business and on an arm's length basis. Missing one limb means the exemption is incomplete [Source: Explanation to Section 188(1), Companies Act 2013].
Using outdated or estimated numbers for Rule 15. The threshold test is based on audited figures from the preceding financial year, not management projections or post-balance-sheet business plans [Source: Rule 15(3), Companies Rules 2014].
Forgetting the listed-company overlay. A team may conclude that no Section 188 approval is needed and stop there, even though Regulation 23(2) still requires prior audit committee approval for a listed entity's RPT [Source: Regulation 23(2), SEBI LODR].
Missing the Section 189 and AOC-2 trail. A clean board minute without the register entry and annual disclosure creates a gap that auditors will usually flag [Source: Section 189, Companies Act 2013; Rule 8(2), Companies (Accounts) Rules, 2014].
Ignoring aggregation and modifications. Repeated transactions and material modifications can change the approval outcome mid-year, especially in listed entities with policy-based materiality thresholds [Source: Regulation 23(1), SEBI LODR; Regulation 23(4), SEBI LODR].

Based on compliance filings processed by our team, the most common avoidable mistake is not keeping the pricing support and the approval minutes in the same file. When those records are split between finance, legal, and procurement folders, a later audit or diligence review often treats the file as incomplete even though each team did part of the work correctly.

Listed Company Overlay Under SEBI LODR

For listed entities, Regulation 23 changes the analysis in three major ways. First, the audit committee must grant prior approval for all RPTs [Source: Regulation 23(2), SEBI LODR]. Second, material RPTs and material modifications need prior shareholder approval, with related parties abstaining from voting [Source: Regulation 23(4), SEBI LODR]. Third, the listed entity must make half-yearly disclosures to stock exchanges [Source: Regulation 23(9), SEBI LODR].

The composition rule also matters. Under Section 177(2), the audit committee must have a majority of independent directors, while Regulation 18(1)(b) raises the listed-company standard to at least two-thirds independent directors [Source: Section 177(2), Companies Act 2013; Regulation 18(1)(b), SEBI LODR]. In practical terms, that means the committee reviewing a listed-entity RPT is expected to be structurally independent from the related party whose proposal is under review.

Material Related Party Transaction for a listed entity means a transaction whose value, individually or together with previous transactions during a financial year, exceeds ₹1,000 crore or 10% of annual consolidated turnover, whichever is lower. Material modifications are also tested under the listed entity's policy and require the same approval route [Source: Regulation 23(1), SEBI LODR; Regulation 23(4), SEBI LODR].

Listed-company teams should also remember that the SEBI definition of related party is broader than the Companies Act definition, so a transaction can trigger LODR review even when the Companies Act analysis appears narrow [Source: Regulation 2(1)(zb), SEBI LODR]. This broader lens becomes especially relevant in promoter-group restructurings, subsidiary cash-pooling, and acquisitions reviewed through a wider business due diligence exercise.

From our experience handling listed-company documentation packs, the most useful board paper is the one that shows the Companies Act result and the SEBI result side by side. Directors and investors often ask different questions, and a side-by-side matrix prevents the meeting from spending time on whether a transaction is exempt under one framework but not the other.

Private Companies, Group Companies, and Common Exemptions

Private companies often assume RPT compliance is lighter, but the relief is narrower than that. The key relaxation is the MCA notification G.S.R. 464(E) dated 5 June 2015, which exempts private companies from shareholder approval under the first proviso to Section 188(1), provided the transaction is recorded in the minutes of the board meeting and entered in the register under Section 189 [Source: G.S.R. 464(E), MCA, 05-06-2015; Section 189, Companies Act 2013]. Board process, interest disclosures, pricing support, and annual disclosures do not disappear because of this relaxation.

Wholly owned subsidiary structures may also have narrower exemptions under the rules and under listed-company provisions, but those should be checked carefully against the exact wording of the current rule, the shareholding pattern, and whether the entity is listed [Source: Rule 15(3), Companies Rules 2014; Regulation 23(5), SEBI LODR]. This is particularly important when promoter groups reorganise holdings, execute a share transfer, or move assets across entities in preparation for financing, merger discussions, or external investment.

If the entity has recently changed size, control, or board composition, the RPT matrix should be refreshed alongside the broader governance pack. That review often sits naturally with a corporate compliance services checklist and the annual private limited company compliance program because the same records, registers, and board approvals are being tested anyway.

Real-World Scenario, From Identification to Disclosure

Consider a listed manufacturing company with turnover of ₹500 crore and net worth of ₹200 crore. The company proposes to buy raw materials worth ₹62 crore during the year from a promoter-group entity. The procurement team flags the counterparty based on the related-party master created from MBP-1 disclosures and promoter-group mapping [Source: Section 184(1), Companies Act 2013; Regulation 2(1)(zb), SEBI LODR].

Identification and classification. The contract is classified under Section 188(1)(a) as purchase of goods and also tagged as an RPT under Regulation 23 [Source: Section 188(1)(a), Companies Act 2013; Regulation 23, SEBI LODR].
Pricing support. The company compares the proposed rates with third-party supplier quotes and recent non-related purchases to test arm's length pricing. Because the company is listed, this pricing support goes to the audit committee even if management believes the ordinary-course arm's-length exemption would have helped under the Companies Act [Source: Explanation to Section 188(1), Companies Act 2013; Regulation 23(2), SEBI LODR].
Threshold check. Goods threshold under Rule 15 is ₹50 crore, and the listed-company material threshold under LODR is also ₹50 crore in this fact pattern, so the proposal crosses both [Source: Rule 15(3)(a), Companies Rules 2014; Regulation 23(1), SEBI LODR].
Approval sequence. The audit committee reviews the proposal first, the board approves the transaction with clean interest disclosures, and the company then places the matter before shareholders with related parties abstaining from voting [Source: Section 184(2), Companies Act 2013; Section 188(1), Companies Act 2013; Regulation 23(2), SEBI LODR; Regulation 23(4), SEBI LODR].
Execution and record keeping. Once approved, the company records the contract in the Section 189 register, tracks utilisation against the approved cap, and prepares the year-end AOC-2 and exchange disclosure trail [Source: Section 189, Companies Act 2013; Rule 8(2), Companies (Accounts) Rules, 2014; Regulation 23(9), SEBI LODR].

This start-to-finish sequence is what acquirers, investors, and lenders usually expect to see when they review the compliance history of a target. In practice, the same file is often reviewed again during business due diligence, annual filing work, and tax provisioning, so building it properly once saves repeat effort later.

When an RPT is likely to be reviewed by multiple teams, keep a single indexed file with the board note, pricing support, audit committee extract, shareholder notice, Section 189 entry, and disclosure draft. From our experience handling documentation reviews, this reduces the risk that the same transaction is described differently in the board minutes, financial statements, and annual filing annexures.

Tax and Accounting Touchpoints

Even where the Companies Act approvals are in place, tax scrutiny does not disappear. Payments to related parties can still be tested under Section 40A(2) of the Income Tax Act if the expenditure is considered excessive or unreasonable, and cross-border related party arrangements remain within the transfer pricing framework in Sections 92 to 92F [Source: Section 40A(2), Income Tax Act 1961; Sections 92 to 92F, Income Tax Act 1961]. Domestic transfer pricing under Section 92BA was omitted by the Finance Act, 2017, but that omission does not prevent other reasonableness tests from applying [Source: Finance Act 2017].

Accounting disclosures operate in parallel. Financial statements generally need related party disclosures under Ind AS 24 or AS 18, and those disclosures should reconcile with the company's Section 189 register, board approvals, and AOC-2 annexure [Source: Ind AS 24; Section 189, Companies Act 2013; Rule 8(2), Companies (Accounts) Rules, 2014]. If the finance team is already reconciling deferred tax, audit queries, and filing positions through the year, it is practical to connect the RPT trail with the income tax return filing and year-end audit preparation workflow.

Quick Compliance Checklist Before You Sign an RPT

Confirm the counterparty falls within Section 2(76) and, if listed, the broader Regulation 2(1)(zb) definition [Source: Section 2(76), Companies Act 2013; Regulation 2(1)(zb), SEBI LODR].
Map the deal to one of the seven categories in Section 188(1) [Source: Section 188(1)(a) to (g), Companies Act 2013].
Test whether the ordinary-course arm's-length exemption is available, and document both limbs of the test [Source: Explanation to Section 188(1), Companies Act 2013].
Apply the correct Rule 15(3) formula using audited preceding-financial-year numbers [Source: Rule 15(3), Companies Rules 2014].
For listed entities, obtain prior audit committee approval and separately test materiality under Regulation 23 [Source: Regulation 23(1), SEBI LODR; Regulation 23(2), SEBI LODR].
Update MBP-1, board minutes, Section 189, and AOC-2 so the file can withstand annual filing and diligence review [Source: Section 184(1), Companies Act 2013; Section 189, Companies Act 2013; Rule 8(2), Companies (Accounts) Rules, 2014].

Used together, these steps give the board a defensible record of why the transaction was approved and how the company protected itself. They also make later reviews simpler, whether the issue surfaces in annual reporting, an investor request, a financing diligence list, or a targeted compliance review.

If you need help organising RPT documents, board papers, register updates, or annual disclosure support, you can review our related resources on corporate compliance services, private limited company compliance, ROC annual filing, and compliance health check. Keep the approval trail, pricing support, and annual disclosures aligned before the transaction reaches execution.

Frequently Asked Questions

What is a related party transaction under the Companies Act 2013?

A related party transaction, or RPT, is a contract or arrangement that a company enters into with a related party in any of the categories listed in Section 188(1)(a) to (g). The approval path depends on whether the deal falls within Section 188, whether the ordinary course and arm's length exemption applies, and whether Rule 15 or Regulation 23 of SEBI LODR is triggered [Source: Section 188(1), Companies Act 2013; Rule 15, Companies (Meetings of Board and its Powers) Rules, 2014; Regulation 23, SEBI LODR].

Who qualifies as a related party under Section 2(76)?

Under Section 2(76), related parties include directors, key managerial personnel, their relatives, firms in which a director, manager, or relative is a partner, private companies in which a director or manager is a member or director, public companies in which a director or manager is also a director and holds, along with relatives, more than 2% of paid-up share capital, and group entities such as holding, subsidiary, associate, fellow subsidiary, investing company, or venturer relationships [Source: Section 2(76), Companies Act 2013; Section 2(77), Companies Act 2013; Rule 4, Companies (Specification of Definitions Details) Rules, 2014].

When is board approval sufficient for related party transactions?

Board approval is generally sufficient when a transaction is covered by Section 188, is not in the ordinary course at arm's length, but still stays within the shareholder thresholds in Rule 15(3). If the transaction is in the ordinary course of business and on an arm's length basis, Section 188 approval is not required; listed entities must still obtain audit committee approval under Regulation 23(2) [Source: Explanation to Section 188(1), Companies Act 2013; Rule 15(3), Companies (Meetings of Board and its Powers) Rules, 2014; Regulation 23(2), SEBI LODR].

When is shareholder approval required for RPTs?

For companies that are not covered by a notification-based exemption, shareholder approval by ordinary resolution is required when the transaction value exceeds the relevant threshold in Rule 15(3). Listed entities also need prior shareholder approval for material related party transactions and material modifications under Regulation 23(4), with all related parties abstaining from voting [Source: Rule 15(3), Companies (Meetings of Board and its Powers) Rules, 2014; Regulation 23(4), SEBI LODR].

What is arm's length pricing in the context of RPTs?

Arm's length pricing means the commercial terms should match what the company could reasonably obtain from an unrelated counterparty in a comparable transaction. If a transaction is both in the ordinary course of business and on an arm's length basis, the approval requirements of Section 188(1) do not apply, although listed entities still test the proposal under SEBI LODR [Source: Explanation to Section 188(1), Companies Act 2013; Regulation 23(2), SEBI LODR].

What is Form MBP-1 and when must it be filed?

Form MBP-1 is the disclosure through which every director reports interests in companies, bodies corporate, firms, or other associations. The disclosure is given at the first board meeting of every financial year and whenever there is a change in interest, helping the company identify whether a proposed deal is an RPT [Source: Section 184(1), Companies Act 2013].

What is Form AOC-2 and who needs to file it?

Form AOC-2 is the prescribed annexure for disclosing particulars of contracts or arrangements with related parties that are referred to in Section 188(1). It is attached to the board's report under Section 134(3)(h) read with Rule 8(2) of the Companies (Accounts) Rules, 2014 [Source: Section 134(3)(h), Companies Act 2013; Rule 8(2), Companies (Accounts) Rules, 2014].

What are the penalties for non-compliance with Section 188?

If the required approval is not obtained and the contract is not ratified, the transaction can become voidable at the option of the board or shareholders and the concerned director may have to indemnify the company for losses. Under Section 188(5), the penalty is a fine of ₹25,000 to ₹5 lakh, and in the case of a listed company, imprisonment up to one year or both may also apply [Source: Section 188(3), Companies Act 2013; Section 188(5), Companies Act 2013].

Are private limited companies exempt from RPT provisions?

Private limited companies are not exempt from the full RPT framework. They still need to identify related parties, record board-level approvals where Section 188 applies, keep the Section 189 register, and make disclosures; however, MCA Notification G.S.R. 464(E) dated 5 June 2015 exempts private companies from shareholder approval under the first proviso to Section 188(1), subject to the transaction being recorded in board minutes and entered in the Section 189 register [Source: Section 188(1), Companies Act 2013; Section 189, Companies Act 2013; G.S.R. 464(E), MCA, 05-06-2015].

What role does the audit committee play in RPT approval?

Where Section 177 applies, the audit committee reviews related party proposals before they move to the board. For listed entities, Regulation 23(2) requires prior audit committee approval for all related party transactions and later review of the disclosures, terms, and material modifications [Source: Section 177(4)(iv), Companies Act 2013; Regulation 23(2), SEBI LODR].

Can an interested director vote on an RPT resolution?

As a general rule, a director who is interested in a contract or arrangement must disclose that concern or interest and should not participate in the board meeting in which the matter is discussed. Companies should also verify whether any notification-based relaxation applies to their class of company before the meeting is held [Source: Section 184(2), Companies Act 2013; relevant MCA notifications, where applicable].

What is the materiality threshold for RPTs under SEBI?

For listed entities, a material related party transaction is one whose value, individually or taken together with previous transactions during a financial year, exceeds ₹1,000 crore or 10% of annual consolidated turnover, whichever is lower. Such transactions require prior shareholder approval and related parties cannot vote on the resolution [Source: Regulation 23(1), SEBI LODR; Regulation 23(4), SEBI LODR].

What types of transactions are covered under Section 188?

Section 188(1) covers 7 categories of transactions: sale or purchase of goods or materials, selling or otherwise disposing of property, leasing of property, availing or rendering of services, appointment of agents for purchase or sale, appointment to an office or place of profit, and underwriting the subscription of securities or derivatives of the company. Loans and guarantees require a separate review under Sections 185 and 186 [Source: Section 188(1)(a) to (g), Companies Act 2013; Section 185, Companies Act 2013; Section 186, Companies Act 2013].

Is transfer pricing applicable to related party transactions?

Domestic RPTs may still attract tax scrutiny even though Section 92BA was omitted by the Finance Act, 2017. Excessive or unreasonable payments can be challenged under Section 40A(2), while cross-border related party dealings continue to be governed by Sections 92 to 92F and the transfer pricing rules [Source: Section 40A(2), Income Tax Act 1961; Sections 92 to 92F, Income Tax Act 1961; Finance Act 2017].

Do companies need a board-approved RPT policy?

Listed companies need a board-approved policy on materiality of related party transactions and on dealing with related party transactions under Regulation 23. For unlisted companies, a written internal policy is not expressly mandated in the same way, but keeping one helps boards document aggregation rules, approval routes, and pricing support [Source: Regulation 23, SEBI LODR].

What happens if an RPT is entered without proper approval?

A contract or arrangement entered without the required consent of the board or shareholders must be ratified by the board or, where applicable, by shareholders within three months. Failing that, the transaction becomes voidable at the option of the board or shareholders, and the concerned director may have to indemnify the company for losses [Source: Section 188(3), Companies Act 2013].

How are RPTs disclosed in the annual report?

Companies disclose applicable Section 188 contracts through Form AOC-2 in the board's report, while the financial statements carry related party disclosures under the applicable accounting framework such as Ind AS 24 or AS 18. Listed entities also make periodic exchange disclosures under Regulation 23(9) [Source: Section 134(3)(h), Companies Act 2013; Rule 8(2), Companies (Accounts) Rules, 2014; Regulation 23(9), SEBI LODR; Ind AS 24].

What is the role of independent directors in RPT approval?

Independent directors are central to RPT oversight because the audit committee under Section 177(2) must have a majority of independent directors, and listed entities need at least two-thirds independent directors on the audit committee under Regulation 18(1)(b). Their review helps the board test fairness, pricing support, and minority shareholder impact [Source: Section 177(2), Companies Act 2013; Regulation 18(1)(b), SEBI LODR].

Can a holding company enter RPTs with its subsidiary?

Yes, a holding company can transact with its subsidiary, but it must still test the arrangement under the Companies Act and, where relevant, SEBI LODR. Depending on the facts, exemptions may apply for ordinary-course arm's length transactions, certain wholly owned subsidiary situations, or listed-entity carve-outs under Regulation 23(5), but the company should document the reasoning before signing [Source: Explanation to Section 188(1), Companies Act 2013; Rule 15(3), Companies (Meetings of Board and its Powers) Rules, 2014; Regulation 23(5), SEBI LODR].

What is the difference between RPT rules for listed and unlisted companies?

Unlisted companies primarily follow the Companies Act route of Section 188, Section 184, Section 189, Rule 15, and AOC-2 disclosure. Listed entities have an added layer under Regulation 23, including audit committee approval for all RPTs, shareholder approval for material RPTs, material modification controls, and half-yearly disclosures to stock exchanges [Source: Section 188, Companies Act 2013; Section 184, Companies Act 2013; Section 189, Companies Act 2013; Regulation 23, SEBI LODR].

Are loans and guarantees to related parties covered under Section 188?

Not as a separate category. Section 188(1) does not list loans or guarantees among its seven transaction heads, so companies usually analyse such proposals under Section 185 and Section 186, while listed entities separately test whether the arrangement amounts to a related party transaction under SEBI LODR [Source: Section 188(1), Companies Act 2013; Section 185, Companies Act 2013; Section 186, Companies Act 2013; Regulation 23, SEBI LODR].

How does SEBI define a related party for listed companies?

SEBI uses a broader related party framework than the Companies Act and includes promoter group relationships, group entities, and other relationships captured in Regulation 2(1)(zb). Listed entities should therefore test every proposal under the LODR definition even if the Companies Act analysis appears narrower [Source: Regulation 2(1)(zb), SEBI LODR].

What documents are required for RPT board approval?

Boards usually review the draft contract, nature of relationship, material terms, monetary value, tenure, pricing basis, commercial rationale, and the interested director's disclosures before granting approval. These particulars align with the matters specified for the explanatory material under Rule 15(1), and the supporting file usually includes MBP-1, comparable quotations or benchmarking, and the proposed register entry under Section 189 [Source: Rule 15(1), Companies (Meetings of Board and its Powers) Rules, 2014; Section 184(1), Companies Act 2013; Section 189, Companies Act 2013].

Can RPTs be conducted through omnibus approval?

Yes. The audit committee may grant omnibus approval for repetitive transactions subject to the conditions laid down in Rule 6A, and listed entities also follow the framework in Regulation 23(3). The approval must define the related party, transaction type, value cap, and validity period, and unspecified transactions above the prescribed limit cannot be pushed through a generic approval [Source: Section 177(4)(iv), Companies Act 2013; Rule 6A, Companies (Meetings of Board and its Powers) Rules, 2014; Regulation 23(3), SEBI LODR].

What is the consequence of an interested director voting on an RPT?

If an interested director participates contrary to the applicable disclosure and participation rules, the company creates a challengeable approval record and should re-run the approval process with clean disclosures and a valid vote. Depending on the facts, the contract may also become vulnerable under Section 188(3) and the concerned individuals may face exposure under Section 188(5) [Source: Section 184(2), Companies Act 2013; Section 188(3), Companies Act 2013; Section 188(5), Companies Act 2013].

Tags:

Written by Dhanush Prabha

Dhanush Prabha is the Chief Technology Officer and Chief Marketing Officer at IncorpX, leading platform development, digital growth, and product strategy. With experience in full-stack development, scalable systems, SEO, and marketing automation, he focuses on building technology-driven solutions and educational business resources for startups and growing businesses. He writes on technology, entrepreneurship, business setup processes, and digital transformation.