Related Party Transactions Compliance Under Companies Act 2013

Related party transactions (RPTs) rank among the most scrutinised corporate compliance areas under Indian company law. The Companies Act, 2013, combined with the Companies (Meetings of Board and its Powers) Rules, 2014, creates a multi-layered approval and disclosure framework designed to prevent self-dealing and protect minority shareholders. Every company registered in India, whether private, public, or listed, must comply with RPT regulations whenever it enters into a contract or arrangement with a director, KMP, holding company, subsidiary, or any other related party.

This guide breaks down the full RPT compliance process: identifying related parties, securing Board and shareholder approvals, maintaining statutory registers, filing mandatory forms, and handling Income Tax transfer pricing obligations. All section numbers, rule references, form numbers, and monetary thresholds cited here are current as of the financial year 2025-26.

Who Is a Related Party Under Section 2(76)?

Section 2(76) of the Companies Act, 2013, defines "related party" in relation to a company. The definition is broad and covers both natural persons and corporate entities connected to the company through directorship, management, shareholding, or familial relationships. Correctly identifying every related party is the first and most critical step in RPT compliance because a missed identification results in an unapproved transaction, which is voidable and attracts penalties.

Related Party refers to any person or entity that has a direct or indirect relationship with the company through ownership, control, directorship, or family connection, as enumerated under Section 2(76) of the Companies Act, 2013.

Complete List of Related Parties

The following persons and entities qualify as related parties of a company under Section 2(76):

1. Director or their relative -- Every director of the company and every person defined as a "relative" under Section 2(77) (spouse, father, mother, son, daughter, son's wife, daughter's husband, brother, sister)
2. Key Managerial Personnel (KMP) or their relative -- KMP includes the Managing Director, whole-time director, Chief Executive Officer, Chief Financial Officer, Compliance Professional, and manager as defined under Section 2(51)
3. Firm in which a director, manager, or their relative is a partner -- If any director or manager of the company (or their relative) is a partner in a partnership firm, that firm is a related party
4. Private company in which a director or manager is a member or director -- Any private company where the director or manager holds membership or directorship qualifies
5. Public company in which a director or manager is a director and holds 2%+ of paid-up share capital -- Both conditions (directorship and 2% shareholding) must be satisfied simultaneously
6. Body corporate whose Board of Directors, managing director, or manager acts on the advice, directions, or instructions of a director or manager -- This captures shadow directorship situations
7. Person on whose advice, directions, or instructions a director or manager of the company habitually acts -- Excludes advice given in a professional capacity (legal, accounting, or technical)
8. Holding company -- As defined under Section 2(46)
9. Subsidiary company -- As defined under Section 2(87)
10. Associate company -- As defined under Section 2(6), where the company has significant influence (20%+ of total voting power or control of business decisions)
11. Director or KMP of the holding company or their relative -- This extends the related party net to the parent company's management

Key Managerial Personnel (KMP) means the Managing Director, CEO, manager, whole-time director, CFO, and Compliance Professional of a company, as defined under Section 2(51) of the Companies Act, 2013.

Definition of "Relative" Under Section 2(77)

Section 2(77) defines "relative" with reference to any person as a member of that person's family. Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014, lists the following relationships:

• Father (including step-father)
• Mother (including step-mother)
• Son (including step-son)
• Son's wife
• Daughter
• Daughter's husband
• Brother (including step-brother)
• Sister (including step-sister)
• Spouse

This list is exhaustive, not illustrative. A director's uncle, cousin, grandparent, or in-law (other than son's wife and daughter's husband) does not qualify as a "relative" under the Companies Act, 2013, even though they would qualify under common understanding. Companies frequently make compliance errors by either over-including or under-including relatives.

Types of Transactions Covered Under Section 188

Section 188(1) of the Companies Act, 2013, lists seven categories of contracts or arrangements between a company and its related parties that require Board approval. These categories cover the full spectrum of commercial dealings between a company and its insiders.

Related Party Transaction (RPT) is any contract or arrangement entered into by a company with a related party, falling within any of the seven categories specified under Section 188(1) of the Companies Act, 2013.

Approval Framework: Board, Audit Committee, and Shareholders

RPT compliance under the Companies Act, 2013, operates through a three-tier approval framework. Every RPT must clear specific approval gates depending on the nature, value, and type of company involved. Skipping any tier makes the transaction voidable and exposes directors to personal penalties.

Tier 1: Audit Committee Prior Approval (Section 177)

Section 177(4)(iv) requires that every related party transaction receives prior approval from the Audit Committee before it is placed before the Board. The Audit Committee evaluates whether the transaction is in the company's interest, whether the pricing is at arms length, and whether there is any conflict of interest. For companies not required to constitute an Audit Committee (private companies with paid-up capital below ₹10 crore, turnover below ₹100 crore, and outstanding loans/borrowings below ₹50 crore), this tier does not apply.

Audit Committee is a committee of the Board of Directors constituted under Section 177 of the Companies Act, 2013, comprising at least 3 directors, two-thirds of whom must be independent directors, responsible for overseeing financial reporting, auditor independence, and related party transaction approvals.

Tier 2: Board Approval (Section 188 First Proviso)

The first proviso to Section 188(1) mandates that no company shall enter into any RPT listed under clauses (a) through (g) except with the consent of the Board given by a resolution at a duly convened Board meeting. This is a universal requirement: Board approval applies to every RPT regardless of the transaction value. The interested director must disclose their concern or interest under Section 184 and must abstain from participating in the discussion and voting on the resolution.

Tier 3: Shareholder Approval (Section 188 Second Proviso)

If the value of the RPT exceeds the materiality thresholds prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, the company must obtain approval from its shareholders through an ordinary resolution. The notice of the general meeting must include an explanatory statement under Section 102 disclosing all material facts. The related party, whether a member of the company or not, must not vote on the resolution.

Materiality Thresholds Under Rule 15

Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, defines the monetary thresholds beyond which shareholder approval is mandatory for RPTs. These thresholds are calculated against the company's audited financial figures (turnover, net worth) for the immediately preceding financial year.

An additional requirement applies to companies with paid-up share capital of ₹10 crore or more: such companies must pass an ordinary resolution for RPTs exceeding the thresholds above. For companies below ₹10 crore paid-up capital, the same thresholds apply, but the practical impact is that most small private companies have relatively lower turnover and net worth figures, making the 10% thresholds easier to cross.

Section 184: Disclosure of Interest by Directors

Section 184 of the Companies Act, 2013, creates the foundational disclosure requirement for directors. It operates independently of Section 188 and applies to every contract or arrangement in which a director has a personal interest, whether or not the contract falls within the seven categories of Section 188.

Section 184(1): General Disclosure

Every director must disclose the nature of their concern or interest in any company, body corporate, firm, or association of individuals at the first Board meeting they attend in each financial year, or at the first Board meeting after acquiring such interest. This disclosure is made through Form MBP-1. The disclosure covers all entities where the director has any interest, not just entities that are parties to current transactions.

Section 184(2): Specific Disclosure for Contracts

When a specific contract or arrangement with a related party is placed before the Board, the interested director must disclose the nature of their concern or interest in that particular contract at the meeting itself. After disclosure, the interested director must not participate in the discussion and must not vote on the resolution. The disclosure and abstention must be recorded in the minutes of the Board meeting.

Penalties for Non-Disclosure

A director who contravenes Section 184 faces imprisonment for a term extending up to 1 year, a fine ranging from ₹50,000 to ₹1,00,000, or both. The contract entered into without proper disclosure is voidable at the company's option. Repeated violations can lead to director disqualification under Section 164(1)(g) of the Companies Act, 2013.

Disclosure of Interest is the statutory requirement under Section 184 of the Companies Act, 2013, for directors to declare their personal, financial, or familial interest in any contract or arrangement being considered by the Board, ensuring transparency and preventing conflict of interest in corporate decision-making.

Form MBP-1: Annual Director Disclosure Process

Form MBP-1 (Disclosure of Concern or Interest by a Director) is the standardised format for directors to fulfil their Section 184(1) disclosure obligation. Every director of every company must file this form, making it one of the most universal compliance requirements under the Companies Act, 2013.

When to File MBP-1

• First Board meeting of each financial year -- Every director submits MBP-1 at the first Board meeting held in April or May (whichever comes first after 1 April)
• First Board meeting after joining -- A newly appointed director submits MBP-1 at the first Board meeting they attend after appointment
• When interest changes -- If a director acquires a new interest (joins a new company's Board, becomes a partner in a firm, or a relative starts a business), they must file a fresh MBP-1 at the next Board meeting

Contents of Form MBP-1

The form captures the following details for each entity in which the director holds a concern or interest:

• Name and CIN/Registration Number of the entity
• Nature of the entity (company, LLP, partnership firm, body corporate, association)
• Nature of concern or interest (director, member, partner, shareholder, proprietor)
• Shareholding percentage (if applicable)
• Date since when the interest was held

Filing and Record-Keeping

MBP-1 is not filed with the MCA or ROC. It is an internal company document. The director signs the form and submits it to the Compliance Professional or the Board. The form is preserved in the company's records alongside Board meeting minutes. The statutory auditor reviews MBP-1 disclosures during the annual audit to verify that all RPTs were entered into with proper prior disclosure.

Audit Committee: Composition, Powers, and Omnibus Approval

The Audit Committee acts as the first-line gatekeeper for related party transactions. Its approval is required before the Board considers any RPT. Section 177 of the Companies Act, 2013, and Rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014, define the composition, powers, and operating procedures of the Audit Committee for RPT purposes.

Composition Requirements

• Minimum 3 directors on the Audit Committee
• Two-thirds must be independent directors -- In a 3-member committee, at least 2 must be independent
• All members must be financially literate -- Ability to read and understand financial statements
• At least 1 member must have accounting or financial management expertise -- Professional qualification in accounting, finance, or audit
• The Chairperson of the Audit Committee must be an independent director

Companies Required to Constitute an Audit Committee

Under Section 177(1), the following companies must constitute an Audit Committee:

• Every listed public company
• Every public company with paid-up share capital of ₹10 crore or more
• Every public company with turnover of ₹100 crore or more
• Every public company with outstanding loans, debentures, or deposits exceeding ₹50 crore

Private companies are exempt from the Audit Committee requirement unless they fall under the threshold criteria applicable to public companies. Most small and medium private companies do not need an Audit Committee, and their RPT approvals go directly to the Board.

Omnibus Approval Framework

For repetitive or regular RPTs (monthly raw material purchases from a director's firm, ongoing service contracts with a related party), the Audit Committee can grant omnibus approval under Rule 6A. The omnibus approval must specify:

• Name of the related party and the nature of the relationship
• Type and nature of the transaction
• Period of the transaction (up to 1 financial year)
• Maximum value per transaction
• Aggregate maximum value for the financial year
• The basis for determining the arms length price

The Audit Committee reviews the actual transactions against the omnibus approval terms on a quarterly basis. Any transaction exceeding the approved limit requires fresh individual approval.

Arms Length Pricing and Transfer Pricing Obligations

The second proviso to Section 188(1) mandates that every RPT must be on an arms length basis. This requirement applies to all RPTs, regardless of whether they require shareholder approval. Additionally, the Income Tax Act, 1961, imposes transfer pricing obligations on specified domestic transactions with related parties.

Arms Length Price is the price at which two unrelated, independent parties would transact for comparable goods, services, or property in an open-market setting, ensuring that the transaction reflects fair market value without influence from the related party relationship.

Companies Act Requirement

Under the Companies Act, 2013, arms length pricing is a Board-level compliance matter. The Board must satisfy itself that the RPT is at a fair price. Supporting evidence includes:

• Quotations from 2-3 independent vendors for comparable goods or services
• Valuation report from a registered valuer for property transactions
• Market rate comparison for leasing arrangements
• Industry benchmarking data for service contracts
• Cost-plus margin analysis for manufacturing or supply transactions

Income Tax Transfer Pricing (Sections 92 to 92F)

The Income Tax Act, 1961, applies transfer pricing provisions to "specified domestic transactions" under Section 92BA read with Section 40A(2). If the aggregate value of specified domestic transactions with related parties exceeds ₹50 crore in a financial year, the company must:

1. Maintain transfer pricing documentation under Section 92D (description of the transaction, method used, comparable analysis, and price determination)
2. Obtain a transfer pricing audit report in Form 3CEB from a Tax Professional
3. File Form 3CEB on the Income Tax e-Filing portal by 31 October of the assessment year
4. Use one of the prescribed methods for determining the arms length price: Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), or Transactional Net Margin Method (TNMM)

Section 40A(2): Disallowance of Excessive Payments

Even where the ₹50 crore threshold is not breached, Section 40A(2) allows the Assessing Officer to disallow any expenditure incurred by a company in favour of a related party if the expenditure is considered excessive or unreasonable compared to the fair market value. The disallowed amount is added back to the company's taxable income, increasing the tax liability. Related parties under Section 40A(2)(b) include directors, partners, relatives of directors, and entities where directors hold substantial interest (20%+ voting power).

Register of Contracts: Section 189 and Form MBP-4

Section 189 of the Companies Act, 2013, mandates that every company maintain a Register of Contracts or Arrangements in which directors are interested. This register, maintained in Form MBP-4, is a permanent statutory record that captures every related party contract, every contract where a director has a personal interest, and every contract with a body corporate where a director holds 2% or more of the paid-up share capital.

Contents of Form MBP-4

• Date of the contract or arrangement
• Name of the party and relationship to the company
• Principal terms and conditions of the contract
• Names of directors interested in the contract
• Date on which the contract was approved by the Board
• Date on which the contract was approved by shareholders (if applicable)
• Date on which the contract was varied, modified, or terminated

Inspection Rights

Section 189(2) provides that the Register of Contracts shall be open for inspection by members during business hours at the registered office of the company. Any member can inspect the register by giving a reasonable notice. Extracts from the register are also available to members on payment of a prescribed fee. This transparency mechanism ensures that shareholders can monitor related party dealings and raise concerns at general meetings.

Penalty for Non-Maintenance

If a company fails to maintain the Register of Contracts as required under Section 189, the company and every officer in default are liable to a penalty. The company faces a penalty of ₹25,000 to ₹5 lakh, and every officer in default faces a penalty of ₹25,000 to ₹1 lakh. The statutory auditor flags the non-maintenance of the register in the audit report under CARO 2020 clause (xiii).

Board's Report Disclosure: Form AOC-2 and Section 134(3)(h)

Section 134(3)(h) of the Companies Act, 2013, requires the Board's Report to include particulars of contracts or arrangements with related parties referred to in Section 188(1). This disclosure is made in the prescribed Form AOC-2, which is annexed to the Board's Report filed with the ROC as part of the company's annual filing.

Structure of Form AOC-2

Form AOC-2 has two parts:

Part A: Transactions on Arms Length Basis

• Name of the related party and nature of relationship
• Nature of the contract or arrangement (sale, purchase, lease, service, etc.)
• Duration of the contract
• Salient terms of the contract including value
• Date of approval by the Board
• Amount paid as advance (if any)

Part B: Transactions Not on Arms Length Basis

• All details from Part A, plus:
• Justification for not transacting on arms length basis
• Approval date by the Board and shareholders
• Whether the transaction was modified or changed during the year

Form AOC-2 is signed by the Board of Directors (or authorised signatory) and annexed to the Board's Report. A nil AOC-2 is prepared even when no RPTs occurred during the year, confirming the absence of reportable transactions.

RPT Compliance: Private Limited vs Public vs Listed Companies

The intensity of RPT compliance varies significantly based on the company type. Private limited companies enjoy certain exemptions, while listed companies face the most stringent requirements due to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Material Related Party Transaction (Listed Companies) is defined under SEBI LODR Regulation 23 as any transaction with a related party where the value exceeds 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements.

Key Exemption for Private Companies

Section 188 has a specific carve-out for private companies: where all the members of the company are relatives of the promoter(s), the requirement to pass a special resolution for RPTs does not apply. This exemption covers family-owned private companies where the founding family holds 100% of the shares and all members are relatives under Section 2(77). Board approval remains mandatory even for these exempt private companies. The exemption does not extend to Audit Committee approval requirements where applicable.

Penalties and Consequences for RPT Non-Compliance

The Companies Act, 2013, imposes penalties on both the company's own directors and the directors of the related party entity. In addition to monetary fines, non-compliant RPTs are voidable, meaning they can be reversed or set aside, causing commercial disruption and financial loss.

Section 188(4): Penalty on the Company's Director

Any director of the company who enters into or authorises a contract or arrangement with a related party in contravention of Section 188 is liable to a fine of ₹25,000 to ₹5,00,000. The fine applies per contravention, meaning multiple unapproved RPTs can attract separate penalties. The director can also be required to indemnify the company for any loss arising from the transaction.

Section 188(5): Penalty on the Related Party's Director

Any director or any other employee of the related party entity who participated in or authorised the RPT knowing that the company had not obtained proper approval faces imprisonment for a term up to 1 year, a fine of ₹25,000 to ₹5,00,000, or both. This provision extends personal criminal liability to officers of the related party, not just the company entering into the RPT.

Voidability of Unapproved RPTs

Under Section 188(3), any RPT entered into without proper Board or shareholder approval is voidable at the option of the Board or shareholders, as the case requires. The Board can elect to ratify the transaction within 3 months from the date of the contract, but only if the terms are confirmed to be at arms length. If ratification is not done within 3 months, the interested director must indemnify the company against any loss.

Additional Consequences

• Audit qualification -- The statutory auditor reports unapproved RPTs in the audit report under CARO 2020 clause (xiii), creating a qualified or adverse audit opinion
• Director disqualification -- Repeated contravention of Section 184 (non-disclosure of interest) can lead to disqualification under Section 164
• ROC action -- The Registrar of Companies can initiate prosecution against directors for violations of Sections 184, 188, and 189
• Tax disallowance -- Under Section 40A(2) of the Income Tax Act, 1961, the Assessing Officer can disallow excessive or unreasonable payments made to related parties, increasing the company's tax liability

Step-by-Step RPT Compliance Process

Follow this 10-step process for every related party transaction to ensure full compliance under the Companies Act, 2013. The process applies to all company types, with additional steps for listed companies under SEBI LODR.

Step 1: Map Related Parties and Update the Master List

At the start of each financial year, prepare a comprehensive list of all related parties under Section 2(76). Include every director, KMP, and their relatives; every firm, private company, and public company where directors hold interest; and all holding, subsidiary, and associate companies. Circulate the list to the finance team, procurement team, and sales team so they can identify proposed transactions with related parties before contracts are executed.

Step 2: Collect MBP-1 Disclosures from All Directors

At the first Board meeting of the financial year (typically April or May), collect signed Form MBP-1 from every director. Compare the MBP-1 disclosures against the related party master list to ensure completeness. Any new interest not previously disclosed must trigger an immediate update. File all MBP-1 forms with the Compliance Professional's records.

Step 3: Identify the Proposed Transaction and Classify It

When a proposed transaction with a related party is identified, classify it under the appropriate category of Section 188(1): sale/purchase of goods (clause a), property sale/purchase (clause b), property lease (clause c), services (clause d), agent appointment (clause e), office of profit (clause f), or underwriting (clause g). Determine the estimated transaction value and identify the related party involved.

Step 4: Obtain Audit Committee Approval (If Applicable)

For companies with an Audit Committee, present the RPT details to the Committee for prior approval. Provide the Committee with the name and relationship of the related party, transaction description, estimated value, arms length justification, and business rationale. For regular or repetitive transactions, seek omnibus approval with defined limits. Record the Committee's approval in minutes.

Step 5: Obtain Board Approval

Place the RPT on the Board meeting agenda with full details. At the meeting, the interested director must disclose their interest under Section 184 and abstain from discussion and voting. Pass a Board resolution approving the RPT, recording the names of directors who voted for and against, and noting the interested director's abstention. The resolution must reference the Audit Committee's prior approval.

Step 6: Check Materiality Thresholds for Shareholder Approval

Calculate whether the RPT value exceeds the Rule 15 thresholds using the company's latest audited turnover and net worth figures. If the threshold is exceeded, convene a general meeting (EGM or the next AGM) and pass an ordinary resolution. Prepare the notice with an explanatory statement under Section 102. Exclude the interested related party from voting on the resolution. File Form MGT-14 within 30 days of the resolution.

Step 7: Execute the Transaction at Arms Length

Execute the RPT at the approved arms length price. Maintain documentation of the pricing basis: vendor quotations, valuation reports, market rate comparisons, or independent benchmarking reports. If the transaction value changes from the approved amount, assess whether fresh approval is needed (if the revised value exceeds the originally approved limit or the materiality threshold).

Step 8: Record in the Register of Contracts (Form MBP-4)

Enter the transaction details in the Register of Contracts maintained in Form MBP-4 under Section 189. Record the date, parties, terms, Board approval date, and shareholder approval date (if applicable). Update the register promptly after each RPT. Ensure the register is available for member inspection at the registered office.

Step 9: Prepare Form AOC-2 at Year End

At the close of the financial year, compile all RPTs into Form AOC-2. Classify each transaction into Part A (arms length) or Part B (not at arms length). Have the Board approve AOC-2 and annex it to the Board's Report filed with the ROC as part of the annual return package.

Step 10: Annual Audit Review

The statutory auditor reviews all RPT compliance as part of the annual audit. Under CARO 2020 clause (xiii), the auditor specifically reports whether the company has complied with Sections 177 and 188 and whether transactions are disclosed in the financial statements per AS-18 (or Ind AS 24 for Ind AS compliant companies). Cooperate with the auditor by providing the Related Party Master List, MBP-1 forms, Board minutes, Audit Committee minutes, Register of Contracts, and Form AOC-2.

Filing Requirements and Annual Compliance Calendar

RPT compliance generates specific filing obligations throughout the financial year. Missing these deadlines attracts penalties and creates audit qualifications. Here is the complete annual filing timeline for RPT compliance:

Form AOC-2 is the prescribed format under the Companies Act, 2013, for disclosing particulars of related party contracts and arrangements in the Board's Report, classified into arms length transactions (Part A) and non-arms length transactions (Part B).

Annual RPT Compliance Calendar

Income Tax Implications of Related Party Transactions

Beyond corporate law compliance, RPTs trigger specific provisions under the Income Tax Act, 1961. Companies must ensure that payments to related parties are both legally compliant under the Companies Act and tax-efficient under the Income Tax Act.

Section 40A(2): Disallowance of Excessive Payments

Section 40A(2)(a) provides that where a company incurs expenditure for which payment is made or is to be made to a "specified person" (related party), and the Assessing Officer considers the expenditure to be excessive or unreasonable having regard to the fair market value of the goods, services, or facilities, the AO can disallow the excess amount. The disallowed portion is added back to the company's income, increasing the tax liability.

Specified persons under Section 40A(2)(b) include:

• Directors of the company and their relatives
• Partners of the firm and their relatives
• Any person who has a substantial interest (20%+ of voting power) in the company
• Any company, firm, or HUF in which the first company's director or partner has a substantial interest

Transfer Pricing for Specified Domestic Transactions

Section 92BA (as effective from AY 2013-14 onwards) defines "specified domestic transactions" that attract transfer pricing provisions. For RPTs, the key provision is Section 40A(2)(b) transactions where the aggregate value exceeds ₹50 crore in a financial year. When this threshold is breached, the company must:

1. Maintain transfer pricing documentation under Section 92D
2. Determine the arms length price using one of the prescribed methods (CUP, RPM, CPM, PSM, or TNMM)
3. Obtain a Expert's certificate in Form 3CEB and file it by 31 October
4. Report the transactions in the Income Tax Return

The Transfer Pricing Officer (TPO) can make adjustments to the declared arms length price during assessment, potentially increasing the taxable income and attracting interest under Section 234B and penalty under Section 271(1)(c).

Common Compliance Mistakes and How to Avoid Them

Based on our experience handling RPT compliance for thousands of companies, these are the 10 most frequent errors that companies make, along with corrective actions:

1. Not collecting MBP-1 at the first Board meeting -- Schedule MBP-1 collection as a standing agenda item for the April Board meeting. Treat it as a non-negotiable compliance action.
2. Failing to update the related party master list -- Review and update the list at every Board meeting where directorship changes, KMP appointments, or shareholding changes are discussed.
3. Interested director voting on RPT resolutions -- The Compliance Professional must specifically record the interested director's disclosure, withdrawal from discussion, and abstention from voting in the Board minutes.
4. Not checking materiality thresholds -- Calculate thresholds at the start of each financial year using audited figures and compare every RPT against these limits before execution.
5. Missing Audit Committee approval for RPTs -- The Audit Committee must approve the RPT before it reaches the Board. Retrospective Audit Committee approval is not valid under Section 177.
6. Not maintaining the Register of Contracts -- Assign responsibility to the Compliance Professional to update Form MBP-4 within 7 calendar days of each RPT. Conduct quarterly reviews to ensure completeness.
7. Incomplete Form AOC-2 -- Review all Board meeting minutes, Audit Committee minutes, and the Register of Contracts at year-end to ensure every RPT is captured in AOC-2. Omitting an RPT from AOC-2 is a disclosure failure.
8. Not filing MGT-14 after shareholder resolution -- File MGT-14 within 30 calendar days of the resolution date. Late filing attracts additional fees on the MCA portal.
9. No arms length pricing documentation -- Maintain a pricing justification file for every RPT with vendor quotes, valuation reports, or market rate comparisons. The auditor and Income Tax AO both review this documentation.
10. Ignoring RPTs between subsidiaries and associates -- Transactions between a company's subsidiary and its associate are also RPTs. Map the full group structure and track inter-company transactions across all entities.

RPT Compliance for Specific Scenarios

Director Appointed to Office of Profit in a Subsidiary

When a director of the holding company (or their relative) is appointed to an office of profit in a subsidiary or associate company, it qualifies as an RPT under Section 188(1)(f). "Office of profit" is defined under Section 2(60) to include any position held in the company where the holder receives a salary, fee, commission, or other remuneration. If the monthly remuneration exceeds ₹2,50,000, shareholder approval is required. The Board must pass a resolution, and the appointment must be recorded in the Register of Contracts.

Lease of Property Between Company and Director

A common RPT scenario is the company leasing office or factory premises from a director or the director's relative. This falls under Section 188(1)(c). The lease rental must be at arms length, benchmarked against prevailing market rental rates for comparable properties in the same locality. If the annual rental value exceeds 10% of the company's net worth or 10% of turnover (whichever is lower), shareholder approval is required. The lease agreement, rental valuation, and Board resolution must be maintained.

Purchase of Goods from a Firm Where Director's Relative Is a Partner

If the company purchases raw materials or finished goods from a partnership firm where a director's son, daughter, or spouse is a partner, the firm is a related party under Section 2(76)(iv). The purchase falls under Section 188(1)(a). If the purchase value exceeds 10% of the company's turnover, shareholder approval is needed. The company must compare the purchase price with prices from at least 2-3 independent suppliers to establish the arms length basis.

Inter-Company Loans and Investments

While loans and investments between related companies are primarily governed by Section 185 (Loans to Directors) and Section 186 (Loans and Investments by Companies), they can also trigger RPT compliance under Section 188 if they involve availing or rendering of financial services. Interest rates on inter-company loans must be at arms length (aligned with RBI or market lending rates). The transaction must be recorded in the Register of Contracts and disclosed in Form AOC-2.

Role of the Compliance Professional in RPT Compliance

The Compliance Professional is the compliance anchor for related party transactions. In companies where a full-time Expert is appointed (mandatory for companies with paid-up share capital of ₹5 crore or more), the Expert manages the entire RPT compliance lifecycle. For smaller companies without a full-time Expert, a Compliance Professional in practice (CSP) handles these responsibilities on a retainer basis.

Key Responsibilities

• Preparing and maintaining the Related Party Master List
• Collecting and filing MBP-1 forms from all directors
• Drafting Audit Committee and Board agenda papers for RPT approvals
• Recording director disclosures, abstentions, and resolutions in Board minutes
• Maintaining the Register of Contracts in Form MBP-4
• Preparing Form AOC-2 for the Board's Report
• Filing Form MGT-14 on the MCA portal after shareholder resolutions
• Coordinating with the statutory auditor on RPT compliance review
• Advising the Board on materiality thresholds and approval requirements

For companies planning to register a new private limited company or appoint new directors, incorporating RPT compliance processes from incorporation prevents compliance gaps from accumulating in the early years.

SEBI Requirements for Listed Companies (Regulation 23)

Listed companies face additional RPT compliance requirements under Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. These requirements operate on top of the Companies Act provisions and are enforced by SEBI and stock exchanges.

Key SEBI RPT Requirements

• Prior Audit Committee approval for ALL RPTs -- Unlike the Companies Act, SEBI requires Audit Committee approval for every RPT, not just those exceeding thresholds
• Material RPT definition -- A transaction is material if it exceeds 10% of annual consolidated turnover of the listed entity (as per the last audited financial statements) or ₹1,000 crore, whichever is lower
• Shareholder approval for material RPTs -- Material RPTs require approval by ordinary resolution where related parties cannot vote
• Half-yearly reporting to stock exchanges -- Listed companies must disclose RPTs to stock exchanges on a half-yearly basis
• RPT policy -- Every listed company must adopt a policy on RPTs, approved by the Board and disclosed on the company's website
• Review by Audit Committee -- The Audit Committee must review all RPTs quarterly and determine the arms length nature of each transaction

Non-compliance with SEBI RPT requirements can result in penalties of up to ₹25 crore under the SEBI Act, show-cause notices from stock exchanges, and trading restrictions on the company's securities.

Practical Checklist for RPT Compliance

Use this checklist at the start of each financial year and before each RPT to ensure nothing is missed:

Annual Setup (April of Each Financial Year)

• ☐ Update the Related Party Master List with all Section 2(76) categories
• ☐ Collect Form MBP-1 from every director at the first Board meeting
• ☐ Calculate materiality thresholds using latest audited turnover and net worth
• ☐ Obtain omnibus approval from the Audit Committee for regular RPTs
• ☐ Circulate the related party list to finance, procurement, and sales teams
• ☐ Review and update the Register of Contracts (Form MBP-4)

Per-Transaction Checklist

• ☐ Identify the related party and the Section 188(1) category of the transaction
• ☐ Determine estimated transaction value and compare against materiality thresholds
• ☐ Obtain arms length pricing documentation (vendor quotes, valuation report, market rates)
• ☐ Obtain Audit Committee prior approval (if Audit Committee exists)
• ☐ Place the RPT on the Board meeting agenda with full details
• ☐ Record the interested director's disclosure and abstention in Board minutes
• ☐ Pass Board resolution approving the RPT
• ☐ If threshold exceeded: convene EGM/AGM, pass ordinary resolution, file MGT-14
• ☐ Execute the transaction and maintain all supporting documents
• ☐ Update the Register of Contracts (Form MBP-4) within 7 calendar days

Year-End Checklist

• ☐ Compile all RPTs from Board minutes, Audit Committee minutes, and accounts
• ☐ Prepare Form AOC-2 (Part A and Part B)
• ☐ Have the Board approve AOC-2 and include it in the Board's Report
• ☐ Verify all MGT-14 filings are complete for shareholder resolutions
• ☐ If transfer pricing applies: file Form 3CEB by 31 October
• ☐ Provide RPT compliance documents to the statutory auditor for CARO 2020 reporting

Related Resources

• Private Limited Company Annual Compliance -- Full ROC filing and Board meeting management including RPT disclosures
• ROC Annual Filing Service -- AOC-4, MGT-7, and AOC-2 filing for all company types
• Corporate Compliance Services -- Compliance Professional support for Board resolutions, registers, and SEBI compliance
• Compliance Health Check -- Comprehensive audit of your company's statutory compliance status
• Director Appointment Service -- DIN, DSC, and Board resolution for new director appointments
• Accounting and Bookkeeping Services -- Financial record maintenance, tax computation, and transfer pricing documentation
• Companies Act 2013 -- Full Text (MCA) -- Official text of the Companies Act on the Ministry of Corporate Affairs website
• Income Tax Act 1961 -- Transfer Pricing Provisions -- Official text of transfer pricing sections on the Income Tax India website

Summary

Related party transaction compliance under the Companies Act, 2013, requires companies to identify all related parties under Section 2(76), collect Form MBP-1 disclosures from directors at the start of every financial year, obtain prior Audit Committee approval under Section 177, pass Board resolutions with interested director abstention under Section 184 and Section 188, check materiality thresholds under Rule 15 for shareholder approval, execute transactions at arms length price, maintain the Register of Contracts in Form MBP-4 under Section 189, and prepare Form AOC-2 for the Board's Report under Section 134(3)(h). Non-compliance attracts fines of ₹25,000 to ₹5 lakh per director, imprisonment up to 1 year for the related party's directors, and voidability of the unapproved transaction. Companies with specified domestic transactions exceeding ₹50 crore must also comply with transfer pricing requirements under Sections 92 to 92F of the Income Tax Act, 1961, and file Form 3CEB. Building RPT compliance into the company's governance framework from the start prevents audit qualifications, regulatory penalties, and commercial disruption.