Related Party Transactions: Compliance, Approval and Disclosure Requirements

Almost every private limited company in India transacts with its own inner circle. Office space taken from a promoter, raw material bought from a director’s brother’s firm, a management fee paid to a group company, a relative appointed as general manager. These are all related party transactions, and the Companies Act, 2013 treats them as a governance risk rather than routine business, because the same people sit on both sides of the table.

Related party transactions are governed mainly by Section 188 of the Companies Act, 2013 read with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, supported by Section 2(76), Section 177, Section 184 and Section 189. Section 188 does not prohibit these transactions. It requires them to be approved in the correct sequence, priced fairly and disclosed openly. This guide covers who is a related party under Section 2(76), which transactions need a board resolution and which also need shareholder approval, the Rule 15(3) thresholds, and exactly what must be disclosed in Form AOC-2, the MBP-4 register and your financial statements.

Get the sequence wrong and the consequences are personal, not just procedural: the contract becomes voidable, the director who authorised it can be asked to indemnify the company, and a penalty of up to ₹25 lakh applies under Section 188(5).

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

A related party transaction, or RPT, is a contract or arrangement between a company and a person or entity connected to it through control, management or family, as defined in Section 2(76). The concern the law is addressing is simple: an insider can use the company’s money to buy overpriced goods from his own firm, or sell company property to a relative at a discount, and no outside shareholder would ever know. The approval and disclosure framework exists to make that visible.

Who is a related party under Section 2(76)?

• A director of the company, or a relative of a director
• A key managerial personnel (KMP), or a relative of a KMP
• A firm in which a director, manager or their relative is a partner
• A private company in which a director, manager or their relative is a member or director
• A public company in which a director or manager is a director and holds, along with relatives, more than 2% of its paid-up share capital
• A body corporate whose board, managing director or manager is accustomed to act on the directions of a director or manager of the company
• Any person on whose advice, directions or instructions a director or manager is accustomed to act, other than advice given in a professional capacity
• A holding, subsidiary or associate company, and any fellow subsidiary of the same holding company
• An investing company or the venturer of the company
• A director (other than an independent director) or KMP of the holding company, or their relative

For most private limited companies the fourth entry does the heavy lifting. Any other private company that shares even one common director or one common member is a related party, which is why promoter groups running three or four companies find that nearly every intra-group invoice falls inside the net.

Who counts as a relative under Section 2(77)?

Relative is a closed list. It covers members of a Hindu Undivided Family, spouse, father (including step-father), mother (including step-mother), son (including step-son), son’s wife, daughter, daughter’s husband, brother (including step-brother) and sister (including step-sister). Cousins, nephews, nieces, uncles and in-laws outside that list are not relatives for Companies Act purposes, although accounting standards and SEBI rules apply wider tests based on control and significant influence.

Which transactions does Section 188 cover?

Section 188(1) applies to seven categories of contracts or arrangements with a related party:

1. Sale, purchase or supply of any goods or materials
2. Selling or otherwise disposing of, or buying, property of any kind
3. Leasing of property of any kind
4. Availing or rendering of any services
5. Appointment of any agent for purchase or sale of goods, materials, services or property
6. Appointment of a related party to any office or place of profit in the company, its subsidiary or its associate company
7. Underwriting the subscription of any securities or derivatives of the company

This is a closed list. Loans, guarantees and security given to directors are governed by Section 185, loans and investments in other bodies corporate by Section 186, and managerial remuneration by Sections 196 and 197. Those transactions still show up as related party disclosures in the notes to accounts, but they do not travel through the Section 188 approval route.

The approval chain: audit committee, board, shareholders

Step 1: Audit committee approval, where a committee exists

Under Section 177(4)(iv), every related party transaction requires prior approval of the audit committee. This applies only to companies that must constitute one: every listed public company, and every public company with paid-up capital of ₹10 crore or more, turnover of ₹100 crore or more, or aggregate outstanding loans, debentures and deposits above ₹50 crore. Private companies fall outside this requirement.

The committee can grant omnibus approval for repetitive transactions under Rule 6A, valid for one financial year, subject to criteria the committee lays down and a ceiling of ₹1 crore per unforeseen transaction. Where a transaction not covered by Section 188 and not exceeding ₹1 crore is entered into without committee approval, it must be ratified within three months or it becomes voidable at the option of the committee.

Step 2: Prior consent of the Board at a meeting

Section 188 requires consent of the Board given by a resolution passed at a meeting of the Board. A resolution by circulation is not valid for this purpose. The agenda for that meeting must, under Rule 15(1), set out the name of the related party and nature of relationship, the nature, duration and particulars of the contract, the material terms and monetary value, any advance paid, the manner of determining the pricing, and whether all factors relevant to the contract have been considered.

An interested director must disclose his interest in Form MBP-1 and, under Section 184(2), must not participate in the discussion or vote on that item. Private companies have a relaxation here: an interested director may participate after disclosing his interest, and the minutes should record that disclosure.

Step 3: Shareholder approval when the Rule 15(3) limits are crossed

Where the transaction exceeds the limits below, prior approval of members by an ordinary resolution is required in addition to board approval. The Companies (Amendment) Act, 2015 replaced the earlier special resolution requirement with an ordinary resolution.

Transaction under Section 188(1)	Members’ approval needed when it is
Sale, purchase or supply of goods or materials, directly or through an agent	10% or more of turnover
Selling, disposing of or buying property of any kind, directly or through an agent	10% or more of net worth
Leasing of property of any kind	10% or more of turnover
Availing or rendering of services, directly or through an agent	10% or more of turnover
Appointment to any office or place of profit in the company, subsidiary or associate	Monthly remuneration above ₹2.5 lakh
Underwriting the subscription of securities or derivatives	Remuneration above 1% of net worth

Two points are missed regularly. First, the limits apply to transactions taken together with previous transactions with the same party during the same financial year, not to each invoice in isolation. Second, a member who is a related party cannot vote on the resolution, so a promoter-heavy company may find the resolution impossible to carry unless an exemption applies.

Ordinary course of business and arm’s length: the exemption everyone relies on

The fourth proviso to Section 188(1) is the most used provision in the whole section. Nothing in Section 188(1) applies to transactions entered into by the company in its ordinary course of business, other than transactions that are not on an arm’s length basis. In other words, if a transaction is both in the ordinary course of business and at arm’s length, no board resolution under Section 188 and no members’ resolution is required.

The catch is that the burden of proving both limbs sits with the company. Arm’s length means a transaction between two parties conducted as if they were unrelated, with no conflict of interest. Ordinary course of business is not defined at all, and is tested against the main objects in the memorandum, the company’s actual trading history and the frequency of similar transactions.

Build the evidence file at the time of the transaction, not during the audit. Keep at least two comparable third-party quotations, a rate card or published price list, a transfer pricing study or valuation report for property and high-value deals, a written agreement, and board minutes that record how pricing was arrived at. Where the file is thin, take board approval anyway. Approving a transaction that did not require approval costs nothing, while skipping approval that was required is expensive.

Exemptions and relaxations worth knowing

• Holding and wholly owned subsidiary: members’ approval is not required for transactions between a holding company and its wholly owned subsidiary whose accounts are consolidated and placed before shareholders for approval.
• Closely held companies: the bar on a related party member voting does not apply where 90% or more of the members, in number, are relatives of promoters or are related parties.
• Private companies: by the MCA exemption notification of 5 June 2015, an interested member may vote on the resolution, and an interested director may participate in the board meeting after disclosing his interest.
• Small value contracts: entries in the MBP-4 register are not required for sale, purchase or supply of goods, materials or services where the value does not exceed ₹5 lakh in aggregate in a year.

Disclosure requirements for related party transactions

Approval is only half the job. Four separate disclosures follow, and they are the ones auditors and ROC scrutiny actually test. They form part of the wider annual compliance for a private limited company, so they need to be planned alongside the year-end filings rather than assembled at the last minute.

Form MBP-1: disclosure of interest by directors

Under Section 184(1), every director gives a notice of his interest in other companies, firms and bodies corporate in Form MBP-1 at the first board meeting of every financial year, and again whenever there is a change. MBP-1 is the master list from which the company identifies its related parties, so a stale MBP-1 usually means missed RPTs.

Form MBP-4: register of contracts and arrangements

Section 189 requires a register in Form MBP-4 of all contracts in which directors are interested and all contracts under Section 188. Entries must be made within seven days of board approval, the register is placed before the next board meeting and signed by the directors present, and it is kept at the registered office and open to inspection by members.

Form AOC-2 in the Board’s Report

Section 134(3)(h) read with Rule 8(2) of the Companies (Accounts) Rules, 2014 requires particulars of contracts with related parties to be given in Form AOC-2 as part of the Board’s Report. AOC-2 has two parts: contracts or arrangements not at arm’s length, and material contracts or arrangements at arm’s length. The Board’s Report and AOC-2 are then filed with the ROC as an attachment to Form AOC-4, alongside the annual return in MGT-7 or MGT-7A.

If there were no such contracts during the year, AOC-2 is still attached with a nil declaration. Leaving it out entirely is the single most common defect ROC officers pick up in the Board’s Report.

Notes to accounts under AS 18 or Ind AS 24

Accounting disclosure is wider than Section 188. AS 18, or Ind AS 24 for companies applying Ind AS, requires the name of the related party, the nature of the relationship, the volume of transactions, outstanding balances, provisions for doubtful debts and amounts written off, along with key management personnel compensation. A transaction can be fully exempt from Section 188 as an arm’s length transaction in the ordinary course of business and still require disclosure in the notes.

Related party transactions under GST and income tax

The Companies Act is not the only law watching, and every entity in the group holding a GST registration is affected. Under Schedule I of the CGST Act, a supply of goods or services between related persons or distinct persons in the course of business is taxable even without consideration, and valuation follows Rule 28 rather than the invoice value. Group companies sharing premises, staff or a corporate guarantee are exactly the cases that get picked up in departmental audits.

On the income tax side, Section 40A(2)(b) allows an assessing officer to disallow the excessive or unreasonable part of any payment made to a specified person, which broadly mirrors the related party list. The practical consequence is that the same benchmarking file supports your arm’s length position under all three laws.

What changed for listed companies: SEBI LODR Fifth Amendment, 2025

Listed entities follow a stricter regime under Regulation 23 of the SEBI (LODR) Regulations, 2015. Every RPT needs prior approval of the audit committee regardless of value, and material RPTs need prior approval of shareholders, with no related party permitted to vote on the resolution.

The SEBI (LODR) (Fifth Amendment) Regulations, 2025, notified on 19 November 2025 with the RPT changes taking effect from 19 December 2025, replaced the flat test of ₹1,000 crore or 10% of consolidated turnover, whichever is lower, with a slab-based scale. Materiality is now 10% of consolidated turnover for entities up to ₹20,000 crore turnover, ₹2,000 crore plus 5% of the excess for turnover between ₹20,000 crore and ₹40,000 crore, and ₹3,000 crore plus 2.5% of the excess above ₹40,000 crore, subject to an overall ceiling of ₹5,000 crore. The amendment also extended the listed entity’s audit committee oversight to certain transactions of subsidiaries above ₹1 crore where the listed entity itself is not a party. Listed companies should refresh their RPT policy and materiality matrix to match.

What happens if you get it wrong

Under Section 188(3), a contract entered into without the required consent, and not ratified by the Board or by members within three months, is voidable at the option of the Board or the shareholders. If the contract was with a related party of a director, or was authorised by a director, that director must indemnify the company against any loss, and the company can proceed against him to recover it.

Section 188(5) imposes a penalty on the director or employee concerned: ₹25 lakh in the case of a listed company and ₹5 lakh in the case of any other company. Add to that qualification in the audit report, adverse remarks in the secretarial audit report where applicable, and the practical difficulty of explaining unapproved insider dealings during due diligence for a loan or an investment.

Where past Board’s Reports omitted AOC-2 or annual filings were never completed, the cleanest fix is to file the pending documents while a settlement window is open. The CCFS 2026 window, open until 31 August 2026, allows pending ROC annual filings to be cleared at a fraction of the usual additional fees.

A practical RPT checklist for FY 2025-26

• Collect fresh MBP-1 declarations from every director at the first board meeting of the year and build a master related party list from them.
• Tag related party ledgers in the accounting software so year-to-date values against each party are visible at any time.
• Compute 10% of last year’s audited turnover and net worth once, and treat those two numbers as trigger points for the year.
• Take board approval before the transaction, with the full Rule 15(1) particulars in the agenda, and take members’ approval before crossing a limit rather than after.
• File the arm’s length evidence, quotations, rate cards or valuation reports, in the same folder as the minutes.
• Update the MBP-4 register within seven days of every approval.
• Reconcile AOC-2, the MBP-4 register and the AS 18 note before the accounts are signed, so all three tell the same story — a periodic secretarial audit is the cleanest way to catch a mismatch.
• Map these steps against your ROC compliance calendar so approvals are dated before the transaction, not backdated after it.

Frequently asked questions

Does a private limited company need shareholder approval for related party transactions?

Yes, if the transaction crosses the Rule 15(3) limits and is not in the ordinary course of business at arm’s length. Private companies are not exempt from Section 188 itself. What they get is the relaxation that a related party member may still vote on the resolution and an interested director may participate in the board meeting after disclosing his interest.

Can a Section 188 resolution be passed by circulation?

No. Section 188 specifically requires consent of the Board given by a resolution at a meeting of the Board. Approval by circulation for a related party transaction is not valid and will be treated as no approval at all.

Is director remuneration a related party transaction?

Remuneration to a director as a director is governed by Sections 196 and 197, not Section 188. However, appointing a related party to an office or place of profit in the company, its subsidiary or its associate is covered by Section 188, and needs members’ approval where monthly remuneration exceeds ₹2.5 lakh. All director and KMP compensation is separately disclosed under AS 18 or Ind AS 24.

Do arm’s length transactions need to be reported anywhere?

Yes. Being exempt from approval is not the same as being exempt from disclosure. Material contracts at arm’s length go into Part B of Form AOC-2, and all related party transactions go into the notes to accounts under AS 18 or Ind AS 24 regardless of pricing.

What if a transaction was entered into without approval?

Ratify it at a board meeting or general meeting within three months of the transaction. If it is not ratified in that window, the contract becomes voidable at the option of the Board or the shareholders, and the director concerned may be required to indemnify the company for any loss suffered. Where several years of approvals and filings were missed, our ROC compliance recovery service reconstructs the record year by year.

Is Form AOC-2 required if there were no related party transactions?

Attach AOC-2 with a nil entry rather than omitting it. A signed nil AOC-2 records that the Board applied its mind to the question, while a missing annexure looks like an oversight and invites a query.

Making related party transactions audit-proof

Related party compliance rarely fails because a company deliberately hid something. It fails because MBP-1 declarations were never refreshed, nobody tracked cumulative values against the 10% trigger, and AOC-2 was drafted in a hurry the week the accounts were signed. Every one of those is a calendar problem, not a legal problem.

Fix the sequence and the rest follows: identify related parties in April, set the trigger numbers from the audited figures, approve before you transact, document the pricing, record it in MBP-4 within seven days, and reconcile AOC-2 with the notes before signing. Do that and the file stands up to any auditor, lender or acquirer who asks.

If you would like this handled end to end, ComplyV manages related party documentation, board and general meeting approvals, AOC-2 preparation and the full annual compliance cycle for private limited companies, and LLP annual compliance where the group includes an LLP. Write to us and we will map your group structure and flag the transactions that need approval this year.