Related Party Transactions (RPTs) are one of the most scrutinised areas under the Companies Act, 2013. Section 188, read with Section 2(76) and Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, lays down detailed provisions to ensure transparency and prevent misuse of position.

Meaning of Related Party

As per Section 2(76), a Related Party includes:

• Directors and their relatives
• Key Managerial Personnel (KMP) and their relatives
• Firms/companies in which directors or KMP have interest or control
• Holding, subsidiary, and associate companies

Nature of Transactions Covered

Section 188 applies to the following transactions:

• Sale, purchase, or supply of goods or materials
• Selling or buying property
• Leasing of property
• Availing or rendering of services
• Appointment of agent
• Appointment to office/place of profit
• Underwriting of securities

Approval Requirements

1. Board Approval (Mandatory)

• All RPTs require prior approval of the Board by passing a resolution at a Board Meeting
• Interested directors must disclose interest under Section 184 and abstain from voting

2. Shareholder Approval (Special Resolution)

Required when transactions exceed thresholds prescribed under Rule 15:

• Sale/purchase of goods: 10% of turnover or ₹100 crore, whichever is lower
• Selling/buying property: 10% of net worth or ₹100 crore, whichever is lower
• Leasing of property: 10% of turnover or ₹100 crore, whichever is lower
• Availing/rendering services: 10% of turnover or ₹50 crore, whichever is lower
• Appointment to office/place of profit: ₹2.5 lakh per month
• Remuneration for underwriting: 1% of net worth

Note: Related parties cannot vote on such resolutions.

Exemptions

• Transactions in ordinary course of business and at arm’s length price do not require shareholder approval
• Transactions between holding and wholly-owned subsidiary (whose accounts are consolidated) are exempt from shareholder approval

Disclosure Requirements

• Disclosure of RPTs in Board’s Report (Section 134)
• Entry in Register of Contracts (Form MBP-4)
• Disclosure in financial statements as per Accounting Standards

Penal Provisions

• Listed Company: Penalty up to ₹25 lakh
• Other Companies: Penalty up to ₹5 lakh
• Contracts may be voidable at the option of the Board or shareholders

Practical Compliance Tips

• Obtain MBP-1 disclosures at the beginning of the financial year
• Pre-screen all transactions for RPT applicability
• Maintain proper documentation and justification for arm’s length pricing
• Monitor thresholds regularly

Conclusion

Section 188 compliance is essential for maintaining corporate governance and avoiding regulatory scrutiny. Companies must adopt a proactive approach in identifying and approving RPTs.

- CS Anand Acharya (Proprietor)