Related Party Transactions: Governance And Compliance Under The Companies Act, 2013

Related party transactions are ordinary business arrangements with an extraordinary capacity for misuse. A company may buy goods from a promoter-controlled entity, lease office space from a director partnership firm, or appoint a relative of a key managerial person to a position caring for financial benefit. None of this is automatically suspect. The expression ‘related party’ is defined in section 2(76) of the Companies Act, 2013 it extends beyond directors and key managerial personnel and includes their relatives, firms In which such person are partners, Private companies in which they are members or directors, certain public companies, holding companies, subsidiaries, associate companies, and other bodies corporate connected through control or influence. A transaction with a related party is subject to section 188, if it falls under any of the following seven categories: (a) Sale, purchase, or supply of any goods or materials, (b) Selling, disposing of, or buying property of any kind, ©  Leasing of property of any kind, (d)  Availing or rendering of any services, (e) Appointment of any agent or purchase or sale of goods, materials, services, or property, (f)  Appointment of a related party to any office or place of profit in the company, Its subsidiary or associate company, (g)  Underwriting the subscription of any securities or derivatives thereof of the company. The third proviso to section 188(1) Provides the most important exemption in the entire RPT framework. A transaction with a related party is completely exempt from all requirements of section 188 if it satisfy both of the following condition which are:  Transaction must be in the ordinary course of the company business i.e, it is part of the usual, regular, and today business activity of the company not a one of or extraordinary transaction And secondly transaction must be on an arm’s-length basis which means it is conducted as if the parties were unrelated strangers dealing at fair market value, with no conflict of interest in tracing the terms.

The civil consequences that usually attend contraventions of section 188 include the viability of the transaction at the option of the company, restitution of undue gains, monetary penalty, and accountability for disqualification.Civil liability in relation to related party transactions most usually arises when statutory approval or disclosure requirements are contravened without any criminal intent and such matters are more often disposed of by adjudication orders under section 454 of the Companies Act, 2013. Transaction structured to siphon funds, Concealed beneficial ownership, or mislaid shareholders may attract prosecution under fraud related provisions of the companies act.

Under section 188, Circular resolutions are not sufficient and the approval must be given at a physical or video conference board meeting. Further, no related party director may participate or vote in the boat resolution approving a transaction in which they are interested; this is mandated by section 184(2) read with section 188. In addition to board approval, certain high value RPTs require prior approval of shareholders by way of an ordinary resolution at a general meeting as per rule 15(3) of the Companies Rules, 2014. And any member of the company who is a related party to the transaction shall not vote on the resolution approving such transaction. If a contract or arrangement is entered into without obtaining prior board shareholder approval the transaction must be ratified by the board or shareholders within three months from the date of entering into the contract. If not ratified within this period, the contract or arrangement shall be voidable at the option of the board.

Additionally, If the transaction was entered into by a director or authorised by a director, The director shall be liable to indemnify the company for any loss arising there from. Listed companies must also obtain prior approval of the Audit Committee for all RPTs irrespective of the value as per the regulation 23 of the SEBI Regulations, 2015. As per section 189 every company must maintain a register of contracts or arrangements in which directors are interested to inform MBP-4. This register must obtain full particulars of every RPT entered into by the company under section 188. Every company that enters into RPTs During a financial year must disclose particulars of all such contracts and arrangements in the board report in the prescribed format- Form AOC-2 ( As per section 134(3)(h) read with rule 8(2) Of Companies Rules, 2014) and such disclosure must include name of the related parties and nature of relationship, nature ,duration and salient terms of the contract, justification for entering into the transaction, date of approval by the board, amount paid as advances if any, and date of special resolution if applicable. Irrespective of whether section 188 applies, Companies are required to disclose RPTs. In their financial statements as per Accounting Standard 18 (AS 18) for non-ind AS companies, Or Indian Accounting Standard 24 for Ind AS companies. For listed companies, RPT compliance goes significantly beyond the companies act. SEBI’s Regulation 23 of the LODR regulations, 2015 overlays a stricter and more detailed framework on top of section 188 and listed companies must comply with both regimes simultaneously. Under regulation 23(1) Of the LODR regulations, an RPT is considered material and requires shareholder approval if its aggregate value in a financial year exceeds the prescribed materiality threshold and in its board meeting of 12 September 2025, SEBI approved a shift to scale-based threshold for determining material RPTs. The absolute threshold for shareholder approval is proposed to be doubled to ₹2000 crore, with a scalar increase up to ₹5000 crore for larger companies. This is expected to reduce the number of materials RPTs requiring shareholder approval by approximately 60% and a significant ease of compliance for large listed companies. Two independent directors shall be appointed by the audit committee. For approval and regulation of all RPT’s.Nomination and remuneration, Stakeholder relationship, and risk management committee must be consulted for high value RPTs and material RPTs Entered into by unlisted material subsidiaries require review by the parent listed entities audit committee. Listed companies must disclose all material RPTs to the relevant stock exchanges within the timelines prescribed and regulation 30 of the LODR regulations. The disclosure must include the names of the parties, Nature of the transaction, Value, And the approvals obtained. This disclosure must also be made in the half yearly results and the annual report. Under section 188(4) Of the companies act, A company that enters into a contract or arrangement in contravention of section 188 is labelled to a fine ranging from ₹25,000 to ₹5,00,000 as substituted by the company’s amendment act, 2000. Any director or employee who authorise or enters into NRPT in contravention of section 188 is liable to a fine ranging from ₹25,000 to ₹5,00,000, Indemnify the company against any loss suffered as a result of the transaction and B proceeded against by the company under section 188(4) for recovery of losses.

I conclude that in an environment of increasing regulatory scrutiny, Boards must move beyond formalistic compliance and adopt informed well documented decision-making processes. Every company from a small private limited company run by family members to a large listed company is likely to have related party transactions and getting the compliance right is not a legal obligation but it is a hallmark of good corporate governance and a signal of trustworthiness to investors,  Creditors, And regulators.