Section 188 of the Companies Act, 2013
Section 188 of the Companies Act, 2013 deals with related party transactions (RPTs) — i.e., transactions between a company and its related parties, which might pose a conflict of interest.
✅ Section 188 – Related Party Transactions
🔍 What It Covers:
A company cannot enter into certain contracts or arrangements with a related party unless they are approved by the Board of Directors (and in some cases, by shareholders).
✅ Covered Transactions (with a related party):
A company needs Board approval for:
Sale, purchase or supply of any goods or materials.
Selling or otherwise disposing of, or buying, property of any kind.
Leasing of property of any kind.
Availing or rendering of any services.
Appointment of any agent for the above transactions.
Appointment of a related party to any office or place of profit in the company, its subsidiary or associate.
Underwriting the subscription of any securities or derivatives of the company.
🧑⚖️ Who is a Related Party?
Defined under Section 2(76) and includes:
Directors and their relatives
Key managerial personnel
Firms/companies where directors/KMPs or their relatives have significant interest or control
📋 Approvals Required:
| Transaction Type | Value Threshold | Approval Needed |
|---|---|---|
| Within prescribed limits | As per Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014 | Board resolution |
| Exceeds threshold | >10% of turnover or net worth (or as prescribed) | Prior shareholders' approval via ordinary resolution (if not exempt) |
📌 Note: No shareholder approval is needed for transactions with a wholly-owned subsidiary, in some cases.
🛑 Restrictions:
Interested directors must not participate in the Board meeting where such matters are discussed.
For private companies, some exemptions are available (as per notification).
⚠️ Penalties:
Listed Company:
Company: Penalty of ₹25 lakh
Director/employee involved: ₹5 lakh
Other Companies:
Party involved may be fined up to ₹5 lakh
📌 Example:
If a company wants to sell goods to a firm where one of its directors is a partner, this is a related party transaction and must be approved as per Section 188.
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