TL;DR
- Under section 188 of the Companies Act 2013, every related party contract of the seven listed kinds needs Board consent unless it is in the ordinary course of business and at arm's length, and shareholder approval is added once it reaches the Rule 15(3) thresholds, such as 10% or more of turnover for goods or services.
- A member who is a related party may not vote on the resolution.
Quick Answer: Under section 188 of the Companies Act 2013, a related party transaction needs shareholder approval once it reaches the Rule 15(3) thresholds. The main limit is 10% or more of turnover for goods, leasing or services, and 10% or more of net worth for property. Transactions in the ordinary course of business and at arm's length are exempt.
Section 188 works in two tiers. Every contract of the seven listed kinds with a related party, other than one in the ordinary course of business at arm's length, needs the consent of the Board, given by resolution at a Board meeting. Shareholder approval is added on top only where the transaction reaches a limit set in Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules 2014.
Section 188 at a glance
| Point | Position | Provision |
|---|---|---|
| Transactions covered | Seven kinds, from goods and property to underwriting | Section 188(1)(a) to (g) |
| Board consent | Required unless the ordinary course and arm's length exemption applies | Section 188(1) |
| Shareholder approval | Added at the Rule 15(3) thresholds | First proviso to section 188(1); Rule 15(3) |
| Main exemption | Ordinary course of business and at arm's length | Section 188(1) proviso |
| Voting bar | A member who is a related party may not vote | Section 188(1) second proviso |
| Annual disclosure | Board's report, in Form AOC-2 | Section 188(2); Rule 8(2), Companies (Accounts) Rules 2014 |
Which Related Party Transactions Need Shareholder Approval Under Section 188?
A covered transaction needs prior shareholder approval when it reaches the limit set in Rule 15(3) for its kind. The goods, property, leasing and services limits apply to a transaction alone or taken together with earlier transactions during the financial year.
What Are the Rule 15(3) Thresholds?
Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules 2014 sets the limits below, in the form last amended by G.S.R. 857(E) of 18 November 2019.
| Transaction under section 188(1) | Shareholder approval threshold under Rule 15(3) |
|---|---|
| (a) Sale, purchase or supply of goods or materials | 10% or more of turnover |
| (b) Selling, disposing of or buying property of any kind | 10% or more of net worth |
| (c) Leasing of property of any kind | 10% or more of turnover |
| (d) Availing or rendering of any services | 10% or more of turnover |
| (e) Appointment of an agent for purchase or sale | Counted within the goods, property or services limit, which each cover dealings made directly or through an agent |
| (f) Appointment to an office or place of profit | Monthly remuneration above ₹2,50,000 |
| (g) Underwriting the subscription of securities or derivatives | Remuneration above 1% of net worth |
Which Year's Turnover and Net Worth Apply?
Turnover and net worth are computed on the basis of the audited financial statements of the preceding financial year. Rule 15(3) is silent on a first year with no audited base.
How Does the 10% Turnover Limit Work in Practice?
Take a company whose audited turnover for 2025-26 was ₹300 crore, so its goods limit is ₹30 crore. It has already bought ₹28 crore of materials from a related party this year. A new ₹4 crore order takes the running total to ₹32 crore, so shareholder approval is needed before that order, unless the ordinary course and arm's length exemption applies.
Give that running total a named owner, such as the compliance officer, because several small contracts can cross a limit unnoticed.
Is Shareholder Approval Always Required Once the Thresholds Are Met?
No. Section 188(1) carves out two situations in which a transaction that crosses a Rule 15(3) limit still needs no shareholder approval.
How Does the Ordinary Course and Arm's Length Exemption Work?
A proviso to section 188(1) takes out transactions in the ordinary course of business, other than those that are not on an arm's length basis. Both limbs must therefore hold. The Explanation to the section defines an arm's length transaction as one conducted as if the parties were unrelated, so that there is no conflict of interest. Such a transaction needs neither Board consent nor shareholder approval under section 188, though a company required to have an audit committee still needs its approval under section 177(4)(iv).
A routine supply contract priced at a related party discount fails the second limb and stays inside section 188. Judgement on whether a price is at arm's length sits with the Board, supported where needed by advisory services on related party questions.
Does the Wholly Owned Subsidiary Exemption Remove Board Approval?
No. The proviso for transactions between a holding company and its wholly owned subsidiary removes only the requirement to pass the members' resolution. It applies where the subsidiary's accounts are consolidated with the holding company and placed before shareholders at the general meeting. Board consent is still required.
What Type of Resolution Is Required and Who May Not Vote?
Section 188 now asks only for a resolution of the members, so an ordinary resolution is sufficient. The Companies (Amendment) Act 2015 replaced the words "special resolution" in the first proviso to section 188(1) with "resolution", with effect from 29 May 2015.
Who May Not Vote on the Resolution?
Under the second proviso, no member may vote on the resolution if that member is a related party in relation to the contract. A further proviso, inserted by the Companies (Amendment) Act 2017 from 9 February 2018, lifts the bar for a company in which 90% or more of the members, in number, are relatives of promoters or related parties.
A private company is outside the voting bar altogether. Ministry of Corporate Affairs (MCA) notification G.S.R. 464(E) of 5 June 2015 disapplies the second proviso for private companies. Since G.S.R. 583(E) of 13 June 2017, that exemption holds only while the company has no default in filing its financial statements or annual return. Those two filings with the Registrar of Companies (ROC) sit within the annual ROC filings for a private limited company.
Who Must Leave the Board Discussion?
A director who is concerned or interested in the contract may not participate in the Board discussion or vote, under section 184(2) read with Rule 15(2). The Board agenda must disclose the name of the related party, the nature of the relationship and the material terms. G.S.R. 464(E) lets an interested director of a private company with no filing default participate under section 184(2) after disclosing the interest. It does not relax Rule 15(2), which keeps an interested director out of the discussion of a related party contract.
Who Is a Related Party Under Section 2(76)?
Section 2(76) of the Companies Act 2013 defines a related party by relationship to the company. The main categories are:
- a director or key managerial personnel, or a relative of either;
- a firm in which a director, manager or relative is a partner;
- a private company in which a director or manager or relative is a member or director;
- a public company in which a director or manager is a director and holds more than 2% of paid-up share capital with relatives;
- a holding, subsidiary or associate company, or a subsidiary of the holding company.
"Relative" is defined separately in section 2(77). For a private company with no filing default, G.S.R. 464(E) disapplies the holding, subsidiary and associate limb for section 188 purposes.
What Does the Audit Committee Approve Under Section 177?
Section 177(4)(iv) requires the audit committee to approve every related party transaction, and any later modification of one, in a company that must have an audit committee. The first proviso to section 177(4)(iv) lets the audit committee give omnibus approval for proposed related party transactions, subject to prescribed conditions.
How Is a Related Party Transaction Disclosed in Form AOC-2?
Section 188(2) requires every contract entered into under section 188(1) to be referred to in the Board's report with the justification for it. Rule 8(2) of the Companies (Accounts) Rules 2014 prescribes Form AOC-2 for that disclosure. Each such contract, other than goods or services contracts of ₹5 lakh or less a year (section 189(5)(a)), is also entered in the register of contracts in Form MBP-4 under section 189. As a yearly disclosure, it belongs on the secretarial and company-law compliance calendar.
What Happens If a Company Breaches Section 188?
The contract becomes voidable, and the directors and employees who authorised it face a penalty.
| Consequence | Position | Provision |
|---|---|---|
| Contract not approved or ratified | Voidable at the option of the Board or shareholders unless ratified within three months | Section 188(3) |
| Contract with a director's related party, or authorised by another director | The directors concerned must indemnify the company against any loss | Section 188(3) |
| Recovery of loss | The company may proceed against the director or employee responsible | Section 188(4) |
| Penalty, listed company | Fixed penalty of ₹25,00,000 on the director or employee who entered into or authorised the contract | Section 188(5), as amended from 21 December 2020 |
| Penalty, other company | Fixed penalty of ₹5,00,000 on the director or employee who entered into or authorised the contract | Section 188(5), as amended from 21 December 2020 |
What Extra Rules Do Listed Companies Follow on Related Party Transactions?
Section 188 still applies, but a listed company also answers to Regulation 23 of the Securities and Exchange Board of India (SEBI) Listing Regulations, which uses its own materiality test in Schedule XII. It requires prior audit committee approval for related party transactions, with limited exceptions such as ratification of transactions up to ₹1 crore a year.
SEBI's industry standards on information for related party transaction approvals, first applied by circular of 26 June 2025 and since revised, set what the audit committee and shareholders must be shown. The current Regulation 23 changes are tracked in the SEBI LODR amendments 2026 tracker. Do not treat the Regulation 23 test as the section 188 test.
How Are Related Party Transactions Tracked Across a Group?
The difficulty is aggregation. A related party list that changes with every new director, and limits that apply to transactions taken together over a year, are hard to follow on a spreadsheet. A compliance management platform can hold the section 188 obligations for each entity, with the approval steps, owners and evidence in one place, so Board and audit committee approvals are tracked before the next contract is signed.
LexComply does not approve or file anything. The Board, the audit committee and the shareholders approve, and the Registrar receives the filings. To see how your related party register would sit there, contact LexComply.
Common Mistakes to Avoid
- Measuring each transaction alone. The goods, property, leasing and services limits in Rule 15(3) apply to a transaction taken individually or together with earlier transactions in the financial year, so a series of small contracts can cross the 10% limit.
- Reading "or more" as "exceeding". The goods, property, leasing and services limits in Rule 15(3) apply at 10% or more, so a transaction at exactly 10% of turnover needs approval.
- Treating ordinary course alone as enough. The section 188(1) exemption needs ordinary course of business and arm's length pricing together.
- Treating a special resolution as mandatory. Since 29 May 2015, the first proviso to section 188(1) needs only a resolution of the members.
- Using the wholly owned subsidiary proviso to skip the Board. It removes shareholder approval only, and Board consent under section 188(1) still applies.
- Applying the voting bar to every private company. G.S.R. 464(E) of 5 June 2015 disapplies the second proviso to section 188(1) for a private company, but only while it has no default in filing financial statements or annual returns.
Legal Disclaimer
This article is general information on Indian company law, current as at the date shown above. It is not legal advice and does not take account of any particular company's facts. Obtain professional advice before acting on any position described here.