How to Approve a Related Party Transaction — Section 188 Process

Approve a Related Party explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

To approve a related party transaction, obtain Audit Committee approval, place it before the Board where interested directors abstain, apply the arm's-length and ordinary-course test, take members' prior approval if Rule 15 thresholds are crossed, file MGT-14 for the special/board resolution, and disclose it in AOC-2 and the Board's report under Section 188.

Overview

A Related Party Transaction (RPT) is a contract or arrangement between a company and its related parties — directors, KMP, their relatives, holding/subsidiary/associate companies, or entities they control. Section 188 of the Companies Act, 2013, read with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, governs how such transactions must be approved and disclosed to prevent conflicts of interest.

When It Is Required & Legal Basis

Section 188 covers sale/purchase of goods or property, leasing, availing/rendering services, appointment of a related party to an office or place of profit, and underwriting the subscription of securities. Approval is not required where the transaction is in the ordinary course of business and on an arm's-length basis. If Rule 15 monetary thresholds (linked to turnover or net worth) are crossed, prior approval of members by resolution is additionally required, and related-party members cannot vote.

Step-by-Step Process

1. Identify the related party. Confirm the counterparty is a related party under Section 2(76) and the nature of the transaction under Section 188(1).
2. Audit Committee approval. Where an Audit Committee exists, obtain its prior approval (omnibus approval for repetitive dealings).
3. Board approval. Place the item before the Board; interested directors must not participate or vote and must disclose interest in MBP-1.
4. Apply thresholds. If Rule 15 limits are exceeded, seek members' prior approval by resolution.
5. File MGT-14. File the resolution with the ROC within 30 days where required.
6. Disclose. Record the transaction in Form AOC-2 and refer to it, with justification, in the Board's report.

Forms, Attachments & Fees

MGT-14 fees follow the capital-based slab (₹300–₹600 for most SMEs), with additional fees on delay.

Timeline & Due Dates

Approvals must be obtained before entering the transaction. MGT-14, where applicable, within 30 days of the resolution. AOC-2 is filed as part of the annual financial statements.

Penalty for Delay / Non-compliance

Under Section 188(5), a director or employee entering an unauthorised RPT in a listed company is punishable with a penalty of ₹25 lakh, and in any other company with ₹5 lakh. The company may also proceed against the defaulter to recover any loss caused by the transaction.

Practical Tips

• Maintain an updated register of related parties and their interests.
• Document the arm's-length justification with comparable pricing evidence.
• Use omnibus Audit Committee approvals for recurring transactions, reviewed at least annually.
• Never let an interested director sit through the discussion — record their exit in the minutes.

Related Services & Guides

• Corporate Compliance Services
• More Companies Act Guides