Related Party Transactions Section 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.
Section 188 of the Companies Act 2013 regulates transactions between a company and its related parties to prevent self-dealing and protect minority shareholders. All RPTs above prescribed thresholds require prior board/shareholder approval, and details must be disclosed in the financial statements.
Who are "Related Parties"?
- Directors and KMPs of the company and their relatives
- Holding, subsidiary, associate companies and their subsidiaries
- Entities in which a director/KMP/relative holds 2%+ shares
- Entities in which a director/KMP is a partner, director, or director
- Private companies in which director/KMP is a member
Transactions Covered Under Section 188
- Sale/purchase/supply of goods or materials
- Sale, purchase, or lease of property
- Rendering or availing of any services
- Appointment of related party as agent
- Related party's appointment to any office/place of profit
- Underwriting of subscription to securities/derivatives
Approval Requirements
| Transaction Value | Approval Required |
|---|---|
| Below threshold (varies by transaction type) | Board approval (consent of directors present) |
| At/above threshold (e.g., goods/services >10% of turnover or Rs.100Cr) | Ordinary resolution of shareholders (interested shareholders cannot vote) |
| Listed companies (all material RPTs) | Shareholder approval via ordinary resolution + SEBI LODR disclosures |
Form AOC-2
Details of all RPTs not at arm's length basis or RPTs above prescribed thresholds must be disclosed in Form AOC-2, which is annexed to the Board's Report in the Annual Report.
Penalty for Violation
- Ratification not obtained: Penalty for each party = lower of Rs. 25 lakh or 5% of annual turnover
- No ratification after 3 months: Voidable at option of Board/affected party
- Director/KMP in default: Penalty of up to Rs. 5 lakh
Arm's Length Standard
RPTs are not automatically prohibited — they are valid if conducted at arm's length (i.e., on terms that would be agreed between unrelated parties). Companies should document arm's length pricing to protect themselves during scrutiny. Audit Committee must review and recommend all material RPTs before board approval.
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Key Facts About Related Party Transactions Section
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
Which companies must comply with Section 188 RPT rules?
All companies — public and private. Listed companies have additional SEBI LODR requirements for material RPTs.
Do interested shareholders vote on RPT approval?
No. Shareholders who are related parties (interested parties) cannot vote on the special/ordinary resolution approving the RPT.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Related Party Transactions Section: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.
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Why This Matters
Staying compliant with Indian regulations protects your business from penalties, interest and unnecessary legal trouble. It is always wise to maintain proper records and documentation so that any future scrutiny can be handled smoothly. Rules and thresholds in company law are revised periodically, so it helps to review your obligations at the start of each financial year. Professional guidance from a qualified CA, CS or advocate ensures that filings are accurate and submitted well before the due date.
Small businesses and startups especially benefit from setting up a simple compliance calendar to track recurring deadlines. Government portals now allow most applications and filings to be completed online, reducing paperwork and turnaround time. Keeping your PAN, registration certificates and board resolutions organised makes every subsequent filing faster. When in doubt, it is better to seek clarification early rather than risk a notice or a late-filing penalty later.
A clear understanding of the applicable law helps you make confident, well-informed business decisions. TaxClue's experts regularly assist businesses across India with end-to-end company law support at transparent, affordable pricing. Timely compliance also improves your credibility with banks, investors and government authorities.
Getting Related Party Transactions Section right the first time saves both time and money. Many businesses seek expert help for Related Party Transactions Section to stay fully compliant.