Section 188 Contracts 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.
Two conditions must both be satisfied to escape approval — ordinary course and arm's length. Failing either brings the contract back to the board.
The seven categories of section 188 contracts
The following transactions are covered under Section 188 of the CA, 2013:
- Sale, purchase or supply of goods or materials;
- Sale or disposal of or buying of property of any kind;
- Leasing of property of any kind;
- Availing of or rendering any services;
- Appointment of an agent for purchase or sale of goods, materials, services or property;
- Related party's appointment to any office or place of profit in the company or its subsidiary or associate company; and
- Underwriting of subscription of any securities or derivatives.
The exemption is stated as two conditions: transactions in ordinary course of business; and on arm's length basis.
Both must hold. That is the point most often misread, and the consequence is significant.
A transaction can be squarely within the ordinary course of business — a group company buying its usual raw materials from an associate — and still require approval if the price is not at arm's length. Equally, a transaction priced perfectly at market can require approval if it falls outside what the company ordinarily does.
The approval tiers then escalate. Where either condition fails, Board's approval is required. And in the case the transactions exceed the prescribed threshold, prior approval by special resolution of the company shall be required.
Above that sits the audit committee, which reaches further than the board: it must approve all the transactions entered into with related parties — not only those failing the two conditions. The omnibus approval, valid for a period of one financial year, exists because a company with continuous related party dealings cannot bring each one to a committee.
The second exemption is narrower than it appears: transactions between holding company and wholly owned subsidiary company whose accounts are consolidated and laid before shareholders at Annual General Meeting. Three conditions — wholly owned, consolidated, and laid before members. A subsidiary that is 99 per cent owned is outside it.
The approval ladder for section 188 contracts
| Situation | Approval |
|---|---|
| Ordinary course and arm's length | No member approval under section 188; audit committee approval still required |
| Holding company and wholly owned subsidiary, accounts consolidated and laid before members | Exempt from member approval |
| Not in the ordinary course, or not at arm's length | Board approval |
| Above the prescribed threshold | Prior special resolution |
| Any related party transaction | Audit committee approval, or omnibus approval for the financial year |
Participation by an interested director
As per provisions of Section 188 of the CA 2013, if any director is directly or indirectly concerned or interested in a contract or arrangement or proposed contract or arrangement then such director shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.
Private companies have a relaxation: under the notification of 5 June 2015, an interested director can participate and vote in a board meeting after disclosing his interest in the particular transaction. The interested director will be included for the purpose of determining the quorum of the meeting.
The same relaxation runs at member level: an interested member of a private company can participate and vote at general meeting on matters requiring approval for related party transaction.
The register of contracts
Two categories are exempted from being entered in the Register of Contracts and Arrangements in which the directors are interested:
- Sale / purchase / supply of any goods / services, if the value does not exceed five lakh rupees in the aggregate in any year;
- Transaction by a banking company for the collection of bills in the ordinary course of its business.
Note that the five lakh test is in the aggregate in any year, not per transaction — a series of small dealings with the same counterparty is measured together.
Common mistakes
- Treating ordinary course of business alone as exempting section 188 contracts.
- Applying the holding-subsidiary exemption to a subsidiary that is not wholly owned.
- Taking audit committee approval only for transactions that fail the two conditions.
- Testing the five lakh register exemption transaction by transaction.