RPTs Compliance Under Companies Act 2013 (Sec 188) & SEBI LODR (Reg 23)

Related Party Transactions (Section 188 of the Companies Act, 2013 & Regulation 23 of SEBI (LODR), 2015 – Updated till 2025)

Summary: Related Party Transactions (RPTs) in India are primarily governed by Section 188 of the Companies Act, 2013 and Regulation 23 of the SEBI (LODR) Regulations, 2015, with updated compliance norms applicable till 2025. A related party broadly includes directors, key managerial personnel, their relatives, group entities, and entities exercising control or significant influence. Section 188 covers transactions such as sale or purchase of goods or property, leasing, services, appointments to office of profit, and underwriting. While board approval is mandatory for all such transactions, shareholder approval is required only when transactions are not in the ordinary course of business or not at arm’s length and exceed prescribed thresholds. Listed companies face stricter oversight under SEBI LODR, including mandatory audit committee approval, shareholder approval for material RPTs, voting restrictions, and enhanced disclosure obligations. Non-compliance can render contracts voidable and expose directors to liability. Overall, the framework aims to ensure transparency, prevent conflicts of interest, and protect shareholder value.

RELATED PARTY TRANSACTIONS

(Section 188 of the Companies Act, 2013 & Regulation 23 of SEBI (LODR), 2015 – Updated till 2025)

1. Definition of Related Party – Section 2(76)

A related party in relation to a company includes:

• Directors and Key Managerial Personnel (KMP) and their relatives
• Entities (firms, private or public companies) in which directors, managers, KMPs or their relatives have significant interest or control
• Any body corporate or person acting on the advice, directions or instructions of a director or manager (excluding professional advice)
• Holding, subsidiary, associate companies, fellow subsidiaries, and investing company or venturer
• A public company in which a director or manager is a director and holds along with relatives more than 2% of paid-up share capital
• Any person on whose advice a director or manager is accustomed to act
• Director or KMP of the holding company or their relatives

2. Transactions covered under Section 188

• Sale, purchase or supply of goods or materials
• Sale, purchase or disposal of property
• Leasing of property
• Availing or rendering of services
• Appointment of agent for goods, services or property
• Appointment to office or place of profit
• Underwriting of securities or derivatives

3. Approval Requirements under Companies Act

Board Approval:

Mandatory for all transactions covered under Section 188.

Shareholders’ Approval:

Required only when:

• Transaction is not in ordinary course of business OR
• Transaction is not on arm’s length basis

AND

• Transaction exceeds prescribed thresholds.

4. Thresholds – Rule 15(3)

(Whichever is lower)

• Sale / purchase / supply of goods: 10% of turnover or ₹100 crore
• Sale / purchase of property: 10% of net worth or ₹100 crore
• Leasing of property: 10% of turnover or net worth or ₹100 crore
• Availing / rendering services: 10% of turnover or ₹50 crore
• Office or place of profit: ₹2.5 lakh per month
• Underwriting: 1% of net worth

(Turnover / net worth as per last audited financial statements)

5. Voting Restriction

No related party member shall vote on such shareholder resolution, except where exempted under MCA notifications.

6. Disclosure – Section 188(2)

All contracts approved under Section 188 must be disclosed in:

• Board’s Report
• Form AOC-2

7. Non-Ratification – Section 188(3)

Contracts entered without required approvals are:

• Voidable at option of Board or shareholders
• Concerned director / employee may indemnify company for losses

8. Key Exemptions

• Transactions between holding and wholly owned subsidiary on arm’s length basis
• Transactions in ordinary course and arm’s length (shareholder approval exempt)
• Certain exemptions for private companies
• Government company exemptions as notified

9. SEBI (LODR) Regulation 23 – Listed Companies

Audit Committee Approval – Regulation 23(1):

Mandatory for all RPTs.

Material Modification – Regulation 23(1A):

Requires fresh audit committee approval.

Material RPT – Regulation 23(1C):

Exceeds 10% of consolidated turnover or ₹1,000 crore (whichever is lower).

Shareholder Approval – Regulation 23(2):

Material RPTs require ordinary resolution.

All related parties must abstain from voting.

Subsidiary RPTs – Regulation 23(2A):

Audit committee approval required if exceeds 10% of consolidated turnover or ₹1,000 crore.

RPT Policy – Regulation 23(3):

Company must formulate policy on materiality and dealing with RPTs.

Subsidiary threshold crossing – Regulation 23(8):

Shareholder approval of listed parent required.

Disclosure to Stock Exchanges – Regulation 23(9):

Within 15 days from publication of half-yearly financial results.

10. Other Key Points

• Audit Committee may grant omnibus approval (review quarterly)
• Any material change requires fresh approval
• Threshold applies to aggregate of transactions in a financial year.