Related Party Transactions: What Every Company Must Know About Approvals

Introduction

Every company — whether publicly listed on a stock exchange or privately held — will at some point conduct business with entities or individuals connected to it. A sale of goods to a promoter-owned firm, a lease arrangement with a director’s relative, or a service contract with an associate company: these are what the law classifies as Related Party Transactions (RPTs). While such dealings are not inherently improper, they carry an elevated risk of conflict of interest, which is precisely why India’s regulatory framework demands structured, multi-tiered oversight before they are executed.

Understanding who must approve what, and under what conditions, is one of the most practically important aspects of corporate compliance. This article walks through the full approval architecture for RPTs — covering both unlisted and listed companies — across three layers of governance: the Audit Committee, the Board of Directors, and the Shareholders.

Part I: The Three-Tier Approval Structure

Indian corporate law and securities regulations have built a layered approval mechanism that acts as a system of checks and balances. Not every transaction needs to climb all three rungs — but every transaction must pass through at least the first.

Layer 1 — Audit Committee Approval

The Audit Committee sits at the base of every RPT, regardless of the transaction’s size, nature, or whether it falls under the specific categories listed in Section 188(1) of the Companies Act, 2013. Prior approval from the Audit Committee is mandatory for all related party transactions without exception.

This is a blanket requirement. Whether the company is arranging a ₹5 lakh service contract or a ₹500 crore supply agreement, the Audit Committee must examine and sanction the transaction before it proceeds.

For listed companies, an additional layer of rigour applies: only those members of the Audit Committee who qualify as Independent Directors are eligible to grant this approval. This ensures that the review is conducted by persons who have no stake in the outcome — a critical safeguard against rubber-stamping arrangements that benefit insiders.

Layer 2 — Board of Directors Approval

The Board’s involvement is triggered specifically when a transaction falls within the seven categories enumerated under Section 188(1) of the Companies Act, 2013. These categories are:

1. Sale, purchase, or supply of goods or materials

2. Buying or selling property of any kind

3. Leasing of property

4. Availing or rendering of services

5. Appointing an agent for purchase or sale of goods, materials, services, or property

6. Appointing a related party to any office or place of profit in the company, its subsidiary, or associate

7. Underwriting the subscription of any securities or derivatives of the company

Importantly, Board approval is not required if a transaction falling under these categories meets both of the following conditions simultaneously: it is conducted in the ordinary course of business, and it is executed on arm’s length terms. Where either condition is absent, Board approval becomes necessary.

A procedural point worth noting: any director who has an interest in the transaction being discussed must excuse himself or herself from the Board meeting while that agenda item is deliberated.

Layer 3 — Shareholder Approval

Shareholder approval — obtained through an Ordinary Resolution — represents the highest level of oversight in the RPT framework. It is not a universal requirement; it kicks in only when transactions cross prescribed thresholds.

Part II: Approval Requirements for Unlisted Companies

For companies not listed on any stock exchange, the threshold triggers for shareholder approval are defined under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014. The applicable limits, based on transaction type, are as follows:

Key practical notes for unlisted companies:

• Shareholder approval is not required for transactions between a holding company and its wholly owned subsidiary.
• In the shareholder’s meeting, the related party cannot vote on the resolution — unless 90% or more of the total members, by number, are themselves relatives of promoters or related Private companies have been granted a specific exemption from this restriction pursuant to an MCA circular issued in June 2015.
• Transactions involving private companies and their holding, subsidiary, or associate entities are also carved out from certain requirements under the same 2015 MCA
• Every Board meeting agenda at which an RPT is to be approved must include the information mandated under Rule 15 — a procedural compliance point that is often overlooked.

Part III: Approval Requirements for Listed Companies

Listed companies operate under a dual regulatory regime — the Companies Act, 2013 on one side, and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) on the other. This layering creates a more rigorous compliance environment.

Audit Committee: Broader Scope, Fewer Exceptions

For listed entities, the Audit Committee’s mandate covers all transactions, just as with unlisted companies — but the exceptions are more precisely carved out. The following categories do not require Audit Committee approval:

• Remuneration (including sitting fees) paid to Directors, Key Managerial Personnel, or senior management who are not part of the promoter or promoter group, provided the amount is not material
• Transactions between a listed company and its wholly owned subsidiaries
• Transactions between two wholly owned subsidiaries of a listed holding company
• Transactions by a public sector company with the Central or State Government
• Payments of statutory dues, fees, or charges to government authorities
• Dealings between two public sector companies

Every other transaction — regardless of amount — requires prior Audit Committee clearance.

What Makes a Transaction “Material” for Listed Companies?

The LODR framework introduces the concept of material RPTs, which require shareholder approval in addition to Audit Committee and Board sanction. Materiality is determined differently depending on the type of listed entity.

For listed entities other than SME-listed companies, the thresholds scale with the size of the company:

For SME-listed companies, the threshold is simpler: a transaction (individually or when combined with all prior transactions in the same financial year with the same related party) becomes material when it crosses ₹50 crore or 10% of annual consolidated turnover, whichever is lower.

fi special rule for brand usage and royalty payments: Regardless of the general materiality thresholds above, any payment related to brand licensing or royalty arrangements is considered material if it exceeds 5% of annual consolidated turnover — either individually or when aggregated with previous such transactions in the financial year.

Voting Restrictions in Shareholder Meetings

A critical procedural rule applies when shareholders are voting on an RPT resolution: no related party may vote in favour of (or against) the resolution. This restriction applies across the board — ensuring that the very parties benefiting from a transaction cannot influence the outcome of the approval vote.

Part IV: Common Pitfalls and Practical Considerations

1. The “Ordinary Course + firm’s Length” Defence Is Narrow

Companies sometimes assume that routine commercial transactions with related parties are automatically exempt from approval requirements. This is incorrect. Both conditions — ordinary course of business and arm’s length pricing — must be satisfied simultaneously for the Board approval exemption to apply. Audit Committee approval remains mandatory regardless.

2. Aggregation Matters

Shareholder approval thresholds are not assessed on a transaction-by-transaction basis in isolation. For listed companies, transactions are aggregated across the financial year. A company that enters into multiple smaller transactions with the same related party may find that the cumulative value triggers the materiality threshold even if no single transaction crosses it.

3. Disclosure Is Not the Same as Approval

Disclosing a related party transaction in financial statements or annual reports is a separate obligation from obtaining the required approvals. Both must be complied with independently.

4. Board Agenda Compliance

Rule 15 mandates specific disclosures in the agenda placed before the Board for RPT approval. These include the name of the related party, the nature and duration of the transaction, the material terms, and the rationale for the arrangement, among other items. Omitting these details can render the approval procedurally deficient.

Conclusion

Related party transactions are a routine feature of corporate life, but they demand systematic governance. The three-tier approval architecture — Audit Committee, Board, and Shareholders — is designed to ensure that such transactions receive appropriate scrutiny at every level proportionate to their potential impact.

For unlisted companies, the framework under the Companies Act provides clear thresholds and exemptions. For listed companies, the overlay of SEBI’s LODR regulations raises the bar significantly, particularly through the concept of material RPTs and the exclusive role of Independent Directors in the Audit Committee’s approval process.

Compliance professionals, Company Secretaries, and board members would do well to treat RPT approvals not as a checkbox exercise, but as a genuine governance opportunity — one that protects the company, its minority shareholders, and the integrity of its financial reporting.

Disclaimer: This article is prepared for informational and educational purposes only. It does not constitute legal or professional advice. Readers are advised to refer to the applicable statutes, rules, circulars, and notifications, and consult qualified professionals before taking any action based on the contents of this article.