Related Party Transactions | Section 188 | Company Law

According to Section 2(76) of The Companies Act, 2013, related party”, with reference to the company means:

(i) a director or his relatives

(ii) a Key Managerial personnel or his relative

(iii) a firm, in which a director, manager or his relative is a partner

(iv) a private company in which a director or manager or his relative is a member or director

(v) a public company in which a director or manager is a director and holds along with his relatives, more than two percent of its paid-up share capital

(vi) any body corporate whose board of directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity

(viii) any body corporate which is –

• a holding, subsidiary, or an associate company of such company;
• a subsidiary of a holding company to which it is also a subsidiary; or
• any investing company or the venturer of the company.

List of Relatives in terms of section 2(77)

Relative means anyone who is related to another if-

1. they are members of the Hindu Undivided Family;

2. they are husband and wife; or

3. one person is related to another in accordance with Rule 4 of Companies ( Specification of Details) Rules, 2014.

A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely;

1. Father: the term includes step-father

2. Mother: the term includes step-mother

3. son: the term includes step-son

4. son’s wife

5. daughter

6. daughter’s husband

7. Brother: the term includes step-brother

8. sister; the term includes step-sister

Related Party Transactions- Section 188

Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to-

Or in simple terms, Section 188 gets attracted when a company enters any of the following 7 transactions with any of the related parties:

1. Sale or Purchase or Supply pf goods or materials

2. Sale or otherwise disposing of, or buying, property

3. Leasing of property of any kind

4. Availing or rendering of any services

5. Appointment of any agent for the purchase of goods, materials, services, or property

6. Appointment in office or place of profit in company or subsidiary or associate

7. Appointment of underwriter

Whenever Section 188 is attracted, Consent of Board of Directors or Board Resolution at Board Meeting is required to be passed.

If the transactions exceed “Ceiling Limit” then prior approval by Ordinary Resolution in General Meeting is also required.

Provided that while passing Ordinary Resolution in General Meeting, members who are related parties or relatives of promoters cannot vote.

Provided also that the above proviso shall not apply if ninety percent (90%) or more of the members are related parties.

* Point to be noted, both Board Resolution at Board Meeting and Ordinary Resolution at General Meeting shall not be required if any company enters into any transactions with any of its related parties in the ordinary course of its business at Arm length’s Price.

*”Ceiling Limits” of the transactions entered directly or through agents are;