Section 188 of the Companies Act, 2013 deals with related party transactions. A related party transaction refers to a transaction between a company and its directors, shareholders, key management personnel, or their relatives, that may potentially result in a conflict of interest. In the context of body corporate, related party transactions refer to transactions between two or more companies that have a common controlling entity or entities.

For example, consider a group of companies in which Company A controls Companies B, C, and D. If Company B enters into a transaction with Company C, this would be considered a related party transaction as both companies have a common controlling entity, Company A.

Such transactions raise concerns about potential conflicts of interest and the fairness and transparency of the dealings between the companies. To mitigate these concerns, regulatory frameworks such as the Companies Act, 2013 require companies to obtain approval from their board of directors and shareholders before entering into related party transactions. The approval must be based on fair and reasonable terms and conditions that are in the best interest of the company.

It is important for body corporate to adhere to the provisions of related party transactions to maintain the trust and confidence of stakeholders and to ensure the transparency and fairness of their dealings

The provisions and rules regarding related party transactions under Section 188 of the Companies Act, 2013 can be found in the following sections of the Act:

1. Section 2(76): Definition of related party, which includes directors, key management personnel, and relatives of such persons, as well as firms and companies in which such directors or relatives have a substantial interest.

2. Section 188(1): Obligation to obtain prior approval of the board of directors for related party transactions, except in cases where the transaction is in the ordinary course of business and on an arm’s length basis.

3. Section 188(2): Requirement for shareholders’ approval in certain cases, such as when the transaction exceeds the limits specified in the Act or the rules made thereunder.

4. Rule 15 of the Companies (Meeting of Board and its Powers) Rules, 2014: Requirements for the board to consider and approve related party transactions, including the submission of a written proposal and the minutes of the board meeting.

5. Rule 16 of the Companies (Meeting of Board and its Powers) Rules, 2014: Requirements for disclosure of related party transactions in the annual report, including the nature, terms, and amount of the transaction.

6. Clause 49 of the Listing Agreement: Additional disclosure requirements for listed companies, including the justification for the related party transaction and the terms and conditions of the transaction.

In conclusion, Section 188 of the Companies Act, 2013 imposes an obligation on companies to obtain approval from their board of directors and shareholders before entering into related party transactions. The provisions aim to prevent conflicts of interest and promote transparency in the dealings of companies with their related parties. As a lawyer, it is important to have a thorough understanding of these provisions to effectively advise clients on related party transactions.