What approvals are required for related party transactions under Section 188?

Question

My company wants to enter into a contract with a firm in which one of our directors holds an interest. What compliance is required? I would rather settle this without going to court if the law allows it, but I need to know my rights before I sign anything. Please tell me what to do first and what document to keep.

MyVakeel Legal Desk · Accepted Answer

Under Indian law, Companies Act 2013, Section 188 is the starting point for this corporate law question. What follows is the position in substance, together with the steps that usually make the difference in practice.

Section 188 requires board approval for specified related party transactions such as sale or purchase of goods, property, availing services or appointment to a place of profit with a related party.

Transactions exceeding thresholds prescribed under the Companies (Meetings of Board and its Powers) Rules require prior approval of shareholders by ordinary resolution, and related shareholders cannot vote if a company is not wholly owned by promoters.

Section 184 requires every director to disclose their interest in any contract or arrangement at the first board meeting after becoming interested, or as soon as the interest arises.

Contracts entered into without the required board or shareholder approval can be voidable at the option of the board or shareholders unless ratified within three months.

Listed companies must additionally comply with Regulation 23 of the SEBI LODR Regulations, which requires audit committee approval for all related party transactions and shareholder approval for material ones.

What to do next: 1) Identify whether the counterparty qualifies as a related party under Section 2(76); 2) Place the proposed transaction before the audit committee and board for approval; 3) Obtain shareholder approval if the transaction crosses the prescribed thresholds; 4) Disclose the transaction in the board's report and financial statements as required.

If you are unsure whether your facts fall inside Companies Act 2013, Section 188, that is worth checking with an advocate before you commit to a route, because switching later costs time. You can post the details on the MyVakeel forum for a practising advocate to review, or book a paid consultation with a Bar Council verified lawyer in corporate law.