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 have been reading conflicting things online and I would like to understand what Indian law actually says about this, which Act and Section applies, what the realistic timelines and costs are, and what I should be doing right now to protect my position. If the matter can be resolved without litigation I would prefer that route, but I want to know what my rights are before I agree to anything or sign any document.

MyVakeel Legal Desk · Accepted Answer

What approvals are required for related party transactions under Section 188? is governed in India primarily by Companies Act 2013, Section 188, Companies Act 2013, Section 184 and SEBI Listing Obligations and Disclosure Requirements Regulations 2015, Regulation 23. The short answer is set out below, followed by the practical steps most people in this situation need to take. Read it alongside the specific provisions named, because the exact relief available to you turns on the facts you can prove on paper.

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 the other side has already issued a notice, filed a case or set a deadline, treat the matter as time-sensitive — most remedies under Companies Act 2013, Section 188 carry limitation periods, and a delay you cannot explain weakens an otherwise strong case. 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 this practice area.