Secretarial Insights

January 2026

Index

1	Introduction
2	Concept of Related Party
3	Nature of Transactions Covered
4	Approval Mechanism under Section 188
5	Role of Independent Directors and Company Secretaries in Related Party Transactions
8	Conclusion

Understanding Section 188: Governance and Compliance in Related Party Transactions (RPTs)

Dear Reader,

The Company Secretary Team at UJA is pleased to present an insightful overview of Section 188 of the Companies Act, 2013, which governs Related Party Transactions (RPTs), a critical area of corporate governance aimed at preventing conflicts of interest and ensuring transparency in company dealings.

This article provides a clear understanding of the concept and scope of related parties, the nature of transactions covered under Section 188 and the approval framework involving the Board of Directors and shareholders. It also discusses exemptions available for transactions undertaken in the ordinary course of business and on an arm’s length basis, along with the disclosure requirements and consequences of non-compliance.

Special emphasis has been placed on the role of Independent Directors and Company Secretaries, highlighting their responsibility in safeguarding minority shareholders’ interests, ensuring objective oversight through the Audit Committee and maintaining strict compliance with statutory and regulatory requirements, including SEBI (LODR) Regulations for listed entities.

Through this write-up, we aim to simplify the legal provisions relating to related party transactions while underlining the importance of ethical decision-making, transparency and accountability in corporate operations.

We hope you find this article informative and useful in enhancing your understanding of related party transaction compliance under Indian corporate law.

For feedback or topic suggestions, please write to us at cs@uja.in.

Introduction

In the corporate environment, companies frequently enter into transactions with persons or entities that are closely connected with them. While such transactions are not inherently improper, they carry a higher risk of conflict of interest and misuse of authority. Recognizing this risk, the Companies Act 2013 introduced Section 188, which lays down a structured legal framework for regulating Related Party Transactions (RPTs) to ensure transparency, fairness and good corporate governance.

Concept of Related Party

A related party refers to a person or entity that has the ability to influence the decisions of a company. Section 2(76) of the Act defines related parties and includes directors, key managerial personnel, their relatives, as well as entities in which such persons have significant control or interest. Holding companies, subsidiaries and associate companies are also treated as related parties. The wide definition ensures that all possible relationships capable of influencing company decisions are brought under scrutiny.

Nature of Transactions Covered

Section 188 applies to specific types of contracts and arrangements entered into by a company with its related parties. These include transactions relating-

Sale, purchase or supply of goods or materials
Selling or disposing of property of any kind
Leasing of property
Availing or rendering of services
Appointment of any related party to any office or place of profit
Underwriting the subscription of securities or derivatives thereof

Approval Mechanism Under Section 188

To prevent abuse, Section 188 establishes a two-level approval system:

Board Approval: Every related party transaction must first be approved by the Board of Directors through a resolution passed at a duly convened Board meeting. Directors who are interested in the transaction are prohibited from participating in discussions or voting, thereby ensuring impartial decision-making.
Shareholders’ Approval: If the transaction exceeds prescribed thresholds, prior approval of the shareholders by way of an ordinary resolution becomes mandatory. Importantly, related parties are not allowed to vote on such resolutions, which protect the interests of minority shareholders.

Transactions Exempted from Section 188

The Act provides relief for genuine commercial dealings. Transactions entered into in the ordinary course of business and conducted on an arm’s length basis are exempted from the approval requirements of Section 188. This ensures that routine business activities are not unnecessarily restricted while still safeguarding against unfair dealings.

Disclosure and Transparency

Transparency is a key feature of Section 188. Companies are required to disclose details of related party transactions in the Board’s Report, including the justification for entering into such transactions. These disclosures are made in Form AOC-2 and are also reflected in the financial statements as per applicable accounting standards. Such disclosures enable shareholders and regulators to evaluate the fairness of the transactions.

Consequences of Non-Compliance

Any contract entered into without proper approval is voidable at the option of the Board or shareholders.
Directors involved may be required to indemnify the company for any loss incurred.
Penalties under the Act include:

Fine up to ₹25 lakh for listed companies
Fine up to ₹5 lakh for other companies

Significance of Section 188

Section 188 plays a vital role in strengthening corporate governance in India. It discourages self-dealing, promotes ethical business practices and protects the interests of shareholders, particularly minority shareholders. By balancing regulatory control with business flexibility, the provision ensures that related party transactions are conducted in a transparent and fair manner.

Role of Independent Directors and Company Secretaries in Related Party Transactions

Role of Independent Directors

Independent Directors play a crucial role in ensuring fairness and integrity in transactions involving related parties. Since related party transactions carry an inherent risk of conflict of interest, Independent Directors act as guardians of minority shareholders’ interests and uphold principles of good corporate governance.
In listed companies, Independent Directors are key members of the Audit Committee, which is responsible for the prior approval and review of all related party transactions. They evaluate whether such transactions are conducted on an arm’s length basis and are in the ordinary course of business, ensuring that the company is not exposed to undue financial or reputational risk.
Independent Directors also ensure that interested directors abstain from decision-making and that adequate disclosures are made to the Board and shareholders. Their objective judgment adds credibility to the approval process and strengthens stakeholder confidence in the company’s governance framework.

Role of the Company Secretary

The Company Secretary (CS) acts as the chief compliance officer and governance professional of the company and plays a pivotal role in ensuring adherence to Section 188 of the Companies Act, 2013.
The CS is responsible for:
- Identifying related parties and tracking changes in related party relationships
- Ensuring that proper Board and shareholders’ approvals are obtained before entering into related party transactions
- Advising the Board on applicable legal provisions, thresholds, exemptions and procedural requirements
- Facilitating Audit Committee meetings and ensuring correct documentation of approvals
- Ensuring accurate and timely disclosures in the Board’s Report (Form AOC-2), financial statements and statutory registers
The Company Secretary also ensures compliance with SEBI (LODR) Regulations in case of listed companies, including restrictions on voting by related parties and disclosure of material related party transactions to stock exchanges.

Conclusion

Section 188 of the Companies Act, 2013 acts as a safeguard against conflicts of interest arising from related party transactions. Through mandatory approvals, disclosures and accountability mechanisms, it ensures that such transactions serve the best interests of the company rather than individual stakeholders. Effective implementation of this section is essential for maintaining trust, transparency and integrity in corporate functioning.

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