Section 188: Related party transactions

Companies Act, 2013 · Chapter XII: Meetings Of Board And Its Powers · In force

This section regulates related party transactions to ensure transparency and fairness, requiring companies to obtain consent or approval for certain contracts or arrangements and providing penalties for non-compliance.

Penalty

(5)(i) in case of listed company, be 3[liable to a penalty of twenty-five lakh rupees]; and (ii) in case of any other company, be 4[liable to a penalty of five lakh rupees]].

The section, clause by clause

What the section says

In plain terms

(1)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—

A company must get its Board of Directors' consent before entering into contracts or arrangements with related parties regarding certain activities, such as selling or buying goods or property, leasing, or providing services, unless the transaction is in the company's ordinary course of business and on an arm's length basis.

(1)(a)sale, purchase or supply of any goods or materials;

(1)(b)selling or otherwise disposing of, or buying, property of any kind;

(1)(c)leasing of property of any kind;

(1)(d)availing or rendering of any services;

(1)(e)appointment of any agent for purchase or sale of goods, materials, services or property;

(1)(f)such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(1)(g)underwriting the subscription of any securities or derivatives thereof, of the company:

provisoProvided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a2[resolution]:

provisoProvided further that no member of the company shall vote on such 1[resolution], to approve any contract or arrangement which may be entered into by the company, if such member is a related party:

proviso3[Provided also that nothing contained in the second proviso shall apply to a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties:] Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis:

proviso1[Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.]

explanationExplanation.— In this sub-section,—

(1)(a)the expression “office or place of profit” means any office or place—

(1)(a)(i)where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(1)(a)(ii)where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(1)(b)the expression “arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

(2)Every contract or arrangement entered into under sub-section (1) shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.

The company must include details of these contracts or arrangements in its Board's report to shareholders, along with the justification for entering into them.

(3)Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a 1[resolution] in the general meeting under sub- section (1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement 2[shall be voidable at the option of the Board or, as the case may be, of the shareholders] and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

If a contract or arrangement is entered into without the required consent or approval, it can be voided by the Board or shareholders within three months, and the directors concerned may have to indemnify the company against any losses.

(4)Without prejudice to anything contained in sub-section (3), it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement.

The company can take action against a director or employee who enters into a contract or arrangement in contravention of this section to recover any losses sustained.

(5)Any director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of the provisions of this section shall,—

A director or employee who violates the provisions of this section can be liable to a penalty of twenty-five lakh rupees for a listed company or five lakh rupees for any other company.

(5)(i)in case of listed company, be 3[liable to a penalty of twenty-five lakh rupees]; and (ii) in case of any other company, be 4[liable to a penalty of five lakh rupees]].

The right-hand column is written from the section text, not quoted from it, and it has no legal force. Where the two differ, the left-hand column is the law.

Amendment notes

1. Subs. by Act 29 of 2020, s. 38, for sub-section (4) (w.e.f. 21-12-2020).
2. Subs. by Act 21 of 2015, s. 16, for “special resolution” (w.e.f. 29-5-2015).
3. The proviso ins. by Act 1 of 2018, s. 63 (w.e.f. 9-2-2018).
1. The proviso ins. by Act 21 of 2015, s. 16 (w.e.f. 29-5-2015).
2. Subs. by Act 1 of 2018, s. 63, for “shall be voidable at the option of the Board” (w.e.f. 9-2-2018).
3. Subs. by Act 29 of 2020, s. 39, for certain words (w.e.f. 21-12-2020).
4. Subs. by s. 39, ibid., for certain words (w.e.f. 21-12-2020).

Referred to by

s. 47 Voting rights s. 134 Financial statement, Board’s report, etc s. 164 Disqualifications for appointment of director s. 177 Audit Committee s. 189 Register of contracts or arrangements in which directors are interested

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Reproduced from the official India Code print for reference. Check the current text on India Code before you rely on it, and read the section alongside its Rules. Nothing here is legal advice.