Related party transactions (RPTs) are dealings between a company and the people or entities connected to it — its directors, key managerial personnel (KMP), their relatives, and group companies. Because such transactions can be used to shift value or mask a conflict of interest, they are tightly governed by Sections 177 and 188 of the Companies Act, 2013, read with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, and, for listed companies, by Regulation 23 of the SEBI (LODR) Regulations, 2015.
Who counts as a related party
Section 2(76) defines the term broadly. In practice, the parties you must track include:
- Directors, KMP and their relatives
- A firm in which a director, manager or their relative is a partner
- A private company or body corporate in which a director or manager holds a directorship or a controlling interest
- Holding, subsidiary, associate and fellow-subsidiary companies
- Any person on whose advice a director or manager is accustomed to act
Approval framework
Approval works in cumulative layers, not alternatives:
- Audit Committee: prior approval of every RPT for listed companies and for public companies required to form an Audit Committee under Section 177.
- Board of Directors: a board resolution is needed for RPTs that are not in the ordinary course of business or not at arm's length. The interested director must disclose their interest and cannot vote on that item.
- Shareholders (ordinary resolution): required once a transaction crosses the Rule 15 limits. The earlier special-resolution requirement was relaxed to an ordinary resolution in 2015.
Thresholds that trigger shareholder approval
The limits below are measured against the company's audited turnover or net worth of the immediately preceding financial year:
| Type of transaction | Threshold |
|---|---|
| Sale, purchase or supply of goods or materials | 10% or more of turnover |
| Selling, disposing of or buying property of any kind | 10% or more of net worth |
| Leasing of property of any kind | 10% or more of turnover |
| Availing or rendering of any services | 10% or more of turnover |
| Appointment to any office or place of profit | Monthly remuneration above ₹2.5 lakh |
| Remuneration for underwriting securities | More than 1% of net worth |
Listed companies under SEBI LODR
For listed entities, Regulation 23 requires prior Audit Committee approval for all RPTs and prior shareholder approval for a "material" RPT. A transaction is material if it exceeds ₹1,000 crore or 10% of the annual consolidated turnover, whichever is lower. Separately, where a subsidiary is a party but the listed entity itself is not, prior Audit Committee approval of the listed entity is required once the transaction exceeds 10% of the listed entity's annual consolidated turnover. No related party may vote on the resolution, whether or not it is a party to that specific transaction. SEBI has been moving toward scale-based limits, so confirm the current threshold before a large deal.
Exemptions
- Transactions in the ordinary course of business at arm's length price fall outside Section 188's approval regime, though disclosure obligations still apply.
- Transactions between a holding company and its wholly-owned subsidiary, whose accounts are consolidated, need no shareholder resolution.
Documentation and common mistakes
- Maintain the Register of Contracts in Form MBP-4 under Section 189 and record every arrangement.
- Disclose material RPTs with justification in the Board's Report, and in the financial statements under Ind AS 24.
- File Form MGT-14 with the ROC wherever the underlying resolution is one that must be filed.
- Frequent errors: claiming "arm's length" without documented benchmarking, letting an interested director vote, and splitting a single arrangement across the year to stay under 10% — regulators aggregate transactions of the same kind.