- Short Overview
For an Indian private limited company, related party transactions (RPTs) under the Companies Act, 2013 require:
- Prior Board approval by way of a resolution for specified categories of transactions;
- Prior shareholders’ approval by an ordinary resolution if the transaction value exceeds the thresholds prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014; and
- Statutory disclosures and maintenance of records as mandated under the Act and the Rules.
Non-compliance may render the contract voidable at the option of the company or its shareholders, may require ratification within a prescribed period, and could result in indemnification by the concerned director and monetary penalties under Section 188(5).
- Legal Framework
2.1 Section 188 – Companies Act, 2013
(a) Transactions covered:
Section 188 applies to the following transactions with a “related party”:
- Sale, purchase or supply of goods or materials;
- Selling, buying, or otherwise disposing of property;
- Leasing of property;
- Availing or rendering of services;
- Appointment of an agent for the purchase or sale of goods, materials, services or property;
- Appointment to any office or place of profit in the company, its subsidiary or associate company;
- Underwriting the subscription of any securities or derivatives.
(b) Board approval:
Prior consent of the Board, by a duly passed resolution at a Board meeting, is mandatory before entering into any of the above transactions.
(c) Shareholders’ approval:
If the value of the transaction exceeds the monetary thresholds prescribed under Rule 15, prior shareholders’ approval by ordinary resolution is also required. The notice convening the general meeting must include an explanatory statement containing prescribed particulars of the transaction.
(d) Consequences for non-compliance:
Transactions entered into without requisite approvals are:
- Voidable at the option of the company or its shareholders;
- May require ratification within a prescribed period;
- May result in the concerned director indemnifying the company for any loss; and
- Attract monetary penalties under Section 188(5).
2.2 Rule 15 – Companies (Meetings of Board and its Powers) Rules, 2014
Thresholds and conditions:
Rule 15 specifies monetary and percentage thresholds for each category of transaction. If these thresholds are crossed, shareholders’ approval must be obtained in addition to Board approval.
The Rule also sets out the information to be included in the explanatory statement annexed to the notice of the general meeting.
- Practical Compliance Overview for a Private Limited Company
In practice, compliance with Section 188 typically involves the following stages:
- Identification of related parties and relevant transactions:
- Determination of whether the counterparty qualifies as a “related party” under Section 2(76) of the Act.
- Classification of the nature of the transaction to verify whether it falls within the scope of Section 188.
3.2 Board-Level Consideration and Approval
- Placing the proposed transaction before the Board for prior approval through a resolution.
- Ensuring that interested directors make the required disclosure of interest and abstain from participation or voting in the relevant agenda item.
3.3 Evaluation of Monetary Thresholds under Rule 15
- Assessing whether the proposed transaction value exceeds the prescribed limits under Rule 15.
- Where applicable, obtaining shareholders’ approval by an ordinary resolution supported by a detailed explanatory statement.
3.4 Disclosures and Record Maintenance
- Recording particulars of all related party contracts and arrangements in the statutory register.
- Including requisite particulars in the Board’s Report to shareholders.
- Retaining supporting documents and approvals for audit and compliance purposes.
3.5 Handling of Non-Compliance
- Considering the possibility of ratification by the Board or shareholders within the permitted time frame.
- Reviewing exposure to indemnification obligations and statutory penalties.
- Penalties and Legal Consequences
4.1 Voidability and indemnity:
A related party transaction entered into without due approval is voidable at the option of the company or its shareholders. If the transaction involves a related party to any director or is entered into without authority, the concerned director may be required to indemnify the company for any resulting loss.
4.2 Statutory penalties
Under Section 188(5), any director or employee who enters into or authorizes an RPT in contravention of Section 188 is liable to a monetary penalty. For private companies, the penalty scale applicable to “other companies” (i.e., non-listed entities) is relevant.
- Conclusion
The compliance framework for related party transactions under the Companies Act, 2013 for a private limited company involves:
- Obtaining Board approval prior to entering into covered transactions;
- Obtaining shareholders’ approval where monetary thresholds under Rule 15 are exceeded; and
- Ensuring proper disclosures, record-keeping, and transparency.
Failure to comply may render the transaction voidable, may require ratification, and can result in indemnification obligations and statutory penalties.