Related Party Transactions Under the Companies Act: Compliance Guide
A related party transaction — any contract or arrangement with a director, key managerial personnel, their relatives, or an entity they significantly control — requires Board approval under Section 188 of the Companies Act, and shareholder approval by special resolution if the transaction exceeds prescribed thresholds. All such transactions must be disclosed in Form AOC-2, attached to the Board's Report.
Who counts as a "related party"
- A director or key managerial personnel (KMP) of the company, or their relative
- A firm in which a director, manager or relative is a partner
- A private company in which a director or manager is a member or director
- A public company in which a director or manager holds 2%+ shares with others
- Holding, subsidiary or associate companies, and their directors/KMP
Types of transactions covered
Sale/purchase of goods or property, leasing of property, availing/rendering of services, appointment of an agent, and appointment to any office or place of profit in the company or its subsidiary/associate.
Approval thresholds
Board approval is required for all related party transactions. Shareholder approval (via special resolution, with related parties abstaining from voting) is additionally required once the transaction value crosses thresholds set by the rules, which vary by transaction type and are typically a percentage of turnover or net worth.
What must be disclosed
- Name of the related party and nature of relationship
- Nature, duration and material terms of the contract/arrangement
- Monetary value and the advance, if any, paid or received
- The approving authority (Board or shareholders)
What happens if a related party transaction isn't properly approved
The transaction is voidable at the Board's option, and the director/officer who authorised it may be liable to indemnify the company for any resulting loss, in addition to potential penalties under the Act.
Our compliance team reviews related party arrangements and prepares the necessary approvals and AOC-2 disclosures.