Related Party Transactions (RPTs) are not prohibited under the Companies Act, 2013. They are regulated to ensure transparency, prevent conflicts of interest, and protect minority shareholders.

Most compliance failures arise not because an RPT was entered into, but because the approval sequence was incorrect.

Who Is a Related Party?

Section 2(76) covers directors, Key Managerial Personnel (KMPs), their relatives, holding, subsidiary and associate companies, and certain entities connected with directors.

The definition is broader than many companies assume. Indirect relationships are often overlooked, making periodic identification of related parties essential.

Approval Framework

  • Board Approval: every RPT under Section 188(1) requires approval by a Board resolution at a duly convened Board meeting. Interested directors must disclose their interest in Form MBP-1 and abstain from voting.
  • Shareholder Approval: an ordinary resolution is additionally required where transactions exceed the prescribed thresholds under Rule 15. Related parties cannot vote on such resolutions.
  • Listed Companies: prior Audit Committee approval is mandatory for all RPTs under Regulation 23 of the SEBI (LODR) Regulations.

Key Exemption

Transactions entered into in the ordinary course of business and on an arm's length basis are exempt from shareholder approval under Section 188. Listed companies must still obtain the applicable Audit Committee approvals.

Disclosure Requirements

  • Form AOC-2 with the Board's Report, where applicable.
  • Form MBP-1 at the first Board meeting of every financial year and on any change in interest.
  • Related party disclosures under Ind AS 24 or AS 18, as applicable.

Where Companies Go Wrong

A common mistake is executing an RPT first and seeking approval later.

Section 188(3) permits ratification within three months, but only to rectify inadvertent omissions, not as a substitute for prior approval. Failure to ratify may render the transaction voidable at the option of the Board.

Key Takeaway

A robust RPT framework begins with early identification of related parties, timely approvals, and complete disclosures. Proactive compliance is always easier than post-facto correction.