Law · Sections
Section 188 Companies Act: related party transactions explained
Section 188 of the Companies Act, 2013 explained in plain language: which contracts are covered, the Board and member approval path, the ordinary-course and arm's-length exception, disclosure, ratification and the extra checks listed companies need.
In this guide
Section 188 of the Companies Act, 2013 regulates specified contracts or arrangements between a company and a related party. Board consent at a meeting is the starting point, subject to prescribed conditions. Member approval is required where the applicable thresholds are crossed. A transaction in the ordinary course of business and on an arm's-length basis is outside section 188(1), but the company must document why both tests are met and check other rules that apply.
What section 188 regulates
Section 188 governs specified contracts and arrangements between a company and a related party. It is not a ban on dealing with related parties. It requires the company to identify the relationship, classify the deal, follow the approval route and keep a record that explains why the terms were accepted.
The first question is whether the other party is related under section 2(76). The second is whether the proposed deal falls within the list in section 188(1). A company needs both answers before it can decide which approval route applies.
Which contracts are covered
| Deal type | Examples to flag early |
|---|---|
| Goods or materials | Purchase, sale or supply arrangements |
| Property | Buying, selling or leasing land, equipment or premises |
| Services | Management, technical, shared-service or professional services |
| Agency | Appointment to buy or sell goods, services or property |
| Office or place of profit | Appointment of a related person within the company or its subsidiary |
| Underwriting | Subscription of securities or derivatives of the company |
This list is wider than a sale contract. Property leases, shared services and arrangements involving an office or place of profit often enter the process too late because teams focus only on procurement or revenue.
What the approval path looks like
Section 188(1) requires consent of the Board by a resolution at a Board meeting, subject to prescribed conditions. The section then adds a member approval route when the contract or arrangement crosses the thresholds prescribed in the rules.
- Identify the related party and the proposed contract category.
- Test whether the deal is in the ordinary course and at arm's length.
- Where section 188 applies, prepare the Board proposal with the material terms and commercial basis.
- Check the applicable rules to see if prior member approval is required.
- Check the voting restriction and every statutory exception before the meeting notice is issued.
- Record the approval, related-party interest and disclosure trail.
The transaction should not be split into smaller documents merely to make an approval analysis look easier. Consider the real arrangement and its commercial substance.
When the ordinary-course exception applies
Section 188(1) does not apply to a transaction entered into by the company in its ordinary course of business and on an arm's-length basis. Both conditions must be met. Ordinary course asks whether the transaction fits the company's regular business activity. Arm's length asks whether the terms look like terms between unrelated parties.
Keep evidence for both. That can include comparable quotations, pricing policy, past third-party terms, credit terms, service specifications and the reason a related counterparty was selected. A familiar counterparty or a long-standing group arrangement does not itself prove arm's-length terms.
What records, ratification and disclosure require
If a contract or arrangement is entered into without the required Board or member approval and is not ratified within three months, it is voidable at the option of the Board or, where applicable, the shareholders. The interested director may have to indemnify the company for loss caused by the unauthorised contract.
Section 189 also requires a register of contracts or arrangements in which directors are interested. The Board's report must contain the prescribed particulars and justification for contracts or arrangements with related parties that are referred to in section 188(1). Treat the approval pack, register entry and Board's report disclosure as one chain.
Why listed companies need another check
A listed entity must also test the related-party transaction framework in the SEBI Listing Obligations and Disclosure Requirements Regulations. The listing rules may require audit committee review, shareholder approval or disclosure on a different basis from section 188.
Use a combined approval map, but do not merge the legal tests. Section 188 is a Companies Act provision. The SEBI requirements apply through the listing framework. Clearing one does not prove compliance with the other.
How to verify the legal position
- Read section 2(76), section 184, section 188 and section 189 together.
- Check the current prescribed thresholds and conditions in the relevant Companies Rules.
- For a listed entity, read the applicable SEBI LODR related-party provisions.
- Compare the draft commercial terms with reliable third-party comparables.
- Get company-secretarial and legal advice before an unusual or material transaction is signed.
Common section 188 mistakes
- Calling a transaction arm's length without retaining pricing evidence.
- Checking only a sale of goods and overlooking leases, services or agency appointments.
- Seeking approval after the contract has already been performed.
- Ignoring the voting position of an interested member.
- Using section 188 approval as a substitute for the section 185 or 186 analysis.
- For a listed entity, stopping after the Companies Act review.
Where Complied AI fits
Related-party analysis changes when the Act, MCA rules or SEBI regulations change. Complied AI brings MCA updates and source documents together, so teams can check the instrument behind a change before updating their approval matrix.
Practical checks
Common questions
What transactions does section 188 cover?
Section 188 covers specified contracts or arrangements with a related party, including sale, purchase or supply of goods or materials; property transactions; leasing; services; agency arrangements; appointment to office or place of profit; and underwriting of securities or derivatives. Read the exact statutory list and related-party definition before classifying a deal.
Does every related party transaction need shareholder approval?
No. Section 188 begins with Board consent, and member approval applies when the transaction crosses prescribed thresholds. A transaction in the ordinary course of business and on an arm's-length basis is outside section 188(1). The thresholds and exceptions must be checked against the current rules and the company's facts.
What does arm's length mean under section 188?
The explanation to section 188 describes an arm's-length transaction as one conducted as if the parties were unrelated, so there is no conflict of interest. The label alone is not enough. The company should retain evidence of pricing, terms and the decision process.
Do listed companies only need to follow section 188?
No. A listed company must also review the related-party transaction requirements in the applicable SEBI listing regulations. Section 188 and the listing rules answer related but separate compliance questions.
Publication method
How this guide was prepared
This guide is published by the Complied AI research desk. Its source list and stated position were checked against the official records shown below on 6 August 2026.
Automation, including AI, may assist research, drafting and structure. It does not replace the official record or amount to an independent professional review. Read our editorial standards and corrections policy.
Verification path
Official sources used
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