What related-party deals does section 188 cover?
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 between a company and a related party. Board consent at a meeting is the starting point. Member approval applies where the rule thresholds are crossed. A deal in the ordinary course of business and on an arm's-length basis sits outside section 188(1). An unapproved contract not ratified within three months is voidable.
What does section 188 regulate?
Section 188 of the Companies Act, 2013 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 does section 188 cover?
| 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.
How does section 188 approval work?
Section 188(1) of the Companies Act, 2013 requires consent of the Board by a resolution at a Board meeting, subject to the conditions in the rules. Member approval is added when the contract or arrangement crosses the thresholds in those 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.
Can we split one arrangement into smaller contracts?
No. Section 188 looks at the real arrangement and its commercial substance. Splitting one deal into smaller documents to stay under a member-approval threshold does not take the arrangement outside the section.
When does section 188 skip Board consent?
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.
Is a long-standing group arrangement automatically arm's length?
No. A familiar counterparty or a long-standing group arrangement does not itself prove arm's-length terms under section 188. Keep comparable quotations, pricing policy, past third-party terms, credit terms and the reason a related counterparty was selected.
What records does section 188 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 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.
Must listed companies also follow SEBI LODR?
Yes. A listed entity must also test the related-party transaction framework in the SEBI Listing Obligations and Disclosure Requirements Regulations, 2015. 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 do I confirm section 188 today?
- Read section 2(76), section 184, section 188 and section 189 together.
- Check the current thresholds and conditions in the Companies (Meetings of Board and its Powers) Rules, 2014.
- 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.
Why do section 188 approvals fail?
- 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 are section 188 rule changes published?
Related-party analysis changes when the Act, MCA rules or SEBI regulations change. Complied AI brings MCA updates and SEBI updates 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 of the Companies Act, 2013 covers specified contracts or arrangements with a related party: sale, purchase or supply of goods or materials; property deals; leasing; services; agency; appointment to an office or place of profit; and underwriting of securities or derivatives. Read the list in section 188(1) and the related-party definition in section 2(76) before classifying a deal.
Does every related-party deal need shareholder approval?
No. Section 188 of the Companies Act, 2013 starts with Board consent at a meeting. Member approval applies only where the contract crosses the thresholds in the Companies (Meetings of Board and its Powers) Rules, 2014. A deal in the ordinary course of business and on an arm's-length basis sits outside section 188(1) altogether.
What does arm's length mean under section 188?
The explanation to section 188 of the Companies Act, 2013 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. Keep quotations, pricing policy, past third-party terms and the reason the related counterparty was selected.
We signed the contract last month without Board consent. Can we fix it?
Yes, if the Board or the members ratify it within three months. Section 188 of the Companies Act, 2013 makes an unapproved related-party contract voidable at the option of the Board or, where member approval was required, the shareholders, if it is not ratified inside that three-month window. The interested director may also have to indemnify the company for loss.
Do listed companies only need to follow section 188?
No. A listed company must also test the related-party transaction rules in the SEBI Listing Obligations and Disclosure Requirements Regulations, 2015. Those rules can require audit-committee review, shareholder approval or disclosure on a different basis from section 188 of the Companies Act, 2013. Clearing one test does not prove the other.
Is a shared-services agreement with our parent a section 188 deal?
Usually yes. Section 188(1) of the Companies Act, 2013 lists services, not only a sale of goods, and a parent is a related party under section 2(76). Test ordinary course and arm's-length terms before treating it as outside section 188(1). Record the pricing evidence even if both tests are met.
Does section 188 approval replace the section 185 loan test?
No. Section 188 of the Companies Act, 2013 is the related-party contract rule. A loan, guarantee or security still has to clear section 185, and an investment or loan to a body corporate still has to clear section 186. Passing a section 188 resolution does not satisfy those other sections.
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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.
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