FreeComplianceRelated-party transactions under Section 188
Founders often transact with their own company: renting it an office, lending it money or billing through another firm they own. These are related-party transactions (RPTs). Section 188 requires approval for certain RPTs unless they are in the ordinary course of business and at arm's length.
Who is a related party
- Directors and key managerial personnel, and their relatives
- Firms in which a director or relative is a partner
- Private companies in which a director is a member or director
- Holding, subsidiary and associate companies
What needs approval
Contracts for sale or purchase of goods, property, leasing, services, appointment of agents, and appointment of related parties to an office of profit need board approval. Above prescribed thresholds, they also need shareholder approval. Interested directors cannot vote.
Transactions that are in the ordinary course of business and at arm's length are exempt from these approvals, but must still be disclosed.
Private company relaxations
For private companies, a member who is a related party can still vote on the shareholder resolution, under the 2015 exemption notification. All RPTs are recorded in MBP-4 and disclosed in the board's report (AOC-2 where applicable) and financial statements.
Frequently asked questions
This guide is general information, not legal advice. Government fees and procedures change; confirm current figures before you file.
- Can a company lend money to its directors? Section 185 explained
Restrictions on loans, guarantees and security to directors under Section 185, the private company exemption and its conditions.
- Director disclosures: MBP-1 and DIR-8 explained
What directors must disclose to the company in MBP-1 (interests) and DIR-8 (non-disqualification), and when.
- Directors' report: what a private company must include
Contents of the board's report under Section 134 for small private companies, with the abridged option and who signs it.