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Related Party Transaction | Section 188 | Companies Act, 2013

The related-party transaction refers to a deal which made between 2 parties who are joined either by a pre-existing business relationship or by the common interest. Companies oft find business deals with parties with whom they are familiar or have a common interest. Though related-party transactions are legal themselves, they may frame conflicts of interest or lead to other illegal situations. Public companies need to disclose these transactions.

Under the Companies Act, 2013, the entire concept of related party transactions has been defined in a one section which is Section 188 who combines the erstwhile Sections 314 & Section 297 of the Companies Act, 1956 and also contains few new provisions within its scope. The section is perfectly layered with many sets of provisions & leaves the mind perplexed with its scope and coverage.

In the next paragraph we have tried to analyze the concept of related party transactions under the Companies Act, 2013 as mentioned in Section 188 read with relevant rules made thereunder.

Applicability of the Section

Section 188 is applicable to both companies which is private and public and is applicable with effect from 01 April 2014.

How Does SEBI Govern Related Parties & Related Party Transactions?

Clause 49 of SEBI also states certain regulatory requirements for related party transactions. It defines RPT (related party transaction) as a transaction which includes transfer of resources or services or obligation. Their scope is wider than the Companies Act 2013. It includes Director’s close family members or key managerial personnel, private company in which directors or key managerial personnel plus their relatives have control.

Every related party transaction which is material need to be approved by the shareholders through passing a special resolution & all related parties will not be allowed to vote on such resolutions.

Which Counted as Related Party Transactions?

These below mentioned transactions between a firm & its related party is described as a related party transaction: –

  1. Sale, purchase or supply of any materials or goods
  2. Availing or rendering of any service
  3. Selling or buying property of any kind
  4. Leasing of the property of any kind
  5. Appointment of an agent for the sale or purchase of goods, materials, service, or property
  6. Related party’s appointment to the place of profit or office in the company, associate, & subsidiary
  7. Firm underwriting the subscription of any securities or derivatives of the company


For auditing as per the provision of Companies Act, 2013 it is required to approve or modify the transaction with the related party scrutinizes by the audit committee. Further, this act provides the audit committee with the authority to investigate the matters falling within their scope & to have full access over the information contained in the records of the company.

Who all are excluded from Related Party Transaction?

  1. Director or KMP of associate and JV companies
  2. Public companies where directors hold less than 2% share capital
  3. Any person appointed in senior management in
    • The company or
    • Its holding or
    • Subsidiary or
    • Associate company