Corporate Restructuring, Valuation and Insolvency · Process of M&A Transactions

Section 188 Related Party Transactions in M&A Deals

Updated 11 October 2026 · Fact-checked

Section 188 of the Companies Act, 2013 bars a company from entering the listed contracts with a related party without Board consent by resolution at a meeting. Above prescribed limits, prior shareholder approval by resolution is also needed, with related parties not voting. Disclosure in the Board's report is mandatory. Ordinary-course, arm's length deals are outside it.

Understand Related Party Transactions under Section 188

A related party transaction (RPT) is a contract or arrangement between the company and someone close to it, such as a director, a key managerial person, a relative, or a connected company. The risk is simple. Insiders may push the company into a deal on terms that favour them and hurt other shareholders. Section 188 is the control on that risk.

The section lists seven types of dealings: sale, purchase or supply of goods or materials; sale, disposal or purchase of property; leasing of property; availing or rendering of services; appointing an agent for purchase or sale of goods, materials, services or property; the related party's appointment to an office or place of profit in the company, its subsidiary or associate; and underwriting the subscription of the company's securities or derivatives. If the deal is not in this list, Section 188 does not apply to it. Other rules may still apply.

There are two layers of approval. First, the Board must consent by a resolution passed at a meeting. Second, where the company's paid-up share capital or the transaction value crosses the prescribed limits, the company must give prior approval by a resolution in general meeting. The Act now says "resolution", not "special resolution". The 2015 amendment made that change. Members who are related parties cannot vote on that resolution. The exception is a company in which 90% or more of the members, in number, are relatives of promoters or are related parties.

There is a key exemption. The section does not apply to transactions in the ordinary course of business, but only if they are on an arm's length basis. An arm's length transaction is one between two related parties conducted as if they were unrelated, so that there is no conflict of interest. Both conditions must be met. An ordinary-course deal at an inflated price is not exempt.

The shareholder resolution is also not required for transactions between a holding company and its wholly owned subsidiary, whose accounts are consolidated with the holding company and placed before shareholders at the general meeting for approval. In M&A, this matters in share swaps, asset transfers, service arrangements and appointments between the acquirer, the target and their promoters. Always map the related parties first.

Section 177 works with Section 188. The Audit Committee must approve or modify related party transactions, and it may give omnibus approval on prescribed conditions. The audit committee approval is a separate step. It does not replace Board consent under Section 188.

Key rules to remember

Board consent rule: Related party contract in the seven listed categories → Board resolution at a meeting, before entering the contract; Subject to prescribed conditions. The consent must be by resolution at a meeting, not by circulation, as the section reads.
Shareholder approval rule: Paid-up capital or transaction value ≥ prescribed limit → prior approval of the company by resolution; The prescribed limits come from the Rules. Do not quote figures unless you are sure of them. Related-party members cannot vote.
Voting bar: Member who is a related party → cannot vote on the resolution; Exception: company in which 90% or more members, in number, are relatives of promoters or related parties.
Ordinary course exemption: Ordinary course of business AND arm's length basis → Section 188(1) does not apply; Both limbs are needed. Failing the arm's length test removes the exemption.
Holding-wholly owned subsidiary relief: Holding company and wholly owned subsidiary, accounts consolidated and placed before shareholders → no shareholder resolution needed; This relieves only the shareholder resolution requirement under the first proviso.
Disclosure: Every contract under Section 188(1) → refer in Board's report with justification; Section 188(2).
Ratification: No Board consent or shareholder approval + not ratified within 3 months → voidable; Voidable at the option of the Board or the shareholders, as the case may be. Section 188(3). Directors concerned indemnify the company if the contract is with a related party of any director or authorised by another director.
Penalty: Listed company: ₹25 lakh. Any other company: ₹5 lakh; Applies to a director or any other employee who entered into or authorised the contract in violation. Section 188(5).

How to solve Related Party Transactions under Section 188 questions

Use this order for any case question on related party transactions in a deal. Write each step as provision, facts, conclusion.

1Identify the related parties from the facts: directors, KMP, relatives, group companies. Note who sits on both sides.
2Check whether the transaction falls in one of the seven categories in Section 188(1). If not, say Section 188 does not apply.
3Test the exemption: is the deal in the ordinary course of business and at arm's length? If both, Section 188(1) does not apply. If price or terms look non-market, say so.
4Check the holding and wholly owned subsidiary relief where the parties are a holding company and its wholly owned subsidiary.
5If Section 188 applies, state the Board consent requirement and then test the prescribed limits for shareholder approval. Say which members cannot vote.
6Add the Section 177 point: Audit Committee approval, with omnibus approval if conditions are met.
7State the disclosure duty: reference in the Board's report with justification.
8Conclude. If approval was missed, apply the three-month ratification rule, voidability, indemnity and the penalty.

Quickest way: Five-question RPT check

When to use it: Use when time is short and the question gives a deal between connected parties.

Who is the related party?
Is the deal in the seven listed types?
Is it ordinary course and arm's length?
Which approvals: Board, Audit Committee, shareholders (with voting bar)?
What if approvals are missing: ratify within 3 months, else voidable, plus penalty.

Common mistakes in Related Party Transactions under Section 188

Saying shareholder approval needs a special resolution.
Older notes and the pre-2015 law used the term special resolution.
Fix: Write "resolution". The 2015 amendment substituted it in the section.
Treating every ordinary-course deal as exempt.
Students remember the ordinary course words and forget the second condition.
Fix: Always write both limbs: ordinary course of business and arm's length basis.
Letting related-party members vote on the approving resolution.
Students assume all members vote on every resolution.
Fix: State that a member who is a related party cannot vote, and mention the 90% exception.
Forgetting disclosure and Audit Committee approval.
Focus stays on Board and shareholder approvals.
Fix: Close the answer with Board's report disclosure with justification and Section 177 Audit Committee approval.
Saying a contract without approval is void.
Voidable and void sound alike.
Fix: The contract is voidable at the option of the Board or shareholders if not ratified within three months. Directors concerned must indemnify in the stated cases.
Quoting prescribed limits from memory.
Students try to add numbers to look precise.
Fix: Say "as prescribed" unless you are certain of the Rules. The marks are for applying the structure.

Worked examples

Example 1

Alpha Components Ltd, an unlisted public company, plans to buy a factory building from Mr. Rao, who is the brother of its managing director. The price is the same as a registered valuer's value. Which Section 188 requirements apply? Assume the prescribed limits are crossed.

Show the solution

Related party: the director's relative, Mr. Rao.
Category: buying property of any kind, which is listed in Section 188(1)(b).
Exemption: buying a factory building is not obviously ordinary-course business for a components maker, so the exemption cannot be assumed. The valuer-based price helps show arm's length, but both limbs are needed.
Approvals: Board consent by resolution at a meeting; since the limits are crossed, prior approval of the company by resolution. Related-party members cannot vote.
Audit Committee approval under Section 177(4)(iv) applies if the company has one.
Disclosure: reference in the Board's report with justification.

Answer: Board consent at a meeting and prior shareholder approval by resolution are needed, with related-party members not voting. Disclose in the Board's report with justification.

Example 2

Beta Steel Ltd, a listed company, supplied steel to its associate in the ordinary course at the same rates charged to other customers. The Board did not pass a Section 188 resolution. Is there a contravention?

Show the solution

Related party: the associate company.
Category: sale or supply of goods is listed in Section 188(1)(a).
Exemption: the supply is in the ordinary course of business and at the same rates as to other customers, which supports arm's length basis.
Both limbs are met, so Section 188(1) does not apply and no Board consent or shareholder resolution is required.
Caution: Audit Committee approval of related party transactions under Section 177(4)(iv) may still be required, and disclosure should follow the applicable rules. If the rates were above market, the exemption would fail.

Answer: No contravention of Section 188(1), because the deal is ordinary course and arm's length. The exemption would fail if the price was not at arm's length.

Exam tips

Use the provision, facts, conclusion format and name the category from the seven listed in Section 188(1).
Always test both limbs of the ordinary course exemption in the facts. Examiners often hide a non-market price.
Do not give numeric thresholds unless the question supplies them. Write "as prescribed".
Link to Section 177 when the facts mention an Audit Committee, and to the Board's report for disclosure.
For missed approvals, give the sequence: ratify within three months, then voidable, indemnity, penalty.

Practice questions from Process of M&A Transactions

Related Party Transactions under Section 188 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Related Party Transactions under Section 188: frequently asked questions

Is a special resolution needed under Section 188?

No. The 2015 amendment replaced special resolution with resolution. Prior shareholder approval by resolution is needed where the prescribed limits are crossed.

What is an arm's length transaction?

It is a transaction between two related parties conducted as if they were unrelated, so that there is no conflict of interest.

What is the difference between a related party and an arm's length transaction?

A related party is the person connected to the company. An arm's length transaction describes how a deal is done, on fair terms with no conflict of interest. A deal with a related party can still be at arm's length.

What happens if a related party contract is not approved?

If it is not ratified within three months of the contract date, it is voidable at the option of the Board or shareholders. The director or employee faces a penalty of ₹25 lakh for a listed company or ₹5 lakh for any other company.