Related Party Transactions for Unlisted Companies

2.1 The regulatory rationale

A related party transaction is a transaction in which the person or persons determining the terms are not, or may not be, wholly disinterested. Company law can respond through prohibition, disinterested approval or disclosure. Indian company law principally uses approval and disclosure, while reserving prohibition or stricter restrictions for specific subjects dealt with elsewhere, such as loans to directors and connected persons under Section 185.

The Companies Act, 2013 replaced the earlier Central Government approval model under Section 297 of the Companies Act, 1956 with an internal governance architecture. The underlying judgment is that a conflicted transaction should be subject to informed consideration by a body capable of acting independently of the interested person, followed by transparent disclosure where the statute requires it.

2.2 The three layers of obligation

The three layers operate cumulatively. A transaction may be outside Section 188 yet still require disclosure under Ind AS 24 or AS 18. Conversely, a relationship modified or excluded for a private company for Section 188 purposes may remain relevant for financial reporting or another Companies Act provision. The purpose of each definition and exemption must therefore be kept separate.

2.3 Applicability across company types

Section 188 applies to unlisted private and public companies, subject to statutory exemptions and modifications. The Audit Committee framework, however, depends on Section 177(1) and the prescribed classes under Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014.

For a public company within the Audit Committee regime, Rule 6A makes Audit Committee approval a separate gate. That is why an ordinary-course, arm’s-length transaction can be outside the Board/member approval machinery of Section 188 yet still require Audit Committee approval.

Private companies require a more nuanced analysis. The MCA exemption notifications modify several provisions relevant to related-party compliance, subject to the applicable filing-default condition introduced for private-company exemptions. Three modifications are particularly important:

• Section 2(76)(viii) does not apply to a private company with respect to Section 188. Accordingly, a holding, subsidiary, associate, fellow-subsidiary or investing/venturer relationship that is caught only by clause (viii) does not, by itself, create a Section 188 related party for an eligible private company. This is a Section 188-specific modification; it does not erase the relationship for financial reporting or every other legal purpose.
• The second proviso to Section 188(1), which otherwise prevents a related-party member from voting on the approval resolution, does not apply to an eligible private company.
• Section 184(2) applies to a private company with the modification that an interested director may participate after disclosure of the interest. This private-company modification should be distinguished from the general rule applicable to public companies and from the wording of Rule 15/Secretarial Standards. For a publication aimed at mixed company types, the safest drafting is to state the public-company recusal rule separately and then identify the private-company notification modification.

CARO 2020 should likewise be described conditionally. Many private companies fall within CARO, but OPCs, small companies and specified private companies meeting the exemption conditions are outside the Order. The correct formulation is therefore “CARO 2020, where applicable”, not an unqualified statement that every private company is subject to CARO reporting.

2.4 Recent Companies Act developments

3.1 Identifying the related party: two tests, one master

The threshold question is whether the counterparty is a related party under the applicable legal framework. The correct approach is not to choose one definition and apply it everywhere. Instead, a company should maintain a master population broad enough to capture all applicable relationships and then tag each relationship by the source under which it qualifies.

Section 2(76) of the Companies Act, 2013

The statutory definition is relational and largely mechanical. It includes a director or key managerial personnel and their relatives; specified firms and private or public companies connected with a director or manager; bodies corporate or persons whose boards or management are accustomed to act on specified directions; and the group relationships in Section 2(76)(viii). Advice, directions or instructions given in a professional capacity are excluded from the “accustomed to act” limbs.

The definition also includes the prescribed category under Section 2(76)(ix). Rule 3 of the Companies (Specification of Definitions Details) Rules, 2014 provides that a director other than an independent director, or key managerial personnel, of the holding company, or his relative, is deemed to be a related party with reference to the company. This category was missing from the earlier draft and should be included in every Companies Act related-party mapping exercise.

For private companies, remember that the Section 462 notification disapplies Section 2(76)(viii) only “with respect to Section 188”. It does not delete clause (viii) from the Companies Act definition for every other purpose.

Ind AS 24 and AS 18

The accounting definition is purpose-specific and can reach relationships not captured in the same way by Section 2(76). Under Ind AS 24, a person may be related through control, joint control, significant influence or key-management status; entities can be related through group membership, associate/joint-venture relationships, post-employment benefit plans and specified management-service arrangements. AS 18 applies its own related-party framework to non-Ind AS companies.

3.2 Identifying the transaction: Section 188’s closed list

Section 188(1) applies to seven enumerated categories: sale, purchase or supply of goods or materials; sale/disposal/purchase of property; leasing of property; availing or rendering services; appointment of an agent for specified purchases or sales; appointment of a related party to an office or place of profit in the company, subsidiary or associate; and underwriting the subscription of securities or derivatives of the company. The list is exhaustive for Section 188.

Loans, guarantees, securities and investments are not brought into Section 188 merely because the counterparty is related; they must be tested under the provisions that actually regulate them, including Sections 185 and 186 where applicable. Dividends, share issues and other capital transactions likewise require a transaction-specific analysis rather than automatic classification under Section 188.

3.3 The approval architecture: separate gates, applied in sequence

For a company to which all relevant provisions apply, the approval architecture can involve the Audit Committee, the Board and the members. Each gate has a different trigger. The compliance analysis should therefore be sequential rather than treated as one composite “RPT approval”.

Gate one — the Audit Committee

Section 177(4)(iv) requires the Audit Committee’s terms of reference to include approval or subsequent modification of transactions with related parties. Rule 6A provides that all related party transactions shall require Audit Committee approval and permits omnibus approval subject to prescribed conditions. This gate applies only where the company is required to have an Audit Committee under the Act/rules or the applicable listing framework.

The ordinary-course/arm’s-length carve-out in the fourth proviso to Section 188(1) operates on Section 188(1). It does not, by its own force, switch off Section 177(4)(iv) or Rule 6A. Accordingly, an ordinary-course arm’s-length RPT may still require Audit Committee approval in a company within the Audit Committee regime.

Section 177(4)(iv) is also wider than the Section 188 list. Its provisos expressly refer to transactions other than those referred to in Section 188. This is another reason not to use the Section 188 closed list as the Audit Committee's sole screening tool.

Gate two — the Board

Where Section 188(1) applies, and the ordinary-course/arm’s-length exclusion is not available, the consent of the Board must be given by resolution at a Board meeting. It is not a circulation item. Rule 15(1) prescribes the information to be placed before the Board, including the identity and relationship of the related party, nature and duration of the arrangement, material terms and value, advances, pricing basis, omitted factors and other information relevant to the decision.

For public companies, the interested-director participation restrictions in Section 184(2), Rule 15(2) and Secretarial Standard-1 must be observed. The earlier draft stated recusal as if it applied identically to all companies. For an eligible private company, however, the Section 184(2) exemption notification permits the interested director to participate after disclosure of interest. The company should therefore identify its class before applying a generic recusal statement.

Gate three — the members

The first proviso to Section 188(1) requires prior member approval by resolution where the prescribed Rule 15(3) thresholds are met. The resolution is ordinary. The earlier draft also described the current Rule 15 limits as “entirely percentage-based”. That is too broad: the principal goods/property/leasing/services tests use percentage thresholds, while office/place-of-profit retains a monthly remuneration threshold and underwriting retains a net-worth percentage threshold.

Turnover and net worth are tested by reference to the audited financial statements of the preceding financial year. The aggregation rule means that the threshold cannot be tested in isolation for each invoice or contract if multiple transactions fall within the same relevant category during the financial year.

The related-party member voting prohibition under the second proviso to Section 188(1) does not apply to an eligible private company by virtue of the Section 462 notification. Separately, the third proviso contains the 90%-in-number exception for companies whose members are overwhelmingly relatives of promoters or related parties.

The fifth proviso to Section 188(1) is the primary statutory rule for holding-company / wholly-owned-subsidiary transactions: the first-proviso member resolution is not required for transactions between a holding company and its wholly owned subsidiary where the subsidiary’s accounts are consolidated with the holding company and placed before shareholders at the general meeting. Rule 15’s Explanation should be read after applying this statutory proviso, not as a substitute for it.

All approvals should be designed as prior approvals. Ratification is a limited remedial mechanism and should not be used as a routine operating model.

3.4 The Audit Committee’s role examined

The Audit Committee is distinct from the Board and members because, where the Audit Committee framework applies, its jurisdiction can extend beyond the closed list in Section 188. Section 177(4)(iv) also contains specific remedial and recommendation mechanisms.

• Omnibus approval: permitted subject to Rule 6A conditions and Board-approved criteria.
• Recommendation on refusal: where a transaction other than a Section 188 transaction is not approved, the committee must make recommendations to the Board.
• Limited ratification/voidability under Section 177(4)(iv): for a transaction not exceeding ₹1 crore entered into by a director or officer without Audit Committee approval, ratification within three months can prevent the statutory voidability consequence. Above ₹1 crore, this particular proviso does not provide the same cure.
• Board-report transparency: Section 177(8) requires disclosure where the Board does not accept an Audit Committee recommendation, along with the reasons.

Omnibus approval under Rule 6A

• The Audit Committee must formulate criteria after obtaining Board approval. The criteria must cover the annual aggregate cap, per-transaction cap, information to be provided, review intervals and excluded transaction classes.
• The committee should consider repetitiveness, the need for omnibus approval and the interest of the company.
• Each omnibus approval should identify the parties, nature and duration, maximum amount, indicative/base price and price-variation formula, and other relevant information. Where the need cannot be foreseen, and details are unavailable, the per-transaction limit for such approval is ₹1 crore.
• The approval is valid for not more than one financial year and must be renewed.
• Omnibus approval cannot be granted for sale or disposal of the undertaking.

Information supporting the approval

For an unlisted company, the information placed before the approving body should be driven by Section 188, Rule 15, Rule 6A where applicable, and the need for an informed decision. Rule 15(1) prescribes the minimum information for Board consideration, including the related party and relationship, nature and duration of the contract, material terms and value, advances, pricing and commercial terms, factors considered or omitted, and other information relevant to the decision. Audit Committee papers should be at least sufficiently detailed to support the committee’s statutory approval function.

Where an external valuation or fairness report is relied upon, the approving body should have the report itself or a sufficiently complete extract rather than a management conclusion that a report exists. The process should allow the committee to defer approval where required information is incomplete.

3.5 The disclosure architecture

3.6 Assurance and auditor reporting

CARO 2020 clause 3(xiii), where the Order applies, requires the auditor to report whether RPTs comply with Sections 177 and 188 where applicable and whether the details have been disclosed in the financial statements as required by the applicable accounting standards. Other CARO clauses may also be relevant to loans, advances, and fund movements involving promoters, subsidiaries, joint ventures, associates, or related parties.

SA 550 requires the auditor to understand related-party relationships and transactions sufficiently to address the risk of material misstatement and to evaluate presentation/disclosure. The auditor must inquire of management about the identity of related parties and changes, understand controls for identification/authorisation/accounting/disclosure, and remain alert for previously unidentified relationships while inspecting records.

Where management asserts that a transaction was conducted on terms equivalent to arm’s length, SA 550 requires sufficient appropriate audit evidence for that assertion. Transfer-pricing documentation may be relevant evidence, but it is not automatically determinative of the Companies Act ordinary-course/arm’s-length conclusion.

NFRA inspection and enforcement material has repeatedly focused on incomplete identification, missing business rationale, fund diversion/circularity, unsupported arm’s-length assertions, inadequate approval evidence, misstatement of loans/advances and incomplete disclosure. The March 2025 Auditor–Audit Committee Interactions Series on related parties reinforces the expectation that the Audit Committee should ask how the auditor tested completeness, rationale, approvals and disclosures.

3.7 Consequences of non-compliance

4.1 Build the related-party master to the widest applicable population

A master limited to Section 2(76) may not be enough for financial reporting because Ind AS 24 or AS 18 can identify related parties differently. The database should therefore include all relationships relevant to the Companies Act and the applicable accounting standard, with source tagging so that an accounting relationship is not automatically treated as a Section 188 relationship and vice versa.

• Connect your related-party database with your vendor, customer, and employee lists. This lets you check any proposed transaction for related-party issues before you commit to it.
• Refresh annual declarations from directors and KMPs, together with information needed to identify relatives, connected firms/companies and changes in group relationships relevant to Section 2(76) and the applicable accounting standard.
• Record private-company Section 188 exemptions as a legal tag rather than deleting the relationship from the master.
• Capture changes in group structure, board composition and ownership during the year, not only at year-end.

4.2 Treat ordinary course and arm’s length as documented conclusions

The Section 188 exclusion is available only where the transaction is both in the ordinary course of business and on an arm’s-length basis. The Act defines an arm’s-length transaction by reference to conduct as if the parties were unrelated so that there is no conflict of interest. Still, it does not prescribe a single valuation methodology.

A defensible file should therefore explain the basis for the terms: comparable third-party transactions, competitive quotes, published prices, independent valuation, index-based pricing or a reasoned cost-plus methodology. Transfer-pricing documentation may support the analysis but does not answer the ordinary-course question on its own.

Ordinary course is factual. Relevant factors can include the objects/business model, frequency and regularity of comparable dealings, historical practice and whether comparable transactions are entered into with unrelated parties. A one-off disposal of a major asset is not converted into ordinary course merely because the price is market-based.

4.3 Establish a compliance calendar keyed to statutory periodicity

4.4 Monitor contract variations as a distinct control

A variation can occur without a new contract. For an unlisted company, changes to pricing, scope, tenure, quantity, credit terms, security or funding should be re-screened to determine whether the revised arrangement remains within the terms already approved, exceeds an omnibus approval, changes the arm’s-length/ordinary-course conclusion, or causes the Rule 15(3) member-approval threshold to be met. Material changes should not be treated as administratively irrelevant simply because the underlying contract already exists.

4.5 Reconcile disclosures before filing

For an unlisted company, the related-party position may appear in e-Form AOC-2, the financial-statement related-party note and CARO 2020 reporting where the Order applies. These are not identical disclosure populations, but unexplained differences are a control weakness. A pre-filing reconciliation should compare the related-party master, transaction values, approval references, arm’s-length/ordinary-course conclusions and year-end balances across the applicable outputs.

4.6 Private and closely held company considerations

For family-controlled and closely held companies, the related-party population is often large relative to the business. The private-company limb of Section 2(76)(iv) can be triggered by relatively small shareholdings of a director/manager/relative. At the same time, the Section 2(76)(viii) exemption for private companies can remove certain group-company relationships from Section 188. The identification process therefore needs both completeness and legal classification.

• Do not assume that private-company status removes Section 188. It modifies specified provisions; the underlying Section 188 analysis still applies to the remaining related-party categories and covered transactions.
• Test whether the private company remains eligible for the Section 462 exemptions, including the applicable condition concerning defaults in filing financial statements under Section 137 and annual returns under Section 92.
• Apply the private-company modification to Section 184(2) correctly. A generic instruction that every interested director must leave the meeting can be wrong for an eligible private company.
• State CARO applicability conditionally. Do not automatically include clause 3(xiii) in a checklist for a private company that is outside the Order.

4.7 Matters to keep under review

The Corporate Laws (Amendment) Bill, 2026 is the principal legislative development to monitor. In addition to the proposed Section 164(1)(g) alignment for Section 188 penalties, the Bill proposes changes to the annual Section 184(1) disclosure cycle and proposes a company-level penalty in Section 189. The Bill was introduced on 23 March 2026, and the Joint Committee report was presented on 3 August 2026. None of those proposed changes should be stated as current law until enacted and brought into force.