Penalties and Consequences for Violating RPT Rules (Section 188)
The true teeth of Section 188 lie in its consequences for non-compliance, which extend beyond fines to impacting the very validity of the transaction and imposing personal liability on directors.
I. The Voidable Nature of the Transaction (Section 188(3))
The most immediate consequence of entering into an RPT without the required Board consent or Shareholder approval is that the contract or arrangement becomes voidable at the company’s option.
| Stage | Default Scenario | Consequence |
| Initial Contravention | The RPT is executed without the necessary Board or Ordinary Resolution (where required). | The contract is immediately deemed voidable at the option of the Board of Directors or the Shareholders. |
| Ratification Period | The contract is not ratified by the Board or Shareholders (as the case may be) within three months from the date it was entered into. | The contract automatically becomes void and can be nullified by the company, causing legal complications for both parties. |
II. Personal Liability and Indemnification (Section 188(3) & (4))
The Act ensures that directors and employees who breach RPT rules are personally responsible for the ensuing financial harm to the company.
| Liability | Description |
| Indemnification Obligation | If the unauthorized contract is entered into with a related party of a director, or is authorized by any director, the concerned director(s) must indemnify the company against any loss incurred. This ensures personal accountability for potential undue gains. |
| Recovery of Loss | The company is explicitly entitled to proceed against any director or other employee who contravened the provisions of Section 188 for the recovery of any loss sustained as a result of such contract or arrangement. |
| Undue Gain Liability | Under Section 166 (Duties of Directors), any director found guilty of making an undue gain or advantage (either to themselves, their relatives, or associates) shall be liable to pay an amount equal to that gain back to the company. |
III. Statutory Penalties (Section 188(5))
The individual director or employee who authorized or entered into the unauthorized RPT is subject to severe financial penalties:
| Type of Company | Penalty on Director / Employee |
| Listed Company | Liable to a penalty of ₹25,00,000 (Twenty-Five Lakh Rupees). |
| Any Other Company (Including Private Limited Company) | Liable to a penalty of ₹5,00,000 (Five Lakh Rupees). |
💡 Key Takeaway for Private Companies
While Private Limited Companies enjoy exemptions (like allowing an interested member to vote and not requiring shareholder approval for all RPTs), they are NOT exempt from the penalties under Section 188(5). The financial and personal risk associated with an unapproved RPT remains high, underscoring the necessity of diligent Board approval and careful determination of the Ordinary Course of Business (OCB) and Arm's Length Basis (ALB).