Section 188 of the Companies Act, 2013, dealing with Related Party Transactions (RPTs), is one of the most critical compliance areas.
Here is a concise note on RPTs and the specific exemptions available to a Private Limited Company.
📑 Note on Related Party Transactions (Section 188)
Related Party Transactions (RPTs) are transactions between a company and its Related Parties (as defined under Section 2(76) of the Act). The purpose of Section 188 is to ensure that such transactions are conducted at Arm's Length Basis (ALB) and are in the company's interest, thereby preventing potential conflicts of interest and misuse of funds by the management.
I. Transactions Covered under Section 188
Section 188 mandates compliance for contracts or arrangements with a related party concerning the following seven items:
- Sale, purchase, or supply of any goods or materials.
- Selling or otherwise disposing of, or buying, property of any kind.
- Leasing of property of any kind.
- Availing or rendering of any services.
- Appointment of any agent for purchase or sale of goods, materials, services, or property.
- Appointment to any office or place of profit in the company, its subsidiary, or associate company (at a monthly remuneration exceeding ₹2.5 Lakh, as prescribed).
- Underwriting the subscription of any securities or derivatives of the company (exceeding 1% of net worth, as prescribed).
II. Core Compliance Framework (General)
Compliance under Section 188 has three main tiers, based on the nature and value of the transaction:
| Tier | Requirement | Applicability |
| Exemption | No Board or Shareholder approval required. | Ordinary Course of Business (OCB) AND Arm's Length Basis (ALB). (This is a non-negotiable exemption for all companies.) |
| Tier 1 (Board) | Consent of the Board of Directors by a Resolution at a Board Meeting (not by Circular Resolution). | All RPTs that do not qualify for the OCB & ALB exemption. |
| Tier 2 (Shareholders) | Prior Approval of the Company by Ordinary Resolution at a General Meeting. | Required if a transaction, or a series of transactions, exceeds the prescribed monetary thresholds (e.g., generally 10% of turnover or net worth, depending on the transaction type, as specified in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014). |
III. Special Exemptions for Private Limited Companies
The compliance burden for a Private Limited Company (Pvt Ltd Co) is significantly relaxed via the MCA Exemption Notification (G.S.R. 464(E)), provided the company is not in default of statutory filings:
1. RPT Voting Exemption (Applicable to All Pvt Ltd Cos)
| Provision | Public Company Rule | Private Company Exemption |
| Second Proviso to Section 188(1) | Interested Member Barred from Voting: No member who is a related party can vote on the resolution to approve the RPT. | Interested Member Allowed to Vote: The member who is a related party can vote on the Ordinary Resolution to approve the RPT. This acknowledges the reality of closely held Private Companies. |
2. Related Party Definition Relaxation (Partial Exemption)
The MCA Notification initially provided an exemption regarding the definition of 'Related Party' for Section 188 purposes, by excluding certain corporate entities (Holding, Subsidiary, Associate, and Fellow Subsidiary Companies) from the RPT compliance net when transacting with a Private Company.
- Practical Effect: This historically meant that RPT compliance under Section 188 was not required for transactions between a Private Company and its holding/subsidiary company.
- Current Caution: Given subsequent amendments and the importance of full disclosure, many professionals now advise: While the statutory exemption exists, for transparency and good governance, the Board should still ensure all such intra-group transactions are formally approved at the Board level and documented as being on an ALB.
IV. Mandatory Disclosures
Regardless of exemptions or approvals, the company must:
- Board's Report: Refer to all RPT contracts or arrangements in the Board’s Report to shareholders, along with a justification for entering into them.
- RPT Register: Maintain a Register of Contracts or Arrangements in which Directors are interested (Form MBP-4) under Section 189.