Companies Act 2013 Section 188: Related Party Transactions (2026)

Explainer · Company Law · Companies Act 2013

Updated for 2026 · Claw Editorial

Section 188 of the Companies Act, 2013 controls deals a company makes with its own related parties, such as its directors, their relatives, and firms or companies connected to them. These deals are not banned, because group companies trade with each other all the time, but they are watched closely because a related party can be favoured at the company's cost. Section 188 requires the board, and in bigger deals the shareholders, to approve such transactions in the open. This explainer sets out who is a related party, which deals are covered, the approvals, the main exception, and what happens if the rule is skipped. Last verified October 2026.

01The short answer

Section 188 of the Companies Act, 2013 is titled "Related party transactions". It says that for a set of specified transactions between a company and a related party, the company must get the consent of its Board of Directors. For larger transactions, above the thresholds in the rules, it must also get the approval of the shareholders by an ordinary resolution.

There is one big exception: if the transaction is both in the ordinary course of business and on an arm's length basis, meaning on normal commercial terms as if the parties were strangers, Section 188 approval is not needed. The aim is transparency, so that insiders cannot quietly route value to themselves.

02Who is a related party

A "related party" is defined in Section 2(76) of the Act, not in Section 188 itself. In plain terms it includes:

• a director or key managerial person of the company, and their relatives;
• a firm in which a director, manager or relative is a partner;
• a private company in which a director or manager is a director or member;
• a public company in which a director or manager holds, with relatives, more than 2 per cent of the paid up capital;
• a holding, subsidiary or associate company, and fellow subsidiaries.

03Which transactions are covered

Section 188(1) lists the kinds of deals that are caught, broadly:

• 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 the sale or purchase of goods, materials, services or property;
• appointment of a related party to any office or place of profit in the company or its subsidiary or associate; and
• underwriting the subscription of any securities or derivatives of the company.

If a deal does not fall within one of these heads, Section 188 does not apply to it.

04Approvals needed

The level of approval depends on the size of the deal.

The thresholds in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 are set as a percentage of turnover or net worth, for example around 10 per cent of turnover for sale or purchase of goods. A director who is interested in the contract cannot vote on the resolution, and in a listed company the Audit Committee under Section 177 must also approve.

05The arm's length exception

The most important carve out is in the proviso to Section 188(1). Section 188 approval is not required for transactions entered into by the company in its ordinary course of business, other than transactions which are not on an arm's length basis.

In plain terms, both tests must be met: the deal must be part of the company's normal business, and it must be on arm's length terms, meaning the price and conditions are what the company would agree with an unrelated party. If both are true, no special Section 188 approval is needed, though listed companies still face the stricter SEBI listing rules. This keeps routine, fair group trading outside the approval machinery.

06What if approval is skipped

Under Section 188(3), if a related party transaction is entered into without the required consent or approval, and is not ratified by the Board or the shareholders within three months, the contract is voidable at the option of the Board or the shareholders. If the transaction is with a director or authorised by any other director, those directors must indemnify the company for any loss.

Section 188(5) also provides penalties for a director or employee who enters into or authorises a contract in breach, which can include a fine and, for a listed company, other consequences. Breaches often feed into oppression and mismanagement petitions under Sections 241 and 242.

07Where Claw fits

Claw is an all-in-one legaltech platform for Indian advocates, law firms, and corporate legal teams, combining AI-based case search, an AI legal assistant (Legal GPT), case management, and compliance automation across all Indian courts and tribunals.

Section 188 fights turn on fine questions: was the counterparty a related party, was the deal at arm's length, was the right resolution passed, can the contract be avoided. These run through NCLT petitions, SEBI orders and High Court appeals. Claw lets you search more than 30 crore judgments, with Supreme Court decisions from 1950 and High Court decisions from 1990, to see how courts have read "arm's length", "ordinary course" and the voidable contract rule, with results in under 5 seconds. You can also track a live matter, with its orders and hearings, by company or party name across 9,102 courts, benches and forums. Claw does not use the documents you upload to train its AI models.

Create a FREE Claw account to track any Section 188 matter by party name and follow every hearing, and use case search across Indian courts to find how courts have applied the related party transaction rule.

08Sources and further reading

• India Code (Companies Act, 2013, bare text): indiacode.nic.in
• Ministry of Corporate Affairs (Board and its Powers Rules): mca.gov.in
• PRS Legislative Research: prsindia.org
• Claw: clawlaw.in

This explainer is general information, not legal advice. The thresholds, definitions and procedure under Section 188 and the SEBI listing rules can change, so check the current text and take advice from a company secretary or counsel before you act.

09Frequently asked questions