Related party transaction is any contract or arrangement entered into by a company with a related party — such as a director, key managerial personnel, their relatives, or entities in which they hold significant interest — that is subject to regulatory scrutiny and approval requirements under Indian law. Under the Companies Act, 2013, "related party" is defined in Section 2(76), and the framework for approval of related party transactions is governed by Section 188.
Legal definition
Section 2(76) of the Companies Act, 2013 defines "related party" with reference to a company as:
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director or manager is a director and holds along with his relatives, more than two per cent. of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act;
(viii) any body corporate which is a holding, subsidiary or an associate company of such company; or a subsidiary of a holding company to which it is also a subsidiary (fellow subsidiary).
Section 188(1) lists the categories of transactions that require approval: sale, purchase or supply of goods or materials; selling or disposing of, or buying, leasing of property; availing or rendering of any services; appointment of any agent for purchase or sale of goods, materials, services or property; and appointment to any office or place of profit in the company.
How courts have interpreted this term
Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. (2021) 9 SCC 449
The Supreme Court examined allegations of related party transactions between Tata Group companies. While the Court ultimately set aside the NCLAT's order that had reinstated Cyrus Mistry as chairman, it extensively discussed the governance framework for related party transactions, holding that such transactions must be evaluated on their commercial merit and that the majority shareholders' decisions on business strategy, including inter-group transactions, are entitled to deference unless they constitute oppression or prejudice to minority shareholders.
Miheer H. Mafatlal v. Mafatlal Industries Ltd. (1997) 1 SCC 579
The Supreme Court held that transactions between related parties within a group must be fair and at arm's length, and that the Court has jurisdiction to examine whether such transactions are oppressive to minority shareholders. The decision established that self-dealing by controlling shareholders through related party transactions can constitute grounds for relief under the oppression and mismanagement provisions.
Why this matters
Related party transactions are one of the most significant corporate governance concerns in Indian company law. Because these transactions involve persons who have a relationship with the company — directors, their relatives, and associated entities — there is an inherent risk of conflict of interest. The statutory framework ensures that such transactions are conducted transparently, at arm's length, and with appropriate approvals.
For practitioners, the approval architecture is layered. First, every related party transaction falling within Section 188(1) requires prior approval of the board of directors. If the transaction exceeds the monetary thresholds prescribed in Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014, prior approval of the shareholders by ordinary resolution is also required. The interested director or member must not vote on the resolution approving the transaction. For listed companies, Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 imposes additional requirements, including approval by a majority of minority shareholders for material related party transactions.
A critical point often missed is the exemption: transactions entered in the ordinary course of business and at arm's length price do not require board or shareholder approval under Section 188. However, for listed companies, SEBI regulations have progressively narrowed this exemption, requiring disclosure and approval even for arm's length transactions above specified thresholds.
Related terms
Related governance concepts:
Frequently asked questions
What is an arm's length transaction?
An arm's length transaction is one between parties that are independent and deal with each other on equal footing, where the price is determined by market forces without influence from the relationship between the parties. Section 188 of the Companies Act exempts transactions in the ordinary course of business and at arm's length from the approval requirements.
Who approves related party transactions?
The approval depends on the magnitude of the transaction. The board of directors provides the first level of approval. The audit committee also reviews related party transactions under Section 177. If the transaction exceeds prescribed thresholds, shareholder approval by ordinary resolution is required. For listed companies, SEBI requires approval of a majority of minority shareholders for material transactions.
Can a related party vote on the resolution approving the transaction?
No. Under the proviso to Section 188(1), any member of the company who is a related party shall not vote on the resolution approving the transaction. For listed companies, SEBI LODR Regulations additionally require that all entities falling within the definition of related parties abstain from voting on such resolutions.
What are the penalties for non-compliance?
Under Section 188(4), any director or other employee who enters into a related party transaction in contravention of Section 188 shall be punishable with imprisonment for up to one year or a fine of Rs. 25,000 to Rs. 5,00,000 or both. The contract or arrangement entered in violation may be ratified by the board or shareholders within three months.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.