Related party transactions are governed by Section 188 of the Companies Act, 2013 and Regulation 23 of SEBI LODR, which set approval thresholds for the audit committee, the board and shareholders. Many disclosure failures begin with a transaction nobody flagged as related.
Our course is built for finance teams, company secretaries and directors. The guide below explains where the disclosure gap usually opens.
Quick answer
Section 188 of the Companies Act, 2013 requires board consent, and shareholder approval above Rule 15 thresholds, for specified contracts with related parties. Listed entities must also follow SEBI LODR Regulation 23: independent audit committee approval for all related party transactions and shareholder approval for material ones. Finance teams, company secretaries, directors and KMP should be trained.
The course
What the law requires
Companies Act, 2013: section 2(76), who is a related party
Section 2(76) of the Companies Act, 2013 defines a related party to include a director or KMP or their relative; a firm in which a director, manager or their relative is a partner; a private company in which a director or manager or their relative is a member or director; a public company in which a director or manager is a director and holds, with relatives, more than two per cent of paid-up share capital; bodies corporate and persons on whose advice the board, director or manager is accustomed to act (other than professional advice); and the company's holding, subsidiary and associate companies and fellow subsidiaries. "Relative" is defined separately in section 2(77).
Companies Act, 2013: section 188, approval of related party contracts
Section 188(1) requires the consent of the board, given by resolution at a meeting, before a company enters into a contract or arrangement with a related party for: (a) sale, purchase or supply of goods or materials; (b) selling, disposing of or buying property; (c) leasing of property; (d) availing or rendering services; (e) appointing an agent for purchase or sale; (f) a related party's appointment to an office or place of profit in the company, its subsidiary or associate; and (g) underwriting the subscription of securities or derivatives.
Above prescribed thresholds, the contract also needs prior approval of the company by resolution, and a member who is a related party cannot vote on that resolution. Section 188 does not apply to transactions in the ordinary course of business on an arm's length basis. Every contract under section 188(1) must be referred to in the Board's report with the justification for entering into it (section 188(2)).
A contract entered by a director or employee without the required consent, and not ratified within three months, is voidable at the option of the board or shareholders, and directors concerned must indemnify the company against loss (section 188(3)). The company can also recover its loss from the director or employee (section 188(4)).
Companies (Meetings of Board and its Powers) Rules, 2014: Rule 15
Rule 15 sets out what the board agenda and the explanatory statement must disclose for a related party contract. Rule 15(3) sets the thresholds above which shareholder approval is needed: transactions for goods, leasing and services amounting to ten per cent or more of turnover; transactions for property amounting to ten per cent or more of net worth; appointment to an office or place of profit at monthly remuneration above two and a half lakh rupees; and underwriting remuneration above one per cent of net worth, each measured on the last audited financial statements.
SEBI LODR Regulations, 2015: Regulations 2(1)(zb), 2(1)(zc) and 23
For listed entities, Regulation 2(1)(zb) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (as amended) adopts the Companies Act or accounting standards definition of related party and adds every promoter and promoter group entity, and any person holding ten per cent or more of the equity (directly or on a beneficial basis) during the preceding financial year. Regulation 2(1)(zc) defines a related party transaction as a transfer of resources, services or obligations between the listed entity or its subsidiaries and a related party, or with any other person where the purpose and effect is to benefit a related party, whether or not a price is charged.
Regulation 23(1) requires a board-approved policy on materiality and on dealing with related party transactions, reviewed at least once every three years. Under Schedule XII, inserted with effect from 19 December 2025, a transaction is material if, alone or with previous transactions in the financial year, it exceeds: 10% of annual consolidated turnover for entities with turnover up to 20,000 crore rupees; 2,000 crore rupees plus 5% of turnover above 20,000 crore for turnover up to 40,000 crore; and 3,000 crore rupees plus 2.5% of turnover above 40,000 crore, capped at 5,000 crore, for larger entities. Payments for brand usage or royalty are material above five per cent of annual consolidated turnover (Regulation 23(1A)).
Under Regulation 23(2), all related party transactions and subsequent material modifications need prior approval of the audit committee, and only independent directors on the committee may approve. The committee may grant omnibus approval for repetitive transactions for up to one year (Regulation 23(3)). Material transactions need prior shareholder approval, and no related party may vote on the resolution, whether or not it is party to the transaction (Regulation 23(4)). Disclosures of related party transactions must be filed with the stock exchanges every six months on the date financial results are published (Regulation 23(9)).
Who must be trained and how often
Neither the Companies Act nor SEBI LODR requires related party transaction training or sets a frequency. The duties fall on the people who identify, approve and record these transactions: the board and audit committee, the company secretary, finance and accounts, procurement, legal, and the business owners who sign contracts. Section 188(5) makes the director or employee who entered into or authorised a non-compliant contract personally liable, which is why training reaches beyond the board.
Common practice, not a legal requirement, is to train these teams annually, after each change to the RPT policy (which LODR requires to be reviewed at least every three years), and whenever SEBI amends Regulation 23, as it did with the Schedule XII thresholds from December 2025.
| Audience | Why | Common practice |
|---|---|---|
| Directors and audit committee members | Approve RPTs under s.188 and Reg. 23(2)-(3) | Annual briefing and on policy changes |
| Company secretary and legal | Maintain related party lists, agenda notes and disclosures | Annual and on regulatory change |
| Finance, accounts and procurement | Spot transactions with related parties before they are signed | Annual |
| KMP and business heads | Sign contracts and can be personally liable under s.188(5) | Annual |
Penalties and consequences
| Breach | Provision | Consequence |
|---|---|---|
| Director or employee enters into or authorises a contract in breach of section 188 | Companies Act s.188(5) | Penalty of twenty-five lakh rupees (listed company) or five lakh rupees (any other company) |
| Contract not approved and not ratified within three months | Companies Act s.188(3) | Voidable at the option of the board or shareholders; directors concerned indemnify the company |
| Loss to the company from a non-compliant contract | Companies Act s.188(4) | Company may recover the loss from the director or employee |
| Transaction not ratified by the audit committee where ratification was used | LODR Reg. 23(2) proviso (f) | Voidable at the option of the audit committee; directors concerned indemnify the listed entity |
| Listed entity breaches Regulation 23 | LODR Reg. 98(1) | Stock exchange action, including fines and suspension of trading |
| Contravention of SEBI regulations with no separate penalty | SEBI Act s.15HB | Penalty of not less than one lakh rupees, up to one crore rupees |
What good Related Party Transactions training covers
- Who is a related party under section 2(76) and under LODR, including promoter group and ten per cent shareholders
- What counts as a related party transaction, including transactions with third parties that benefit a related party
- The seven types of contract covered by section 188(1)
- Ordinary course of business and arm's length: what each test means and how to document it
- Board, audit committee and shareholder approval routes and who may vote
- Rule 15(3) and Schedule XII thresholds and how cumulative transactions in a year are counted
- Omnibus approvals: conditions, limits and quarterly review
- Material modifications and ratification within three months
- Maintaining and updating the related party list, and flagging transactions before signing
- Board's report and half-yearly stock exchange disclosures
- Personal liability under section 188(5)
Our courses for this topic
| Course | Audience | Duration | Language | Format |
|---|---|---|---|---|
| Related Party Transaction Policy | Finance & Board | 27 min | English | SCORM eLearning |
Laws & standards covered
- Companies Act 2013 – Section 188
- SEBI LODR Regulations – Regulation 23
- Accounting Standard AS-18
Who it's for
- Finance and accounts teams
- Board of directors
- Company secretaries
- Legal and compliance officers
Guides & insights
Frequently asked questions
Does every related party transaction need shareholder approval?
No. Under the Companies Act, shareholder approval is needed only above the Rule 15(3) thresholds, and transactions in the ordinary course of business at arm's length are outside section 188. For listed entities, LODR requires shareholder approval for material transactions as defined in Schedule XII.
Does the ordinary course and arm's length exemption apply under SEBI LODR?
No. The exemption is in section 188 of the Companies Act. Under LODR Regulation 23(2), every related party transaction of a listed entity needs prior audit committee approval, subject only to the specific exceptions in Regulation 23.
Who approves related party transactions on the audit committee?
Only the members who are independent directors, under the first proviso to Regulation 23(2).
Can a related party transaction be approved after the event?
Under section 188(3), the board or shareholders can ratify within three months. Under LODR, independent directors on the audit committee can ratify transactions up to one crore rupees in a financial year within three months or at the next meeting, whichever is earlier, subject to conditions in Regulation 23(2).
Do subsidiaries' transactions need the listed parent's approval?
Yes, in many cases. LODR covers transactions of subsidiaries with related parties, and a subsidiary transaction above one crore rupees needs the listed entity's audit committee approval if it exceeds the lower of ten per cent of the subsidiary's standalone turnover or the Schedule XII materiality threshold.
Which Related Party Transactions Training courses does Compliance at Workplace offer?
Related Party Transaction Policy (27 min, for Finance & Board).
Which laws and standards does Related Party Transactions Training cover?
Companies Act 2013 – Section 188; SEBI LODR Regulations – Regulation 23; Accounting Standard AS-18.
Who should take Related Party Transactions Training?
Finance and accounts teams, Board of directors, Company secretaries, Legal and compliance officers.
Can the Related Party Transactions Training be customised to our organisation?
Yes. Every course can be customised to your policies, branding and industry scenarios, and delivered on your LMS as SCORM or on our Compliance Central platform.
Sources
- Companies Act, 2013 (India Code)
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (consolidated, SEBI)
- Securities and Exchange Board of India Act, 1992 (as amended, SEBI)
Last updated by the Compliance at Workplace Editorial Team.