Section 188 related-party transactions: thresholds and tests

Section 188 of the Companies Act 2013 governs contracts and arrangements a company enters into with its related parties. The framework has three layers: what counts as a covered transaction, what level of approval it needs, and what must be disclosed.

Covered transactions

Section 188(1) lists the transaction types: sale, purchase or supply of goods or materials; selling or otherwise disposing of, or buying, property; leasing of property; availing or rendering of services; appointment of an agent for any of the above; appointment of a related party to an office or place of profit in the company; and underwriting the subscription of securities or derivatives of the company.

Level of approval

• Board approval at a meeting (not by circulation) is the baseline, with the interested director not participating.
• Prior approval by resolution of the members is required where the transaction exceeds the thresholds prescribed in the rules, unless it is in the ordinary course of business and on an arm’s-length basis — that carve-out takes the transaction outside Section 188’s approval machinery.
• A member who is a related party cannot vote on the resolution to approve a transaction in which that member is a related party.

Disclosure

Every Section 188 contract or arrangement must be referred to in the Board’s report to the shareholders, with the justification for entering into it. Particulars also go into the register of contracts under Section 189. Listed entities carry additional related-party-transaction obligations under SEBI LODR that sit on top of Section 188.

How Yogin AI helps

The company-secretary workspace evaluates a described transaction against the Section 188 tests — covered type, threshold, ordinary-course / arm’s-length carve-out, interested-party voting — and flags the approval route it points to. It is a checklist aid; the company secretary confirms the position and prepares the resolutions and disclosures.