Comprehensive Guide to Related Party Transactions: Approvals Under Companies Act 2013 and SEBI LODR

Companies frequently engage in transactions with persons and entities that are connected to them — for instance:

  • Sale of goods to a firm controlled by a promoter
  • Leasing office premises from a director’s relative
  • Entering into service arrangements with an associate company

All such dealings are treated as Related Party Transactions (RPTs) under the corporate law regime. While these arrangements are permissible, they present heightened conflict-of-interest and mispricing risks, which is why Indian law prescribes a detailed approval mechanism.

The regulatory framework essentially functions on three layers of control:

  1. Audit Committee
  2. Board of Directors
  3. Shareholders

Every RPT must be scrutinized at least by the Audit Committee, and depending on the type, nature, and size of the dealing, further approvals of the Board and/or the Shareholders may be necessary.

This guide explains, in a structured manner, who must approve which type of RPT, and under what conditions, for both unlisted and listed companies under the Companies Act 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR).

2. Three-Level Approval Architecture for RPTs

Indian company law and securities law collectively create a multi-layered control system for RPTs. Not all transactions need to move through all three levels, but every RPT necessarily passes the Audit Committee stage (subject to specific exemptions for listed entities).

2.1 First Layer: Audit Committee Approval

The Audit Committee acts as the primary gatekeeper for RPTs.

  • For companies required to constitute an Audit Committee under the Companies Act 2013, prior approval of the Audit Committee is compulsory for all related party transactions, whether or not they fall within the specific set of transactions mentioned in Section 188(1).
  • This blanket requirement applies regardless of:
    • Value of the transaction (e.g., ₹7 lakh or ₹700 crore)
    • Nature of the contract
    • Frequency of the arrangement

For listed companies, the regulatory standard is even stricter:

Only those members of the Audit Committee who are Independent Directors can approve RPTs.

This ensures that individuals with no direct or indirect personal interest evaluate the transaction, thereby reducing the chances of approvals being influenced by insiders.

2.2 Second Layer: Board of Directors Approval

The Board of Directors becomes involved when a related party transaction falls within any of the seven categories specified under Section 188(1) of the Companies Act 2013.

These seven categories are:

  1. Sale, purchase or supply of any goods or materials
  2. Selling or otherwise disposing of, or buying, property of any kind
  3. Leasing of property of any kind
  4. Availing or rendering of any services
  5. Appointment of any agent for purchase or sale of goods, materials, services or property
  6. Appointment to any office or place of profit in the company, its subsidiary company or associate company
  7. Underwriting the subscription of any securities or derivatives thereof, of the company

When Board Approval Is Not Required

Board approval under Section 188(1) is not mandatory if both of the following conditions are satisfied:

  • The RPT is in the ordinary course of business, and
  • The RPT is carried out on an arm’s length basis

If even one of these conditions is not fulfilled, Board approval becomes compulsory.

Interested Directors – Participation Restriction

Where a director has an interest in the RPT being evaluated, that director must:

  • Refrain from participating in the discussion on that item, and
  • Absent himself/herself during voting on that agenda point

This ensures that the transaction is evaluated objectively by the remaining disinterested directors.

2.3 Third Layer: Shareholder Approval

The highest level of scrutiny is Shareholder approval, typically sought through an Ordinary Resolution.

  • Not every RPT requires Shareholder approval.
  • Shareholder involvement is required only when specified thresholds or conditions are crossed.

The criteria for this requirement differ for unlisted and listed companies, as explained in subsequent sections.

3.