Last reviewed: 24 September 2026. A private company buying office space from its own director, or a group company routing services through a common promoter's other entity, is exactly the kind of transaction Section 188 was written to catch. Getting the approval trail right – board, and where thresholds are crossed, shareholders – matters more than most private companies assume, because an unapproved related-party contract is voidable and can expose the interested director personally.
Who counts as a related party
Section 2(76) casts a wide net: a director or key managerial personnel (KMP) 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 member or director; a public company in which a director or manager holds more than 2% of paid-up capital (along with relatives); a body corporate whose board is accustomed to act on a director's directions; any person under whose advice a director is accustomed to act; and the company's holding, subsidiary, associate, or fellow-subsidiary companies.
What kinds of contracts are covered
| Category | Example |
|---|---|
| Sale, purchase or supply of goods or materials | Buying raw material from a director's other firm |
| Selling, disposing of or buying property | Company purchasing office premises from a director |
| Leasing of property | Renting warehouse space from a promoter-owned entity |
| Availing or rendering of services | Group company providing shared services to another group entity |
| Agency appointments | Appointing a related party as sales/purchase agent |
| Appointment to an office or place of profit | A relative of a director appointed to a paid position in the company or its subsidiary/associate |
| Underwriting subscription of securities | A related party underwriting the company's share issue |
The exemption that does most of the work
Transactions that are both in the ordinary course of business and on an arm's length basis fall entirely outside Section 188 – no board or shareholder approval is required under this section for them. This is the exemption most routine intra-group transactions (at normal commercial terms, for services genuinely in the course of business) rely on. The two conditions are cumulative: a transaction genuinely in the ordinary course but priced favourably to the related party is not arm's length, and still needs approval.
Worked example. A manufacturing company routinely buys a component from a supplier firm in which one director holds a partnership interest, at the same price and terms it would offer any third-party buyer, as part of its regular procurement. If genuinely arm's length and ordinary course, this can proceed without Section 188 board/shareholder approval – though it should still be disclosed appropriately and documented, since "arm's length" needs to be demonstrable, not just asserted.
When shareholder approval kicks in, not just the board's
Once a related-party transaction is not exempt (fails the ordinary-course-and-arm's-length test) and crosses the materiality thresholds prescribed under the Companies (Meetings of Board and its Powers) Rules – framed around percentages of turnover, net worth, or absolute rupee caps depending on the transaction type – it needs shareholder approval by ordinary resolution, in addition to board approval. Any member who is a related party to the specific transaction must abstain from voting on that resolution. The exact current thresholds and any private-company exemptions in force should be confirmed against the Rules at the time, since these have been adjusted more than once since 2014.
What goes wrong in practice for private companies
- Assuming "we are a private company, this does not apply to us" – Section 188 applies to private companies too; only some procedural relaxations (board vs shareholder approval, interested-director participation) have been modified for private companies by specific MCA notifications, not the substantive obligation itself.
- Treating a related-party contract as approved because "everyone knew about it" – the Act requires a documented board resolution (and shareholder resolution where thresholds apply), not informal awareness.
- Not maintaining Form MBP-4, the statutory register of contracts in which directors are interested – a routine ask in due diligence and audit that is frequently found missing or outdated, alongside other basics like current director KYC (DIR-3 KYC) filings.
- Confusing Section 188 (Companies Act related-party contracts) with related-party disclosure requirements under accounting standards (Ind AS 24/AS 18) – these serve different purposes and both may apply to the same transaction.
Consequences of getting it wrong
A related-party contract entered without the required board or shareholder approval is voidable at the option of the Board. Where the contract is with a related party of a director (or authorised by a director), that director must indemnify the company against any resulting loss. This is a real personal exposure, not just a filing formality – another reason the approval trail should be documented contemporaneously, not reconstructed later.
This sits alongside, not instead of, your regular AOC-4 and MGT-7 annual filings – related-party disclosures in Form AOC-2 are filed as an attachment to the board's report, so an untracked related-party transaction can surface as a gap at annual filing time even if nobody flagged it earlier in the year.
Frequently asked questions
Does Section 188 apply to a director's employment contract or remuneration?
Director remuneration is governed separately under Sections 197 and related provisions, not Section 188. Section 188 is about contracts/arrangements for goods, property, services, agency and similar categories with related parties, not the director's own employment terms.
Is a transaction with my own wholly-owned subsidiary exempt from Section 188?
Related-party status still applies between holding and subsidiary companies, so the transaction needs to be assessed against the ordinary-course-and-arm's-length test like any other related-party transaction, though intra-group transactions on genuine commercial terms often do qualify for the exemption.
What happens if we only realise after the fact that a contract needed shareholder approval?
The contract is voidable at the Board's option, and ratification steps may be available depending on the facts. Address this proactively with your company secretary or advisor rather than leaving it unaddressed, since the exposure (including personal indemnity for an interested director) does not go away on its own.
Do all related-party transactions need to be disclosed in the board's report?
Yes, particulars of contracts/arrangements referred to in Section 188(1) that are not at arm's length or not in the ordinary course of business must be disclosed in the board's report, in the prescribed format (Form AOC-2).
Are private companies fully exempt from the shareholder-approval requirement?
Not fully exempt as a blanket rule – certain procedural relaxations for private companies have been notified over time, but the underlying obligation to identify and approve related-party transactions correctly still applies. Confirm the current, specific exemption notifications applicable to your company rather than assuming private-company status alone removes the requirement.
What is Form MBP-4 and who needs to maintain it?
It is the statutory register of contracts and arrangements in which directors are interested, required to be maintained by companies under Section 189. It should be kept current and is commonly requested during statutory audits and due diligence.
We assess Section 188 applicability, prepare the board/shareholder resolutions and maintain your MBP-4 register.
ROC Filing Services Company Registration Talk to usThis article summarises Section 188 of the Companies Act 2013 as understood on the date of review. General information, not advice on your specific facts – confirm details against the current forms/portal and consult us or your tax advisor before acting. CA Somesh Chandak & Associates, FRN 158694W.