By S&S Co. Advocates & Solicitors · Published 24 September 2026 · Informational content, not legal advice — see our disclaimer
What Section 188 Actually Covers
Section 188 of the Companies Act, 2013 applies to a defined list of transactions between a company and its 'related parties' as defined under Section 2(76) — including sale or purchase of goods or property, leasing of property, availing or rendering of services, appointment of agents, and certain appointments to an office or place of profit. If a transaction falls into one of these categories and involves a related party, Section 188's approval requirements are triggered regardless of how the transaction is otherwise documented.
Board Approval Comes First — Always
Every covered related-party transaction requires prior approval by the Board, passed by resolution at a duly convened Board meeting — approval by circular resolution is not permitted for this purpose. An interested director must not be present in the meeting, and certainly must not vote, on the specific agenda item approving that transaction, to preserve the integrity of the approval.
When Shareholder Approval Is Also Required
Board approval alone is not always enough. Where a transaction exceeds the materiality thresholds prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 — generally expressed as a percentage of annual turnover or net worth for categories such as sale or purchase of goods, property, or leasing arrangements — prior shareholder approval by ordinary or special resolution is additionally required, with related-party shareholders barred from voting on that resolution.
Listed companies face a further, often stricter, layer of obligation: SEBI's LODR Regulations impose their own materiality thresholds and audit-committee approval requirements for related-party transactions, which apply on top of, and separately from, the Companies Act's own thresholds.
The Ordinary-Course/Arm's-Length Exemption — and Getting It Wrong
Transactions that are both in the 'ordinary course of business' and conducted on an 'arm's length basis' are exempt from the shareholder-approval requirement — though not from disclosure obligations or from the underlying requirement of Board approval. In practice, correctly characterising a transaction as genuinely ordinary-course and arm's-length is often the crux of disputes in this area, since companies sometimes label a transaction this way to avoid the additional approval step without the characterisation actually holding up.
A contract entered into without the required Board or shareholder approval is voidable at the Board's option, and any director or employee who authorised it may be required to indemnify the company for resulting loss and can face a penalty — so getting the approval chain right at the outset is materially safer than hoping an after-the-fact ratification will cure a defective transaction.
Frequently Asked Questions
What transactions require Board approval under Section 188?
Sale or purchase of goods or property, leasing of property, availing or rendering of services, appointment of agents, and certain appointments to office or place of profit, where the counterparty is a related party under Section 2(76).
Can a related-party transaction be approved by circular resolution?
No. Board approval must be by resolution passed at a duly convened Board meeting, and an interested director must not be present or vote on that specific agenda item.
When does a related-party transaction also need shareholder approval?
When it exceeds the materiality thresholds under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 — generally tied to a percentage of annual turnover or net worth — requiring an ordinary or special resolution with related-party shareholders barred from voting.
Is there an exemption from shareholder approval for related-party transactions?
Yes, for transactions that are both in the ordinary course of business and on an arm's length basis — though disclosure and Board-approval obligations still apply, and correctly characterising a transaction this way is often contested.
References & Further Reading
This article references the following statutory provisions. Readers should always verify current rules, fees and timelines against the applicable statute and rules as amended, since these are revised from time to time.
- Companies Act, 2013, Section 188 and Section 2(76).
- Companies (Meetings of Board and its Powers) Rules, 2014, Rule 15, as amended.
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, for listed-company related-party transaction requirements.