Section 188 Explained: What Every Director Should Know About this

Related Party Transactions under Companies Act, 2013: Meaning, Rules & Disclosure Explained

Introduction

A Related Party Transaction (RPT) means any transaction between a company and its related parties, as defined under the Companies Act, 2013, that involves transfer of resources, services, or obligations — regardless of whether a price is charged or not.

Let’s break it down clearly 👇

⚖️ 1. Legal Definition (Section 188 of Companies Act, 2013)

A Related Party Transaction includes any contract or arrangement between a company and its related party with respect to the following:

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 the purchase or sale of goods, materials, services, or property;
6. Appointment of a related party to any office or place of profit in the company, its subsidiary, or associate company;
7. Underwriting the subscription of any securities or derivatives thereof, of the company.

👨‍👩‍💼 2. Who is a “Related Party”? (Section 2(76))

A related party in relation to a company means:

• A director or key managerial personnel (KMP) of the company or their relatives;
• 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 along with relatives more than 2% of its paid-up share capital;
• Any body corporate whose Board, managing director, or manager acts on the advice, directions, or instructions of a director or manager of the company;
• Any person on whose advice, directions, or instructions a director or manager of the company is accustomed to act;
• Any holding, subsidiary, or associate company;
• Any subsidiary of a holding company to which it is also a subsidiary (fellow subsidiary);
• An investing company or venturer of the company (i.e., one holding ≥20% of voting power in the company).

💼 3. Section 188 of Companies Act 2013 with Examples

Example	Related Party	Covered?
Sale of goods to a director’s private company	Private company where director is a member	✅ Yes
Loan to subsidiary company	Subsidiary	✅ Yes
Rent paid to relative of a director	Relative	✅ Yes
Purchase of property from unrelated vendor	Unrelated third party	❌ No

📘 4. Key Principles

Basis	Explanation
Arm’s Length Basis	Transaction terms are the same as they would be with an unrelated party.
Ordinary Course of Business	The transaction is part of the company’s normal business operations.
Material Transactions	Transactions exceeding prescribed thresholds require shareholder approval (Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014).

🟢 In Simple Words

A Related Party Transaction is when a company does business with someone who is connected to it — like directors, their relatives, or group companies — and involves exchange of goods, services, money, or assets.

 FAQ's

✅ Applicability of Form AOC-2

Form AOC-2 is required to be attached to the Board’s Report under Section 134(3)(h) read with Rule 8(2) of the Companies (Accounts) Rules, 2014.

It applies to:

“Particulars of contracts or arrangements with related parties referred to in Section 188(1) which are not at arm’s length basis or not in the ordinary course of business.”

⚖️ Therefore:

• If your Related Party Transactions (RPTs) are:

✅ at arm’s length, and

✅ in the ordinary course of business,

➤ then Form AOC-2 is not applicable, even if such transactions are material or non-material.

• Only non–arm’s length or not in the ordinary course of business RPTs need to be disclosed in AOC-2.

🧾 However, disclosure still required elsewhere

Even if AOC-2 is not applicable, the company must still:

• Disclose RPT details in Notes to Accounts (as per AS-18 / Ind AS-24).
• Obtain Board approval (and Audit Committee approval if applicable).
• Maintain registers under Section 189.

🟢 In summary

Criteria	At arm’s length	Not at arm’s length
Ordinary course of business	❌ AOC-2 not required	✅ AOC-2 required
Not ordinary course of business	✅ AOC-2 required	✅ AOC-2 required

Answer:

❌ No, AOC-2 is not applicable if the company has entered into Related Party Transactions that are at arm’s length basis and not material.

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