Related Party Transactions Under Section 188 for an Indian Subsidiary

Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.

Section 188 of the Companies Act, 2013 covers seven kinds of contracts with a related party. Each needs a board resolution passed at a meeting. Rule 15(3) of the Meetings of Board Rules adds a members' resolution once a deal reaches 10 percent of turnover or net worth. The same applies when a related employee's pay exceeds INR 2,50,000 a month. Deals in the ordinary course of business and at arm's length need neither approval, but material ones still go into Form AOC-2.

This page is for the directors and finance teams of foreign owned Indian subsidiaries. It covers who counts as a related party, the exemptions, the approvals, Form AOC-2, and how the same deals meet transfer pricing and GST.

What does section 188 require for related party transactions?

Section 188(1) requires the board's consent, by a resolution at a board meeting, before a company signs a covered contract with a related party. Above the rule 15(3) limits, members must approve by resolution first. Deals in the ordinary course of business and at arm's length are exempt from both approvals.

The text of section 188 works in four layers. We walk every intercompany contract through them in this order:

1. Who is the other party? Only a related party under section 2(76) brings the section into play.
2. What is the deal? Only the seven types in clauses (a) to (g) of section 188(1) are covered.
3. Is it exempt? The fourth proviso takes out deals in the ordinary course of business at arm's length.
4. Who approves? The board always, and the members above the prescribed limits.

The detail sits in rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014. We call them the Meetings of Board Rules on this page.

Requirement	Source	What it means for a subsidiary
Board consent	Section 188(1)	A resolution at a meeting of the board, not by circulation
Interested director	Rule 15(2); section 184(2)	Rule 15(2) asks the director to stay out of the discussion; section 184(2) is relaxed for a private company, so the director may take part after disclosure
Members' approval	First proviso; rule 15(3)	Needed before the deal when it crosses the turnover, net worth or pay limits
Related member voting	Second and third provisos	A related party member may not vote. The bar does not apply to a private company, or where 90 percent or more of members are related
Ordinary course exemption	Fourth proviso	No approval for deals in the ordinary course of business at arm's length
Wholly owned subsidiary	Fifth proviso	No members' resolution for deals with the holding company where the conditions are met
Board's report	Section 188(2); section 134(3)(h)	Every covered contract is reported, with the justification, in Form AOC-2
Penalty	Section 188(5)	INR 5,00,000 on each director or employee involved; INR 25,00,000 for a listed company

Who is a related party of an Indian subsidiary under section 2(76)?

Section 2(76) of the Companies Act, 2013 lists nine categories of related party. They cover directors, key managerial personnel (KMP), their relatives and the firms and companies they are interested in. They also cover group companies and people whose instructions directors follow. Rule 3 of the definitions rules adds the holding company's directors and KMP.

The list in section 2(76) reads as follows for a subsidiary.

Sub clause of section 2(76)	Who it covers	Example for a foreign owned subsidiary
(i)	A director or the director's relative	The resident director or a parent nominee director, and their families
(ii)	A KMP or the KMP's relative	The CFO, company secretary, whole time director or manager
(iii)	A firm in which a director, manager or relative is a partner	A consulting firm where the resident director's spouse is a partner
(iv)	A private company in which a director, manager or relative is a member or director	An Indian vendor company where a subsidiary director sits on the board
(v)	A public company in which a director or manager is a director and holds, with relatives, over 2 percent of paid up capital	A vendor where the director holds 3% and sits on the board
(vi)	A body corporate whose board or manager is accustomed to act on a director's advice	A vendor run on the instructions of a subsidiary director
(vii)	A person on whose advice a director or manager is accustomed to act	A group executive whose instructions the Indian directors follow
(viii)	A holding, subsidiary or associate company, a fellow subsidiary, or an investing company or venturer	The foreign parent, sister companies and a joint venture partner
(ix) with rule 3	A director (other than an independent director) or KMP of the holding company, or their relative	The parent's CEO, CFO and non independent directors

A proviso takes advice given in a professional capacity out of sub clauses (vi) and (vii). A lawyer or auditor whose advice the board follows is not a related party for that reason alone.

Key managerial personnel under section 2(51) are the CEO, managing director or manager, the company secretary, a whole time director and the CFO. The board can also designate an officer one level below the directors. A relative under section 2(77) is a member of the same Hindu undivided family or a spouse. Rule 4 of the definitions rules adds father, mother, son, son's wife, daughter, daughter's husband, brother and sister. Step relations are included.

Rule 3 matters more than most subsidiaries expect. A consulting contract with the parent's CEO is a related party deal of the Indian company. So is a lease of a flat owned by the parent CFO's spouse.

Is the foreign parent a related party of a private subsidiary?

Usually not through sub clause (viii). G.S.R. 464(E) of 5 Jun 2015 says sub clause (viii) does not apply to a private company for section 188. The parent, fellow subsidiaries and associates drop out on that ground. The parent can still return through sub clause (vii), and its directors stay in through rule 3.

The notification was issued under section 462 of the Act and applies to every private company. It disapplies sub clause (viii) of section 2(76), which covers holding, subsidiary and associate companies, fellow subsidiaries and investing companies or venturers. It is narrow. It changes the definition only for section 188.

The parent remains a related party everywhere else. Accounting Standard 18 or Ind AS 24 still needs a related party note in the financial statements. Section 162 of the Income Tax Act, 2025 still makes the parent an associated enterprise. The GST law still treats the two as related persons.

Section 2(46) treats any body corporate as a possible holding company, so a foreign parent is one. Section 2(20) limits "company" to one incorporated under Indian company law. In our reading, a foreign parent is therefore outside sub clauses (iv) and (v).

Sub clause (vii) is the open risk. It covers any person on whose advice, directions or instructions a director is accustomed to act. Parent nominee directors usually act on group instructions. A regulator could read the parent back in through that clause. We advise subsidiaries to take a board resolution for any parent deal that is outside the ordinary course or not clearly at arm's length. It costs one agenda item.

Counterparty	Public company subsidiary	Private company subsidiary
Foreign parent	Related under (viii)	Outside (viii) for section 188; test (vii)
Fellow subsidiary in India or abroad	Related under (viii)	Outside (viii) for section 188
The subsidiary's own subsidiary or associate	Related under (viii)	Outside (viii) for section 188
Parent's CEO, CFO or non independent director	Related under (ix) and rule 3	Still related
Subsidiary's own directors, KMP and relatives	Related under (i) and (ii)	Still related
Firm where a director's relative is a partner	Related under (iii)	Still related

Which transactions does section 188 cover?

Section 188(1) covers seven types of contract or arrangement with a related party. These are goods, property deals, leases, services, agency, an office or place of profit, and underwriting. Loans, guarantees, security and investments sit outside section 188. Sections 185 and 186 govern them.

Clause of section 188(1)	Transaction	Common example in a subsidiary	Members' resolution needed at
(a)	Sale, purchase or supply of goods or materials, directly or through an agent	Buying finished goods from the parent for resale	10% or more of turnover
(b)	Selling or otherwise disposing of, or buying, property of any kind	Buying used servers from a director's company	10% or more of net worth
(c)	Leasing of property of any kind	Renting an office from a director's relative	10% or more of turnover
(d)	Availing or rendering of any services, directly or through an agent	Software services to the parent; management fees from it	10% or more of turnover
(e)	Appointment of any agent for purchase or sale of goods, materials, services or property	A director's firm acting as selling agent	Tested under (a), (b) or (d)
(f)	Appointment to any office or place of profit in the company, its subsidiary or associate	Hiring a director's son as a manager	Monthly pay above INR 2,50,000
(g)	Underwriting the subscription of securities or derivatives of the company	Rare in private subsidiaries	Pay above 1% of net worth

Explanation (a) to section 188 defines an office or place of profit. A director holds one if they receive anything beyond sitting fees. Anyone else holds one if they receive salary, fees, commission, perquisites or rent free accommodation from the company. So hiring a relative of a director as an employee is a clause (f) deal.

Share issues fall under sections 42 and 62, not section 188.

When does the ordinary course and arm's length exemption apply?

The fourth proviso to section 188(1) switches the section off for ordinary course deals, unless they are not at arm's length. Both tests must be met. A deal that is routine but overpriced needs approval. A deal at a fair price but outside the normal business also needs approval.

The Act does not define "ordinary course of business". We apply four practical tests:

1. The deal falls within the objects in the memorandum and the business the company runs.
2. The company does this kind of deal often, not once.
3. The size fits the company's normal volumes.
4. The terms match what the company offers or accepts from unrelated parties.

Explanation (b) defines an arm's length transaction. It is a transaction between two related parties "conducted as if they were unrelated, so that there is no conflict of interest". The Act sets no pricing method. For deals with the parent, the transfer pricing study is the best evidence. For domestic deals such as rent, we keep two market quotes on file.

An exempt deal still has paperwork. Part 2 of Form AOC-2 lists material contracts at arm's length. The directors' interest disclosure in Form MBP-1 under section 184 still applies. The financial statements still need the related party note.

How does the board approve a related party transaction?

The board approves at a meeting, before the company signs. The agenda must carry the disclosures in rule 15(1), and the interested director must declare the interest under section 184. A circular resolution does not work, because section 188(1) asks for consent "given by a resolution at a meeting of the Board".

Directors abroad can attend by video conference and count for quorum. Our note on board meetings with non resident directors covers the procedure. Rule 15(1) asks the agenda to disclose, among other things:

1. The name of the related party and the nature of the relationship.
2. The nature, duration and particulars of the contract.
3. The material terms, including the value.
4. Any advance paid or received.
5. How the price and other commercial terms were set, both those in the contract and those left out.
6. Whether the board considered all relevant factors and, if not, which it left out and why.
7. Any other information the board needs to decide.

Rule 15(2) asks a director interested in the contract not to be present at the meeting during the discussion on it. For a private company, G.S.R. 464(E) modifies section 184(2), so the interested director may take part after disclosing the interest. The notification relaxes the Act and does not amend rule 15(2). We still ask the interested director to step out of the discussion on a section 188 item. Where two or more directors have no interest, we have them carry the vote and record that in the minutes.

A board can approve a framework agreement with a value cap for the year. That works better than approving each invoice. If the cap is exceeded, the excess needs a fresh approval before it is billed.

When is shareholder approval needed under rule 15?

Members must approve by resolution before the deal when it reaches the rule 15(3) limits. Goods, services and leases trigger approval at 10 percent of turnover. Property deals trigger it at 10 percent of net worth. Related party pay over INR 2,50,000 a month and underwriting over 1 percent of net worth also need it.

The limits sit in the last column of the table in the previous section. Three rules shape the test:

1. Turnover and net worth come from the audited financial statements of the preceding financial year (Explanation (1) to rule 15(3)).
2. The limits apply to one transaction, or to it taken together with the earlier transactions of the same financial year.
3. The trigger is 10 percent or more of turnover or net worth, as we read the current rule.

Older copies of rule 15 show other figures. The original rules of 31 Mar 2014 (G.S.R. 240(E)) tested goods at 25 percent of turnover. Rule 15 was then amended by G.S.R. 590(E) of 14 Aug 2014, G.S.R. 309(E) of 30 Mar 2017 and the Second Amendment Rules, 2019 of 18 Nov 2019.

The copy of the rules on the Tripura High Court website still carries the 2014 text. Before you rely on a limit, read rule 15(3) as amended on the MCA rules page listed in our sources.

The first proviso asks for a "resolution", so an ordinary resolution of members is enough. The second proviso bars a related party member from voting on it. G.S.R. 464(E) switches the second proviso off for a private company. The third proviso also lifts it where 90 percent or more of members, by number, are relatives of promoters or related parties.

A company in its first year has no preceding audited accounts. The rule gives no base to test against. We take members' approval for any large deal in that year. A wholly owned subsidiary can hold the meeting at short notice with its two members.

Does a wholly owned subsidiary need a shareholder resolution?

Not for deals with its holding company, if the conditions are met. The fifth proviso to section 188(1) removes the members' resolution for transactions between a holding company and its wholly owned subsidiary. The subsidiary's accounts must be consolidated with the holding company's and placed before its shareholders at the general meeting for approval.

Rule 15(3) has a matching Explanation (2). It says a resolution passed by the holding company is enough for transactions between the wholly owned subsidiary and the holding company. The board resolution under section 188(1) is still needed in both cases.

A foreign parent raises a question the proviso does not answer. The consolidated accounts must be "placed before the shareholders at the general meeting for approval". Whether a foreign parent meets that depends on its home law and its own constitution. Where the parent's shareholders do not approve the group accounts at a general meeting, the condition is not met on its words.

For most private subsidiaries the point is academic. The parent is outside sub clause (viii) for section 188 anyway. The proviso matters for a public company subsidiary, and where the parent is treated as related through sub clause (vii).

The proviso covers only deals with the holding company. It does not cover deals with fellow subsidiaries, directors or their relatives. See our guide to wholly owned subsidiaries in India for the two member structure.

What goes into Form AOC-2 and the board's report?

Section 188(2) requires every contract under section 188(1) to be referred to in the board's report, with the justification. Section 134(3)(h) and rule 8(2) of the Companies (Accounts) Rules, 2014 prescribe Form AOC-2 for it. The form has two parts: contracts not at arm's length, and material contracts at arm's length.

Each part asks for these particulars:

1. Part 1 (not at arm's length): the related party and relationship, the nature and duration of the contract, the salient terms and value, the justification, the date of board approval, any advance paid, and the date of the members' resolution.
2. Part 2 (material and at arm's length): the related party and relationship, the nature and duration, the salient terms and value, the date of board approval if any, and any advance paid.

The Act does not define "material" for an unlisted company. We adopt a short written policy that uses the rule 15(3) limits as the materiality line. The auditor then tests one consistent rule.

The board's report is filed with the financial statements in Form AOC-4. For a deficient report, the section 134 text sets a penalty of INR 3,00,000 on the company. Each officer in default pays INR 50,000. Our guide to AOC-4 and MGT-7 filing covers the annual filing.

AOC-2 is narrower than the financial statement note. The note under Accounting Standard 18 or Ind AS 24 lists all related party transactions, including those with the parent. Where CARO 2020 applies, clause 3(xiii) asks the auditor whether related party transactions comply with sections 177 and 188. Our page on the statutory audit of a foreign owned subsidiary explains when CARO applies.

How does section 188 interact with transfer pricing?

They are separate tests under separate laws. Section 188 asks whether the board and members approved a related party deal. Transfer pricing under sections 161 to 173 of the Income Tax Act, 2025 tests the price with an associated enterprise for tax. Passing one does not pass the other.

The 2025 Act renumbered the transfer pricing code from 1 Apr 2026. The sections that matter here are:

1. Section 161 computes income from an international transaction at the arm's length price. Section 161(4) bars any result that reduces income below the books.
2. Section 162 defines an associated enterprise. One test is 26 percent of voting power. Others include appointing more than half the board, a loan of 51 percent of total assets, or a guarantee of 10 percent of borrowings.
3. Section 163 defines an international transaction. It includes services, property, financing, cost sharing and business restructuring.
4. Section 172 requires the accountant's report in Form 48, which replaces Form 3CEB from tax year 2026-27.

For FY 2025-26, the subsidiary still files Form 3CEB under the 1961 Act. Form 48 applies from tax year 2026-27. The due dates and the rule that sets them are in the table under "What changed in 2026" below.

Question	Companies Act, 2013	Income Tax Act, 2025	CGST Act, 2017
Who is covered	Related party, section 2(76)	Associated enterprise, section 162	Related person, Explanation to section 15
Parent and subsidiary	Related, but outside (viii) for section 188 in a private company	Associated where the parent holds 26% or more of voting power, among other tests	Related where one controls the other
Price test	As if unrelated, with no conflict of interest	Arm's length price under the prescribed methods	Open market value under rule 28
Effect of a wrong price	Approval needed; contract voidable; penalty	Income adjusted upwards only	Tax on the correct value, unless the full credit proviso applies
Report	Form AOC-2 in the board's report	Form 48 (Form 3CEB up to FY 2025-26)	GST returns

We tie the two together in practice. One intercompany agreement covers each flow. The transfer pricing study supports the board's arm's length finding, and the minutes cite it. See our guides to transfer pricing documentation and arm's length price methods.

A loan from the parent adds a FEMA test. FEMA 3(R)(5)/2026-RB of 9 Feb 2026 rewrote the ECB rules in the Borrowing and Lending Regulations. It took effect on Gazette publication on 16 Feb 2026. Paragraph 9 of the new Schedule I requires an ECB from a related party to be on an arm's length basis. Our ECB guide covers the limits and reporting.

How does GST value related party supplies?

GST values a supply between related persons at open market value. Section 15(4) of the CGST Act and rule 28 of the CGST Rules set this. Paragraph 2 of Schedule I makes such a supply taxable even without consideration. Where the recipient is eligible for full input tax credit, the invoice value is deemed to be the open market value.

The second proviso to rule 28 carries most subsidiaries. An exporter of services to the parent usually has full credit, so the invoice value stands. A subsidiary with exempt supplies, or one that cannot claim full credit, must defend an open market value.

Paragraph 4 of Schedule I covers services imported from a related person outside India without consideration. The subsidiary pays GST under reverse charge on a management fee from the parent. Rule 28(2) has a separate rule for corporate guarantees given for related persons. The 2021 rules text linked above does not carry it. Read the current CGST Rules on cbic-gst.gov.in for its wording.

The GST definition of related persons is wider than section 2(76). It includes employer and employee, and any person holding 25 percent or more of the voting shares of both parties. Our guide to GST on cross charges between related companies covers valuation in detail.

What are the penalties for breaching section 188?

Section 188(5) imposes a penalty of INR 5,00,000 on each director or employee who entered into or authorised the contract in breach. In a listed company it is INR 25,00,000. The contract is voidable unless ratified within three months, and interested directors must indemnify the company for any loss.

Default	Consequence	Source
Contract without board or members' approval	Penalty on each director or employee involved: INR 5,00,000 (unlisted), INR 25,00,000 (listed)	Section 188(5)
No ratification within three months	Voidable at the option of the board or the members	Section 188(3)
Loss from a contract with a director's related party	Directors concerned indemnify the company	Section 188(3)
Loss from an unauthorised contract	The company may recover it from the director or employee	Section 188(4)
Board's report without AOC-2 particulars	Company INR 3,00,000; each officer in default INR 50,000	Section 134(8)
Price not at arm's length for tax	Income adjusted to the arm's length price; never downwards	Section 161, Income Tax Act, 2025
Form 48 not furnished	Fee of INR 50,000 for a delay of up to one month, INR 1,00,000 after that, from tax year 2026-27	Section 428(d), Income Tax Act, 2025

The Companies (Amendment) Act, 2020 replaced the earlier fines and imprisonment under section 188(5) with these penalties. For a contract signed long ago, check the commencement notification for that amendment on the MCA site before you quote a penalty. An adjudicating officer appointed under section 454 decides these penalties. An appeal lies to the Regional Director within 60 days of receiving the order, under section 454(6).

What changed in 2026

We found no 2026 notification that amends section 188 or rule 15. The 2026 changes came from tax and FEMA.

Area	Old rule	New rule	Date	Instrument
Transfer pricing law	Sections 92 to 92F, Income Tax Act, 1961	Sections 161 to 173, Income Tax Act, 2025	1 Apr 2026	Income Tax Act, 2025 (Act 30 of 2025)
Accountant's report	Form 3CEB under section 92E	Form 48 under section 172, due one month before the return date	From tax year 2026-27	Income Tax Rules, 2026, rule 85 (G.S.R. 198(E) of 20 Mar 2026)
Late accountant's report	Penalty of INR 1,00,000 under section 271BA, 1961 Act	Fee under section 428(d): INR 50,000 for a delay of up to one month, INR 1,00,000 after	From tax year 2026-27 (1 Apr 2026)	Finance Act, 2026 (clause 83 of the Bill)
Due dates for FY 2025-26	Form 3CEB 31 Oct 2026; return 30 Nov 2026	Unchanged for transfer pricing cases, while other audit cases moved to 21 Oct 2026 and 21 Nov 2026	28 Sep 2026	CBDT Circular No. 07/2026
ECB from a related lender	ECB Master Direction	Schedule I of the Borrowing and Lending Regulations; related party ECB at arm's length	16 Feb 2026 (Gazette)	FEMA 3(R)(5)/2026-RB of 9 Feb 2026
Companies Act amendments	Not applicable	Corporate Laws (Amendment) Bill, 2026 introduced in the Lok Sabha and referred to a Joint Committee; we found no record of passage, so it is not law	23 Mar 2026	Bill No. 85 of 2026

Worked example

A US parent owns 99.99 percent of an Indian private company, with a US group company holding one share. The audited accounts for FY 2025-26 show turnover of INR 48 crore and net worth of INR 15 crore. The company plans four deals for FY 2026-27.

The rule 15(3) limits for FY 2026-27 are:

1. Turnover limit: 10 percent of INR 48 crore is INR 4.8 crore.
2. Net worth limit: 10 percent of INR 15 crore is INR 1.5 crore.
3. Pay limit: more than INR 2,50,000 a month.

Deal	Value for FY 2026-27	Related under section 188?	Limit test	Approval
A. Software services to the US parent at a benchmarked mark up	INR 45 crore	Parent outside (viii); test (vii)	94% of turnover	None if ordinary course and arm's length; AOC-2 Part 2
B. Office lease from a firm where the resident director's wife is a partner, at INR 4,50,000 a month	INR 54,00,000	Yes, sub clause (iii)	1.1% of turnover	Board, because the rent is above market
C. Hiring the resident director's son as head of sales at INR 3,10,000 a month	INR 37,20,000	Yes, a relative under sub clause (i)	Above INR 2,50,000 a month	Board and members' resolution before appointment
D. Buying used servers from an Indian fellow subsidiary	INR 2.1 crore	Fellow subsidiary outside (viii)	14% of net worth	None under section 188 for a private company

Deal B shows the arm's length test at work. Two market quotes put similar space at INR 3,75,000 a month. The lease pays INR 75,000 a month above market, or INR 9,00,000 a year. The premium takes the deal outside the exemption. INR 54,00,000 is below INR 4.8 crore, so the board approves it alone and Part 1 of AOC-2 reports it.

Deal C needs both approvals. The parent votes, because the second proviso does not apply to a private company. The subsidiary holds a short notice meeting with its two members before the offer letter goes out.

Deal D would need a members' resolution in a public company, because INR 2.1 crore exceeds INR 1.5 crore. In this private company, the fellow subsidiary is outside sub clause (viii) for section 188.

A second scenario shows tax and GST running in parallel. The US parent charges a management fee of INR 1,20,00,000 for FY 2026-27. The transfer pricing study supports INR 90,00,000.

1. Income tax: section 161(2) allows only the arm's length amount. INR 30,00,000 is added back to income.
2. At 25.168 percent (22 percent under section 200, with 10 percent surcharge and 4 percent cess), the extra tax is INR 7,55,040.
3. GST: the subsidiary pays reverse charge on the invoice value of INR 1,20,00,000 at 18 percent, which is INR 21,60,000. It takes credit for the same amount if eligible.
4. Companies Act: if the parent is treated as related under sub clause (vii), the fee is not at arm's length. INR 1.2 crore is below the INR 4.8 crore limit, so a board resolution is enough.

Common mistakes

1. Treating the foreign parent as the only related party. Fix: list the directors, KMP, their relatives and the parent's directors under rule 3, and screen vendors and staff against the list.
2. Approving by circular resolution. Fix: put section 188 approvals on the agenda of a board meeting, held in person or by video conference.
3. Relying on the ordinary course exemption without evidence. Fix: keep the transfer pricing study, market quotes or rate cards on file and cite them in the minutes.
4. Testing each invoice against the 10 percent limit. Fix: add the transaction to the earlier transactions with the same related party in the financial year, as rule 15(3) requires.
5. Using current year turnover for the limit. Fix: use the audited financial statements of the preceding financial year.
6. Leaving Form AOC-2 out of the board's report because every deal was exempt. Fix: report material arm's length contracts in Part 2.
7. Assuming the fifth proviso helps any group deal. Fix: apply it only to deals between the holding company and its wholly owned subsidiary, and check the consolidation condition.
8. Treating section 188 approval as tax cover. Fix: run the transfer pricing and GST valuation tests on the same deal before the board meets.

Checklist

1. Build the related party list from section 2(76), rule 3 and the Form MBP-1 disclosures from each year's first board meeting.
2. Map every recurring contract against clauses (a) to (g) of section 188(1).
3. Test each contract for ordinary course and arm's length, and file the evidence.
4. Calculate the rule 15(3) limits from the previous year's audited turnover and net worth.
5. Aggregate transactions with each related party for the financial year.
6. Table the contracts that need approval at a board meeting with the rule 15(1) disclosures.
7. Pass a members' resolution before the deal where a limit is crossed.
8. Record the interested director's disclosure and the vote in the minutes.
9. Prepare Form AOC-2 with Part 1 and Part 2 for the board's report.
10. Align the transfer pricing study, Form 3CEB or Form 48, and the GST invoices with the approved values.

For a review of your intercompany contracts before the next board meeting, email [email protected] with last year's AOC-2 and transfer pricing report.

Frequently Asked Questions

What is a related party transaction under section 188?+

It is a contract with a related party under section 2(76) for goods, property, leases, services, agency, an office of profit or underwriting. Section 188(1) of the Companies Act, 2013 needs board consent at a meeting. Members approve above the rule 15(3) limits. Deals in the ordinary course and at arm's length are exempt.

Does section 188 apply to a private limited company?+

Yes. Section 188 applies to every company, including a Private Limited company. G.S.R. 464(E) of 5 Jun 2015 relaxes it in two ways. Holding, subsidiary and associate companies are outside sub clause (viii) of section 2(76) for section 188. Related party members may also vote on the members' resolution.

Is board approval needed for transactions in the ordinary course of business?+

No, if the transaction is also at arm's length. The fourth proviso to section 188(1) exempts such deals from both board and members' approval. The company should keep evidence for both tests. Material arm's length contracts still go into Part 2 of Form AOC-2 in the board's report.

What are the rule 15 thresholds for shareholder approval?+

Rule 15(3) of the Meetings of Board Rules needs a members' resolution when goods, services or leases reach 10 percent of turnover. Property deals trigger it at 10 percent of net worth. Pay above INR 2,50,000 a month for an office or place of profit also needs it. So does underwriting above 1 percent of net worth.

Is an ordinary resolution enough under section 188?+

Yes. The first proviso to section 188(1) now asks only for a "resolution", so an ordinary resolution of members is enough. The resolution must come before the company enters into the contract. A related party member cannot vote on it, except in a private company or where 90 percent or more of members are related.

Does a wholly owned subsidiary need members' approval for deals with its parent?+

Not where the fifth proviso to section 188(1) applies. It needs the subsidiary's accounts to be consolidated with the holding company's and placed before the holding company's shareholders at a general meeting. Board approval is still needed. The proviso does not cover deals with fellow subsidiaries or directors.

Who are the relatives of a director under the Companies Act?+

Section 2(77) of the Companies Act, 2013 covers members of a Hindu undivided family and spouses. Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014 adds father, mother, son, son's wife, daughter, daughter's husband, brother and sister. Step relations count. Each is a related party of the company under section 2(76).

What is Form AOC-2?+

Form AOC-2 is prescribed by rule 8(2) of the Companies (Accounts) Rules, 2014 for the board's report under section 134(3)(h). Part 1 lists contracts with related parties that are not at arm's length. Part 2 lists material contracts at arm's length. It is filed with the financial statements in Form AOC-4.

What is the penalty for not complying with section 188?+

Section 188(5) imposes a penalty of INR 5,00,000 on each director or employee who entered into or authorised the contract. In a listed company it is INR 25,00,000. The contract is voidable unless ratified within three months under section 188(3). A board's report without AOC-2 particulars draws penalties under section 134(8).

Can a related party transaction be ratified after it is signed?+

Yes, within three months of the contract under section 188(3). The board or the members, depending on which approval was missing, ratify it at a meeting. If they do not, the contract is voidable at their option. Ratification cures the contract but does not remove a penalty already incurred under section 188(5).

Are loans to the parent covered by section 188?+

No. Section 188(1) lists goods, property, leases, services, agency, office or place of profit and underwriting. Loans, guarantees, security and investments fall under section 186, and loans to directors under section 185. A loan is still an international transaction for transfer pricing under section 163 of the Income Tax Act, 2025.

Does section 188 approval satisfy transfer pricing rules?+

No. Section 188 is a corporate approval test. Transfer pricing under sections 161 to 173 of the Income Tax Act, 2025 tests the price with an associated enterprise for tax, using prescribed methods. The subsidiary reports these deals in Form 3CEB for FY 2025-26 and in Form 48 from tax year 2026-27.

How does GST value services between a subsidiary and its foreign parent?+

Rule 28 of the CGST Rules values supplies between related persons at open market value. Where the recipient can claim full input tax credit, the invoice value is deemed open market value. Services imported from the parent without consideration are still taxable under paragraph 4 of Schedule I, paid by the subsidiary under reverse charge.

Sources

• Income Tax Department (Companies Act, 2013 text), Section 188 Related party transactions, accessed 23 Oct 2026, https://www.incometaxindia.gov.in/w/section-188-73
• Income Tax Department (Companies Act, 2013 text), Section 2 Definitions, clauses (20), (46), (51), (76), (77), accessed 23 Oct 2026, https://www.incometaxindia.gov.in/w/section-2-148
• Income Tax Department (Companies Act, 2013 text), Section 134 Financial statement, Board's report, accessed 23 Oct 2026, https://www.incometaxindia.gov.in/w/section-134-81
• Ministry of Corporate Affairs, Companies (Meetings of Board and its Powers) Rules, 2014, G.S.R. 240(E) of 31 Mar 2014, original text (rules 15(1), 15(2) and the Explanations) on the Tripura High Court website, which does not show the later amendments to rule 15(3), https://thc.nic.in/Central%20Governmental%20Rules/Companies%20(Meetings%20of%20Board%20and%20its%20Powers)%20Rules,%202014.pdf
• Ministry of Corporate Affairs, Notifications: G.S.R. 590(E) of 14 Aug 2014; G.S.R. 464(E) of 5 Jun 2015 (exemptions to private companies under section 462, sub clause (viii) of section 2(76), section 184(2) and the second proviso to section 188(1)); G.S.R. 309(E) of 30 Mar 2017; Companies (Meetings of Board and its Powers) Second Amendment Rules, 2019 of 18 Nov 2019, listing page https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/notifications.html
• Ministry of Corporate Affairs, Rules: Companies (Accounts) Rules, 2014 (rule 8(2), Form AOC-2); Companies (Specification of Definitions Details) Rules, 2014 (rules 3 and 4), https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/rules.html
• Income Tax Department, Income Tax Act, 2025, Section 161, https://www.incometaxindia.gov.in/w/section-161-83
• Income Tax Department, Income Tax Act, 2025, Section 162 Meaning of associated enterprise, https://www.incometaxindia.gov.in/w/section-162-86
• Income Tax Department, Income Tax Act, 2025, Section 163 Meaning of international transaction, https://www.incometaxindia.gov.in/w/section-163-83
• Central Board of Direct Taxes, Circular No. 07/2026 (due dates for AY 2026-27), 28 Sep 2026, https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-09/Circular-7-2026.pdf
• Ministry of Finance, Notes on Clauses to the Finance Bill, 2026, clause 83 (sections 427 and 428 of the Income Tax Act, 2025), https://www.incometaxindia.gov.in/documents/81799/11848482/Notes-on-clauses-2026.pdf/ecfb4f92-f679-f49b-4405-8e6eabe534e2
• GST Council, Central Goods and Services Tax Rules, 2017, rule 28 (text as at 1 Jun 2021; read the current rules on cbic-gst.gov.in), https://gstcouncil.gov.in/sites/default/files/2024-04/01062021-cgst-rules-2017-part-a-rules.pdf
• Reserve Bank of India, Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026, FEMA 3(R)(5)/2026-RB, 9 Feb 2026, https://rbi.org.in/ScriptS/BS_FemaNotifications.aspx?Id=13306