RPT approvals under Section 188: the threshold every founder-led board misses

Section 188 of the Companies Act, 2013 governs related-party transactions. The framework is two-tiered: transactions within the prescribed thresholds need board approval; transactions above the thresholds need an ordinary resolution of shareholders. Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 sets out the thresholds.

On its face, Section 188 looks like a calculation problem. Identify the transaction, identify the threshold, compare. Where it goes wrong is one step earlier: identifying the related party. For founder-led companies, the related-party perimeter is wider than founders typically perceive, and the wider perimeter is where Section 188 applications are missed.

Who is a related party

Section 2(76) defines related party. The list is more detailed than founders usually expect.

Directors and KMP, and their relatives. Relatives are defined in Section 2(77) — spouse, parents and step-parents, children and step-children, children's spouses, siblings and step-siblings, and members of the same Hindu Undivided Family.

A firm in which a director, manager, or relative is a partner.

A private company in which a director or manager or 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 paid-up share capital.

A body corporate whose board of directors, MD, or manager is accustomed to act in accordance with the advice, directions, or instructions of a director or manager.

Any person on whose advice, directions, or instructions a director or manager is accustomed to act. (Note the carve-out for advice given in a professional capacity.)

A holding, subsidiary, or associate company. An investing company or the venturer of the company.

Such other person as may be prescribed.

The width is in the third, fourth, and fifth limbs — the indirect related parties via partnerships, private companies, and corporate bodies under common control.

The thresholds under Rule 15

Rule 15(3) sets the thresholds above which Section 188(1)(a) to (g) transactions require shareholder approval. The thresholds are computed against the company's turnover or net worth as per the audited financial statements of the preceding financial year.

Sale, purchase, or supply of any goods or materials. 10% of turnover, or ₹100 crore, whichever is lower.

Selling or otherwise disposing of, or buying, property of any kind. 10% of net worth, or ₹100 crore, whichever is lower.

Leasing of property of any kind. 10% of net worth, or 10% of turnover, or ₹100 crore, whichever is lowest.

Availing or rendering of any services. 10% of turnover, or ₹50 crore, whichever is lower.

Appointment of any agent for purchase or sale of goods, materials, services, or property. 2.5% of net worth, or ₹50 crore, whichever is lower.

Appointment of a related party to any office or place of profit at a monthly remuneration above the prescribed limit. ₹2.5 lakh per month.

Underwriting the subscription of any securities or derivatives. 1% of net worth.

The thresholds are aggregate for the financial year. A series of transactions with the same related party adds up; once the aggregate crosses the threshold, the shareholder approval is needed prospectively for further transactions.

The omnibus approval

The audit committee can grant omnibus approval for related-party transactions that are repetitive in nature, subject to prescribed conditions. The omnibus framework is set out in Rule 6A of the Companies (Meetings of Board and its Powers) Rules.

Omnibus approval works where the related-party transactions are routine, predictable, and within defined parameters — for example, recurring lease payments to a related party at a pre-agreed rate, or recurring supply transactions on standard commercial terms. The omnibus approval is granted annually and reviewed quarterly by the audit committee.

What omnibus approval does not cover: transactions outside the predefined parameters, transactions with new related parties added during the year, and transactions that individually exceed prescribed sub-limits.

Where founder-led boards miss

We see four patterns of failure on Section 188.

Pattern 1: The director's spouse's consultancy

The founder's spouse runs a consultancy that provides services to the company. The founder declares interest, the audit committee approves, and the transaction is recorded as an RPT. So far, so correct.

What gets missed: the consultancy is a sole proprietorship, then converts to an LLP. The LLP is registered in the spouse's name. Two years later, the spouse's parent joins the LLP as a partner. The LLP is now a related party through two distinct limbs — relative of director (spouse) and partner of relative of director (parent). The transactions continue. Nobody refreshes the related-party register to reflect the partner change.

Three years on, diligence picks up the LLP partner change and asks why the related-party register lists only the spouse. The company has been making correct disclosures but against an outdated relationship map.

Fix: refresh the related-party register annually, not at incorporation. Ask each director and KMP to confirm in writing the current state of their interests — entities they are directors of, entities their relatives are partners in, entities of which any of the above are members holding above 2% (for public companies).

Pattern 2: The HUF on the founder's mother's side

The founder's mother is the karta of an HUF that holds shares in a vendor company. The vendor company sells goods to the company we are advising. The vendor company's principal shareholders are the HUF (40%) and the founder's brother (35%).

The vendor company is a related party through two limbs: a private company in which a relative of a director is a member (the mother as karta holds via the HUF, which is treated as held by the karta for these purposes under standard interpretation), and a private company in which a relative is a director or member (the brother).

The transactions with the vendor company are RPTs. Section 188 applies. The relationship is not visible from the founder's direct register of interests because the founder's name does not appear in the vendor's documents.

Fix: the related-party interest declaration should cover both direct holdings and indirect holdings of the director's relatives, including via HUFs, trusts, partnerships, and corporate bodies under common control. The declaration form should ask the relevant questions explicitly.

Pattern 3: The subsidiary-of-subsidiary transaction

The company has a subsidiary, which has its own subsidiary (a step-down subsidiary). The step-down subsidiary supplies goods to the parent company we are advising.

Holding-subsidiary-subsidiary relationships are caught by the related-party definition under Section 2(76). The transaction between the parent and the step-down subsidiary is an RPT, requiring Section 188 compliance.

Founders sometimes treat intercompany transactions within the group as outside Section 188 on the basis that the same beneficial ownership runs through. This is wrong as a matter of statute. The framework applies, the audit committee approval is required, and the shareholder approval is required above threshold.

Fix: treat all intercompany transactions within the group as RPTs by default. The omnibus approval framework typically covers them — annual approval at the audit committee for the year's intercompany flows, refreshed at each AGM where shareholder approval is needed.

Pattern 4: Retrospective discovery during audit

The auditor, during the year-end audit, discovers a transaction with a party not previously identified as related. The relationship — a director's brother-in-law's company — was not on the related-party register. The auditor raises the matter as an audit observation.

Section 188(3) provides that any transaction entered into without the required board or shareholder approval can be voidable at the option of the board or shareholders. The retrospective discovery does not retrospectively cure the lack of approval.

Fix: at year-end, before the audit begins, the company secretary runs an exception report against the year's transactions — counterparties not previously identified as related, but whose ownership or directorship overlaps with the director or KMP list. Any matches are flagged for ratification or, where the transaction is voidable, for board action.

How we run the related-party process

On engagement, we set up the related-party register at the start of the financial year, refreshed against directors' and KMP's written declarations of interest. The register lists every related party by limb of the definition, with the relationship documented (which director, which relative, which interest).

We then circulate the register to the finance team for transaction tagging. Every counterparty in the company's books is checked against the register. Matches are flagged as RPTs.

At each audit committee meeting, the RPT report covers: transactions approved under omnibus, transactions approved at the meeting, transactions above threshold awaiting shareholder approval, and any exception items (a transaction with a counterparty not previously identified as related, where the relationship has since been confirmed).

At year-end, the disclosures under Section 134(3)(h) — the Board's Report — cover the year's RPTs in the prescribed format. The disclosure is reconciled against the audit committee's record and against the accounts.

The discipline that prevents the miss

The threshold calculation under Rule 15 is mechanical and rarely wrong. The identification of the related party — the step before the threshold — is where the discipline matters. Founder-led companies miss the indirect relationships because the founder is not in the habit of mapping their family's commercial interests. A structured annual declaration, run by the company secretary, surfaces what the founder does not volunteer.

We treat the declaration as the most important compliance interview of the year. It is short — ten minutes per director — and it is the moment when the related-party perimeter is set for the year. Done well, it makes the Section 188 calendar predictable. Done poorly, it leaves the perimeter to be reconstructed under audit pressure.