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Related Party Transactions Approvals.

📌 Related Party Transactions (RPT) — Approval Framework (India)

Main law:

Section 188, Companies Act, 2013

Section 177 (Audit Committee approval)

Section 2(76) – Definition of Related Party

SEBI LODR (for listed companies)

Accounting Standard 18 / Ind AS 24 (disclosure)

🧾 1. What is a Related Party Transaction?

An RPT is a contract or arrangement between a company and a related party, such as:

Director or KMP

Relative of director

Firm in which director is partner

Private company where director is member/director

Public company where director + relatives hold >2%

Holding, subsidiary, associate company

📌 2. Types of Transactions Covered (Sec 188)

Approval required for:

Sale/purchase of goods

Sale/purchase of property

Leasing property

Availing/rendering services

Appointment to office/place of profit

Underwriting subscription of securities

📌 3. Levels of Approval

📌 4. “Arm’s Length” & “Ordinary Course” Exception

Shareholder approval not required if transaction is:

✔ In ordinary course of business, and
✔ At arm’s length price

If either fails → shareholder approval mandatory.

📌 5. Disclosure Obligations

Company must:

Mention RPTs in Board’s Report

Disclose in financial statements

Listed entities → stock exchange disclosure

📌 6. Consequences of Non-Compliance

Transaction is voidable at option of company

Directors must indemnify company

Penalty and imprisonment (in some cases)

May amount to oppression/mismanagement

⚖ Key Case Laws

1️⃣ Needle Industries (India) Ltd v. Needle Industries Newey (1981 SC)

Directors must act bona fide and in company’s interest.
👉 RPTs benefiting insiders without justification can be invalid.

2️⃣ Dale & Carrington Investment v. P.K. Prathapan (2005 SC)

Corporate powers cannot be used for personal gain.
👉 Classic authority against abusive related party dealings.

3️⃣ Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (2005 SC)

Oppression occurs when majority uses power to prejudice minority.
👉 Unfair RPTs often ground for oppression petitions.

4️⃣ Nanalal Zaver v. Bombay Life Assurance (1950 SC)

Directors are fiduciaries and must avoid conflict of interest.
👉 Foundation for RPT regulation.

5️⃣ Official Liquidator v. P.A. Tendolkar (1973 SC)

Directors liable for misapplication of funds.
👉 RPTs leading to losses may attract liability.

6️⃣ Cook v. Deeks (1916 PC)

Directors diverted contract to themselves; held breach of fiduciary duty.
👉 Landmark global case on self-dealing.

7️⃣ Regal (Hastings) Ltd v. Gulliver (1942 HL)

Directors must not profit from position.
👉 Applies to undisclosed RPT benefits.

📌 7. Governance Risks in RPTs

📌 8. Best Compliance Practices

✔ Audit committee review with valuation
✔ Independent director approval
✔ External fairness opinion
✔ Detailed board minutes
✔ Arm’s length documentation

🎯 Key Takeaway

RPT law exists to prevent:

Insider enrichment

Conflict of interest

Minority shareholder oppression

Fund diversion

Every RPT must pass three tests:

Disclosure → Approval → Fairness

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