Section 188 The Companies Act, 2013

(1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party‘s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company:

^6,10[Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a ¹[resolution]:

^5&7[Provided further that no member of the company shall vote on such ¹¹[resolution], to approve any contract or arrangement which may be entered into by the company, if such member is a related party:]]]

⁸[Provided also that nothing contained in the second proviso shall apply to a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties:]

Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis:

²[Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.]

Explanation.— In this sub-section,—

(a) the expression “office or place of profit” means any office or place—

(i) where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(ii) where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(b) the expression “arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

(2) Every contract or arrangement entered into under sub-section (1) shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.

(3) Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a ³[resolution] in the general meeting under sub-section (1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement ⁹[shall be voidable at the option of the Board or, as the case may be, of the shareholders] and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the Directors concerned shall indemnify the company against any loss incurred by it.

(4) Without prejudice to anything contained in sub-section (3), it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement.

(5) Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall,—

(i) in case of listed company, be ¹⁰[liable to a penalty of twenty-five lakh rupees] and

(ii) in case of any other company, be ¹¹[liable to a penalty of five lakh rupees]

Amendment

^1. Substituted by Companies (Amendment) Act, 2015 and is effective from 29th May, 2015.

In sub-section (1), for the words “special resolution”, at both the places where they occur, the word “resolution” shall be substituted;

^2. Inserted by Companies (Amendment) Act, 2015 and is effective from 29th May, 2015.

^3.Substituted by Companies (Amendment) Act, 2015 and is effective from 29th May, 2015.

In sub-section (3), for the words “special resolution”, the word “resolution” shall be substituted.

^4. Clarification related to Non- applicability of section 188 to Corporate Reconstruction etc.

^8. Inserted by The Companies (Amendment)Act,2017:- Amendment effective from 9th february 2018

^9.Substituted by the Companies (Amendment) Act,2017 :- Amendment effective from 9th february 2018

In section 188, in sub-section (3),

for the words “shall be voidable at the option of the Board”

the following words shall be substituted, namely :-

“shall be voidable at the option of the Board or, as the case may be, of the shareholders”

^10.Substituted by the Companies (Amendment) Act, 2020. Notification dated 28th September, 2020. Amendment Effective from 21st December 2020

In sub-section (5), in clause (i):-

“punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both;”

The Following shall be substituted namely:-

“liable to a penalty of twenty-five lakh rupees”

^11. Substituted by the Companies (Amendment) Act, 2020. Notification dated 28th September, 2020. Amendment Effective from 21st December 2020

In sub-section (5), in clause (ii):-

“punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.”

The Following shall be substituted namely:-

“liable to a penalty of five lakh rupees”

Exceptions/ Modifications/ Adaptations

^5. In case of private company – Second proviso to Sub-section (1) of section 188 shall not apply – Notification dated 5th june, 2015.

^6. In case of Government company – First and second proviso to Sub- section (1) of section 188 shall not apply to :-

(a) a Government company in respect of contracts or arrangements entered into by it with any other Government company;

(b) a Government company, other than a listed company, in respect of contracts or arrangements other than those referred to in clause (a), in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before entering into such contract or arrangement. – Notification dated 5th june, 2015.

^7. In case of Specified IFSC Public Company – Second proviso to sub section (1) of section 188 shall not apply. – Notification Date 4th January, 2017

^10. In case of Government company – First and second proviso to Sub- section (1) of section 188 shall not apply to :

(a) a Government company in respect of contracts or arrangements entered into by it with any other Government company, or with Central Government or any State Government or any combination thereof;

(b) a Government company, other than a listed company, in respect of contracts or arrangements other than those referred to in clause (a), in case such company obtains approval of the Ministry or Department of the Central Government which is administratrvely in charge of the company, or, as the case may be, the State Government before entering into such contract or arrangement. – Notification dated 02nd March, 2020.