Section 188- related party

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Querist : Anonymous

Querist : Anonymous (Querist)

26 August 2014 An Individual who is a Chartered Accountant by profession is appointed as a consultant to advise the company(Pvt Ltd) on financial matters. He is the relative of the Director of the said Company. Are provisions of Section 188 of the Act applicable?

CS Divesh Goyal

CS Divesh Goyal (Expert)
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27 August 2014 ya its service.under section 188

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Querist : Anonymous

Querist : Anonymous (Querist)

27 August 2014 Thank You Sir.
So in that case, he has to be appointed by the Board according to Sec 188 and procedures laid there under?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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23 July 2025 Yes, you are correct!

Since the individual in question is a relative of a Director of the company and has been appointed as a consultant to advise the company on financial matters, the provisions of Section 188 of the Companies Act, 2013 will indeed apply.

Applicability of Section 188:
Section 188 of the Companies Act, 2013 governs related party transactions (RPTs), which includes transactions between a company and its directors, key managerial personnel (KMPs), relatives of directors or KMPs, and other specified related parties.

In your case:

The individual is a relative of the director.

The individual is providing services (as a consultant) to the company.

This relationship and the nature of the transaction (providing consultancy services) will likely fall under the purview of Section 188 as it qualifies as a related party transaction.

Section 188 - Approval and Procedure:
As per Section 188(1), the transaction with a related party must be approved by the Board of Directors and, in some cases, may also require the approval of the shareholders (via ordinary resolution or special resolution) depending on the value of the transaction.

Steps Involved:
Board Approval: The Board of Directors must approve the transaction. If the transaction is with a related party, the Board Resolution should specify the details of the related party transaction, including the terms and conditions (like the consultant’s fee).

Disclosure in Board Meeting: The transaction should be disclosed in the Board Meeting, and the director who is related to the individual in question may have to disclose his/her interest in the transaction to the Board as per Section 184.

Shareholder Approval (if required): If the transaction exceeds certain thresholds (as specified under the Rules), shareholder approval may be required via ordinary resolution or special resolution.

For transactions exceeding prescribed limits, it requires approval of the shareholders by way of ordinary resolution (for transactions that are less than Rs. 1 crore) or special resolution (for transactions exceeding Rs. 1 crore).

Form AOC-2: Any related party transaction should be disclosed in the Form AOC-2 in the Board’s Report if the transactions exceed a certain threshold.

Summary:
Yes, the individual, being a relative of the director, is a related party under Section 188 of the Companies Act.

The consultant agreement must be approved by the Board of Directors.

If the transaction value exceeds prescribed limits, shareholder approval (by ordinary or special resolution) will be required.

The company must also disclose the transaction in the Board Report via AOC-2 if applicable.

So, to answer your follow-up question: Yes, the individual must be appointed by the Board according to Section 188 and the procedures laid out for related party transactions.

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