Related Party Transactions & Board Resolutions — The Compliance Trap Most Family-Owned Companies fall into

Loans between family members, property leased from a director, purchases from a relative’s business — completely normal in a family-run company, and almost always undocumented in exactly the way the Companies Act requires.

A large share of Indian Private Limited Companies are, in practice, family businesses — run by relatives, financed informally between family members, operating out of property owned by a director, buying from or selling to businesses controlled by the same family. None of this is unusual, and none of it is inherently a problem. What is a problem, and what we see missed constantly, is that the Companies Act treats almost every one of these arrangements as a related party transaction — with its own specific approval and disclosure requirements that most family businesses have never formally gone through.

Who Counts as a “Related Party” Under the Companies Act???

Section 2(76) of the Companies Act defines “related party” broadly enough to catch most family business arrangements without anyone realising it applies. It includes:

Relatives of directors or key managerial personnel

Section 2(77) defines “relative” specifically — it covers a director’s or KMP’s spouse, parents, siblings, and children (including a step-child), along with the spouse of a sibling or child. This is a specific, defined list, not a general “family member” concept — but it covers most of the people a founder would naturally think of as family.

Key Managerial Personnel and their relatives

This includes the Managing Director, Whole-Time Director, CFO, and Company Secretary, and their relatives as defined above — not just directors in the narrow sense.

Companies controlled by the same individuals

Holding, subsidiary, and associate companies, and any private company in which a director or manager is also a director or member, or any firm in which a director, manager, or their relative is a partner. This is the category that most often catches family businesses off guard — a second family-owned entity, however informally connected, is very likely a related party under this test.

The Seven Categories of Transactions Section 188 Covers

Section 188(1) specifically lists the categories of related party dealings that require board approval — and in family businesses, most of these come up naturally, without anyone thinking of them as a formal “related party transaction” at the time:

One important clarification: loans and guarantees to or from a director specifically fall under Sections 185 and 186 of the Companies Act, not Section 188 — a distinct set of rules with their own restrictions, often confused with the related party transaction framework covered here.

Board Approval vs Shareholder Approval — Where the Line Sits

Every related party transaction covered above requires board approval, passed at a properly convened board meeting — this is the baseline, with no exceptions. Beyond that baseline, whether shareholder approval is also required depends on both the size of the transaction and its nature:

• Ordinary course of business, at arm’s length price: If a transaction is both a genuine part of the company’s normal business activity and priced the same way it would be with an unrelated party, it is exempt from the Section 188 approval requirement entirely (though good governance still argues for documenting it). Many companies wrongly assume any one of these two conditions alone is enough — both must be true together.
• Below the prescribed threshold: For transactions that don’t qualify for the exemption above but stay under specific value thresholds (for example, sale or purchase of goods/materials under 10% of the company’s annual turnover, or ₹100 crore, whichever is lower), board approval alone is sufficient.
• Above the threshold, or otherwise not exempt: A shareholder ordinary resolution is additionally required, passed at a general meeting, in addition to the board approval already obtained.

The Special Exception That Actually Matters Most for Family Companies

Normally, a related party with a personal interest in a transaction cannot vote on the board or shareholder resolution approving it — a director interested in the deal has to step back from the decision. This creates an obvious practical problem for a genuinely family-owned company: if every director and shareholder is a relative, who’s actually left to vote?

The law specifically anticipates this. Where 90% or more of the members (by number, not by shareholding value) of a company are relatives of promoters or are otherwise related parties, the voting restriction on interested members does not apply in the same way — allowing genuinely closely-held family companies to actually pass the required resolutions without being structurally unable to do so. This is a meaningful, specific relief for family businesses, but it’s also one of the least understood provisions — many founders don’t know it exists, and end up either wrongly believing they can’t pass a required resolution at all, or wrongly assuming no approval process is needed in the first place.

Common Traps We See in Family-Owned Companies

The company operates from property owned by a director

Extremely common, and almost never formally approved as a related party transaction. Even where rent is genuinely paid at a fair market rate, the arrangement still needs board approval as a leasing transaction under Section 188 unless it can be clearly shown to be ordinary course and arm’s length — and “ordinary course” is a harder argument to make for a one-off property arrangement than it sounds.

Buying from or selling to a relative’s business

Where a family runs more than one business, cross-trading between them is common and rarely documented as a formal related party arrangement, even when the pricing is genuinely fair. Without documentation, a genuinely arm’s-length arrangement is indistinguishable, on paper, from one that isn’t — which is precisely the gap a due diligence process or an ROC review will flag.

A relative appointed to a paid role

Appointing a director’s spouse, sibling, or child to a genuine, paid position in the company is a specifically listed Section 188 category — “appointment to an office or place of profit” — and needs the same formal approval process as any other related party arrangement, regardless of how obviously deserved the role is.

Shared costs and services between group companies

Where a family operates multiple companies sharing office space, staff, or services informally, with costs allocated between entities on an ad hoc basis, this typically constitutes a related party service arrangement requiring the same approval and documentation as any other transaction in this category — informal cost-sharing between commonly-controlled entities doesn’t fall outside Section 188 just because no formal contract was signed.

The Paperwork That Actually Needs to Exist

• Form MBP-1 — a disclosure of interest that every director must file at the first board meeting of each financial year (and whenever their interests change), listing every entity in which they hold an interest that could make a future transaction a related party matter
• Board resolution — a properly minuted board approval for each related party transaction, or a general framework resolution for recurring arrangements, with the interested director’s non-participation (where applicable) recorded
• Form AOC-2 — an annexure to the Board’s Report disclosing the particulars of related party contracts and arrangements for the financial year, filed as part of the annual return
• Register under Section 189 — a register of contracts and arrangements in which directors are interested, maintained on an ongoing basis, not assembled retrospectively

What Happens If a Related Party Transaction Was Never Properly Approved??

A related party contract entered into without the required board (or shareholder, where applicable) approval is voidable at the option of the Board. If the director or employee who authorised it did so without the necessary approval, they are personally required to indemnify the company for any loss arising from the transaction — a real, personal liability, not just a company-level compliance gap. Beyond the direct legal exposure, undocumented related party arrangements are consistently one of the specific items flagged during investor due diligence, bank credit assessments, and statutory audits — turning a quiet, informal arrangement into a formal finding at exactly the moment a company can least afford the delay.

How Rudra Capital Helps??

We treat related party review as a standing part of annual compliance for family-owned companies, not a one-time exercise conducted only when a problem surfaces.

FAQs — Related Party Transactions for Family-Owned Companies, 2026

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