Related Party Transactions (Section 188): Arm's Length Testing, Audit Committee Approvals & Form AOC-2 Disclosures

Published: January 26, 20256 min readEffective: Applicable across all ongoing contracts

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Executive Regulatory Summary

Governing commercial arrangements between companies and interested directors, relatives, or holding entities under Section 188. Detailed guide on proving the 'ordinary course of business' and 'arm's length basis' exemptions, obtaining prior Audit Committee omnibus approval, shareholder approval thresholds, and statutory disclosure in Form AOC-2.

Key Statutory Takeaways

Transactions in the ordinary course of business AND on an arm's length basis are exempt from Section 188 board/shareholder approval.
Non-arm's length contracts exceeding statutory monetary limits (e.g. sale/purchase exceeding 10% of turnover) require prior ordinary resolution of shareholders.
Interested directors cannot participate or vote in board discussions concerning related party contracts.
All non-arm's length contracts must be explicitly disclosed in the Board's Report in Form AOC-2.

Actionable Compliance Checklist for Businesses

Step-by-step advisory measures prescribed by ASGR and CO for immediate adherence:

1Compile and maintain a complete master register of related parties under Section 189.

2Establish documented transfer pricing comparable studies to demonstrate arm's length pricing for group cross-charges.

3Secure annual omnibus approval from the Audit Committee for repetitive related party transactions.

4Prepare Form AOC-2 attachment with concrete justifications for inclusion in the annual Board's Report.

1. Defining 'Ordinary Course of Business' and 'Arm's Length'

Courts and regulatory authorities place the burden of proof strictly upon the corporate board to establish that a related party contract was executed on identical commercial terms as would have been offered to an unrelated third party.

Target Entities Governed by this Notification:

Corporate Boards & Independent DirectorsAudit Committee MembersCompany Secretaries & CFOsStatutory Auditors

Advisory Published By

CA Sanjay Agarwal

Senior Partner & Co-Founder • B. Com, FCA, CS Inter, FAFD (ICAI)

ASGR and CO, Chartered Accountants (Peer Review Certified: #018Xxx)

Statutory Disclaimer: This publication is compiled by ASGR and CO solely for general informational and educational purposes to assist corporate clients and peers in understanding statutory notifications. It does not constitute legal, tax, or formal secretarial advice. Before acting upon any provisions, specific professional counsel should be sought.

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