Section 188 of the Companies Act, 2013 requires board approval, and shareholder approval beyond certain thresholds, for specified categories of contracts or arrangements with related parties — sale or purchase of goods and property, leasing, appointment of agents, and related services among them. An auditor checks that each material related-party transaction identified has the approval the section requires, evidenced in board minutes and, where applicable, a shareholder resolution, and tests omnibus approvals against the actual transactions that followed rather than accepting the omnibus resolution as covering everything by default.
This article explains section 188 at a working level for audit purposes. The exact categories of contract covered, the monetary and percentage thresholds that trigger shareholder approval, and the exemptions for transactions in the ordinary course of business at arm's length, have all been subject to amendment and clarification over the years. Verify the current text of section 188 and the applicable rules before relying on any threshold figure in an audit file.
What the section covers
Section 188 applies to specified contracts or arrangements between a company and its related parties, broadly including sale, purchase or supply of goods or materials, selling or disposing of property, leasing of property, availing or rendering of services, appointment of a related party to an office or place of profit, and underwriting of securities. Two exemptions matter most in practice: transactions in the ordinary course of business, and transactions on an arm's-length basis. A transaction that is genuinely both is outside the approval requirement, though not outside the disclosure requirement under AS 18 or Ind AS 24, which has no such carve-out.
- "Ordinary course of business" is a factual question about the entity's own normal operations, not a label management can apply to an unusual transaction simply by calling it routine.
- "Arm's length" for section 188 purposes should not be assumed from pricing alone; the terms as a whole — payment period, security, volume commitments — need to look like terms an unrelated party would accept.
- Even where a transaction is exempt from section 188 approval on these grounds, that conclusion belongs in the file with the basis stated, because it is a position management and the auditor are both taking, not a default.
Approval requirements
Board approval by resolution at a meeting is the baseline requirement for contracts falling within section 188, with the interested director excluded from voting on that resolution under the section's own related provisions. Beyond certain thresholds set by rule — which have moved with amendments and should be checked against the current rules rather than assumed from memory — shareholder approval by ordinary resolution is additionally required, with the related-party shareholders required to abstain from voting on that resolution for most categories of transaction. Listed and certain other prescribed companies have additional requirements that do not apply to most private mid-market clients but should be checked where the client's structure is close to a threshold.
Omnibus approval in practice
For related-party transactions that are repetitive in nature, audit committees of companies required to have one — and boards, in substance, for companies without a mandatory audit committee — commonly grant omnibus approval covering a category of transactions up to specified value limits for a defined period, rather than approving each instance separately. This is standard practice for recurring transactions like rent, routine purchases from a group entity, or shared service arrangements, and it is a legitimate mechanism, not a workaround.
Common practice, not a requirement
Where an audit committee is not mandatory for the client, boards in practice often still pass an annual omnibus resolution covering routine related-party dealings with group entities, for the same reason listed companies use the audit committee route: approving every invoice separately is impractical. Confirm this was actually done rather than assuming it, since it is easy for a smaller company's board to simply never pass one.
Testing against board minutes
- 01List every material related-party transaction identified during transaction testingUse the population built during related-party transaction testing, not a shorter list limited to what management flagged as requiring approval.
- 02For each, identify whether it falls within a section 188 category or an exemptionRecord the basis for treating a transaction as ordinary-course or arm's-length where that exemption is being relied on, rather than leaving the classification unstated.
- 03Trace approval to a specific board minute or resolutionA general statement in minutes that "related-party transactions were noted" is not approval of a specific contract. Look for a resolution that names the counterparty, the nature of the arrangement, and, for omnibus approval, the value limit and period.
- 04Check that the interested director did not voteMinutes should show the interested director was present for disclosure purposes but did not participate in the vote, where the section requires exclusion.
- 05Test actual transactions against the omnibus limits grantedAn omnibus approval for a category up to a stated value, for a stated period. Transactions exceeding either boundary need a fresh or supplementary approval, and a transaction that quietly exceeded the limit partway through the year is a compliance gap, not a rounding issue.
- 06Confirm shareholder approval where the transaction crosses the thresholdCheck the notice, the resolution text excluding related-party shareholders from voting, and the result, against the AGM or EGM minutes.
| Gap | Why it happens |
|---|---|
| Omnibus approval exists but transactions during the year exceeded its value limit | Nobody tracked cumulative value against the limit as the year progressed |
| Board minute approves "the arrangement" without naming terms or value | Minutes drafted loosely, approval intended but not evidenced with the specificity the section contemplates |
| Interested director's vote not excluded in the minute record | Minute-taking does not distinguish presence from participation |
| Transaction classified as ordinary course with no basis recorded | Classification made verbally by management, never documented |
| New related party added mid-year, transactions begin before any approval sought | Approval process only triggered at year-end disclosure preparation, not when the relationship began |
Regulatory requirement
Section 188 also carries consequences for non-compliance, including the possibility that a contract entered into without the required approval can be voidable at the option of the board or shareholders, and penal provisions for certain categories of persons. Confirm the current consequences and any ratification route available under the section before concluding on a compliance gap found during the audit.
How we think about this
Checking whether a transaction's cumulative value has crossed an omnibus limit is arithmetic against a running total — exactly the kind of check that should be computed automatically across every transaction rather than sampled. Whether the board minute's wording actually constitutes the specific approval the section contemplates is a reading of governance intent, and that stays a judgement for the auditor.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Related parties & disclosuresRelated-party transaction testing under AS 18 / Ind AS 24Testing related-party transactions means proving the population is complete before checking what management already disclosed.
- Related parties & disclosuresRelated-party disclosure checklist for financial statementsA related-party note that lists transactions but not relationships, or balances but not terms, is an incomplete disclosure even if every number in it is correct.
- Related parties & disclosuresAuditing loans to directors and connected personsThe riskiest loans to directors are rarely booked as loans. They show up as unsettled expense advances and drifting current-account balances.
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