Approval Requirement from Audit Committee for Related Party Transactions under Section 188

Section 188 of the Companies Act, 2013 governs Related Party Transactions (RPTs) and specifies when prior approval is required. Additionally, the Companies (Meetings of Board and its Powers) Rules, 2014 and SEBI (LODR) Regulations, 2015 impose further compliance requirements.

1. Applicability of Section 188

Section 188 applies when a company enters into a transaction with a related party, including:
✅ Sale, purchase, or supply of goods/materials
✅ Selling or disposing of property
✅ Leasing of property
✅ Availing or rendering services
✅ Appointment of related party to office or place of profit
✅ Underwriting of securities

If these transactions exceed the prescribed threshold limits, approval from the Board of Directors and in some cases, shareholders is required.

2. Threshold Limits for Shareholder Approval under Section 188

As per Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014, shareholder approval via a special resolution is required if the transaction value exceeds the following limits:

Note: The limits are based on the last audited financial statements of the company.

3. Role of the Audit Committee in Related Party Transactions (RPTs)

• Section 177(4)(iv) of the Companies Act, 2013 mandates that the Audit Committee must approve all RPTs, including those covered under Section 188.
• Even if a transaction does not exceed the monetary limits of Section 188, it still requires Audit Committee approval if the company is required to have an Audit Committee.
• Listed companies and certain public companies must comply with SEBI (LODR) Regulations, 2015, which impose stricter approval requirements for RPTs.

4. Exemptions Where Audit Committee Approval May Not Be Required

Audit Committee approval is not required in the following cases:
❌ Transactions between holding and wholly-owned subsidiary (subject to disclosure requirements).
❌ Transactions entered in the ordinary course of business and at arm’s length price.

However, even in these cases, proper documentation and disclosure are essential.

5. Shareholder Approval for Certain Transactions

In addition to Audit Committee and Board approvals, shareholder approval via special resolution is required if the transaction value exceeds the thresholds mentioned above.

Final Answer

✅ Yes, Audit Committee approval is mandatory for all Related Party Transactions, including those under Section 188, unless they are exempted (ordinary course & arm’s length).
✅ If the transaction exceeds prescribed limits, Board and shareholder approval is also required.
✅ Listed companies must comply with SEBI (LODR) Regulations, 2015, which impose additional RPT approval requirements.

Is a Director Required to Disclose His Interest in Companies Incorporated Outside India?

Yes, under the Companies Act, 2013, a director is required to disclose his interest in any company, whether incorporated in India or outside India. The disclosure requirements are governed by Section 184 and Rule 9 of the Companies (Meetings of Board and its Powers) Rules, 2014.

1. Section 184 of the Companies Act, 2013 – Disclosure of Interest

A director must disclose his interest in any company, body corporate, firm, or other association of individuals in which he holds:
✅ Directorship
✅ Shareholding
✅ Partnership interest
✅ Any other financial interest

🔹 Frequency of Disclosure:

• At the first Board meeting after becoming a director.
• At the first meeting of every financial year.
• Whenever there is a change in his interest during the year.

🔹 Does it Apply to Foreign Companies?
✔ Yes, foreign companies are covered under the definition of “body corporate” as per Section 2(11) of the Companies Act, 2013.
✔ A director must disclose his interest in any foreign company where he holds directorship, shareholding, or any financial stake.

📌 Format of Disclosure:
Directors must provide disclosure using Form MBP-1 at the Board meeting.

2. Section 189 – Register of Contracts & Arrangements in Which Directors are Interested

🔹 Companies must maintain a Register of Contracts (MBP-4) where all disclosures of directors’ interests are recorded.
🔹 This register is open for inspection by directors and auditors.

3. SEBI & RBI Regulations for Listed and Foreign Companies

✔ If the company is listed, the director’s interest must be disclosed under SEBI (LODR) Regulations, 2015.
✔ RBI regulations also require Indian companies with foreign subsidiaries or investments to maintain disclosures of director interests.

Final Answer

✔ Yes, a director must disclose his interest even in companies incorporated outside India.
✔ This applies to directorships, shareholding, partnerships, and financial interests.
✔ Disclosures must be made in Form MBP-1 and recorded in Register MBP-4.
✔ Compliance with SEBI and RBI regulations may also be required for listed or regulated entities.

📌 Recommendation: Directors should ensure timely disclosure of foreign company interests to avoid non-compliance and penalties under the Companies Act, 2013.