Board & Governance

Board Resolution — Related Party Txn

Two questions decide how this resolution is drafted. Is the transaction in the ordinary course of business and on arm’s length terms? And does it cross the threshold above which shareholder approval is required? Answer both in Annexure A before drafting, and record the reasoning — an assertion that a transaction is at arm’s length, with nothing behind it, is not a defence.

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Certified True Copy of a Board Resolution

Approval of a related party transaction

Item	Detail
Company	[COMPANY NAME], CIN [CIN]
Meeting	Meeting of the Board of Directors
Date, time and place	[DATE], [TIME], at [PLACE]
Directors present	[NAMES AND DIN]
Interested directors	[NAMES] — disclosed interest and [did not participate in the discussion or vote / participated after disclosure, as permitted]
Chairperson	[NAME]
Audit committee approval	[Not applicable — the Company is not required to constitute an audit committee / Approved by the audit committee on ______]
Shareholder approval	[Not required — below the prescribed threshold and on arm’s length terms in the ordinary course / Ordinary resolution to be passed before the transaction is entered into]

Disclosure and consideration

The Chairperson informed the Board that the Company proposed to enter into the transaction described in Annexure A with [RELATED PARTY NAME], being a related party of the Company by reason of [BASIS — e.g. a director of the Company is a director and member of that company / the counterparty is a private company in which a director is a member / the counterparty is a relative of a director].

[NAME], being interested in the transaction, disclosed the nature and extent of his or her interest in accordance with the disclosure already recorded in the register of contracts maintained by the Company, and confirmed that the disclosure in the prescribed form furnished at the first Board meeting of the financial year remained accurate.

The Chairperson placed before the Board:

(a)the draft [agreement / purchase order / lease deed] recording the terms of the proposed transaction;

(b)the comparison of the proposed terms against terms available from unrelated parties, set out in Annexure B, together with the supporting quotations, market data and independent evidence relied on;

(c)the computation at Annexure A of the value of the transaction, together with the aggregate value of all transactions with the same related party during the financial year; and

(d)the register of contracts or arrangements in which directors are interested, maintained by the Company.

The Board considered whether the transaction was in the ordinary course of the business of the Company and whether the terms were at arm’s length, and recorded its reasoning as set out in Annexure B. After discussion, [the interested director having withdrawn from the meeting,] the Board passed the following resolution:

Resolution

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Notes for use

These notes accompany the template and explain the drafting choices, the compliance points and the mistakes most often made with this document. They appear as a final page in the Word file, intended to be deleted before the document is executed.

The two questions that decide everything

A related party transaction that is both in the ordinary course of business and on an arm’s length basis does not require the approval that other related party transactions require. Everything else follows from that. But the exemption is not self-declaring — it depends on the Board actually forming and recording a view, supported by evidence. Annexure B is that evidence, and a Board that writes "the transaction is at arm’s length" with nothing behind it has not met the standard.

Get the relationship right before anything else

The definition of a related party is wider than most people assume and catches directors, key managerial personnel, their relatives, firms in which a director or relative is a partner, private companies in which a director is a director or member, and bodies corporate whose board acts on a director’s instructions, among others. Establish the precise basis of the relationship and record it — not merely that the counterparty "is related".

Aggregate, do not look at the transaction alone

Thresholds are tested by reference to the aggregate value of transactions of the same nature with the same related party in a financial year, not transaction by transaction. A series of small purchases from a director’s company can cross the threshold without any single purchase coming near it. Annexure A asks for both the individual and the aggregate figures for that reason, and the register of contracts is where the aggregate comes from.

The interested director

An interested director must disclose the nature and extent of the interest. The general position is that an interested director does not participate in the discussion or vote on the matter, though a relaxation is available to certain classes of company subject to conditions. Whichever applies, record what actually happened at the meeting — whether the director withdrew, remained but abstained, or participated — rather than leaving the minutes silent.

Annual disclosure of interest

Every director must disclose interests in the prescribed form at the first Board meeting of each financial year and whenever there is a change. That standing disclosure is what makes it possible to identify related party transactions before they are entered into, rather than at audit. If the Company does not collect it annually, it will find related party transactions retrospectively, which is the expensive way.

Register of contracts

The particulars must be entered in the register of contracts or arrangements in which directors are interested, the register must be placed before the next Board meeting and signed by the directors present, and it must be kept at the registered office. It is a permanent record and diligence will ask for it. Update it at the time of the transaction, not at year end.

Board’s report disclosure

Related party transactions not at arm’s length or not in the ordinary course must be disclosed in the Board’s report with a justification. The justification written in the Board’s report should match the reasoning recorded in Annexure B. Where the two differ, the discrepancy is visible on the public record.

Transfer pricing is a separate regime

Approval under company law does not answer the tax question. Transactions with associated enterprises may attract transfer pricing scrutiny under the specified domestic transaction and international transaction provisions, each with its own documentation and reporting requirements and its own definition of arm’s length. The company law benchmarking in Annexure B is a useful starting point but is not a transfer pricing study.

Goods and services tax on related party supplies

Supplies between related persons may be treated as taxable even without consideration, and the valuation rules for related party supplies differ from the transaction value used for third parties. A management fee, a shared service, or the free use of premises between group companies frequently has a tax consequence that the company law analysis does not surface. Raise it with the tax adviser before the transaction is entered into.

Loans to directors

A loan to a director, or to a person in whom a director is interested, is subject to a separate and stricter prohibition and is not simply a related party transaction. Do not use this resolution for a loan to a director. Take advice first — the exemptions are narrow and conditional.

Ratification is not a substitute for approval

Where a related party transaction requiring approval is entered into without it, it is voidable at the option of the Board, and the director concerned may be required to indemnify the Company for any loss. Retrospective ratification is possible within a limited window but is not a planned strategy. Approve before entering into the transaction.

Current as of

Reflects Indian law current as of {{DATE OF USE}}. Thresholds, the categories of transaction caught, the audit committee requirement and the applicable exemptions all change — confirm each with a company secretary before the meeting.

This is a ready-to-use template provided for convenience. Laws and requirements change, and every situation is different — please have it reviewed by a qualified professional (a lawyer, company secretary, or chartered accountant as relevant) before you rely on it.