Corporate Governance Essentials

Thresholds and disclosure requirements under the Companies Act are periodically revised. This article is for general information and does not constitute legal advice.

Related Party Transactions

Under Section 188 of the Companies Act, transactions between a company and its related parties (directors, key managerial personnel, their relatives, or entities they’re connected to) need board approval, and shareholder approval by ordinary resolution once the transaction crosses specified value thresholds. The point of the disclosure requirement isn’t to ban these transactions, which are often legitimate, but to make sure they happen on arm’s-length terms rather than quietly favouring an insider.

Independent Directors

Certain classes of public companies, based on paid-up capital, turnover, or outstanding loans/borrowings/debentures/deposits crossing prescribed thresholds, must appoint independent directors, individuals with no material pecuniary relationship with the company beyond director’s remuneration, meant to bring objective oversight to board decisions. Private companies generally fall outside this requirement unless they cross the relevant thresholds themselves.

The Audit Committee

The same threshold classes that require independent directors must also constitute an Audit Committee of the board, with independent directors forming the majority. Its role covers overseeing financial reporting, related party transactions, and the company’s internal financial controls, sitting at the intersection of the two other governance mechanisms covered here: it’s the body that actually reviews the related party transactions requiring approval, staffed largely by the independent directors appointed for exactly this kind of oversight.