Ratification Of Related Party Transactions By The Audit Committee

1. Introduction

Few areas of Indian corporate governance have witnessed such sustained  regulatory tightening as related party transactions ("RPTs"). The Companies Act, 2013, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations"), and a steady stream of SEBI circulars (most recently the Industry Standards on Minimum Information for RPT approval ) have together created a framework that is both rigorous and unforgiving. The framework is built on a single premise: RPTs must be approved before they are entered into — not after.

And yet, in the real world, transactions do get entered into without prior approval. A vendor turns out to have a related-party linkage no one was aware of. A subsidiary executes a reimbursement that the parent's audit committee never saw. A KMP signs a service contract believing it to be arm's-length, only for an internal audit or compliance review, subsequently to flag it. In each such case, the same question presents itself: can the audit committee "ratify" the transaction after the fact — and if so, up to what limit, and with what consequence?

This article addresses some interconnected key questions that recur in boardrooms and audit committee meetings across listed and unlisted companies in India with respect to the ratification of related party transactions.

2. Ratification — the common-law concept and its statutory adoption

Ratification, at common law, is the act by which a principal adopts as his own an act done on his behalf by an agent who, at the time of the act, had no authority (or had exceeded his authority) to do it. The doctrine carries with it the celebrated relation-back principle laid down in Bolton Partners v. Lambert (1889) 41 ChD 295 — that a valid ratification operates retrospectively, validating the unauthorised act as if it had been authorised at the moment of its doing. The boundaries of the doctrine were sharpened in Keighley Maxsted & Co v. Durant [1901] AC 240, where the House of Lords held that ratification is unavailable to an undisclosed principal — establishing that ratification is a creature of specific authority and is not casually inferred.

The doctrine of ratification is codified in Indian statute through Sections 196 to 200 of the Indian Contract Act, 1872. Section 196 declares that where acts are done by one person on behalf of another, without his knowledge or authority, the principal may elect to ratify or to disown such acts; and on ratification, the same effects ensue as if the acts had been performed by his authority. Sections 197 and 198 deal with implied ratification and the knowledge required for valid ratification; Section 199 addresses ratification of part of an integrated transaction; and Section 200 bars ratification that would prejudice third parties. The Contract Act position remains the bedrock against which all statute-based ratification provisions — including those in the Companies Act and the LODR Regulations — must be read.

3. The statutory architecture for RPT approval and ratification

3.1  Companies Act, 2013

The Companies Act creates a two-tier approval framework. Section 177(4)(iv) requires every audit committee [whose constitution is mandatory under Section 177(1)] to approve, or subsequently modify, transactions of the company with related parties. The first proviso enables the audit committee to grant omnibus approval, subject to such conditions as may be prescribed — those conditions being set out in Rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014. The third proviso to Section 177(4)(iv) carries a critical consequence: where a transaction is entered into without approval of the audit committee for an amount not exceeding rupees one crore and is not ratified by the audit committee within three months from the date of the transaction, such transaction shall be voidable at the option of the audit committee, and where the transaction is with a related party of any director or is authorised by any other director, the director concerned shall indemnify the company against any loss.Section 188 of the Act operates alongside this framework. It mandates Board approval (and, in transactions exceeding the thresholds prescribed under Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014, shareholders' approval by an ordinary resolution) for transactions falling within the seven sub-clauses of Section 188(1) — including sale or purchase of goods, leasing of property, appointment of agents, and the like — unless the transaction is in the ordinary course of business and at arm's length. The critical ratification provision is Section 188(3): where any contract or arrangement covered by Section 188(1) is entered into without the requisite Board or shareholders' approval, and is not ratified by the Board or the shareholders (as the case may be) within three months from the date of the contract, such contract shall be voidable at the option of the Board or the shareholders. Section 188(4) further empowers the company to proceed against the director or employee for recovery of any loss suffered by the company.

3.2  SEBI (LODR) Regulations, 2015

The LODR Regulations, applying to listed entities, impose a more elaborate and unforgiving overlay. Regulation 23(2) requires prior approval of the audit committee for every RPT and for any subsequent material modification thereto. Regulation 23(4) requires prior approval of the shareholders by way of a resolution for material RPTs.  

Until late 2024, the LODR framework did not contain an express provision empowering the audit committee to ratify RPTs entered into without prior approval. That gap was filled by amendments to Regulation 23 introduced by the SEBI (LODR) (Third Amendment) Regulations, 2024, which inserted a dedicated ratification regime — by which the independent director members of the audit committee may ratify an RPT within three months from the date of the transaction, or by the immediate next meeting of the audit committee whichever is earlier, subject to certain specified conditions. The Industry Standards on Minimum Information for RPT Approval issued by SEBI , completed the framework by stipulating the minimum information that must accompany every Audit Committee or shareholders’ approval (including ratification).

4. Does the power to approve include the power to ratify?

This question, often posed in boardrooms when an audit committee discovers an inadvertently unapproved transaction, deserves a categorical answer: no, the power to approve does not, by implication, include the power to ratify. The two are conceptually and jurisprudentially distinct.

Approval is a power exercised ex ante — sanction granted before the act is done. Ratification is a power exercised ex post — adoption of an act already done by an unauthorised actor. Indian jurisprudence, and the English common law from which it descends, has long treated retrospective sanction as an exceptional remedy that must be specifically conferred. The general principle, embodied in the maxim expressio unius est exclusio alterius, is that where a statute specifies the mode in which a power may be exercised, the inferential extension of that power to a different mode is impermissible. The Companies Act, 2013, applies this principle by expressly conferring a ratification power in Section 177 and 188(3) — but it does so only on the Audit Committee, Board and the shareholders, and within a fixed three-month window.

From a governance perspective, this distinction is significant. Treating the power to approve as implicitly including the power to ratify would dilute the discipline intended by the statutory framework of prior approvals. Recognising ratification as a separate and narrowly conferred statutory power reinforces the expectation that prior approval remains the norm, while ratification is available only as a limited corrective mechanism in specified circumstances.

The Hon’ble Supreme Court has drawn a distinction between approval simpliciter and prior approval/permission. In Ashok Kumar Das v. University of Burdwan¹, the Court held that “approval” can include subsequent approval because approval includes confirming, ratifying, assenting, sanctioning or consenting to an act already done. It also distinguished cases where the statute requires “permission” or “prior approval”; where only “approval” is required, action may be taken first and approval obtained later, failing which the action may become invalid.

The same approach was applied in Bajaj Hindustan Ltd. v. State of U.P.², where the Supreme Court accepted ex-post-facto approval because the relevant provision did not use “prior approval”.

5. Can the audit committee ratify beyond the limits? The short answer and the long one

The short answer is no. A power that is statutorily defined cannot be exercised beyond the parameters of that definition. The audit committee's ratification power derives entirely from the third proviso to Section 177(4)(iv) of the Companies Act and from the post-2024 amendment to Regulation 23 of the LODR. Each conferment is hedged by express conditions — including the prescribed time limit, monetary threshold, materiality considerations, recording of rationale and disclosure of details of ratification of RPT to the stock exchanges in the half-yearly report on RPT. A purported "ratification" by the audit committee of a transaction outside any of these conditions is, in law, no ratification at all: it is an ultra vires act, void in its corporate effect, and incapable of regularising the underlying default.

The longer answer requires a closer look at what happens when the limits are exceeded. The applicable principles are drawn directly from administrative law and from Section 196 of the Contract Act: a body cannot ratify what it cannot do. If a transaction is non-material but exceeds the ₹1 crore aggregate ratification cap, the audit committee's hands are tied by the cap itself; the company must look elsewhere for a remedy.

There is also a structural reason for this strictness. The ratification regime was inserted into the LODR precisely to deal with small, sporadic, unforeseeable slip-ups — not to provide a back-door route for regularising significant non-compliance. SEBI's regulatory philosophy, as evidenced in its 2024 working group reports and the 2025 Industry Standards, has consistently been to use ratification as a corrective valve of limited capacity, not as a substitute for prospective governance. Reading the ₹1 crore aggregate cap expansively — to accommodate larger transactions on the strength of a creative committee resolution — would defeat the very legislative scheme that put the cap there.

6. The Two Situations That Can Arise

Once an unapproved RPT comes to light, two distinct outcomes are possible, and each carries a different consequence.

Scenario 1: Where the audit committee or board or shareholder, ratifies the transaction in accordance with the law within the prescribed period, the default is cured, and the transaction is treated, for compliance purposes, as having been approved at the outset.

Scenario 2: Where the three-month period lapses without the transaction being noticed or the transaction amount exceeds the threshold, and the transaction is subsequently identified, no statutorily envisaged power of ratification survives.  Beyond the three-month period, the law still provides the audit committee with the option to declare the transaction voidable or not and, if it so declares, to seek consequential remedies, including indemnity from the responsible director(s).

Unlike ratification under the general law of contract, ratification under Section 177 and Regulation 23 operates only within the prescribed window. Once the three months expire, there is no statutory ratification power left to exercise. Any purported “ratification” thereafter will not cure the defect/lapse; at best, it would be ex post facto approval with only mitigating, not curative, effect.

Even after the three-month period, prompt action, either to rescind or to approve the transaction, may mitigate the risk exposure but would not cure the underlying default. Simply leaving the matter unaddressed is not a safe middle ground; it offers the company no protection and instead adds a second governance default, i.e., a further question as to why the audit committee, having identified the lapse, did not act on the remedy available to it.

From a practical governance perspective, identifying that a transaction is incapable of ratification should not bring the Audit Committee's role to an end. Equally important is understanding how the lapse occurred, whether it reflects an isolated oversight or a broader control weakness, and whether additional remedial measures—such as strengthening approval workflows, enhancing related-party identification processes or reinforcing internal reporting protocols—are required to prevent similar lapses in future.

7. The voidability provision — a remedy, not a licence

A misconception that recurs with surprising regularity is the conflation of "voidable" with "validly ratified". A voidable transaction is one that remains valid and effective unless and until it is set aside by the person or body upon whom the law confers that right. The Companies Act and the LODR Regulations confer that option upon the Board (or shareholders, or the audit committee, depending on the provision invoked) precisely because the transaction was entered into without authority — not because it was somehow authorised by the threat of voidability.

The structure of Section 188(3), read with Section 188(4), makes this design plain: the contract is voidable at the option of the Board or the shareholders; and, independently of that option, the company may proceed against the director or employee who entered into the contract for recovery of any loss. The voidability is the company's shield — a remedy by which the company may rescind the contract and restore the parties to their pre-contractual positions. It is not, and has never been, a licence permitting officers to enter into transactions they were not authorised to enter into, on the comforting basis that the Board can always undo them later. To read voidability that way would empty the prior-approval regime of all force.

This understanding directly answers a related question: does the existence of the voidability remedy mean that transactions beyond the ratification limit can themselves be ratified? It does not. Voidability addresses what the company may do with the non-compliant transaction (rescind it, recover money, sue the responsible officer); it does not confer any additional ratification capacity on the audit committee or the Board. The two operate at different levels — the ratification provisions empower a specific organ to regularise a specific class of transactions within prescribed limits; the voidability provisions empower the company to undo any transaction (whether within or beyond the ratification limits) that was not approved as the law required.

8. Precautions and best practices — preventing ratification as a default response

The following practices can materially reduce ratification incidents in listed and large unlisted companies.

8.1  A robust process that goes beyond the regulatory minimum

Companies should implement robust processes providing for (a) maintaining a continuously updated related-party master, refreshed at least quarterly and on every change in directorship or KMP; (b) setting internal escalation thresholds well below the regulatory thresholds; (c) prescribing mandatory dual sign-off (finance and legal) on any vendor onboarding above a stipulated value; and (d) treating every transaction with a person who is or has been a related party in the preceding 12 months as an RPT for screening purposes, even where the technical regulatory definition would not catch it.

8.2  ERP-level controls and pre-approval workflows

An ERP that flags a related-party PO or invoice at the point of issuance — based on a maintained related-party master — is significantly more reliable than human screening. Where the company's ERP supports it, the related-party flag should hard-stop the PO unless the audit committee's pre-approval (or omnibus approval) is referenced. This single control, combined with quarterly vendor-master reconciliation and periodic confirmation of related-party information from directors, KMPs and relevant business functions eliminates the vast majority of ratification incidents.

8.3  Quarterly audit committee agenda with forward-looking RPT review

Audit committees that consider only backward-looking RPT disclosures inevitably encounter ratification proposals. A better practice is to include, at every quarterly meeting, a forward-looking schedule of anticipated RPTs for the next two quarters, with proposed value bands and proposed approval routes (per-transaction approval, omnibus, or shareholders' approval). Where uncertainty exists, the committee can grant conditional approval or omnibus approval at that meeting, eliminating the need for any subsequent ratification.

8.4 Learning from ratification incidents

Where an inadvertent RPT lapse results in a ratification proposal, companies should treat the incident as an opportunity to strengthen their governance processes rather than as a one-time compliance event. A structured root-cause analysis should identify whether the lapse arose from weaknesses in related-party identification, approval workflows, system controls or internal communication. The corrective actions identified should be documented, implemented and, where appropriate, monitored to reduce the risk of similar lapses in future.

9. Omnibus approval — the legitimate alternative to ratification

If ratification serves as a corrective mechanism, omnibus approval serves as the preventive mechanism. A well-structured omnibus approval can absorb the vast majority of repetitive and unforeseen RPTs at the prospective stage, rendering ratification largely unnecessary. The provisions deserve careful study.

Rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014, empowers the audit committee to grant omnibus approval for RPTs proposed to be entered into by the company, subject to certain conditions. Critically, Rule 6A(d) — the carve-out that matters most for ratification-avoidance — permits the audit committee to grant omnibus approval for transactions which cannot be foreseen and the details of which are not available, subject to the condition that the value per transaction shall not exceed ₹ 1 crore. The omnibus approval cannot be granted for transactions in respect of selling or disposing of an undertaking of the company. Each transaction covered by the omnibus must subsequently be reported to the audit committee, but the prior-approval requirement stands satisfied at the point of contracting.

A similar provision exists under the LODR framework

9.1 The ₹ 1 crore carve-out — what it does and what it does not do

The ₹ 1 crore per-transaction omnibus carve-out is the single most important compliance instrument for managing unforeseen RPTs in a listed entity. Properly structured, it works as follows: at the first audit committee meeting of every financial year, the committee grants an omnibus approval covering (i) a defined list of repetitive RPTs with named counter-parties and value caps, and (ii) a residual basket of "unforeseen, non-identified RPTs" capped at ₹ 1 crore per transaction. Throughout the year, any RPT that falls within either head is treated as having been pre-approved; no ratification is required.

9.2 The relationship between omnibus and ratification — same value, different meaning

A point of recurring confusion deserves a final word. Both the omnibus framework and the LODR ratification framework operate at a ₹ 1 crore threshold — but the thresholds are conceptually different. The omnibus ₹ 1 crore is a per-transaction prospective cap on unforeseen transactions that have been pre-approved by way of an annual umbrella resolution. The LODR ratification ₹ 1 crore is an aggregate retrospective cap on the total value of all transactions with a single related party that can be ratified after the fact within a financial year. The omnibus operates ex ante; the ratification operates ex post. When used effectively, omnibus approval can substantially reduce the need for ratification.

10. Conclusion

The ratification provisions of the Companies Act, 2013, and the LODR Regulations, 2015, are best understood as a narrow, statutorily-defined remedy for inadvertent procedural slippage — not as a parallel approval mechanism that the audit committee may invoke at will. The power to approve does not include the power to ratify; the power to ratify is conferred by specific statutory authority and is bounded by specific temporal, monetary, and materiality limits. A purported ratification beyond those limits is no ratification at all — it is an ultra vires act, void in its corporate effect, and incapable of curing the underlying default. The discipline of prevention is therefore the heart of the matter. Ultimately, the objective of the ratification framework is not to facilitate post-facto approvals, but to reinforce a culture of robust governance in which ratification remains the exception rather than the rule.

Footnotes

^{1 2010 AIR SCW 1906}

^{2 CIVIL APPEAL NO. 1467 OF 2006}

The views expressed in this article are solely those of the author in her personal capacity and are based on her understanding of the applicable legal and regulatory framework. They do not necessarily represent the views, policies or practices of organisation with which the authors is associated.