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.

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.

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