Shortwalkers Limited was a listed company operating fitness centres all over India. In their Meeting on 1st April, 2022 the Board of directors of the company approved purchase of gym equipment for ₹75 crore from Fitness

Section 188 of the Act, provides that except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, no company shall enter into any contract or arrangement with a related party with respect to— sale, purchase or supply of any goods or materials; selling or otherwise disposing of, or buying, property of any kind; leasing of property of any kind; availing or rendering of any services; appointment of any agent for purchase or sale of goods, materials, services or property; such related party's appointment to office or place of profit in the company, its subsidiary company or associate company; and underwriting the subscription of any securities or derivatives thereof, of the company. However, such approval by the Board of Directors will not be required for transactions entered in the ordinary course of business and on an arm's length basis. In other words, approval of the Board of Directors will only be required for related party transactions which are either not in the ordinary course of business or not on an arm's length basis. Under regulation 23 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (LODR), transaction with a related party shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year exceeds rupees one thousand crore or ten percent of the consolidated turnover of the listed entity as per the last audited financial statements of the listed entity, whichever is lower. The transaction entered here in case of Shortwalkers Ltd., shall be approved by Audit Committee as well as by the members in a general meeting, if the same exceeds 10% (₹500 Crores* 10%= ₹50 Crores) of the annual consolidated turnover as stated above. According to Section 2(76) of the Act, related party includes a KMP or his relative. As per Section 2(77) of the Act, relative includes wife and daughters. Hence, the contention of the Board that the supplier, i.e, Fitness Solutions (Pvt) Limited has neither a director nor his relative of Shortwalkers Limited as its director is not acceptable. Section 188(1) does not apply to any transaction entered into by the company in the ordinary course of business which are on arm's length basis. According to Section 188(2) of the Act, arm's length transaction means a transaction between two related parties that were conducted as if they were not related so that there was no conflict of interest. In the instant case, since the transaction was between two related parties, due process should have been followed including approval of audit committee and approval of the company in general meeting by an ordinary resolution. The contention of auditor is correct.