What do you understand by Related Party Transactions (RPT) and discuss why its regulation is crucial for good governance in India. (200 words)
Refer – Financial Express
Enrich the answer from other sources, if the question demands.
IAS Parliament 7 years
KEY POINTS
· A concern that many markets around the world share in relation to poor corporate governance is the abuse of related party transactions (RPTs).
· Significant corporate frauds such as the Satyam scandal, Enron fiasco and WorldCom débâcle have happened connected to RPTs or similar arrangements.
Related-Party Transaction
· A related-party transaction is a business deal or arrangement between two parties who are joined by a special relationship prior to the deal.
· For example, a business transaction between a major shareholder and the corporation, such as a contract for the shareholder's company to perform renovations to the corporation's offices, would be deemed a related-party transaction.
Why it has to be regulated?
· In India, RPTs assume even more significance due to the nature of Indian business houses, which are primarily promoter-led and consist of family business structures.
· Given that the number of family-owned businesses is very high, it follows that they will have closer ties with other businesses owned by the same family or its relatives.
· Not all RPTs are detrimental to the interest of the company or its shareholders. Some transactions can be legitimate and serve practical, commercial purposes.
· But, the desire and opportunity to deal with a known party will be greater.
· The tension between dealing fairly with a familiar party and exploiting shareholders’ resources for personal gain becomes magnified in family-owned businesses.
· A RPT can present a potential or actual conflict of interest and might not be aligned with the best interests of the company and its shareholders.
· It can result in situations where such transactions are used as a conduit to channel funds out of the company into another entity.
· The absence of transparency exacerbates the problem by creating an environment in which attempts to siphon off resources go unchecked.
· Abusive RPTs oppress small and retail investors, undermining confidence in the financial market and thereby adversely affecting the mobilisation of investment.
· Hence, the corporate governance framework in India should emphasise monitoring/regulating connected transactions involving controlling shareholders and related entities.
· India’s regulators are recognising that appropriate checks and balances in relation to related party transactions are crucial for good governance, and are improving safeguards and disclosures pertaining to them.
