Rise in related-party transactions outpaces sales growth, shows data

Share has risen as a percentage of net sales

The value of transactions that listed companies enter with related parties is worth trillions of rupees among the top companies.

The value of related party transactions as a percentage of total assets on the balance sheets of S&P BSE 500 companies is over 9 per cent as of 2022-23 (FY23).

Transactions on the profit and loss (P/L) statement are equivalent to over a fifth of net sales, shows a Business Standard analysis of numbers from corporate data provider Capitaline.

In absolute terms, the value of related party transactions on the balance sheets of companies totalled Rs 11.6 trillion, and those on P/L statements Rs 21 trillion in FY23. These numbers cover 268 companies from the S&P BSE 500 for which data is available over seven years.

Balance sheet transactions have remained at similar levels over seven years. Transactions on the P/L statement show a rising trend and are now at their highest level in at least seven years.

Jio Financial Services, through a wholly owned subsidiary, is set to enter into a Rs 36,000 crore deal with a related party. It is set to purchase telecommunications equipment and devices from Reliance Retail, a step-down subsidiary of Reliance Industries (RIL).

The Securities Appellate Tribunal set aside a Securities and Exchange Board of India (Sebi) order against Linde India’s related party transactions last week.

The value of related party transactions reported on the balance sheet was equivalent to 9.6 per cent in 2018-19/FY19 (pre-pandemic year) for the companies that were part of the analysis. It is at 9.1 per cent in FY23. The value of related party transactions reported on the P/L statement was equivalent to 16.9 per cent of net sales for the sample in FY19. It is 21 per cent in FY23.

Group companies can often be a source of raw materials or technology support, which can make such transactions necessary for business. Sebi has tightened regulations around related party transactions to prevent the possibility of their abuse. This is because the promoter, or majority owner, can potentially skew the transaction to serve their interests at the cost of other shareholders. It has sought to give more shareholders the right to decide whether such transactions, if material, should be carried out.

Of the top five with the highest transactions disclosed on the P/L account (for FY23), four are state-owned — Oil and Natural Gas Corporation (ONGC), Indian Oil Corporation, GAIL (India), and Mangalore Refinery and Petrochemicals (majority owned by ONGC) — even as Reliance Industries tops the list.

The highest transactions disclosed on the balance sheet include the Indian Railway Finance Corporation worth over Rs 4.5 trillion. Others include SBI Card (Rs 1.3 trillion) and two Adani Group companies — Adani Enterprises and Adani Ports — in addition to HDFC Bank.