India Inc sees related-party transactions drying up on increased scrutiny

In the midst of a spat over related-party transactions involving India’s largest airline IndiGo, data shows that the rest of corporate India may actually have restrained from such transactions in recent years.
 
A related-party transaction is one that involves the company and another entity in which key officials may have a stake. Numbers from annual reports — captured by corporate data provider Capitaline for the past financial year that ended in March 2019 for most companies — show a steady decline in the value of related-party transactions over previous years.
 
InterGlobe Aviation, which runs IndiGo, had co-founders Rakesh Gangwal and Rahul Bhatia fight over alleged improprieties in related-party transactions. The stock subsequently lost over a tenth of its market capitalisation, with one founder writing to the stock market regulator over the issue.
 
The Capitaline analysis looked at related-party transactions of some big companies. The value of such transactions, according to the annual profit and loss statements made public so far by companies in the S&P BSE 100 universe, accounted for over 11.5 per cent of sales in FY19.
 
The analysis looked at as many as 31 companies whose annual reports are out so far and also have comparable data over the past five years. Some companies had a financial year ending in December. These were also included in the analysis.
 
The value of such transactions, as a percentage of sales, shows a decline over the past three years, and is lower than the high of 17.1 per cent seen in FY16.
 
Related-party transactions on the balance sheet are at 5 per cent of total assets. This is the second lowest since FY15. It was 3.7 per cent in FY18.
 

All other years had a higher percentage, ranging from 5.4 per cent to 6.6 per cent.
 
A look at the numbers show that the value of such transactions grew slower than net sales and total assets.
 
The value of the transactions recorded in the profit and loss section grew at 2.2 per cent since FY15 compared to an 8.8 per cent rise in net sales. Deals recorded on the balance sheet grew at 5.4 per cent. Total assets grew at 11.6 per cent for comparison.
 
“Companies are facing more questions about such deals,” said Shriram Subramanian, founder and managing director at proxy advisory firm InGovern. This could be a reason why a significant rise in such transactions has become more difficult. “Companies are also under increased scrutiny,” he said.
 
Audit committees are asking more questions about whether transactions were done on an arm’s length basis, and whether competitive quotes were called for. Shareholders are also increasingly asking more questions, according to InGovern’s Shriram.
 
There is more work to be done on increasing shareholder awareness about such transactions, according to J N Gupta, managing director at Stakeholders Empowerment Services, a proxy advisory firm. Many are still not voting against such issues, except perhaps in certain large companies where public shareholding is significant.
 
“Given the voting pattern that is there, it is not difficult to get related-party transactions approved even now,” Gupta said.