Impact of Related Party Transactions and Corporate Governance on Industry Performance in the Manufacturing Sector Post Companies Act 2013 in India

Abstract

Related party transactions and Corporate Governance are major attributes of corporate terrain. Related party transactions, being carried out in-house and within the groups, result in exercise of control or significant influence over minority shareholders with lesser control rights. Related party transactions when genuinely carried out facilitate reduction of transaction costs and efficient utilisation of resources. Corporate collapses in the past few decades, with related party transactions being the underlying cause, urged the governments, world over, to implement improved corporate governance mechanisms. In India, the extreme convergence of corporate control rights with few aristocratic families and major corporate misconducts in 2009 involving controversial related party transactions led to the enactment of Companies Act, 2013, bringing in a host of amendments to facilitate development and regulation of the corporate sector in India. This study analyses the impact of related party transactions and Corporate Governance on industry-wise and overall industry performance in the manufacturing sector in India, post Companies Act 2013. The study is based on secondary data from PROWESS database and annual reports published by the companies. The study period is five years from 2014-2015 to 2018-2019, subsequent to the regulations on related party transactions and Corporate Governance by the Act. Return on assets, cash flows from operations and Tobin s Q are the measures of industry performance and constituents of related party transactions and components of Corporate Governance are independent variables. Spearman s rank correlation and panel data regression are used to find the relationship between dependent and independent variables. The analytical findings portray that related party transactions and Corporate Governance impact industry-wise and overall industry performance, newlineKey Words: Related Party Transactions, Corporate Governance, Industry Performance, Return on assets, Cash Flows from Operations and Tobin s Q.