A Study of related party transactions in the Indian corporate sector

Abstract

A related party transaction is defined as any transaction between a company and an individual related to it. Related individualsand#8223; could be the companyand#8223;s managers, directors, or principal owners. The definition also applies to transactions of a subsidiary, a joint venture partner, a family member of, a company owned by or affiliated with, any of the above related individualsand#8223;. newlineThe collapse of some large companies in the United States, such as Enron, World.com and Tyco, may be attributed to significant levels of transactions among related parties in these companies. Loans to major shareholders and sale of assets to shareholders at low prices were the prevalent forms of these transactions. The low level of transparency in the figures reported in financial statements combined with the ineffectual role of the Board of Directors made it possible to hide related party transactions and mislead investors about the true value of the company. If the Board of Directors of these companies had been more proactive about preventing such related party transactions and insisting upon high standards of transparency, it is less likely that these corporate collapses would have occurred. In this context, in recent times, companies in developed economies (e.g. United States) are required to disclose all transactions with related parties such as executives, associates and their family members in their Annual 10-K Report. newlineThe global corporate debacles have provoked the Indian jurisdiction on strengthening its corporate governance standards. Related party disclosures are important constituents of the revised corporate governance standards and regulations. Disclosure of information concerning related party relationships and of the nature and volume of transactions with related parties enables the investors to make a more informed judgment about an enterprise. One of the major corporate debacles in India is that of Satyam Computer Services, which had to face lawsuit filed by Upaid, claiming fraud, forgery and breach of contract. In these