Govt firms’ related-party transactions hit 5-yr high
Increase from 8.8% of net sales in FY15 to 31.5% in FY19
Related-party transactions (RPTS) of government firms have risen from 8.8 per cent of net sales in financial year 2014-15 (FY15) to 31.5 per cent in FY19, the highest in at least five years.
Related-party transactions (RPTS) of government firms have risen from 8.8 per cent of net sales in financial year 2014-15 (FY15) to 31.5 per cent in FY19, the highest in at least five years.
Such transactions recorded on the balance sheet have also risen from 1.2 per cent of total assets to 2.4 per cent in the same period. The balance sheet transactions had risen to as high as 3.4 per cent in FY17.
RPTS are transactions entered into by a company with an entity related to its promoter. Such transactions have been under scrutiny because they can be used by promoters or majority shareholders to serve their own needs at the cost of minority shareholders. Research has shown that the net effect can be negative even when the promoter is the government.
This analysis was based on information from firms in S&P BSE 500 index that had continuous data over the last five years, and excluded banking and finance companies.
A similar exercise for private sector companies showed a decline over the past five years. RPTS on the profit and loss statement were the equivalent of 51.7 per cent of net sales in FY15. This had fallen to 24.9 per cent by FY19. Such transactions recorded on the balance sheet fell from 14 per of total assets in FY15 to 12.5 per cent of total assets by FY19.
A recent Securities and Exchange Board of India (Sebi) discussion paper looked to address issues around such transactions. It mentions existing regulations that include an exemption to government firms from rules other firms are obliged to follow under the Listing Obligations and Disclosure Requirements Regulations, 2015 (LODR).
It has sought to introduce changes such as ensuring that such transactions involving subsidiaries should require audit committee approval for private sector firms.
Amit Tandon, founder and managing director of proxy advisory firm Institutional Investor Advisory Services India (IIAS), said the use of funds by unlisted subsidiaries can be opaque and open to abuse through transactions that may not be in the interest of minority shareholders. “The subsidiary is the route through which a lot of these transactions are taking place,” he said.
Globally, it has been argued that RPTS by state-owned enterprises (SOES) can be detrimental, and it can cause problems even when the company stands to benefit.
“First, RPTS in SOES may decrease social welfare not only when they harm a given SOE by extracting wealth from minority (non-state) investors...but also when the state provides the SOE with benefits not available to (private players),” said the March 2018 paper from authors Curtis J Milhaupt of Stanford Law School and Mariana Pargendler at the New York University School of Law. It noted that better disclosures and empowering minority shareholders are among the strategies that may help address these issues.
Shriram Subramanian, founder and managing director of proxy advisor Ingovern Research Services, suggested that regulatory moves must ensure that the direction is not towards easing companies’ burden at the cost of investors, as it can have a negative effect on minority shareholders. “So, at the end of the day, it now becomes easier for companies and investors are (shortchanged),” he said.