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The Curse of the Related Party Transactions

The ongoing dispute between Rakesh Gangwal and Rahul Bhatia, the promoters of Indigo Airlines and various other cases, whether of fraud, debt default or the violation of financial statements of entities, which are all getting exposed or are under investigation, whether it be ILFS, DHFL, the Reliance Group etc. have all brought into focus, the scourge of related party transactions (RPT) in India. In the case of Indigo, Gangwal alleges that dozens of related party transactions have been entered into without the approval of its audit committee, thus casting a doubt on their bonafides; in the case of DHFL the findings of the Cobrapost investigation are that a huge sum of Rs.35000 crores has been siphoned away through such transactions and in the case of ILFS, loans were given to related parties, only to be circulated and brought back as capital, to build up a false position of networth, which  truly did not exist. ILFS had many other illegal RPT in various forms in order to window dress its accounts and show a rosy picture, as the MCA alleges.

Also Read: The Indigo Affair

In the case of the dubious Manpasand Beverages, it is reported that the company floated 30 related bogus units, all over the country, by which it booked bogus sales of Rs.300 crores, out of its reported sales of Rs.710 crores and bogus profits too, and also claimed bogus GST credit of Rs.40 crores against these transactions, leading to the arrest of its managing director, CFO and other top officers. Or take the case of banks which greened the loan accounts of defaulting borrowers, where fresh loans were given to defaulters, only to be circulated back to the bank, showing the same as a loan repayment. It thus turns out that the bane of corporate India, by which all frauds, diversion of funds, siphoning of resources and the rampant manipulation of financial statements has taken place, has been through dubious related party transactions.

It is time to discuss related party transactions. RPT is a simple concept. Related parties as the word goes are entities that are related to or belong to the promoters/directors, of a company, whether directly or indirectly. These are entities, which are owned either by the directors or by their relatives or their nominees, due to which bogus transactions can be entered with them. When a company deals with a related party, the transaction can be easily window dressed, adjusted and given a predetermined façade, all meant to violate the law and conceal the truth. Thus an advance given can be booked as a purchase or a capital advance, as RCom did in respect of a Rs.4000 crores advance to an entity called Netizen and income received through a related party may be booked as a loan, merely to evade taxes. It is a collusion between the directors and their parties, to cheat the company. Such related parties could be in India or overseas. Nirav Modi, Mehul Chokshi, Jatin Mehta, Sandesaras of Sterling Biotech and Chandras of Unitech to name a few, siphoned away thousands of crores abroad, through such related parties based overseas. Such transactions thus achieve what is sought ie. bogus sales, bogus purchases and profits, bogus capital, bogus promoter loans etc., all of which result in the defrauding and bankruptcy of the company, causing a complete loss to the shareholders, bankers, vendors, and the tax departments too.

While the originators and prime beneficiaries of the RPT are the company directors and promoters, it is not possible to get away with such transactions, until there is active collusion of top executives, independent directors, bankers, and the auditors, which is evident in every case where the RPTs have been unearthed. How could such giant RPT frauds have taken place without the collusion of the system.

But if you thought that such transactions are only restricted to dubious corporates only, then you are mistaken. These are rampant in the government too. Does the government not borrow money through public sector enterprises like in the case of the Rs.1 lakh crore borrowings by the Food Corporates of India, to pay for the government’s food subsidy bill or government expenditure incurred by say the Railways, in order to window dress the government’s claim for meeting its fiscal deficit targets. And moreover are not government contracts awarded to the kith and kin of netas and babus, to the detriment of the government? Perhaps the inspiration for such transactions by the corporates is the government itself.


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