Related party transactions can present a conflict of interest and may not be consistent with the best interests of the company and its shareholders. It can lead to situations in which a business opportunity is lost, or funds are tunneled out of the company into another entity.
A related party transaction is an arrangement between two parties who are joined by a special relationship prior to the transaction. The parties on the two sides of the deal could be a parent company and its subsidiaries or affiliates, the employees, the principal owners, directors or management of the company and the subsidiaries, or members of their immediate families.
The paper presents some instances of Indian companies who fully comply with the regulatory system, and several measures often adopted by some companies to circumvent the system and disguise the related party transactions as usual commercial decisions.
The paper was prepared by Pratip Kar as a background document for the Asia Roundtable on Corporate Governance - Fighting Abusive Related Party Transactions in Asia. Workshop on Implementation, New Delhi, India, October 2010.