ANALYSIS OF RELATED PARTY TRANSACTIONS IN INDIA: A GROUP AND NON-GROUP COMPANY PERSPECTIVE

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Abstract

Related party transactions (RPTs) which occur between related companies which are commonly reported in published financial reports. Regulations have been enforced by authorities globally, to control and prevent misuse of these types of transactions through extensive disclosure requirements. Research on RPTs in a country is important as it gives an indication of the usage of these transactions by companies during their operations. These transactions need to be tracked as they could be for legitimate reasons or for influencing the performance reports, thereby misleading potential global investors. This paper examines 1) the impact of increased regulatory requirements introduced in India for disclosure of RPTs by listed companies and 2) the usage pattern of RPTs by companies which are part of a Group, as compared to those of standalone companies. Analysis of RPTs reported by 78 non-financial companies (part of the Bombay Stock Exchange Index 100) shows an increasing trend for RPTs reported for the period 2013-15, as compared to 2009-12. This trend is an indication that the regulatory requirements in India through the new Companies Act 2013, is proving to be effective in achieving its objectives. Such regulations passed to improve transparency in financial reporting in India will also act as a deterrent to companies, who may be intending to misuse these transactions in the future. Statistical tests show that Group Companies have a higher value of average annual RPTs, for transactions related to balance sheet and profit and loss accounts, as compared to Non-Group companies. This confirms that Group companies use RPTs extensively in their business operations, for achieving various objectives. Unlike other studies on RPTs in India, this study focuses on the use of these transactions by Group and Non- Group companies separately, over a seven-year period. The study goes into further detail on the different types of RPTs and shows the trend for each type after the revised regulations have been enforced.

Keywords: Related Party Transactions, Related Party Disclosures, Earnings Management

Received: 25.08.2017

Accepted: 24.01.2018

JEL Classification: M41, M49, G30

How to cite this paper: Mahtani, U. S. (2018). Analysis of related party transactions in India: A group and non-group company perspective. Corporate Ownership & Control, 15(2-1), 174-187. https://doi.org/10.22495/cocv15i2c1p4