KOCHI: In the bustling corridors of Kerala’s corporate world, a quiet but persistent challenge has long troubled auditors and investors alike: related-party transactions, or RPT.
Deals between a company and its promoters, group firms, or associates are not illegal. But when transparency falters, these transactions can obscure the real financial health of a company, favour insiders, and leave unsuspecting shareholders at a disadvantage.
“The biggest challenge we face is related-party transactions,” says a chartered accountant familiar with Kerala’s mid-sized and promoter-driven companies. “Even when a deal looks routine on paper, there is always pressure – direct or indirect – to approve terms that favour insiders.”
Ensuring fairness and arm’s-length compliance is not just a technical exercise; it often tests the ethical backbone of the company.
The fallout from poorly monitored related-party transactions is not just theoretical — it has real victims. Take the case of IL&FS, where questionable dealings with group entities contributed to a liquidity crisis that shook India’s financial system.
Investors, small lenders, and ordinary depositors bore the brunt, while insiders often remained insulated from the worst consequences. Such episodes underscore how unchecked RPTs can quietly drain value, distort financial statements, and leave stakeholders exposed, making regulatory oversight and active shareholder engagement more than just formalities.
Recent steps by the Securities and Exchange Board of India (Sebi) aim to change that. In fresh guidelines, listed companies are now required to justify why each RPT is in the company’s interest, provide valuations or external reports relied upon.
They are required to disclose details such as loans, advances, or investments involved. Shareholders can also be informed about the percentage of the counterparty’s annual turnover represented by the deal. Smaller transactions under one per cent of turnover or Rs10 crore are exempted, leaving some gaps.
Kerala scenario
In Kerala, the stakes are particularly high. Many companies are closely held or promoter-driven, with boards and audit committees that can sometimes act as formalities rather than true checks and balances.
Shareholders rarely scrutinise explanatory statements, and votes often go in favour of management proposals by default. This opens the door for deals that may be legally compliant yet economically skewed in favour of insiders.
Instances abound where government-backed firms, co-operatives, or family-owned companies enter into service contracts or leasing arrangements with connected entities.
Even if permissible, these deals may shift profits, mask risks, or obscure the real financial position. Sebi’s new disclosure requirements are a step forward, but as the chartered accountant points out, “Transparency alone cannot prevent questionable practices unless there is moral accountability at every level.”
For shareholders, the message is clear: reading, questioning, and engaging with RPT proposals is no longer optional. Audit committees must actively challenge management rather than endorsing deals out of routine.
Only then can Sebi’s measures move beyond procedural compliance to real protection, ensuring that the interests of investors are genuinely safeguarded.
In a state where corporate structures are often promoter-heavy and shareholder activism is limited, these reforms could mark a turning point – if investors, auditors, and boards take them seriously.
Without vigilance, related-party transactions will remain a subtle yet significant way insiders can exploit loopholes, eroding trust and transparency in Kerala’s corporate sector.
