The NSE Centre for Excellence in Corporate Governance has published its quarterly briefing on “Related Party Transactions”, which has been authored by Professor Vikramaditya Khanna. The executive summary is as follows:
- Related Party Transactions (RPTs) are a topic of increasing interest around the world, especially as some of them have been associated with quite well known frauds.
- Boards, shareholders and other governance actors can play an important role in preventing value-decreas- ing RPTs while not dissuading many value-enhancing RPTs.
- Commonplace in India, RPTs occur in varying ways, and can have a large impact on financial performance.
- Prior to 2013, India’s regulatory regime focused primarily on disclosure of RPTs (although there were some explicit limits on RPTs), but did not, by and large, require approval of RPTs by disinterested or in- dependent parties.
- The Companies Act 2013 created a new regime that required disinterested or independent approval for many RPTs bringing India into alignment with global standards.
- There remain concerns with the Companies Act 2013 - in particular, some RPTs are not covered by the new law, the selection of independent directors may raise concerns, and enforcement mechanisms are not very efficacious.
- The success of the new RPT regulation in India may also depend on the degree of shareholder activism in India.