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Effective governance assures stakeholders on transparency, accountability, and improved decision-making for corporates. Related party transactions (RPT) are a normal feature of businesses that bring in efficiency by leveraging available resources within the group or affiliated entities.
Though RPT are beneficial for a company, they are often regulated by various regulatory bodies as there is an inherent ability for the transacting parties to not necessarily deal at arm’s length for a variety of considerations – business or otherwise. It is this underlying feature of RPTs that can often lead to a potential conflict with shareholders’ and other stakeholders’ interests. As mentioned, the regulatory environment requires extensive disclosures of RPT, approval mechanisms to be adhered to and above all, the stipulation that the RPTs be conducted at arm’s length price. Recent reported incidents of misgovernance in RPTs and the consequential impact on the financial statements reveal that mounting a regulatory driven governance framework around these transactions are yet to be stringently followed.
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