KAAND 13: The Related Party Kaand TACTIC: Sell to yourself at a profit — how money moves between promoter entities legally
THE TACTIC IN ONE PARAGRAPH A promoter-controlled company sells assets, goods, or services to another entity owned by the same promoter at an inflated price. The transaction appears legitimate on paper—contracts are signed, payments are made, and profits are booked. But the real buyer and seller are the same group, so the "profit" is just money moving from one pocket to another, often leaving minority shareholders, lenders, or tax authorities holding the bag. The assets sold could be anything: land, intellectual property, raw materials, or even a "consulting service" with no tangible output. The key is that the price is set artificially high, the transaction is structured to bypass scrutiny, and the promoter’s net worth increases while the listed company’s cash reserves—or its ability to service debt—dwindles.
HOW IT WORKS IN INDIA SPECIFICALLY This tactic thrives in India due to a combination of regulatory arbitrage, weak enforcement, and structural incentives. First, the Companies Act, 2013, requires related-party transactions (RPTs) to be approved by the board and, in some cases, shareholders, but the definition of "related party" is narrow—it excludes entities where the promoter holds less than 20% directly but controls them through other means. Second, the gap between SEBI’s oversight of listed entities and the RBI’s oversight of unlisted promoter entities creates blind spots. A listed company can sell assets to an unlisted promoter-owned firm at a premium, and while SEBI may flag the transaction, the RBI has no jurisdiction over the unlisted buyer. Third, Indian accounting standards (Ind AS) allow "arm’s length" pricing to be determined by management, not independent valuers, making it easy to justify inflated prices. Fourth, the judiciary’s slow pace means that even if a transaction is challenged, the promoter can extract value long before any verdict. Finally, the political economy of Indian business—where access to capital, licenses, and regulatory forbearance often depends on relationships—creates an environment where such tactics are tolerated, if not encouraged.
THE HISTORICAL RECORD One of the most documented instances of this tactic was the case of Satyam Computer Services, where the promoter, Ramalinga Raju, allegedly siphoned funds through a web of related-party transactions. Between 2003 and 2008, Satyam’s books showed payments to "Maytas Properties" and "Maytas Infra"—companies controlled by Raju’s family—for land purchases and infrastructure projects that either didn’t exist or were grossly overvalued. The amounts ran into thousands of crores. When the fraud was exposed in 2009, Satyam’s books were found to have inflated cash reserves by $1 billion, much of which had been funneled out through these transactions. Raju was convicted, but the minority shareholders and lenders bore the losses.
Another case was Kingfisher Airlines, where the promoter, Vijay Mallya, allegedly used related-party transactions to strip assets. Between 2008 and 2012, Kingfisher’s books showed payments to "United Breweries Holdings" and other Mallya-controlled entities for "brand usage" and "consultancy services" at rates that were later deemed excessive by creditors. The airline, which was already struggling with debt, paid these entities hundreds of crores, effectively transferring cash from the listed company to the promoter’s private firms. When Kingfisher collapsed, lenders recovered only a fraction of their dues, while Mallya fled the country.
A third example is DHFL, where the Wadhawan family allegedly used related-party transactions to divert funds. Between 2015 and 2019, DHFL’s books showed loans and investments in entities like "RKW Developers" and "Wadhawan Global Capital," which were controlled by the promoters. These transactions were often structured as "secured loans" but were later found to be unsecured or backed by overvalued collateral. When DHFL defaulted in 2019, investigators found that over ₹30,000 crore had been diverted through such transactions. The promoters were arrested, but depositors and bondholders suffered massive losses.
THE INSTITUTIONS THAT ENABLED IT No tactic of this scale works without institutional complicity. In the Satyam case, the auditors—PricewaterhouseCoopers—signed off on the books despite red flags in related-party transactions. In Kingfisher, the banks, including State Bank of India and Punjab National Bank, continued lending even as the airline’s financials deteriorated, partly because the promoter’s other businesses were seen as collateral. In DHFL, rating agencies like CRISIL and ICRA maintained investment-grade ratings until the very end, despite the company’s high exposure to related-party entities. The boards of these companies, often packed with promoter nominees or compliant independent directors, approved the transactions without rigorous scrutiny. Regulators like SEBI and the RBI took years to act, and even then, their interventions were often too late to prevent the damage.
THE CURRENT STATE The tactic is still alive, though regulators have tightened some rules. SEBI’s 2021 amendments to the Listing Obligations and Disclosure Requirements (LODR) now require listed companies to disclose all related-party transactions, not just those above a certain threshold. The Companies Act, 2013, also mandates shareholder approval for material RPTs. However, the enforcement remains weak. Promoters still find ways to structure transactions through third parties or unlisted entities to avoid scrutiny. The RBI’s oversight of NBFCs has improved, but gaps remain, especially in cases where the promoter’s unlisted entities are not directly regulated. The real change would require a cultural shift—where auditors, boards, and lenders prioritize scrutiny over relationships—but that hasn’t happened yet.
WHAT TO WATCH FOR First, look for frequent transactions with entities that share the promoter’s surname or initials—these are often related parties in disguise. Second, check if the company is paying unusually high prices for assets or services from unlisted entities, especially if those entities have no independent track record. Third, watch for sudden spikes in "other expenses" or "loans and advances" to unknown firms—these are common vehicles for related-party siphoning. If the company’s cash flows don’t match its reported profits, dig deeper.
This newsletter describes documented business tactics and systemic patterns based on public records, regulatory orders, and published financial journalism. It does not make allegations against any individual or entity. Readers are encouraged to consult primary sources and form their own conclusions.