Party transactions and more: Sebi flags key issues plaguing India Inc

The second issue, which the market regulator pointed to be plaguing the industry, is non-disclosure of valuation reports and their adherence to transparency

With a rise in corporate failures in recent times, market regulator Securities and Exchange Board of India (Sebi) has flagged concerns on key issues plaguing the corporate sector and suggested that companies take measures to improve their consciousness and integrity. 

The primary issue, according to Sebi, is related  to party transactions (RPT) that are being extensively used by some companies to raise capital for another firm. The regulator is of the view that while RPTs serve the promoter's purpose to raise capital using mortgage or extension of loans or inter-corporate deposits, it goes against the interest of minority shareholders. Moreover, it is being used as a means for fraud. 

"We have seen promoters use RPTs when they see their company is heading towards insolvency", Amarjeet Singh, executive director at Sebi said.

According to Singh, company boards need to protect the interest of both the minority as well as the majority stakeholders and balance their interest. 

The second issue, which the market regulator thinks is plaguing the industry, is non-disclosure of valuation reports and their adherence to transparency. "There are concerns over adequacy and transparency of the disclosures", Singh said. 

Sebi is of the view that some promoter groups have been using a complex structure of companies to conceal possible fraud which is hard to detect and surfaces only at a time of dire financial stress. Singh cited that there has been an incident when a promoter group had floated as many as 150 companies to hide "his misdeeds". 

Singh also called for more participation from these independent directors in a company's board. 

Economy to bounce back

Government and industry officials say while the current sluggishness is momentary, one needs to consider ongoing investments and other parameters that will boost the economy and help it to bounce back. 

Anand Mohan Bajaj, joint secretary at the Centre's department of economic affairs, said an investment of Rs 1 lakh crore is being lined up to boost rural infrastructure. This will help the economy to recover while good corporate governance norms, greater use of technology and financial prudence will help India achieve its projection of becoming a $5-trillion economy. 

"I believe the target is very much achievable and doable. Low inflation, stable exchange rate and an optimal GDP growth rate will help the country achieve the target", he said.

On the other hand, Ashishkumar Chauhan, managing director and CEO at BSE, said that the current sluggishness is momentary and economic growth will return. 

"These are temporary things - cycles which come and go. Investment isn't something which happens in one day; it takes 10-20 years", he said. 

According to Chauhan, investors who stick to older ways of undertaking investments will have a "tough time" as the world is becoming better technology-enabled and urged people to use modern digital technologies to make an informed decision and see the "bigger picture".

"Probably the change is happening faster than it has happened before and this is worrying the older generation", he said. 

While acknowledging that volatility and uncertainty in the market have increased, Chauhan said that in the next 50 years, the world will create so much wealth it hasn't done in the past "10,000 years" and India will account for 20-25 per cent of that wealth.