A company should ideally show its generosity while paying dividends to investors. When it is generous to its sister concerns and lends huge amounts of shareholder's wealth to them, investors should take note of it. Take a look at the accompanying table to see some large-hearted companies that have offered advances of even up to 20-40 per cent of their total assets to 'related parties'.
Of course, one can't say all these advances are in bad faith or detrimental to the interest of investors. Only a closer scrutiny would reveal the clear picture. For example, one has to see what the purpose of the loan is, how much interest rate is charged, among other things, to ascertain whether these loans make any business sense to the lending company. Companies like Gulf Oil Corp, FTIL and Orbit Corp have a significant ratio of related party advances to total assets. This could be alarming for an investor in these companies. On a general note, investors should be particularly wary of the companies that offer large loans to their related companies at rates much below the market rate.
Companies with significant related-party advances
|Company Name||Advances to Related Party||Total Assets||Shareholder's Funds|
|Gulf Oil Corporation||1174||2891||1127|
|Sterling International Enterprises||357||2613||2012|
|Blue Dart Express||159||1246||643|
|FAG Bearings India||148||1333||990|
|IL&FS Engineering and Construction||306||3954||263|
|Network 18 Media & Investment||503||6639||2685|
|All Amounts are in Rs Crore|