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Brotherly Behaviour

Shareholders should closely watch companies that offer large advances to related entities on conditions that are unfavourable to investors

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 NameAdvances to Related PartyTotal AssetsShareholder's Funds
Gulf Oil Corporation117428911127
Financial Technologies108231772410
Orbit Corporation54026591057
Kiran Vyapar129784756
Shriram EPC367238776
Sterling International Enterprises35726132012
SKF India23016931276
Blue Dart Express1591246643
FAG Bearings India1481333990
United Spirits1344147613032
Ingersoll-Rand1471633915
IL&FS Engineering and Construction3063954263
Hubtown29238361692
Network 18 Media & Investment50366392685
Peninsula Land22733271502
All Amounts are in Rs Crore