Stock market shenanigans – Why are too many family deals raising eyebrows and your risk!

Imagine your uncle runs a lemonade stand, but you secretly sell all the lemons at 10 times the price. Juicy profit for you, right? Not so fast. This, in a nutshell, is why a high number of related party transactions (RPTs) in a stock can be a major red flag for investors.

So, let’s brew a cup of financial awareness and sip on these insights:

What are RPTs? 

Think of it as the company playing a game of “Monopoly” with itself. RPTs involve transactions between the company and entities it’s connected to, like family members, executives, or affiliated businesses.

Why are RPTs a red flag? 

Think “insider trading” on steroids. Here’s why:

Non-arm length deals: Unlike “normal” transactions with strangers, RPTs lack that “arm’s length” distance. This means prices and terms might be skewed in favour of the related party, not the company (and by extension, you, the investor).

Opacity and manipulation: RPTs can be used to hide financial losses, inflate profits, or even siphon money out of the company. Remember our lemonade stand? It’s harder to catch the shenanigans when it’s all in the family.

Conflicts of interest: Imagine the CEO selling a dud property to his cousin’s construction firm at a premium.

Spotting the Red Flags

So, how do you sniff out these fishy deals? Here are some clues to keep your investor nose twitching:

A sudden surge in RPTs: A company that suddenly starts doing business with its brother-in-law’s sock puppet factory? Time to raise an eyebrow.

Unfavourable terms: Check if the deals seem one-sided, with the company getting the short end of the stick.

Vague disclosures: If the company’s explanation of the RPTs reads like a mysterious sum note, it’s probably not a good sign.

Management with a history of misconduct: If the CEO’s past is filled with financial shenanigans, RPTs become even more suspicious.

Example (AGI Greenpac) 

The CFO, Mr Om Prakash Pandey, extending loans raises concerns about conflict of interest within AGI Greenpac AY’23. This practice suggests potential favouritism, as executive-level involvement in loan disbursements may not align with the best interests of all stakeholders.

Furthermore, the intertwining of AGI and Hindware Limited under the same promoter group intensifies the conflict of interest, casting shadows over the impartiality of business dealings within the conglomerate. Vigilance in scrutinizing such interrelations is crucial for maintaining transparency and ensuring the fair treatment of all parties involved.

Remember:

Do your research: Dig into the company’s financial statements and news to see if there’s a pattern of RPTs.

Ask questions: Don’t be shy to contact the company and ask for clarification on any RPTs that raise concerns.

Diversify: Don’t put all your eggs in one basket. Spread your investments across different companies to minimize risk.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.