Satyam to DHFL:Why RPTs Can Be Dangerous: 2 Case Studies

When the Boss’s Brother Gets the Contract:

Imagine you’re part of a housing society that needs a contractor to repaint the entire building. Several professionals submit quotes, but the society’s secretary—who controls the decision—insists on hiring his own brother’s company.

His brother’s quote is higher than the others. The quality of work is average. But the deal still goes through. Why? Because of the relationship—not the merit.

This is a classic example of a related party transaction.

In the business world, these kinds of deals happen when a company does business with someone closely connected—like a relative of a director, another company owned by the CEO, or even a subsidiary. And just like in our housing society, these deals can put fairness and accountability at risk.

When companies favor their “own people” instead of making decisions in the best interest of all stakeholders, it becomes a serious corporate governance issue. Money can be misused, shareholders may lose trust, and companies can even collapse under the weight of hidden deals.

In this blog, we’ll break down what related party transactions really are, how they work, and why they’re often a red flag for investors and regulators alike.

🏢 Which Companies Are Covered?

Type of Company	RPT Rules Applicable?
Private Companies	Yes, but with some exemptions (e.g. relaxed approvals in certain cases)
Public Unlisted Companies	Yes, governed by the Companies Act, 2013
Listed Companies	Yes, very strict rules under SEBI LODR Regulations
Subsidiaries of Listed Cos	Yes, indirectly covered under consolidated compliance requirements

Related Party Transactions (RPTs) are business deals between a company and someone it has a close relationship with — like a director, major shareholder, or a company owned by a relative of management.

These are not ordinary, arm’s-length deals. Instead, there’s a risk that the decision might be biased because of personal interests.

👉 Examples:

A company gives a loan to its CEO’s brother’s business.
A company buys services from a firm owned by the chairperson’s son.
A listed company sells assets to its own subsidiary at a lower-than-market price.

Category	Who is Included
1. Key Management Personnel	– Directors (Board members) – CEO, CFO, Company Secretary, etc.
2. Relatives of Key Personnel	– Spouse – Parents – Children (including step-children) – Siblings
3. Holding Company	– The parent company that owns or controls the reporting company
4. Subsidiary Company	– A company that is controlled by the reporting company
5. Associate Company	– A company in which the reporting company holds significant influence (≥20%)
6. Joint Venture Partner	– A company that has a joint control agreement with the reporting company
7. Shareholders with Influence	– Persons or entities owning ≥20% shares or voting power
8. Entities Controlled by Related People	– Firms or companies where directors/relatives hold ≥20% ownership or control
9. Partnership Firms or HUFs	– Where directors/relatives are partners or members
10. Others (As per Law)	– Any person on whose advice a director or manager routinely acts

⚠️ Why Are RPTs a Red Flag in Corporate Governance?

Though RPTs can be legitimate, they raise concerns when used to favor insiders or siphon off company value. Here’s why regulators and investors stay alert:

🚩 1. Conflict of Interest

The decision-maker may benefit personally, instead of acting in the company’s or shareholders’ best interest.

🚩 2. Lack of Fair Pricing

Prices may not reflect market value (e.g., selling assets cheaply to a director’s firm).

🚩 3. Diversion of Funds

Money may be moved out of the company under the guise of a legitimate transaction, especially in loans and guarantees.

🚩 4. Suppression of True Financial Health

Profits/losses may be manipulated by transacting with related entities.

🚩 5. Weak Internal Controls

If oversight is weak, RPTs can be used for fraud, bribery, or enrichment of promoters.

📉 Impact on Investors & Stakeholders

Reduced trust in financial reporting
Lower valuation of the company due to governance risk
Potential for regulatory action or penalties
In extreme cases, business collapse (e.g., Satyam, IL&FS)

Yes, they are allowed, but only under certain conditions:

Must be done at arm’s length (i.e., on fair market terms)
Must be approved by the right authority within the company
Must be disclosed properly

Related Party Transactions (RPTs) are not completely banned, but they are heavily regulated to ensure transparency, fairness, and accountability.

Identification of a Related Party:
- The company identifies whether the counterparty is a related person/entity.
- This includes directors, key managerial personnel (KMP), their relatives, and entities controlled by them.
Nature of Transaction:
- Sale/purchase of goods or property
- Loans or guarantees
- Transfer of resources, services, or obligations
Approval Process:
- Audit Committee approval (mandatory for listed companies)
- Board approval for transactions beyond certain thresholds or not in the ordinary course
- Shareholder approval for large (material) transactions
Disclosure:
- Must be disclosed in financial statements, annual reports, and for listed firms, to the stock exchange.

✅ Whose Approval is Required for RPTs?

Type of RPT	Required Approval
At arm’s length & in ordinary course of business	No prior approval needed, but must be disclosed in financials
Not at arm’s length OR not in ordinary course	Board of Directors approval is required
Material RPTs (large value transactions)	Must be approved by shareholders via special resolution
Listed Companies	Also need approval from Audit Committee before execution

📌 Note:

Interested directors cannot vote on RPTs in board meetings.
For listed companies, all RPTs (even if arm’s length) must go through the Audit Committee.

📊 What is a “Material” RPT?

As per SEBI (India) norms:

A transaction is material if it exceeds ₹1,000 crore or 10% of the company’s annual consolidated turnover, whichever is lower.

🤝 What Does “Arm’s Length” Mean?

“Arm’s length” is a term used to describe a fair and independent transaction between two parties who are not related and have no conflict of interest.

It means both parties act in their own self-interest, negotiate freely, and the deal reflects true market value — just like it would between strangers.

📌 Key Features of an Arm’s Length Transaction:

Feature	What It Means
No special relationship	The buyer and seller are not family, partners, or insiders.
Fair pricing	The price is based on what the product/service is worth in the open market.
Independent decision	Both parties act independently, without pressure or influence from the other.
Comparable to market deals	Similar terms would apply if the same deal happened with an unrelated party.

🏡 Simple Example:

✅ Arm’s Length:

You sell your house to a stranger for ₹50 lakh after comparing market rates and negotiating freely.

❌ Not Arm’s Length:

You sell the same house to your cousin for ₹30 lakh — because of your relationship, not fair market value.

🏢 In a Business Context:

Let’s say a company hires a vendor for office catering:

✅ If the vendor is selected through open bidding, with competitive pricing → Arm’s length
❌ If the vendor is the CEO’s brother, and no other bids were considered → Not arm’s length

⚠️ Why It Matters in Corporate Governance:

If a related party transaction is not at arm’s length, there’s a higher risk of:

Favoritism
Overpayment or underpricing
Conflict of interest
Shareholder loss

That’s why companies must prove that RPTs are done at arm’s length, or else get board/shareholder approval.

📋 Summary:

RPTs are not illegal, but they must be approved by the Board, Audit Committee, and sometimes shareholders.
Disclosure is mandatory in annual reports and stock exchange filings (for listed companies).
Strong rules apply especially to listed companies, where public money is involved.

📉 Case Study: Satyam Computers Scam (India, 2009)

“India’s Enron” — How a related party deal exposed massive fraud

🏢 The Company:

Satyam Computer Services Ltd.
A leading Indian IT services company, once hailed as a blue-chip stock listed on the BSE, NSE, and NYSE.

In 2008, Satyam Computer Services Ltd., a publicly listed company on the NSE, BSE, and NYSE, shocked the corporate world with a failed attempt to acquire two companies — Maytas Infra and Maytas Properties. The twist? Both companies were owned by its Chairman Ramalinga Raju’s family.

🔍 The Problem:

In 2008, Satyam’s board approved a related party transaction — a $1.6 billion deal to acquire two infrastructure companies:

Maytas Properties
Maytas Infra

These companies were owned and controlled by the family of Satyam’s Chairman, Ramalinga Raju.

The deal was not in Satyam’s core business (IT), and the pricing was opaque and hugely inflated.

🚨 Red Flags:

Red Flag	Explanation
❌ Same promoter group	Raju controlled both buyer (Satyam) and sellers (Maytas firms)
❌ Overpriced assets	Infrastructure companies were valued far above their worth
❌ No shareholder approval	The transaction bypassed shareholder consultation initially
❌ Conflict of interest	Raju’s personal interests clashed with those of the shareholders
❌ Outrage from investors & analysts	Stock plummeted 55% in a single day post-announcement

💣 What Happened Next:

This related party transaction (RPT) raised immediate red flags. The deal had no clear business logic, involved massive sums, and was with entities directly controlled by the promoter’s family. At the time, RPTs were governed in India by Clause 49 of the SEBI Listing Agreement, which required listed companies to ensure transparency and board oversight in such transactions.

However, oversight mechanisms failed. The board approved the deal, ignoring glaring conflicts of interest and valuation concerns.

Next –

After intense backlash, investor pressure, the deal was aborted.
A few weeks later, Raju confessed to a massive ₹7,000+ crore accounting fraud.
He had inflated cash and bank balances for years to make the company look profitable.
The aborted RPT was seen as an attempt to fill the hole by diverting cash to related entities.

⚖️ Consequences:

Stakeholder	Outcome
Chairman (Raju)	Arrested and jailed; confessed in a written letter to the board
Board of Directors	Dismissed; faced criticism for failing to exercise independent judgment
Company	Takeover by Tech Mahindra in 2009 through government intervention
Auditors (PwC)	Found guilty of negligence; partners arrested; lost credibility
Investors	Massive wealth erosion; shares crashed by over 80%
Regulators (SEBI, MCA)	Tightened norms for RPT disclosures, corporate governance, and audit standards

Case Study: The DHFL Scam (India, 2019-2021)

When Loans Go Home: The Dark Side of Related Party Transactions

Lets see a real world case study of how one of India’s largest housing finance companies collapsed under its own web of shady deals.

In 2019, investors were stunned when Dewan Housing Finance Corporation Ltd. (DHFL) — once a trusted name in affordable housing loans — was accused of siphoning off over ₹30,000 crore through a network of related party transactions.

What followed was a stunning corporate collapse that revealed how unchecked insider deals, fake loans, and regulatory gaps can devastate even the biggest companies.

This is not just a story of fraud — it’s a blueprint of what can go wrong when personal interests override public trust.

📉 The Allegations:

In early 2019, investigative reports revealed that DHFL had:

Given thousands of crores in loans to obscure shell companies
These firms had no real operations and were linked to the Wadhawan family (DHFL’s promoters)
Many of these loans were never repaid — but still shown as “performing assets” in the books

📊 How the Scam Worked

Step	What Happened
🏚️ Fake shell companies created	Promoter-linked firms were set up with dummy directors
💰 DHFL lent huge amounts	Loans given with little or no due diligence
📚 Loans shown as assets	These inflated the balance sheet and misled investors
🔄 Money round-tripped	Some funds allegedly returned to the promoters or used for unrelated activities

🗓️ Timeline of the DHFL Collapse

(Visual Suggestion: Horizontal Timeline Graphic)

Date	Event
Early 2019	CobraPost exposé alleges ₹31,000 crore siphoned via shell firms
June 2019	DHFL delays bond repayment; panic begins among investors
Nov 2019	RBI supersedes DHFL’s board due to governance failure
2020	ED and CBI file multiple cases against promoters under PMLA & IPC
Jan 2021	DHFL becomes the first NBFC sent to NCLT for bankruptcy under IBC
June 2021	Piramal Group wins bid to acquire DHFL in ₹34,000 crore resolution plan

⚖️ Legal Violations Involved

Section 188 of the Companies Act, 2013 (RPT approval rules violated)
SEBI (LODR) Regulations (lack of disclosure of material RPTs)
PMLA, IPC, and Fraud under ED/CBI investigation
RBI Guidelines for NBFCs (breach of lending norms)

💥 Consequences of the Scam

Stakeholder	Impact
Promoters	Arrested and charged with fraud and money laundering
Company (DHFL)	Declared bankrupt; acquired by Piramal Group after ₹30,000+ crore write-off
Investors	Major losses to mutual funds, FDs, retail bondholders
Auditors	Investigated for negligence and failure to flag irregularities
Regulators	RBI & SEBI tightened norms on NBFC governance and RPT monitoring

💸 What Happened to DHFL Investors?

After DHFL’s bankruptcy and resolution through the Insolvency and Bankruptcy Code (IBC) process, the outcomes varied based on type of investor:

👨‍💼 1. Shareholders (Equity Investors)

✅ Did they get anything back?
No. DHFL shares were delisted and shareholders got nothing.

Piramal Group’s takeover offer (₹34,250 crore) wiped out all existing equity.
As per IBC rules, equity shareholders are last in line — after secured and unsecured creditors.
On June 14, 2021, DHFL shares were delisted from NSE and BSE.
Investors lost 100% of their capital in DHFL stock.

🔻 Outcome:
Complete loss for retail and institutional shareholders.

📉 2. Bondholders (NCD Holders, Debenture Investors)

📊 Mixed outcome — partial recovery.

DHFL had issued Non-Convertible Debentures (NCDs) to retail and institutional investors.
Under Piramal’s resolution plan:
- Secured bondholders received between 40%–65% of their money, depending on the class and seniority.
- Unsecured bondholders received almost nothing or token value (~1% or less).

🏦 Why the difference?

Secured creditors (banks, large institutions) had charge over DHFL’s assets.
Unsecured NCD holders, including many retail investors, had no asset protection.

🔻 Outcome:

Partial recovery for secured NCDs
Heavy losses (up to 90–100%) for unsecured ones

🏦 3. Fixed Deposit (FD) Holders

📊 Small recovery.

FD holders were treated as unsecured creditors under the IBC process.
Most received small payouts — around 23%–30% of their deposit amounts (in staggered installments).
Many senior citizens who invested in DHFL FDs suffered huge losses, with no full refund.

🔻 Outcome:
Partial recovery (majority lost 70%+)

🛠️ What Did Piramal Group Actually Do?

Piramal acquired DHFL’s assets and loan book for ₹34,250 crore through IBC.
It merged DHFL into its financial services arm and is now operating the business under Piramal Capital & Housing Finance Ltd.
No funds were paid to DHFL’s original shareholders.
Funds were distributed as per the IBC waterfall mechanism (secured > unsecured > shareholders).

🧠 Investor Takeaways:

Lesson	Implication
Equity is high-risk, high-return	You’re the first to gain in success, but the last to be paid in a collapse.
NCDs ≠ 100% safe	Especially when unsecured — read the terms and credit rating carefully.
FDs in NBFCs carry credit risk	Unlike bank FDs, NBFC deposits are not insured by RBI or DICGC.
IBC protects creditors, not shareholders	Resolution prioritizes repayment of debt, not market value recovery.

📘 Lessons for Investors & Corporate Boards

Always review a company’s RPT disclosures in annual reports
Be skeptical of unusual loan growth to private or unknown firms
Strong audit committees and independent directors are vital to protect stakeholders
Regulators must be empowered with real-time data and greater enforcement teeth

🧩 Final Thoughts

The DHFL collapse is a cautionary tale for the financial system. It shows how Related Party Transactions, when hidden behind complex structures, can silently destroy companies from within.

Transparency, oversight, and accountability are not just compliance terms—they are the pillars of trust in any public company.

💔 Conclusion: The Cost Wasn’t Just Financial — It Was Human

Behind the balance sheets, court filings, and corporate headlines of the DHFL scam were real people.

A retired schoolteacher who invested her life savings in a DHFL fixed deposit, trusting its brand and credit ratings.

A middle-class family saving for their child’s education, who thought NCDs offered both safety and better returns.

Thousands of small investors — senior citizens, homemakers, salaried professionals — who never imagined that a regulated, publicly listed housing finance company could vanish overnight, taking their hard-earned money with it.

For them, the collapse wasn’t about bad headlines or stock charts — it was about shattered trust, sleepless nights, and a future suddenly uncertain.

While the promoters walked away under legal proceedings, and financial institutions counted their write-downs, retail investors were left with nothing but regret — no refunds, no justice, just silence.

The DHFL story reminds us that financial scams don’t just destroy companies — they destroy lives. It’s a call for stronger accountability, stricter governance, and most importantly, for protecting the everyday investor who simply believed that their money was in safe hands.

📘 Key Takeaways:

RPTs can be used to hide fraud or divert funds if not monitored.
Boards must act independently and question transactions, even if initiated by promoters.
Audit Committees and shareholders must have full transparency before approving such deals.
The scandal triggered regulatory reforms in India, including stricter norms under the Companies Act 2013 and SEBI regulations.

✅ Conclusion

Not all RPTs are bad—but unchecked RPTs are dangerous. They’re like secret deals in a family-run shop where customers (investors) don’t know what’s really happening behind the scenes. That’s why regulators, auditors, and investors pay close attention to them.

📣 Call to Action: For a Safer, Fairer Financial System

✅ For Regulators:

Tighten enforcement around RPTs.
Mandate real-time, digital disclosures for high-value transactions.
Ensure promoter accountability doesn’t stop with resignations.

✅ For Boards & Auditors:

Treat every RPT like a potential conflict, not just a compliance checkbox.
Build a culture where questioning is a duty, not disrespect.

✅ For Investors:

Always read the Related Party Transactions section in annual reports.
Be wary of sudden, unexplained shifts in business focus or large intra-group loans.
If it smells fishy — it probably is.

✅ For Policy Makers:

Create fast-track grievance redressal for small investors caught in corporate fraud.
Introduce retail investor insurance for deposits in regulated NBFCs.

🛑 Let’s not wait for another Satyam or DHFL to act.

Because behind every “related party” is an unrelated investor who may lose everything — and they deserve better.

Read Corporate Governance Best Practices here.

References:

Governs how companies can enter into contracts with related parties. It includes approval requirements by board/shareholders and defines “related party.”

🔗 Companies Act, 2013
→ Refer to Section 188, page 101–102.

Covers disclosure and approval requirements for listed entities. Applies stricter norms, mandates audit committee oversight, and shareholder approval in certain cases.

🔗SEBI
→ See Regulation 23 in Chapter IV.

Table of Contents

A Story About Related Party Transactions