unrave wrote:avier wrote:unrave wrote:Your reasoning amounts to "One airline has committed fraud therefore all airlines are fraudulent".
It is MY OPINION that the RPTs in IndiGo don't seem to be fraudulent prima facie. I am not going to investigate the claims. Let the appropriate institutions do their job.
So far you seem to have made no effort to understand the issue, so I can't help you. Do not engage with me on this issue.
Well, you yourself spoke of it as being a part and parcel of business being governed by solid rules put in place to ensure misdoings wouldn't happen, handing me out links to educate me on the rules . And when I highlight how it has been misused, you start questioning about what I have understood or not. Personal attacks when you don't have a justifiable answer. Atleast glad you stated it as your opinion now, and not something obvious and factual.
I am sorry you can't identify an opinion without it being explicitly spelt out. I will keep this in mind when I respond to you in future.
Now if you go back to read my comments you will realise that I never claimed they are "governed by solid rules put in place to ensure misdoings wouldn't happen". You seem to think that the very existence of RPTs point to something sinister. Let me reiterate: no, RPTs are common, you'll find them everywhere if you look.
Edited to expand the points.
Unrave - I cannot help but laugh at the comments and sublime snide remarks thrown at you. Let me give my inside view on how these things work out so that the lesser brethren can understand the whole issue in a somewhat holistic way.. ( No pun intended to anyone and much less to three or four people trying to question you- so kindly do not take offence at my choice of words but the message has to be delivered hence, .......)
In any related party transaction there are many aspects involved. The very first is the relative ease by which a requestor company can take the benefit of a service from a party which is within its domain of operations ( in this case domain of operations means group of companies working under a common corporate identity but varied commercial interests). So for example a shipping company ( shipping liner) company like Mitsui OSK lines also owns a telcom service provider say for example SK Telecom ( NOTE : SK group is actually South Korean and is not owned by Mitsui&Co.). So for all varied needs of Mistsui OSK lines SK telecom is the best bet since it is within their own group. Best rates and other benefits cannot be obviously undermined or less emphasized upon. And a Shipping Line has a continuous and extensive need for telecommunications services all the time.
Second is the issue of Taxation, specifically Income Tax Act. All related party transactions whether or not they are carried out by listed entities or unlisted entities need to have a distinct Transfer Pricing audit ( in this case of Indigo Airlines it should be Domestic Transfer Pricing Audit assuming that overseas operations are not covered in this 'expose' letter of RG group{I have not read the letter but followed what Anish Majumdar of Business Standard and Aditi Phadnees of Hindu Business Line have reported}). In any Transfer Pricing Audit ( THIS IS actually separate from the Statutory Audit under Companies Act 2013[As amended till date]) the auditor will look into multiple aspect of the fairness of the related party transaction and the extent of the involvement of parties. There are multiple thresholds when this will attract the provisions of the regulating statutory provisions - each of them being exclusive of each other ( meaning SEBI rules will undertake a different inquiry from what Income Tax Act will inquire into). As far as Income Tax Act is concerned there are some set percentage limits under which there would not be legally permissible Domestic Transfer pricing transactions. What this entails is that if legally permissible Domestic Transfer pricing is not allowed then TDS has to be deducted and all such transactions need to be probed for arms length pricing compliance{ important factors to note here- rules governing TDS applicability, legally permissible domestic transfer pricing is dependent upon many rules, amendments and rulings of ITAT[Income TAX Appellate Tribunal], High Courts and Supreme Court}.
Thirdly, the Companies Act 2013 lays down elaborate guidelines as to how to carry out a related party transactions, how to classify it, how to report it and then how to ensure that proper compliance is being undertaken at all times. The Key Managerial Personnel or KMP which consists of Chief Executive officer, Chief Financial officer, Company Secretary, Chief Legal officer ,Audit COmmittee are all equally responsible for adhering to these norms. In fact they have to collectively sign off on all these compliance every quarter or every year (this is dependent upon the turnover of the company as to when the filings are done). In addition to this, the staututory auditor and the internal auditor ( now they are to be rotated under new MCA rules, and have to be different firms) also verify and cross check all such related party transactions EVERY QUARTER and submit their findings to the Audit Committee and then later to Board of Directors as the case may be. If the findings are adverse and the Audit Committee and/or the Board is unable to satisfy the findings or the queries raised, the statutory Auditor or the internal auditor are mandated by Law to qualify such findings {these auditor qualifications remain a public record when the annual balance sheet is uploaded to MCA21 portal}. These findings are then subject to external scrutiny or corrections as the case may be. The Board of Directors are also required to answer to the auditor qualifications in the Directors Statement of the Audited Balance Sheet, with specific reference to the P/L account. These qualifications once so done cannot be removed even if the Board or the Senior Management disagrees[though the responses will be recorded].
Finally coming to the SEBI Rules, there are some very elaborate arrangements that the market regulator has laid down when it talks about related party transactions. Some of these are the value of these agreements in relation to the overall turnover, nature of the transactions, effect of the transactions, period and manner of payment, frequency of the payments, equity structure of the parties involved in the related party transactions. One thing which is very common to both MCA and SEBI ( THIS IS ALSO IN THEIR RESPECTIVE STATUTES - Companies Act 2013 and SEBI Act - is that when the Board takes a decision on the RPT[related party transactions] it is to be seen - Who in the respective Boards of the two companies entering into RPT have equity ownership in excess of 15% in either or each of these parties , when the RPT proposal is being discussed or being taken into consideration. Any one having a direct or 'presumed influence' need to recuse themselves from such deliberations. So taking my example, when Director A who is on the board of SK Telecom having an equity ownership of 16% in Mitsuit & Co will recuse himself when the RPT is being discussed and put to vote in Mitsui&Co. Similar would be the case for Director B having equity ownership in SK Telcom{note that it is assumed that in both these instances Director A and Director B will have board positions in Mitsui&Co and SK Telecom}.
NOTE- the respective thresholds of equity ownership, or having board position or having management presence or not is subject to multiple layers of exclusions and restrictions applicable for a variety of reason. Several amendments have been carried which have excluded or included many companies from complying with these rules but the essence is explained above.
This rule of having the necessity of calling for mandatory bids when RPT are discussed is actually not engraved in stone. There is certain degree of latitude which the management can use to sustain effective business operations. While some of the points raised in rebuttal from IGE group is very true that since it is a very restricted number as compared to the total percentage of Gross Revenue(or Total Revenue if we are using exact balance sheet terms) so it does not amount to any transgression of law much less an intentional one. One way companies try to engage in this to seek bids from competitors for financial year 1 and then match it with the RPT bid. Usually the RPT bid is always lower (for variety of reasons which i cannot explain here for sake of brevity). After financial year 1, for financial year 2 , only a cursory email sent to the previously participating competitors can elicit their bid numbers{without running again a bid} and then they can simply match or refuse the price quoted by RPT party. This way the compliance is both achieved and effective commercial operations are not hampered.
Apart from these points, there are many other interwoven critical issues of law and corporate complainces which involve, regulate and administer the RPT, management participation of financial records, business ethics, corporate governance and reasonable shareholder scrutiny in the affairs of the administration of a company. While we can criticise or take sides in this debate or debacle(depending upon the side of the fence we mind booking our seats on) , all the above points in addition to the many unknown issues need to be examined.
DISCLAIMER: I have drafted many RPT and cost sharing agreements between group companies of past employer. I was also signing authority on the compliance confirmation to both internal auditor and statutory auditor for about 6 years. I was also Management representative in these meetings with internal audit and statutory audit {this included final statement approval of the Board in response to Auditor observations, and Auditor qualifications}.
