When a company’s governance slips, its share price can tumble almost instantly.
What are Related Party Transactions?
Related Party Transactions (RPTs) are deals a company makes with people or firms that have a close connection to its owners, directors, or major shareholders. These parties could be family members, subsidiaries, or entities owned by insiders.
Why They Matter to Investors
Because insiders often have more information, RPTs can be used to move money in ways that boost reported profits or hide losses. When the market learns about questionable RPTs, investors lose confidence and the stock may drop sharply.
Common Ways Companies Misuse RPTs
- Inflated sales: Selling goods to a related party at above‑market prices to show higher revenue.
- Under‑priced purchases: Buying assets from insiders at low prices, reducing costs on paper but hurting minority shareholders.
- Round‑tripping: Moving cash to a related firm and back as “sales” to fake turnover.
- Preferential loans: Giving loans to insiders on easy terms, which can later affect the company’s balance sheet.
Red Flags Investors Should Watch
- Sudden spikes in related‑party balances on the balance sheet.
- Disclosure of new RPTs in quarterly or annual reports without clear business rationale.
- Unusual price differences between the company’s transactions and market rates.
- Frequent changes in senior management or board members who have related interests.
Remember, this is just an overview, not a prediction. Always do your own research and consider talking to a financial adviser before making any investment decisions.