Page 236 - ES 2020-21_Volume-1-2 [28-01-21]

Regulatory Forbearance: An Emergency Medicine, Not Staple Diet! 219

Figure 17: Misallocation of Credit during Forbearance – Evidence from Capital Expenditure of
Firms Benefitting from Restructuring

Source: MCA (for restructured loans) and CMIE Prowess for the composition of boards
Pre: Average percentage change two years after and before for firms restructured during 2002-2006
Post: Average percentage change two years after and before for firms restructured during 2009-2015

Mis-appropriation of resources in borrowers that benefited from forbearance

7.25 Another likely consequence of strong management influence and declining governance
is the increase in private benefits being redirected to the firms’ management. In the Indian
context, related party transactions (RPTs) are often utilized to camouflage the expropriation
of firm resources. Incumbent management can force the firm to engage in related party
transactions with entities connected to key managerial personnel. This is shown in figure 18.
Related party transactions to key personnel increased by around 34% among firms whose loans
were restructured during the forbearance regime. When taken as a proportion of total expenses,
related party transactions to key personnel increased by over 7%. In comparison, among firms
restructured before forbearance, the related party transactions to key personnel increased
by 26% in absolute terms but decreased by 1.5% as a proportion of total expenses. Box 7
shows the results of careful panel regressions that demonstrate a jump in overall management
compensation and directors’ sitting fees during the forbearance regime. Hence, the increased,
lax restructuring seems to have resulted in the misappropriation of firm resources at the cost of
minority shareholders.