Related-party transactions spike in three years following an allotment of a coal mine via a committee-based allotment, reveals the Economic Survey.
Analysis of related-party transactions of coal block licensees immediately after the allotment makes a strong case for market-based allocation of natural resources in Economic Survey 2019-20 released by Chief Economic Advisor K Subramanian on January 31.
Discretionary allotment of natural resources leads to opportunities for rent-seeking via related-party transactions (RPTs) in firms that receive coal blocks via discretionary allotment.
In such cases, the rupee value of specific RPTs shows significant spike in the years immediately after allotment, even as their market share steadily decreases, the Survey said.
The study of RPTs reveals a stark difference in the behaviour of firms depending on whether the coal block licenses have been obtained through committee-based allotment or through competition-based auction process, reveals research by Abraham, Chopra, Subramanian & Tantri (2018) that was cited in the Survey.
The rupee value of RPTs under heads such as capital purchases, revenue income and revenue expenses show a marked increase in the three year period following a discretionary allotment by a committee as compared to the three years prior.
Similarly, the RPTs with unlisted or foreign entities, based out of internationally recognised tax havens, show a spike in the three years period following allotment. One-time payments to directors also follow the same trend.
In the universe tracked by the study, the director commissions rose 12 percent, perquisites by 5.7 percent and consulting expenses by 7.6 percent for firms which received coal blocks through the committee system. Interestingly, the research found that director (and not other employees) salaries shrank after coal block allotment on the auction basis.
Interestingly, other types of RPTs such as capital sales, loans and advances given and taken do not show any such increase. And such an increase is also not seen in the case of competitive auctions.
According to the Survey, the increase in the value of the RPTs in discretionary allotment indicates transfer of wealth away from the firm. The RPTs that allow large one-time non-recurring cash outflows can serve as a mask to hide transactions from regulators.
Meanwhile, the beneficiaries of discretionary allotment also show a perplexing trend of shrinking market share in the years following the allotment.
The Survey explains: "The gain of an almost free resource should have aided firm productivity and business fundamentals. Instead the market share has fallen over the years -- suggesting a case of Dutch disease -- firms that got the free resource diverted efforts towards the tunnelling of the windfall gain instead of towards productive business activity."
Further, committee-based allotment leads to wealth destruction in the firms that are beneficiaries relative to firms which do not get such licenses. For instance,
Metric decline over three-years post-allotmentTotal income: 54.9 percent
Total expense: 58.7 percent
PAT: 37.8 percent
Total assets 76.2 percent
Land & building: 48.2 percent
Plant & machinery: 51.1 percent
Interestingly, such spikes in RPTs or such declines in income and assets do not occur in case of auction of coal blocks, the research pointed out.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.
