38 | Chapter 5
Unrecovered Loans
Another method by which insiders of a company
benet at the cost of other share holders is by
giving loans to the directors and the management
of the company which are left unrecovered. This
practice is not limited to India alone. Certain large
American companies collapsed or suered heavily
because of such loans—Worldcom and Adelphia.
From the point of view of the company regula-
tors, this is one of the main risks to be managed.
The Indian Companies Act 1956 puts in place re-
strictions in this regard. However, this practice of
giving loans to directors and their family members
or loans to shell companies created by the control-
ling share holders is widely prevalent in India.
In a number of cases of corporate frauds, it is
noticed that the controlling share holders have en-
tered into real estate transactions with related par-
ties either directly or through formation of shell
companies controlled by the family members. In
a number of such cases, the wealth of the main
company has been expropriated by either selling
a property at highly inated price to the company
or by buying a property from the company at a
highly undervalued price.
From the Income Tax Administrations point
of view, the main risk to be managed is the ten-
dency of multinational companies to shift prots
from high tax to low tax jurisdictions. Apart from

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