Every coin has two sides. There are pluses and minuses of these policies. The situation vayjanthi has mentioned might be a discrimination from the point of the candidate and can demotivate the existing employees.
On the other hand like hrquest mentioned these recruitments might lead to frauds and other matters.
Even in Sri Lanka some companies have these policies but limiting the relatives to work in the same department, branch or division. But many companies take other controlling actions, have better systems, processes and procedures and they DO recruit relatives etc.
After all it is a small world and even new relationships can occur among the existing employees (in laws through marriage) and also any sort of relationships can lead to performance management and other issues
So I think having proper systems, processes and procedures will be better than these sort of policies.