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IAI Actuarial Core Principles · Business Finance · Ethical responsibilities of owners and managers

A promoter family holding 62% of an Indian listed company proposes that the company buy a property from a firm owned by the family at a price well above independent valuation. Which statement is most accurate from an ethical and governance viewpoint?

It is a related-party transaction that creates a conflict between the controlling promoters and minority shareholders, since value may be transferred at an inflated price. Ethical governance requires independent review, evidence of fair value and full disclosure, with interested parties not deciding the matter.

  1. AIt is acceptable because the majority shareholder's wishes always define the company's interest
  2. BIt is a related-party transaction raising a conflict between controlling and minority shareholders, so it needs independent scrutiny and full disclosureCorrect
  3. CIt is a conflict between lenders and employees and needs no board involvement
  4. DIt is purely an accounting issue with no ethical dimension
  5. It is acceptable provided the price is not disclosed, to protect commercial confidentiality

Explanation

Paying above market value to a promoter entity can transfer wealth from minority shareholders to the controlling group. Good governance requires independent directors or audit committee review, fair pricing evidence and disclosure, and often non-interested shareholder approval. Concealment or majority dominance does not make it ethical.

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