NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Business and Governance
A research analyst reviewing the governance of an Indian listed company wants to judge the risk of promoter-related fund diversion. Which observation is the most direct red flag?
Rising pledge of promoter shares combined with big unsecured loans to promoter-linked entities is the clearest red flag, since it suggests promoter financial stress and possible diversion of company funds, unlike a higher dividend, a woman independent director or a local office shift.
- APromoters have pledged a rising share of their holding and the company gives large unsecured loans to promoter-linked entitiesCorrect
- BThe company has declared a higher dividend than the previous year
- CThe company has appointed a woman independent director
- DThe company has changed its registered office within the same city
Explanation
Increasing pledge of promoter shares signals financial stress, and large unsecured loans to related parties suggest possible diversion of funds. Higher dividends, a woman independent director and a local office change are not governance warnings in themselves.
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