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NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Business and Governance

In analysing the governance of a listed company, which of the following is generally treated as a red flag by a research analyst?

Frequent related party transactions on non-arm's length terms are a governance red flag, because they can shift value from minority shareholders to promoters. Independent audit committee members, separate chair and MD roles, and auditor rotation are all considered good governance practices.

  1. AFrequent related party transactions on non-arm's length termsCorrect
  2. BPresence of independent directors on the audit committee
  3. CSeparate persons holding the roles of chairperson and managing director
  4. DRotation of statutory auditors at regular intervals

Explanation

Related party transactions that are not on arm's length terms can transfer value from minority shareholders to promoters, so they are a governance warning sign. The other three options are accepted good governance practices.

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