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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Concept of Governance in Professional Managed Company and Promoters Driven Company

Kapoor Agro Ltd is promoter-driven. The promoter-Chairman proposes that the company give an unsecured loan to a firm owned by his brother on terms more favourable than market rates. As the Company Secretary advising on governance, which concern is most directly raised by this proposal?

The main concern is tunnelling, where controlling promoters divert company resources to related entities on favourable terms, harming minority shareholders. Related party transaction safeguards such as audit committee scrutiny and disinterested shareholder voting are designed to address this risk in promoter-driven companies.

  1. ARisk of tunnelling of resources to benefit promoters at the expense of minority shareholdersCorrect
  2. BRisk of excessive dividend payout to public shareholders
  3. CRisk of dilution of promoter control through a rights issue
  4. DRisk of too many independent directors on the board

Explanation

Favourable transactions with promoter-related entities are a classic agency problem in promoter-driven firms, where controlling shareholders may divert value from minorities. This is the tunnelling concern, and it is why related party transaction safeguards such as audit committee approval and disinterested voting exist. The other options do not arise from the facts.

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