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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

Mehra Foods Ltd is promoter-driven. The promoter proposes that his brother be appointed to the board as a non-executive director and that the company buy raw material from the brother's firm. Which safeguard most directly addresses the second proposal?

The audit committee must review and approve the related party purchase, with independent directors deciding and disclosure made. This counters the risk that a controlling promoter steers business to his own family firm, which is a central governance concern in promoter-driven companies.

  1. AApproval by the audit committee with only independent directors voting and related-party disclosureCorrect
  2. BApproval by the promoter as Chairman alone
  3. CDeferring the matter to the next annual general meeting without any committee review
  4. DObtaining the statutory auditor's consent to the contract

Explanation

Related party transactions need prior audit committee approval, where only independent directors in the committee vote on them, and disclosure follows. The promoter cannot self-approve. The auditor reports on such matters but does not consent to contracts.

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