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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Governance Influencers

Orion Securities, a research analyst firm registered with SEBI, publishes a 'Buy' report on Nilgiri Foods Ltd. Its research head holds shares in Nilgiri Foods bought a week before the report, and the report does not mention this. Which statement best identifies the governance failure?

The failure is non-disclosure and mismanagement of a conflict of interest. A research analyst must disclose financial interest in the subject company and must not trade ahead of its own report. Buying shares a week earlier and staying silent undermines the objectivity expected of an analyst gatekeeper.

  1. ANo failure, since holdings need disclosure only if above 10 percent
  2. BNo failure, because analysts may trade freely before publication
  3. CThe failure is only in the quality of the valuation model
  4. DFailure to disclose a conflict of interest, since analysts must disclose financial interest in the subject company and avoid trading ahead of the reportCorrect

Explanation

Research analyst regulations require disclosure of financial interest and other conflicts in the subject company and restrict trading around publication of reports. Trading a week before and not disclosing compromises objectivity. A 10 percent threshold is not the test, and the problem is conflict management, not model quality.

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