NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Business and Governance
While assessing corporate governance of a listed Indian company, a research analyst would treat which of the following as the clearest red flag?
Frequent large related-party transactions that are not at arm's length and are poorly disclosed are the clearest governance red flag, because they can divert value from minority shareholders to promoters. Independent directors, an independent audit committee chair and separate chairman and CEO roles are positive practices.
- AIndependent directors forming the required share of the board
- BFrequent large related-party transactions on terms not at arm's length, with weak disclosureCorrect
- CAn audit committee chaired by an independent director
- DSeparate persons holding the chairman and CEO roles
Explanation
Related-party dealings on non-arm's-length terms with poor disclosure can transfer value from minority shareholders to promoters. The other three options are good governance practices. Hence only the second is a warning sign.
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