Fin Maverick
Foundations VocabularyAccounting & ReportingEconomics & MacroQuant Methods & ProgrammingBusiness & Company AnalysisCorporate Finance & ValuationBehavioural Finance
Banking & Market InfrastructureFixed Income & RatesDerivatives & Structured ProductsPublic EquitiesTransactions & DealsPortfolio ConstructionFunds & AMCs
Private Markets & AlternativesRisk, Treasury & ControlAI & Digital FinanceStochastic Calculus & PricingWealth & Personal FinanceIndian Markets & RegulationProfessional Practice
CalculatorComparison
Frameworks
Explore Bootcamps
Equity ResearchPortfolio ManagementMutual Fund MasteryFinancial LiteracyInvestment Banking Analyst
Private Equity AnalystHedge Funds AnalystBreaking Into VCBreaking Into QuantsAI For Finance
Financial Analyst ProgramRisk Management ProgramPrivate Wealth ManagementDebt Capital MarketsDerivatives Foundation
Explore Internships
Equity Research InternMutual Fund Intern
Portfolio Management InternFinancial Literacy Intern
Explore Micro Courses

Equity Research6

Writing an Investment ThesisBuilding a Discounted Cash FlowReading an Annual Report FastReading a Sector Before a CompanySpotting Quality of Earnings Red FlagsBuilding a Revenue Forecast From Drivers

Portfolio Management3

Rebalancing: When, Why and What It CostsStrategic and Tactical Asset AllocationMeasuring Risk in a Portfolio

Mutual Fund Mastery3

Comparing Funds Without Being FooledHow a NAV Is Struck and Which Day You GetReading a Fund Factsheet Properly

Derivatives Unlocked4

Hedging a Real ExposureThe Greeks, PracticallyFutures, the Basis and What Moves ItReading an Option Payoff

AI For Finance2

Retrieval and Grounding for FinanceDocument Extraction in Finance

Breaking Into Quants4

Backtesting a StrategyHypothesis TestingCleaning Financial DataRegression for Finance

Breaking Into VC3

Sizing a MarketReading a Term Sheet as a FounderHow a Venture Round Actually Works

Financial Analyst Program4

Common Size and Trend AnalysisReading a Cash Flow StatementRatio Analysis That Says SomethingBuilding a Working Capital Schedule

Risk Management Program2

Credit Exposure and How It Is ReducedValue at Risk and What It Hides

Investment Banking Analyst3

Precedent Transactions and Why They DifferReading a Term Sheet StructurallyBuilding a Comparable Companies Table

Private Wealth Management3

Tax Aware Portfolio DecisionsBuilding a Client Risk ProfileGoal Based Planning Arithmetic

Debt Capital Markets3

Analysing an Issuer's CreditDuration and What It Does Not Tell YouBond Pricing and Yield Mechanics

Private Equity Analyst2

Fund Waterfalls and CarryThe LBO in Structure

Hedge Funds Analyst2

Short Selling MechanicsLong Short Mechanics
Courses
Explore Career Roadmaps
Investment Banking AnalystEquity Research AnalystVC AnalystPrivate Equity AnalystHedge Funds Analyst
Quant AnalystAI For FinanceFinancial Analyst ProgramPrivate Wealth ManagementDebt Capital Markets
Risk Management ProgramDerivatives FoundationPortfolio ManagementMutual Fund Mastery
PartnershipsShowdown
Log inSign up
VC Analyst · CoreTrack
1Business, Industry & Company Analysis
iBusiness Fundamentals and Models
The Business EcosystemThe Business ModelStakeholdersThe Business Life CyclePlatform BusinessesHow to Build a…The Value NetworkMonetisationUnit EconomicsThe Profit PoolTake RateB2B vs B2C
iiRevenue and Pricing
The Revenue ModelRevenue Growth vs Monetisation…Pricing PowerRecurring RevenueAverage Revenue Per UserARPU vs Average Order ValuePrice DiscriminationGross Margin vs Contribution MarginFixed Costs vs Variable Costs
iiiOperating Model and Supply Chain
The Operating ModelThe Value ChainThroughputThe Supply ChainVertical IntegrationVertical vs Horizontal IntegrationProcurementCapacity UtilisationJust-in-Time vs Just-in-Case InventoryMake vs Buy
ivCustomers and Brands
Brand EquityCustomer LoyaltyCustomer Segments and the JourneyCustomer EconomicsHow to Analyse Customer…Distribution ChannelsCustomer Acquisition Cost
vCompetitive Advantage and Moats
The Sources of Competitive…Competitive RivalryEconomies of Scale and…Network EffectsSwitching CostsCost Leadership vs DifferentiationHow to Test Whether a Moat Is Eroding
viIndustry Structure and Sector Behaviour
Industry TypesConsolidation and FragmentationSubstitutesBuyer PowerSupplier PowerThe Industry Life CycleHerfindahl-Hirschman IndexSector vs IndustryCompany Analysis vs Industry AnalysisCyclical vs Defensive SectorHow to Apply Porter's…How to Analyse Competitive…
viiMarket Size and Addressable Market
Market SizeMarket Concentration vs Market ShareTop-Down vs Bottom-Up Market SizingDemand DriversThe Adoption CurveGrowth DriversMarket FragmentationMarket ShareHow to Interpret Market Share Changes
viiiInnovation and Technology Shift
InnovationResearch and DevelopmentTechnology Adoption and DiffusionThe Product Life CycleProduct Innovation vs Process InnovationDigital TransformationCannibalisationDisruptive InnovationThe Technology S-Curve
ixCorporate and Business Strategy
Corporate and Business Strategy ComparedHow to Build Business…How Execution Risk Can…Organic and Inorganic Growth ComparedGrowth Investment vs Capital ReturnOrganisation Design and TransformationHorizontal vs Conglomerate DiversificationCentralised vs Decentralised OrganisationCompany Research vs Investment ResearchHow to Separate Facts,…
xManagement and Governance Quality
Management QualityFounder-Led vs Professional ManagementThe PromoterThe BoardInstitutional OwnershipPromoter Ownership vs Institutional…The Agency ProblemIndependent DirectorsInsider OwnershipHow to Analyse Ownership…How Capital Allocation Shapes…
xiStrategic and Business Risk
Business RiskPlatform vs Pipeline BusinessAsset-Light vs Asset-Heavy vs…Commodity vs Branded BusinessHow to Write a…The Business Risk RegisterStrategy in PracticeStrategic Risk vs Financial RiskHow to Evaluate a…How to Build a…
xiiBusiness Research Method
Business AnalysisCompany Filings as a Research SourceCompetitor MappingThe Variant ViewPrimary ResearchPrimary vs Secondary Research
2Private Markets & Alternative Investments
iPrivate Markets Foundations
The Private FundHedge Fund vs Mutual FundHow to map a…How to distinguish a…Category I, II and III AIFs ComparedAlternative Investment FundPrivate MarketsPrivate Markets vs Public MarketsPrivate Equity vs Venture CapitalPrivate Credit vs Public CreditLong-Short vs Market NeutralHow to map Private Credit SeniorityHow to read a…How to map a…How to read a…How to map Private-Market Exit RoutesClawbackIlliquidityPreferred ReturnNAV Financing vs Preferred EquityFund RegistrationMultiple on Invested CapitalBuyout vs Growth EquityManagement Fee vs Carried InterestNAV vs Fair ValueNAV Financing vs Continuation VehicleGP vs LPHow to trace a…How to map a Fund LifecycleHow to read a…
iiPrivate Fund Structure and Governance
Limited PartnerThe Limited PartnershipPlacement MemorandumCommitment, Call and Capital AccountCapital CallCarried InterestHow Conflicts of Interest…Fund AdministratorFund SponsorKey-Person ProvisionsGeneral PartnerHow Limited-Partner Advisory Committees…Side LettersThe Waterfall
iiiFund Lifecycle
Fund Formation and TermRealisation and DistributionInvestment Period and Harvest PeriodDistributionFundraisingFinal CloseFund TermPrivate Fund Return MultiplesVintage BenchmarkVintage YearPublic Market EquivalentThe J-CurveRealised Value, Unrealised Value…MOIC vs IRR
ivPrivate Equity
Private EquityBuyoutGrowth EquityPortfolio CompanyBoard Observer
vVenture Capital
Venture CapitalSeed RoundVenture Capital Fund, Angel,…Series ASeries BThe Cap Table
viPrivate Credit
The Private Credit StackDistressed DebtWorkoutSecurity PackagePIK InterestPreferred EquitySyndicated LoansSenior DebtDirect LendingLeverage Ratios in Private Credit
viiReal Assets
Real AssetsBrownfield InfrastructureGreenfield and Brownfield InfrastructurePrivate Real Estate FundsREIT vs InvIT vs…Infrastructure FundsOccupancyThe Real Asset Risk SpectrumReal-Asset Cash Flow vs…Leases in Real AssetsNet Operating Income
viiiHedge Funds
Hedge FundsGetting Out of a Hedge FundPrime BrokerRedemption WindowSide PocketTail Risk in AlternativesGlobal MacroManaged FuturesMarket NeutralRelative ValueShort SellingHow Long-Short Strategies WorkEvent-Driven StrategiesArbitrageExposure and Leverage
ixDue Diligence and Private Fund Reporting
Private Fund NAVThe Investor LetterDue DiligenceInvestment Due Diligence vs…Fund AuditValuation AgentValuation LagLook-Through ReportingHow Private-Fund Reporting Can…The Quarterly Report
xExits
Strategic and Financial BuyersExitNAV FinancingContinuation VehicleContinuation Vehicle vs Traditional…IPO as an Exit RouteSecondary TransactionsStrategic SaleStrategic Sale vs Secondary Sale vs IPO

The Agency Problem: When Managers and Owners Diverge

Two gaps open between the people who run a business and the people whose business it is: they want different things, and one side knows more. Neither gap can be seen from outside. The one thing a reader outside can see is the list of who the business is connected to, and at this one that list runs to four lines with two of them reading none listed.

Where does this problem actually sit, and is it an accusation against anybody?

Part of the answer is settled where corporate governance is the subject in its own right. The governance treatment puts it in one sentence: whoever controls the money day to day can serve themselves before serving the owners, and that is not an accusation against anyone, it is a description of where the opportunity sits.

Almost everybody skips the second half of that sentence, so read it again. The claim is about a position, not about a person standing in it. The claim is true of a business run beautifully for forty years by somebody who never took a rupee that was not theirs. The claim is true of the shop at the end of any street. The position is the reason governance structures exist at all, in the same way that a lock on a cash drawer is a statement about drawers rather than a statement about the person holding the key.

Every household already runs this arrangement. A household hands the week's shopping money to whichever member is going to the market. Nobody in that household suspects anybody. One person is simply now between the money and everybody else, and only that person knows what the vegetables actually cost that morning. Nothing has gone wrong. Something has become possible, and everyone involved would say the same.

The same treatment names the two parts of the space that opens up, and names them in a way worth keeping. The first is a gap of interest. The runner would like a bigger salary, a bigger empire, a quieter life, or a good price for a relative. The owner would like the money used well. The second is a gap of information: the runner sees every invoice and every offer, and the owner sees a report four times a year, written by the runner. The governance treatment works that pair out at length on Aravalli Agro Foods, a listed snack maker invented for it, and reaches a conclusion carried across here without reopening: every governance structure is a variation on one move. Reduce the gap of interest, or reduce the gap of information, or both, at the point where money is about to move.

The single move is the whole of the mechanism. Committees, approval rights, independent directors, disclosure duties: each one is that move wearing a different set of clothes, and each is covered separately. A much narrower and much more awkward question is left over. Granted that the two gaps exist everywhere, what can somebody standing outside a business actually see of them?

Two gaps, one stack, and the money sitting in the middle of it THE PEOPLE WHOSE BUSINESS IT IS They hold a claim on what it earns, and they see what it reports. THE MONEY and the decisions that move it GAP ONE What each side wants GAP TWO What each side knows WHOEVER CONTROLS THE MONEY DAY TO DAY Sees every invoice and every offer, and decides. A POSITION IS DRAWN HERE. NO PERSON IS DRAWN HERE.
The two gaps sit either side of the money, so the drawing describes a position that exists in every business rather than the conduct of anybody occupying it.
Try it out

1. The agency problem is located in one sentence at the start. Which description does that sentence give?

Equity Research Bootcamp — Fin Maverick

So why can the gap not simply be looked for?

The first thing to establish is bleak. Take the two gaps one at a time and ask what instrument would measure each: the honest answer both times is that no instrument exists. Not because nobody has built one yet. Because of what each gap is made of.

The gap of interest is a fact about what two people want. Wanting is not a line item. In any set of accounts at all, down every statement and every note, there is no row headed what the manager would have preferred. There never will be. The accounts record what a business did with money, and a preference that was never acted on moved no money at all. Even a preference that was acted on arrives in the accounts wearing the same clothes as every other decision: a cost went up, a purchase happened, a project was approved. The wanting stays behind the number and does not come out.

The gap of information is worse, and it is worse in a way that is almost funny once it is seen. The information gap is defined by everything the reader was never given. Any attempt to measure it has to use the published record, and the published record is precisely the side of the gap the reader is standing on. Measuring the size of what somebody else knows, using only the things that somebody disclosed, is not a hard problem. The measurement is a problem with no shape.

A gap that cannot be measured directly is not therefore unknowable, and it is also not therefore absent. The two halves of that sentence are doing different jobs and both matter. The first half keeps the work going: an indirect route exists, and everything below is that route. The second half is the one that saves careers.

The failure it saves a reader from is not a rare one. A reader sets out to find evidence of a divergence, looks carefully, finds nothing, and writes down that there is none. The sequence repays slow reading. The search returned nothing because the search was never capable of returning anything else. Its output is the same whether a gap is wide open and acting or shut tight and dormant, so the finding carries no information at all, and the reader has just converted a method's blind spot into a conclusion about a business.

The market stall has the same shape. Somebody is sent to buy vegetables and comes back with vegetables and the right change. The return establishes that they came back with vegetables and the right change. The return establishes nothing whatsoever about the price they were quoted, the price they paid, or whether the seller is their cousin. None of those things was ever going to travel home in the bag.

So the useful question is a different one, and it is worth writing down before anything else arrives. Where is the gap cannot be answered. Instead: which of this business's decisions would have left a trace if a gap had been acting, and which would have left none? The question has an answer, the answer is short, and getting it is the whole of the skill.

Each gap, beside the instrument that would measure it GAP ONE, WHAT EACH SIDE WANTS THE INSTRUMENT: A STATEMENT, READ ROW BY ROW Revenue an amount Cost of materials consumed an amount Profit before tax an amount What the manager would have preferred NO SUCH ROW EXISTS ANYWHERE Wanting moved no money, so nothing recorded it. GAP TWO, WHAT EACH SIDE KNOWS THE INSTRUMENT: WHAT THE READER IS HOLDING WHAT WAS PUBLISHED The reader holds this. WHAT WAS NOT PUBLISHED HEIGHT UNKNOWN Measured with the stack on the left. One ruler, and it is cut from the thing being measured. BOTH INSTRUMENTS ARE DRAWN AT FULL SIZE. NEITHER HAS A SCALE ON IT.
Neither gap leaves a direct trace, so a search aimed straight at either one comes back empty whether or not a divergence is acting.
Try it out

2. An attempt to observe the information gap at a business directly finds nothing. Which conclusion follows?

Investment Banking Analyst Bootcamp — Fin Maverick

What does this business's own list of connections say, before any amount is attached?

There is exactly one route a divergence can travel that the accounts were built to catch, and it is worth stating precisely because everything after this depends on it. If interests diverge and money moves, the money moves somewhere. If it moves toward somebody connected to the people deciding, a disclosure duty attaches to it and a note in the accounts sets it out. The note is free to read and takes about twenty seconds.

Work it on a real published list. Anjani Stationers Private Limited is a stationer invented for these notes and trading nowhere, making registers for schools. Its note of related partyA person or another business close enough to the reporting business that ordinary bargaining between strangers cannot be assumed to have settled their dealings. Companies inside the same group and the senior people who direct the business are the usual cases. disclosures is set out in full in these notes, and the whole thing is four lines.

The note groups connections by relationship rather than by size. The grouping is itself the first reading. The usual groupings are the companies inside the same group, the people who direct the business, the other entities those people control, and the close relations of those people. Each grouping is a different kind of closeness. For Anjani Stationers the four lines read like this. Companies inside the same group: Chitra Binding Works, 70 per cent held from April. The people who direct the business: Vaidehi Rao, finance controller. Other entities those people control: none listed. Close relations of those people: none listed. The working that publishes it calls that the whole surround.

The list alone already says a great deal, with not one rupee attached to any of it. Anjani Stationers has a binding operation inside its own group from April of its second year, and had none in the first year. Chitra Binding Works Private Limited is a subsidiaryA company in which another company holds a large enough share to decide how it is run. The larger company does not have to hold all of it, and usually does not. from that month, and binding is a thing this business used to buy from outside. A subsidiary in the same trade changes what the rest of the accounts are expected to look like before another line of them has been read, and it settles which questions are worth carrying forward.

The list also says what kind of business this is. One entry among the key management personnelThe people with authority and responsibility for planning, directing and controlling the activities of a business, directly or indirectly. Directors and the most senior managers are the usual members of this grouping., and it is a single named finance controllerThe senior person in charge of a business's books and its reporting. It is a job somebody is hired into, rather than a position somebody arrives at by having started the business., Vaidehi Rao. Not a long roll of appointments. Not a web of entities in six places. A small surround, set out in full.

A short list is information before any amount is attached to it. The ruling comes from where this note is worked in full, and it is the sentence everything here is built on. A list of four lines and a list of thirty entities across four states are two different facts about two different businesses, both free, both readable in twenty seconds, and a reader who skips straight to the figures has thrown away the only part of the note that costs nothing.

Ordinary life does this without thinking. Before asking what anybody ever took, the thing to want is the list of people who can let themselves into the house. Four keys is one situation. Thirty keys is a completely different situation, and that much was clear before anybody mentioned a missing thing.

The whole surround, and it is four lines long THE LIST, GROUPED BY RELATIONSHIP Companies inside the same group Chitra Binding Works, 70 per cent held from April The people who direct the business Vaidehi Rao, finance controller Other entities those people control None listed Close relations of those people None listed FOUR LINES ARE THE WHOLE OF IT. TWO CARRY AN ENTRY AND TWO READ NONE LISTED.
The two empty groupings are printed at the same size and weight as the filled ones, because a line reading none listed is a statement rather than a blank.
Two lists, one width, twenty seconds each FOUR LINES Companies inside the same group 1 entry The people who direct the business 1 entry Other entities those people control None listed Close relations of those people None listed 2 ENTRIES, 2 LINES READING NONE LISTED A SHAPE DRAWN TO COMPARE. NO BUSINESS NAMED. Companies inside the same group 9 entries The people who direct the business 7 entries Other entities those people control 11 entries Close relations of those people 3 entries 30 ENTRIES, SPREAD ACROSS FOUR STATES Twenty seconds gives: one stage now inside the group from April, and nothing else attached anywhere. Twenty seconds gives: a surround that needs a working session to map, before any amount is read. TWO DIFFERENT FACTS. BOTH FREE. NEITHER NEEDS A SINGLE RUPEE.
Shape is readable before size is, so the count of lines and the count of empty ones is a finding a reader gets for nothing.
Try it out

3. Before any amount is attached, what does a connections list on its own already tell a reader?

Two of those lines read none listed. What does that settle, and what does it leave open?

The two empty lines are the centre of the subject, and they repay slow reading. Two of the four lines read none listed, and a line reading none listed is a positive statement rather than a missing entry. The line says that no other entity is controlled by the people who direct this business, and that no close relation of theirs appears on the list at all. Somebody had to look and had to write down what the looking found.

The two empty lines rule out something real and worth having. There is a particular shape money takes when interests diverge, and it is the shape everybody pictures. Money leaves a business toward a company quietly held by the person deciding, or toward a relation of theirs, at a price that ordinary bargaining between strangers would never have produced. The shape is exactly what the note was built to catch, and on this note the two lines where it would show read none listed. One route is closed, on the record, and nothing further needs asking about it.

Now the half a reader almost always skips, and it is this guide's own finding. A divergence of interest does not require a related party, and the note catches one route out of several. Take that apart into cases and it stops being an abstraction.

A manager can prefer a quiet year to a good one. Nothing crosses the boundary of the business, no counterparty exists, and the interest gap is doing real work the whole time. A decision can be taken late, or hesitated over for eleven months, or never taken at all, and no note anywhere in any set of accounts records a decision that was not taken. Money can be spent on things nobody prices separately: more people, more space, a project that sounded good in a meeting. Not one of those needs a connection to exist, and not one of them would ever reach any of the four lines above.

The household version makes the point in one move. The list of people with a key to a house is worth reading, and a short list closes a real question. The key list says nothing at all about whether the person who lives there has been leaving the tap running for a year.

One more sentence has to arrive in the same breath, or a short list reads as an accusation. A four line list with two lines reading none listed is an ordinary and common shape. Most businesses have small surrounds. Anjani Stationers has set out everything the note asks for and has concealed nothing, and there is nothing in the shape of the list that is a criticism of anybody. The finding below is a statement about an instrument, not about a business: the instrument reaches one route, and there are other routes.

One gate, four routes, and only one of them goes through it A DIVERGENCE of interest, acting on a decision THE GATE the connections note Money moves toward somebody connected CAUGHT, AND SET OUT ON THE NOTE A quiet year preferred to a good one A decision taken late, or never taken Money spent on things nobody prices separately THREE ROUTES RUN PAST THE GATE AND OFF THE EDGE OF THIS PICTURE THE GATE IS NARROW. NONE LISTED CLOSES THE ROUTE THROUGH IT, AND NOTHING ELSE.
A divergence of interest needs no connected counterparty, so two lines reading none listed close one route and leave every other route exactly as open as it was.
Try it out

4. Two of the four lines read none listed. A manager at that business decides to spend heavily on things nobody prices separately. Does the note show it?

Private Equity Analyst Bootcamp — Fin Maverick Common Size and Trend Analysis — free micro-course from Fin Maverick

Once an amount is attached to a line, which total does it belong against?

The list is read, and now the figures arrive. The division is worked out in full where reading a dealing with a connected party is the subject, so the result and its ruling are quoted here rather than rebuilt.

Chitra Binding Works invoiced Anjani Stationers Rs 8,00,000/- for binding across the year. Anjani Stationers carries more than one figure of exactly that amount in exactly that year, and two of them sit on this one note, so which Rs 8,00,000/- is meant has to be said every single time it is written. The one just named is the binding invoiced, and binding invoiced is a purchase of a service.

Because it is a purchase, it belongs against what the business buys. The total is cost of materials consumedThe total a business spent in the year on the bought-in materials and services that went into what it sold. It is the buying side of the trading account, and it excludes wages, rent and the other costs of simply being open. of Rs 1,48,50,000/-. Rs 8,00,000/- of binding invoiced against Rs 1,48,50,000/- is 5.4 per cent, and that is the total this item belongs to. One division, one sentence, and the step is finished.

Watch what happens if the total is chosen by habit instead. The same Rs 8,00,000/- of binding invoiced, measured against revenue of Rs 2,70,00,000/-, reads 3.0 per cent. Against total expenses of Rs 2,32,00,000/- it reads 3.4 per cent. Against profit before tax of Rs 38,00,000/- it reads 21.1 per cent. One amount, four correct answers, one relevant question. Every one of those divisions is arithmetically right, and the spread from 3.0 to 21.1 is a sevenfold difference produced entirely by choosing a denominator, with no fact anywhere having changed. The same ordinary purchase can be made to look trivial or made to look alarming without a single figure moving.

Two more items sit on the same note and each needs the same treatment. Rs 1,50,000/- of that binding was still owed when the year closed. An amount still owed is a balance rather than a flow, so it belongs against trade payablesWhat a business still owed its suppliers on the last day of the year. It is a position read on one date, not a total that built up across the year. of Rs 22,00,000/-, giving 6.8 per cent. And there is a guaranteeA promise to stand behind somebody else's borrowing if they do not pay. Nothing is paid and nothing is owed while the borrower keeps up, so it is set out in the notes without being recorded as a cost or a liability. of Rs 8,00,000/- standing over Chitra Binding Works' borrowing, disclosed and not recognised. The guarantee is the second Rs 8,00,000/- on this note, and the guarantee is not the binding invoiced. The two are entirely different things that are never added, never netted and never spoken of as one figure.

The guarantee also produces the most useful refusal here. The guarantee belongs against the borrowing it stands behind, that borrowing is Chitra Binding Works' own, and it appears nowhere on the face of these statements. So no proportion is named for it at all. Naming none is the correct output when the total an item belongs to is not on the face in front of the reader, and reaching for a total that happens to be nearby would be exactly the error the previous paragraph is about.

One last line for scale, and then the arithmetic stops. Rs 8,00,000/- of binding invoiced across the 2,50,000 registers the business made in the year is Rs 3.20/- a register. No rate per unit is disclosed for what binding cost before the arrangement changed, so whether Rs 3.20/- is an arm's lengthA dealing settled by ordinary bargaining between two parties with nothing between them. Used here in its plain sense, with no test, no rule and no approval process attached to it. rate is not a question that can be closed here.

One unchanged block, four totals, four correct answers The same Rs 8,00,000/- of binding invoiced by Chitra Binding Works, drawn at this width in every row Revenue, Rs 2,70,00,000/- 3.0 per cent Total expenses, Rs 2,32,00,000/- 3.4 per cent Cost of materials consumed, Rs 1,48,50,000/- 5.4 per cent THE TOTAL THIS ITEM BELONGS TO Profit before tax, Rs 38,00,000/- 21.1 per cent Same block. Sevenfold the reading, because the bar under it is short. ALL FOUR DIVISIONS ARE CORRECT. ONE OF THEM ANSWERS A QUESTION ABOUT A PURCHASE.
The block of binding invoiced never changes width, so the sevenfold spread from 3.0 to 21.1 per cent is produced by the choice of total and by nothing else.
Two items on one note, and both of them read the same ITEM ONE Rs 8,00,000/- The binding invoiced by Chitra Binding Works across the year. A purchase. BELONGS AGAINST COST OF MATERIALS CONSUMED ITEM TWO Rs 8,00,000/- The guarantee over Chitra Binding Works borrowing. Disclosed, not recognised. NO PROPORTION IS NAMED, AND THAT IS THE ANSWER NEITHER OF THESE SENTENCES IS AVAILABLE HERE the same Rs 8,00,000/- appearing twice on the note one Rs 8,00,000/- of dealings with connected parties THE NUMBER IS THE SAME. THE QUANTITY IS NOT. NAMING WHICH ONE IS PART OF WRITING IT DOWN.
Two separate items on this one note carry the identical amount, so an amount written without its name can be merged with something it has nothing to do with.
Try it out

5. Binding bought in from a subsidiary is Rs 8,00,000/-. The amount reads 3.0 per cent of revenue and 5.4 per cent of cost of materials consumed. Which is the relevant figure?

Try it out

6. The panel above steps through five published decisions. How many of them leave a trace on the four line note?

Play with it

Step through five published decisions and watch the note stop reaching

One control with five stops and no ground between them: a decision standing half way between two decisions is not one anybody ever took. Every setting is something Anjani Stationers actually did, written down earlier in these notes. The note itself is drawn whole at every setting and never changes, including both lines reading none listed, and nothing on this panel ever reaches those two lines. Nothing is scored, nothing is totalled, and no setting says whether any decision was a good one.

Setting 1, the binding bought in. Setting 2, the amount still owed. Setting 3, the guarantee. Setting 4, the machine. Setting 5, the year's profit.

Where the note carries it: carried on the group line. Scale: 5.4 per cent.

One decision at a time, against a note that never changes THE DECISION SELECTED Rs 8,00,000/- The binding invoiced by Chitra Binding Works across the year. A PURCHASE FROM INSIDE THE SAME GROUP SCALE AGAINST THE TOTAL THIS ITEM BELONGS TO 0 2 4 6 8 10 per cent Against cost of materials consumed of Rs 1,48,50,000/- THE NOTE, HELD FIXED AT EVERY SETTING Companies inside the same group Chitra Binding Works, 70 per cent held from April The people who direct the business Vaidehi Rao, finance controller Other entities those people control None listed Close relations of those people None listed PAST THE NOTE AND OFF THE EDGE OF THIS PICTURE BOTH LINES READING NONE LISTED ARE DRAWN AT EVERY SETTING, AND NO SETTING EVER REACHES THEM.

Held at every setting: the four lines of the note, both of the entries on it, and both of the lines reading none listed. The note groups by relationship rather than by size, and no setting adds anything to it.

Educational illustration. Every setting is a decision published earlier in these notes, and the two scale readings are quoted from where they are worked out. Rs 8,00,000/- appears at two settings with two different meanings, being the binding invoiced and the guarantee, and the panel names which one at each.

Common Size and Trend Analysis teaches you to make three years of statements comparable and see what moved.

What sort of divergence would leave no mark on that note at all?

Take the decisions this business published, one at a time, and ask of each whether the note carries a trace. Five of them are on the record, and the answers are not evenly split.

The binding bought in from Chitra Binding Works at Rs 8,00,000/- across the year: the note carries it, on the line for companies inside the same group, at 5.4 per cent of cost of materials consumed. The Rs 1,50,000/- of that still owed when the year closed: the note carries it, as a balance, at 6.8 per cent of trade payables. The guarantee of Rs 8,00,000/- over Chitra Binding Works' borrowing: the note carries it too, disclosed and not recognised, with no proportion named.

Now the other two. A board of directors approves a machine purchase of Rs 15,00,000/-: the note carries nothing. No connected party is on the other side of it, and the accounts themselves record nothing at all until the machine arrives. Board composition and what a board of directors approves is covered separately in these notes. And the whole Rs 30,00,000/- of the year's profit after tax is retained rather than distributed, with no dividend paid: the note carries nothing there either. Three holders agreed to that, and three holders can change it.

Three of the five leave a mark on that note and two leave none, and the two that leave none are both decisions about where the business's own money goes. Sit with which two those are. Not the small ones. Not the obscure ones. The purchase of a large asset and the use of an entire year's profit are precisely the two the instrument cannot reach.

The shortfall is not a defect in the note and it is not a criticism of anybody who prepared it. The note was built to catch money moving toward somebody connected to the people deciding, and at that job it works. The error is entirely on the reader's side, and it is a simple one: a good instrument pointed at one route has been mistaken for an instrument pointed at everything. The note is a torch, and a torch is genuinely useful. A torch is not daylight, and nothing in the room its beam does not fall on has been ruled out.

Five published decisions, one note, and two lines that never arrive Rs 8,00,000/- of binding invoiced bought in from Chitra Binding Works Rs 1,50,000/- still owed unpaid when the year closed Rs 8,00,000/- of guarantee over Chitra Binding Works borrowing Rs 15,00,000/- of machine approved by a board of directors Rs 30,00,000/- of profit after tax retained, and no dividend paid THE CONNECTIONS NOTE Companies inside the same group Chitra Binding Works, 70 per cent The people who direct the business Vaidehi Rao, finance controller Other entities those people control None listed Close relations of those people None listed ALL THREE ARRIVE ON ONE LINE OF THE NOTE NO LINE INTO THE NOTE NO LINE INTO THE NOTE THREE LEAVE A MARK. TWO LEAVE NONE, AND BOTH ARE ABOUT WHERE THE MONEY GOES.
The two decisions the note cannot reach are the two largest uses of the business's own money, which is what makes a short list feel more settling than it is.
Try it out

7. At one panel setting a guarantee of Rs 8,00,000/- is carried on the note and no proportion is named. Why not?

So where does that leave somebody reading this business from outside it?

Three things about this business are published, and one is not. Set them down plainly and the position becomes clear, and it is not the position most readers think they are in.

The decisions are published. At the start of its second year Anjani Stationers paid Rs 21,00,000/- for 70 per cent of Chitra Binding Works Private Limited. Chitra Binding Works had been a separate company under separate control. Of the three stages a register passes through, cutting runs 150 an hour, printing 125 and binding 100, so binding governs the pace of the whole works, and binding was the only one bought in. The same business retained the whole Rs 30,00,000/- of its year's profit after tax and paid no dividend.

One outcome is published against them, and it is the flattest sentence in these notes. On the day the Chitra shares moved, binding still ran at 100 an hour and rated capacity was still 4,00,000 registers a year. Holding the stage bought the right to make a change and did not buy the change. The purchase, what it acquired and what the year did afterwards are worked out separately under How Capital Allocation Shapes Long-Term Business Outcomes.

And the people are published, three of them. Anjani Kulkarni decides. Vaidehi Rao is the finance controller who has to justify to her board of directors why profit moved when nothing about the trading did. Meera Rao is the accountant who comes in three days a week. Three names, three roles, all of them on the record.

No line joining a person to a decision, or a person to a holding, is published anywhere. Nobody is recorded as having decided the purchase. Nobody is recorded as having decided the dividend. The decisions are visible, the outcome is visible, and the decider is not named against either.

The honest thing to say about that is not the reassuring one. The missing line is not a failure of these notes and it is not an unusual gap in this particular record. The missing line is the ordinary position of anybody reading a business from outside it, in India and everywhere else, and it is why the whole skill runs on decisions rather than on people. The name against the choice almost never comes. The choice and its consequence very often do, and that is enough to work with once the wait for the other thing is given up.

Two columns are filled from the record. The third joins to nothing. THE DECISIONS, PUBLISHED Rs 21,00,000/- paid for 70 per cent of Chitra Binding Works, start of year two The whole Rs 30,00,000/- of profit after tax retained, and no dividend paid THE OUTCOME, PUBLISHED On the day the Chitra shares moved, binding still ran at 100 an hour, and rated capacity was still 4,00,000 REGISTERS a year. ONE SENTENCE, AND IT IS THE WHOLE OF THE OUTCOME WHO DECIDED Anjani Kulkarni decides Vaidehi Rao finance controller Meera Rao accountant, three days a week Every stub beside a name stops in empty space. Nothing in the record continues it, and nothing here has been continued for it, because a drawn line would be an invented one. 4,00,000 above is a count of REGISTERS a year. It is not a count of anything else. NO LINE JOINS A NAME TO A ROW, AND NONE IS DRAWN, BECAUSE NONE IS PUBLISHED.
Decisions and their consequence are on the record while the decider is joined to neither, which is where anybody reading a business from outside it actually stands.
Try it out

8. The note has been read properly, the denominator work done correctly, and two lines read none listed. Which output is the honest one?

The analyst who read two empty lines as an all clear

Earlier working in these notes already covers the crude version of this error, and it is quoted here rather than rebuilt: an analyst opens a note, sees the words related party purchases, writes down a governance concern in about four seconds, and has looked at no proportion, no rate, and no sentence explaining that binding used to be bought from outside anyway. The crude failure is settled. The failure below is the same analyst having got much better, and still arriving somewhere they cannot support.

The second time round, the note is read properly. All four lines are taken in. Chitra Binding Works appears as a subsidiary, 70 per cent held from April. Vaidehi Rao appears as finance controller. Two lines read none listed. The denominator work is done correctly: the binding invoiced goes against cost of materials consumed at 5.4 per cent, the amount still owed goes against trade payables at 6.8 per cent, the guarantee is recorded as disclosed and not recognised with no proportion named. Then one sentence is written: the surround is small, nothing is being routed to anybody's relations, and interests are aligned.

Nobody misread the note and nobody chose a bad total, and the conclusion still does not follow. The gap between correct readings and a wrong conclusion is what makes this failure worth working through. Every reading in it is right. The last clause is the only thing in that write-up that nothing above it supports, and it answers a question the note was never built to reach. The note catches money moving toward somebody connected to the people deciding. The note catches that one thing, and a divergence of interest needs no connected party at all.

Now the cost, and it lands somewhere very specific. The words interests are aligned are not one loose clause at the end of a paragraph. The words are a premise, and a premise gets carried. Every later paragraph in that analyst's work is now written by somebody who believes the question is settled. So the two decisions in this guide that leave no mark on the note, being what a board of directors approved and what the entire profit of a year was used for, get read as routine housekeeping rather than as the only places left worth looking. A completed note reads like a completed enquiry, so a year later the analyst can say exactly what the surround contains, cannot say who decided anything, and has never once noticed the gap.

And here is the part worth sitting with. The two empty lines are what made the error hard to see. A list of thirty entities across four states invites work, and nobody writes a confident sentence at the bottom of it. A list with two lines reading none listed invites a conclusion. The reading really was careful, so the conclusion arrives feeling earned. The care is real. The care is pointed at the wrong question.

The fix is one line and it is not a better note. Write down which of the business's own decisions would have left no mark on this document, before writing anything at all about what the document shows.

Seven correct readings, and one clause nothing above supports THE ANALYST'S WORKSHEET, TRANSCRIBED EXACTLY Chitra Binding Works, subsidiary, 70 per cent held from April RIGHT Vaidehi Rao, finance controller RIGHT Other entities those people control: none listed RIGHT Close relations of those people: none listed RIGHT Binding invoiced: 5.4 per cent of cost of materials consumed RIGHT Amount still owed: 6.8 per cent of trade payables RIGHT Guarantee: disclosed and not recognised, no proportion named RIGHT The surround is small, nothing is routed to anybody's relations, and interests are aligned. SUPPORTED BY NOTHING ABOVE IN THE MARGIN This document was built to catch one route out of several. Alignment is a claim about what people want, and no note anywhere records it. WHAT TO WRITE Which of this business's decisions would have left no mark on this at all. EVERY READING WAS RIGHT. THE LAST CLAUSE ANSWERS A QUESTION THE NOTE CANNOT REACH.
The careful reading is what makes the wrong conclusion feel earned, so the defect sits in the question asked rather than in any line of the work.

Four lines that travel with any connections note, in this order

One, read the list before any amount. Write down how many groupings carry an entry and how many read none listed. At Anjani Stationers that is two and two. The count is free, takes about twenty seconds, and it is the only part of the note that costs nothing.

Two, for each entry, name what kind of closeness it is. The note groups by relationship rather than by size, so the grouping is itself the finding. A subsidiary inside the same group is a different fact from a company controlled by somebody who directs the business, and lumping the two together throws away the reason the note is laid out the way it is.

Three, for each amount, name the total it belongs against before computing anything. A purchase belongs against what the business buys. A balance belongs against what the business owes. A guarantee belongs against the borrowing it stands behind, and when that borrowing is not on the face in front of the reader, naming no proportion is the answer rather than a failure to find one. Naming the total first is the difference between 5.4 per cent and 21.1 per cent on one unchanged amount.

Four, write down which of this business's decisions would have left no mark on this note at all. The fourth line is the question the first three do not ask, and it is the one everything here turns on. At Anjani Stationers it comes back with two entries, and they are the largest two uses of the business's own money in the year.

A note read without the fourth line produces an all clear the document never issued. Nobody at the business claimed the note settled anything. The claim was added by the reader, at the end, in a clause that looked like a summary.

The order is the method, and the fourth step is the one people drop 1 READ THE LIST BEFORE ANY AMOUNT Two groupings carry an entry. Two read none listed. Four lines in all. Twenty seconds, no arithmetic. 2 NAME WHAT KIND OF CLOSENESS EACH ENTRY IS A subsidiary inside the same group. One named finance controller. Grouped by relationship, never by size. 3 NAME THE TOTAL EACH AMOUNT BELONGS AGAINST Binding invoiced against cost of materials consumed. 5.4 per cent. Amount still owed against trade payables. 6.8 per cent. Guarantee against a borrowing not on this face. No proportion. 4 WRITE DOWN WHICH DECISIONS WOULD LEAVE NO MARK An open field. Nothing on the note fills it in.
The first three steps are answered by the document itself while the fourth is answered only by the reader, which is why dropping it is so easy.

Where this sits, and where it does not

What comes from India here, and what would be true anywhere

India supplies the currency, the lakh and crore grouping of the digits, the legal form Private Limited, the accounting standard under which a note of connections is prepared, and the year that runs from April. The April year end is why the note above dates the subsidiary from April of the second year. Ind AS 24 Related Party Disclosures and the Companies Act 2013 are named for one thing only: a duty to disclose exists, and duties attach to the people who direct a company. Anybody who needs the current wording reads it at the Ministry of Corporate Affairs on the day the question arises and writes that day down.

The mechanism itself carries no border at all. Two gaps open between whoever runs a business and whoever holds it in every country there has ever been, and a document built to catch one route out of several catches one route out of several everywhere.

The boundaries of the subject, and where each neighbouring question is answered

The subject here is the two gaps between the people who run a business and the people whose business it is, why neither can be seen from outside, and what the one document built to catch a divergence does and does not reach. Everything in the right-hand column below is answered somewhere else.

The question a reader might arrive withWhere it is answered
What structures exist to narrow those two gaps, and how each one worksWhere corporate governance is the subject in its own right
The whole procedure for examining a dealing with a connected party, from first sight to written outputWhere the quality of reported earnings is the subject
Who sits on a board of directors, and what a board of directors approvesThe Board: Composition, Committees and What It Controls
What makes somebody independent, and what testing that would takeIndependent Directors: The Role and the Test of Independence
How far a holding and an earning actually move togetherInsider Ownership: Alignment and Its Limits
What the purchase described above bought against what it acquired, and what the year did nextHow Capital Allocation Shapes Long-Term Business Outcomes
What a business must disclose about its connections, at what size and by whenSet in law and in the accounting standards, and it moves, so it belongs where the rules themselves are the subject
Whether this business is well governedNowhere, and saying so plainly is the honest answer rather than an evasion
Financial Analyst Program Bootcamp — Fin Maverick

What is named here, and why does not one of the rows carry a figure?

What is namedWhat sits thereHow it is handled aboveSite
Ministry of Corporate Affairs, for Ind AS 24 Related Party Disclosures The office where the Indian accounting standards are notified, among them the one under which a business sets out its dealings with the people and companies close to it Named because the note this whole subject turns on is prepared under it, and named for that alone. mca.gov.in
Ministry of Corporate Affairs, for the Companies Act 2013 The place company law sits, including the duties that attach to the people who direct a company and the separate arrangements that govern dealings with persons connected to them Named twice over for two bare existences: that such duties exist, and that such separate arrangements exist. Nothing beyond those two existences is taken from it. mca.gov.in
The arithmetic in this guide Every rupee amount, every proportion and every rate printed above All of it belongs to businesses made up so that a lesson could be taught with them. The four proportions running from 3.0 to 21.1 per cent, the reading of 6.8 per cent and the refusal to name any proportion for the guarantee are quoted from earlier in these notes, where each of them is worked out. finmaverick.com

Anjani Stationers Private Limited, Chitra Binding Works Private Limited, Anjani Kulkarni, Vaidehi Rao, Meera Rao and Aravalli Agro Foods are invented.
Educational material. Not advice on any investment, tax, budget or market position.

← PreviousNext →
Fin Maverick Micro CoursesExplore Micro Courses
Fin Maverick BootcampsExplore Bootcamps
Fin Maverick

Finance education that ends in a job, not a certificate that gathers dust. Built for young India.

LEARN
CalculatorsFrameworksComparisonsCareersShowdown
RESOURCES
All CoursesMicro CoursesBootcampsInternships
COMPANY
AboutJob openingPartnership
LEGAL
Privacy PolicyTerms & ConditionsContent LicenseReturn & Refund Policy
© 2026 FIN MAVERICK / BUILT FOR INDIA.DO FINANCE, DO NOT JUST READ ABOUT IT.