PROFESSIONAL PROGRAMME EXAMINATION JUNE201 1

DUEDILIGENCE AND CORPORATE COMPLIANCE MANAGEMENT

Timeallowed:3hours

Maximum marks: 100

NOTE: Ans!.yerSlX questions including euestion No.1 whichis COM7I)LSOR(. Question 1 (a) State,withreasons brief whether foltowing in the , statemems trueor false are : (i) A company registered undersection of theCompanies 25 Act, 1956shatt be required haveminimum to paid-up capital of.S lakhor suchhigher paid_ up capitalas may be prescribedfrom timelotime. (ii) Remateriarisation meanstheconversion physicar of hotdings back into the electronicholdings. (iii) All tees/compensation, if any,paid to non-executive drectorscanbe fixed by theBoardof diectors without previous the approval theshareholders of in a general meeting. (iv) TheSecurities (Regulation) l956 statesthatif a companv Contracts Act, fails to cornplywith the tistingconditionsor delistingconditionsor grounjs or connnitsa breachthereof,it shallbe liableto a penaltynot exceeding.20 crorc. (v) A companynot eligibleto raisefundsfrom thelndiancapitalmarketwill not be eligibleto issueforeigncurrencyconveftible bonds (2 markseach) (b) Critica y examineand commenton the lollowing. (i) A remuneration committee maybe set-upby theBoardof directors. (ii) As per SEBIregulations, every issuer required submitauditrepofton is to a quanerlybasis. (S markseach) Answer'1(a)(i) False: According Section lo 3(6)of the Companjes a Company Act, regislered under section before a{ter commencemEntcompan 25 jes(Amendment) or the of Act, specified under i009, sl3! not be requiredio have minimumpajd up capitat Section 3(6). Answer1(axii) False: Remateriarisation conversiondemateriarized (i.e. means of shares erectronic holdings) physical into hotdings. Answer1(axili) False: As per Clause of the listing 49 agreement, lees/compensation, all if any. paidto non-executive directors, including independent directors, shaI be fixedbv the

PP-DDCCt/_June 2011

Answer 1(aXiv)

ii'rii*Tfiff $'li1+##i*,['ffi r#Fiiry;*g#

ji:;""ff l:;ild[f iii[ l!"fi d[:,,,;#*l;fil:;,{{*H""":

Answer 1(axv)

Answer 1(bXi)

*x**n*":+l***#u,*

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Answer 1(b)(ii)

mlT'"#r**l$"'il":,#

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tT#ff ::f i{,:a-ii,ll.'.ilJlT'"x.jf ;l"l:?,?t":;ly,?,.".1ee6provdes jstotheconc"'n"J.'o"i iJ:i::',ffi'"1':l:U;:,*n::1,:*;,J"1"d..!i#ffi lltas

3 Question 2 '' [il:";:;,'"st

pp-DDcctvt_June 2011

appropriate answer rrom the siven options in respectot the

(i) Where a company f:i!?.,t?. clnpty with the requireme ot titing the compttancecerrif icate.y:t! tl: R,eSiAra, i"ii"i,,i"", every otticer of the and the companyshau6e prri"niit" "r iui.i ii" whtchmay extend lompany default continues (b) < 1,000 per day during which thedefault continues (c) T 500 per day during which thedefault continues (d) < 750per day during which thedefault continues. () the tistins asreement, theBoard or directors sha, meet f:;:::::E4s:r (a) 2 Times (b) 3 Times (c) 4 Times (d) S Times. (iii) Whena charge on the a-s^:,t: th.e company is satisfied, which oneof the :f tolowins forms is required to be fited;ft;;; ;;;t;i;;7.or companies _ (a) Form No.10 (b) Form No.t2 (c) Form No.g (d) Fotm No.17. (a) < 250 per day during which the

fivl ,! regutations, tndian an partyispermitted make investment to lTy ygUljoint an n overseas venture/wholly owned suLsiaiarii iot.)r"rro,rg *
.@) 1no/" (b) 200.a (c) 400% (d) 500% lastaudited balance sheet. (v) Theproceedingsof eachgeneral meetingof thecompanyshouldbe entered (a) 60 Days of the meeting (b) 45 Days ot the meeting (c) 90 Days of the meeting (d) 30 Days ofthe meeting. of its net worlh as on the date of the

PP-DDCCN4--June 1 201 (vi) Which. the foltowingActs does not come of undet the purvrcwof the securities laws_ (a) Securities Exchange and Boardof tndia Act,1gg2 (b) ForeignContribution (Regutation) Act,t976 (c) Securities Contracts (Regulation) 1956 Act, (d) Depositories 1996. Act, (1 markeach) (0 Distinguish between following the : (i) 'Equityshares' and 'sweatequityshares,. (ii) 'Buy-back shares' of and 'redemption shares,. of (5 markseach) Answer 2(aXi) (c) Rs.500perdayduring which defautt the contjnues. Answer 2(a)(ii) (c) 4 Times Answer 2(a)(iii) (d) Form 17 No. Answer2(a)(iv) (c) 400% Answer 2(aXv) (d) 30 days Answer2(aXvi) (b) Foreign Contrlbution (Regutation) 1976 Act, Answer 2(b)(i) EquityShare As perSection ol theCompanies 1956, equity 85 Act an share capttat onewhich is sharecapitat. Thismeans rharth" norj"i" oi shares not do f^:.?t^1p1"1::"*e anyprererentiar of receiving rights "qrity dividends. Theywirr receive dividend after onry l]-1ve thepreterence dividend been has paid.Theyalsodo nothaveanyprrorrty preference ovei sharesregarding repayment.of the capitat the timeof iiluiOltiono, the company, at Equity shareholders voting have rights. SweatEquityShares Equity Shares mean equity shares issued a company itsemployees by . Sweat to or drrector a discount for consideration, thancash proviOing at or other toi know_how or maKrng avairabre in thenature^of right interectuar property rights varue or additions, by whatever nameca ed. Section A of the CompanLJeci, 79 plrmits issueof Sweat equity.sharesemployees directors recognition thejr to or in of conkibution providing for l(now-how etc.

5 Answer 2(bxii) Buy-Back Shares of

PP-DDCCM-June .j 201

(ii)thesecuriries Premiumaccount(lij)the proceeds .r",9, J:'"1;:;::::rves ot any

sharesr , sharehorcreis p,,;r;;;;;Iil,f'iiffi#" or The buy-back of

Secrron A of rhe Companies 77 ^. .,1:. O:, Acr. .1956, aulhonzation ttsArticles of maypurcnase ownshares tts d;:#Hi:,:'jject

'1o the

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orshares existins rrom

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Redemptionof Shares issueot shares_or (ii) out of profitsavailabte for dtvidend. Further,no such sharescal

jc ""fi:ffiffi::"11;i,'i:"::Iiili:.#,:;"11?$:::3:.,:Xi,""^,,ic, (i) Proceeds tresh ot

#i"'?i*lff ;:",i:l:,t:l:.,TL":,li:i ;:x'"ffi flE:::il;i$j,;;3.'i: i I iJ

Question 3

(4

cuna,e zi:i';;i: f;:;?:i; .?i,g"; :, r a y a, ;, e ;: "f;# : !; ;::l!: :li: ;* : 1st meeting 26th
2nd meeting 3rd meeting 4th meeting 5th meeting

white :::fl:ni:X;i!:"""[u^'37l?toi.no.g"rtiticateotpractice., issuins the

February; 2010 30thMarch, 2010 26thMay,20t0 30thiune, 2010 l st October, 2010

6th meeting 2,th December, 2010 Do you feel that thereis anv vi( 'lation of the provisions of the companies Act, I gs6 ? Exptain. (6 marks) (b) swadesh hasappIed for shares un(lcr ptn^t^\,^^- ^.^^t. -.,..

(c)

'MCA 2t offers facitity view-doc-uments the to and atso s""r"n otpubtic [],,,,!,"1" documents ontine.,. ExD.tain_t.he sratemenr "ro ",nJl, aii-nirri',J r," pro""orr" torexaminationrecords Lya of fited company thii;;oiili with "i6ffi,

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PP-DDCCM*June 1 201 Answer 3(a)

Sectjon of theCompaniesAct, 295 j,956prescribes thatin thecaseof everycompany, a meertng the Boardof Directors of shallOeheldat teaslon""'in""u"ry rnr"e monthsand a t t e a s t o u rs u c hm e e t i n g s h a f "" ' . b e h e t di " ";;ty;' It has beenclarified lonoas four so boardmeetings heldin a calendar are year,one in each quarter;the intervalbJtween two_meetjng. ;ut ;" ;;;e than 3 months. For jf Instance, a meetingis held on January.1, nexf melting m-ay ti,e be heldon June 30, t h e t h i r do n e o n 1 s tJ u t ya n dt h e f o u r r h on" i" on in" g1;"OJ""io"r.

n]rriililiJ.

irmust ensured ineach be that quarrer a catendar a board of year meetrng

In the given case, it is observed that the board meetinghas been held jn each quanerof the calendaryear 20Ogexceptin ,f,r"qr"n", iJrVrOSto SeptemOer i.e. ther OS1 lsnoboard meeting the qur.t"r in

3rd

or..ru[6sio E"J,#b"|. og thecarendar "f

So thereis a violatjon section2g5 of Answer 3(b)

of the Companies Act 1956.

Check points for Non_Transferability of Option under ESOS (i) Checkrhatoptiongrantedto an employeeis not transferaote any person. to (ii) (a) No pe;sonotherthanthe employee whom the optionrs granted to shall be entj ed to exercisethe option. (b) under the cashlesss

permttheempan""{ililil".F?:"li?;,llli"iT,Xll"T;,

whichsha be adjusted against sat" pro"""JJJi.orne or the a the shares, subjectto the provisions the Companie; of ;;i 1r;;: (iij) Check that the optjongranted to,theemployeejs not pledged, hypothecated, - -' mongaged otherwise or alienated any othermanne1. in (iv) Checkthat jn the eventof the deathof employeewhile in all options grantedto htmttllsuchdaterro,,o.i.-,ii-^-.;^;^:^, employment, the t"n are vestedin the legal" heirsor nominees of the deceased emp,ou"". (v) Check that in case the employee suffers a permanentr n c a p a c t tw h i l e y in ail to sranted hi. ;. ;; i;;' d a t e o f p e r m a n e n t :-Tl]?lTglt,i o n ,rheoption I n c a p a c i t a t s h a l lv e s t i n h i m o n t h a td a v .

(vi) checkthatif an emproyee resrgns is terminated, options or aI nol as thatdayexpire. However, emproyee subject theterms vested on the sha[, to anoconditions rormutated compensaiion by committee, O" io-rltain all the vested options. "n,itf"J (vir) Ctl_eck theoptions that, granted,to a director, is an who or and has beennomjnated the said in.t,trtion, employee an Institution by nu" nJi-deen renounced ln iavour institution of nominatinq him.

PP-DDCCM-June i 201 Answer 3(c) MCA-21 offers facirity viewdocuments arso the to and search other and tacirities of public documents. facility handy users banks financial This is for and and institutions while sanctioning loans, Thisfacirity enabres viewing pubric of documents companies which of for payment has beenmadeby user. The document be viewed can onlywithin7 daysaftertite payment beenconfirmed. has Also, documents available only the are for 3 hours atterthe userhasstarted viewing firstdocument thecompany. the ol (a) Userhasto access MCAportal logjn the My MCApcrtal. l,4y and to (b) Click the'MyDocuments,tab loggjng thesysrem. on after into (c) Listof company names be disprayed, whichuserhavearreadv for wifl for oairi public viewing. alsodisplays lt (i) Dateof request the date,whenusermadethe request viewthe i.e, to company document. (ii) Status the request whether of i.e. viewed to view. or (d) Click theviewlinkunder on status fleld. (e) Thedocuments grouped are under categories userhasto clickon the five i.e. desired category under which document the falls. (t)ll morethanonedocument listed, usercanarrange is the themnamewiseor datewise. (g) On clicking document the name, document the shallbe displayed viewing. lor Thepublic documents under facility available viewing public payment this are for by on of requisite Public fee. documents include Incorporation documents, charge documents, annual returns balance and sheet, change directors other ln and oocumenrs. | Question 4 (a) Whatdo you meanby 'persons actingin concert, Whowillbe deemed be ? to personsactingin conceftas per the SEBI(Substantial Acquisition Sharcs of and Takeovers)Regulations,1997 ? (6 marks) theassignment secretarial of auditof XyZ Ltd.for thefinancial yearended31st March, 2010.He received noticeof his assignment l SthAprit, the on 2010and signedtheauditreporton 30thJune,2010.lt is noticed that Sunilceased be to a Company Secretary practicefrom l st June,2010.Examine validitv in the of the repoftdated30thJune,2010 signedby Sunil. (S marXs) (c) Amar Propefties Pvt.Ltd. wasincorporated Amarand histhree sons.The by issued paid-up and capitativas< 4 lakh comprising 4,000shares < 100each. of Afterfewyears, Amardiedin an accident. thattime hisnameappeared the At in following manner the register members. in of
(b) Sunil a Company is Secretary holding cerlificate practice. has accepted of He

PP DDCCM-June 1 201 Name Amar Amar and his tirst son Amar and hissecondson Amar and histhirdson Total : No.of Shares 100 600 600 500

LegT

On the demise of Amar, his wife claimedthat her late husbandheld 1,800 equity shares jointly and severally. He had left behind a will and she accordingly obtaineda probatein her favourin respect of the above mentioned sharesfrom the coun and appliedto the company for transmissionof all the 1,800 shares in her tavour. The company transmittedonly 1A0shares in the name of Amar's wife because of complaintsmade by the other survivors.Amals wife has filed a petition under sections 111(2)and 111(4)ol the CompaniesAct, 1956 challengingthe actian of the company. Prepare a note for the company about the defences it may take. (5 marks) Answer 4(a) A c c o r d i n t o R e g u l a t i o2 ( e )o o S E B I( S A S T ) e g u l a t i o n s , 9 7 , p e r s o n c t i n g n g n R 19 " a i concert" comprises,(1) personswho, for a commonobjective purposeof substantial or acquisition of s h a r e s r v o t i n g i g h t s r g a i n i n g o n t r oo v e rt h e t a r g e t o m p a n yp u r s u a ntto o r o c l c , (t l a n . r q r e e m e n tr u n d e r s t a n d i n go r m ao r i n f o r m a l ) , i r e c t l y r i n d i r e c t lc o o d o y operalcby acquiring agreeing acquiresharesor votingrightsin the target to or c o m p a n y r c o n t r oo v e rt h et a r g e t o m p a n y , o l c (2) wilhoutprejudice the generality thisdefinition, following persons be to oi the wlll persons withotherpersons the samecategory, deemed be to aclingin concert in Llnless contraryis established: the (i) a company, holding its company, subsidiary suchcompany company or or or underthe samemanagement eitherindividually together or witheachother; ( i i ) a c o m p a n yw i t h a n y o f i t s d i r e c t o r so r a n y p e r s o ne n t r u s t e d i t h t h e , w management the fundsof the company; of (iii) directors companies (i) relerredto in sub-clause of clause(2) and their of a ss o ci a t e s ; (iv) mutualfund with sponsoror trusteeor assetmanagement company; (v) foreigninstitutional investors with sub-account(s); ( v i ) m e r c h a nb a n k e r s a t hh e i rc l i e n t ( sa s a c q u i r e r ; t w t ) (vii) portlolio managers withtheirclient(s) acquirer; as (viii) venturecapitallundswith sponsors; (ix) bankswithfinancial stockbrokers the acquirer, anycompany advisers, of or w h i c hi s a h o l d i n g o m p a n ys u b s i d i a ro r r e l a t i v e f t h e a c q u i r e r : c , y o (ix) Provided sub-clause shallnotapplyto a bankwhosesolerelationship that w i t ht h e a c q u i r e o r w i t ha n y c o m p a n yw h i c hi s a h o l d i n g o m p a n y r a , r c o

( x ) a n y i n v e s t m e n t( c

ofthepajd_up capiral that of companV rnv-estment jnwhich company such p",."on r..,i, "ihords "ilr tnan "i,n"iu :^?^er o, noiteAs 2 pe'cent th! paio-up or "."5;;i"1:i::1:1 capitar inoJ ot :1,::"ffi:1i" Answer 4(b)
Auditor.He was CompanySecretary hording certif icateor practice. wnire suniL rereiv#; ^i;;J: on rsth Aprir wasPractisins 201 he 0 company secretallwherg of Auc,it was not companvsecretary practice as "; ,h""i;;';;;;;ng Feport he rn in termso] 6;;;;;;!r"r",".es nencereport Act, 1980. submitted company as secretarv prJi";rJ. norvalid. i" Answer 4(c) The Boardappointed Sunil [/tr. as Secretarial

rundmanaser'"'S:,ii:li'a*liffi :'-ilx,#.xl:::?'j"";3f ::T

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s u b s i d i a r o f t h e - ^ ^ . , , - ^ -- " y

.,

P P - D D C C f rJ u n e2 0 11 4'

m::lniU:: .i"i. .."n,ns :i;ii#j;ffiff ilffn':J:i,v tn","roi" *, ,,nliil transm,ssion "no

wasrrght transmitting in onlythe l0osharestoher.' 't' complalnant '" ' ''' Th""^:a:^:-tATar' getany ' cannot relief frorncompany eoiro in tnisi"s"l". Lai Thispresent caseis similar thecasein Smt.Bivapyne pynepropefties to v. (p) Ltd.and othersl2ot 94 CLA192(CLB). 0l r.,r,,"""* blili"To in",,n" petitionerwas

o0 0 o ff#""J ,"J"JJ r,; 0+ ff ;'^"Ill't :,1' i"i"*i"i ii, to (6 0+6 5 o) .rui' u,.r,,iu-":;fi:i" uny "'I,il:J,"Jf ;,::'ii:J:'Y#i ;;ffi :Tim

Since provjsions Companies the of Act,1956/Articles bindtng the are on company

wife is roonry .r",::1.;il ;:ll?Jif,i';"J$i*,,on, ofAmarenriiled inrespect of100 Thecompany

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Question 5

inrespectshares were inthe ol wnicn nJo sore "n,r name of

(a) Re-write following the sentences filling-in blank spaces after the withappropriate word(s)/figure(s) : (i) promoters' contribution has t-o broughtin as per the SEBI be guiclelines beforethe___ of pubtic iss,ie,. (ii) tndiandepositoo,""",,y:?:n:^1!;_-_ in the formof depository ._- receipt ._created domestic by depositoryi nA^ (iii) The depository participantsharrre.dress grievances the of thebenefi,at ownerswithin of thedateof iceipt it ,r, _ (iv) Form No. "orptuint.

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PP-DDCCM,June 2011

'10

(D)

/t\

(v) Legal due diligenceis a __ operationthrough whrchone can hnow theslrenglhsand weaknesses a Company. of (vi) F_vetycompany accepting deposits from the public has to tite with the Registrar of campanies the return of depositsunder sections6A of the Companies Act,1956on or before_ _ evea,ye)r. (1 inark each) Ka.treena Ltd., a ristedcompany, wants to make an issueof secuntas through a ngnts issue and the aggregate value ofthe securitiesincludingpremium exceeds <.70 lakh. As a Company Secretary of Katreena Ltd., ajvise the company aboLttthe procedures to be followedfor making the rigiris,ssue. (S marks) while conductingthe secretariaraudit Rainbowpharmaceuticars of Ltd., it came to notrce that a Board meeting held on 24th March, 2011 was convened and conducted by Jagat alone as a director ol the company. On enquiry, it was lound that exceptJagat, all other directcrsof the compa;y had resignedandin order to constitute the quorum and to carry out the b;siness ;ctyfties, two additionardirectors were appointed with immeliate etfect in the siid singtedirector B,oard meetng. Decidethe validityol theBoard meeting and the appointnent of Ine lwo addtttonat dircctors in the meetingheld on 24th March, 2b11. (5 marks)

Answer 5(aXi) At least iiay before one opening

A n s w e r5 { ; l i , i ) I n s t i u n rt e A n s w e r5 fa X i i i ) 30,i,..r,s Answer5(a)(iv) 25C Answer5(a)(v) Precautionary Answer5(aXvi) 30th "r,n-o Ansvier5(b) 5Etsl(ICDR)Regulations 20Og applicable rightsissuewherethe aggregate are for valueof specified securities otferedis fifty rakhrupees-or more.The tottowing-arJtne ';ompliances whichare to be ensuredfor issueof rightsshares. ', Fecord Date . Ensure thatthe recorddatehas been announced the purpose determining for of the sharehorders erigibre appryfor specified to securities the proposed in righti

11

P P - D D C C M - J u n e 11 20

rssue.lt may be noted that the issuer shall not withdrawriohts issue after announcement the recorddate. of . lt the issuerwithdraws rightsissueafterannouncing recorddate,it shall the the not make an application listingof any of its speciliedsecurjtieson any for recognised stockexchange a periodof twelvemonthsfromthe recorddate for announced. However, the issuermay seek listingof iis equitysharesallotted pursuant conversion exchange convertible to or of securities issuedpriorto the announcemeni the recorddate,on the recognjsed of stockexchange wherelts securities listed. are 2 . Rstrictionon rights issue N o i s s u e rs h a l lm a k e a r i g h t s s s u eo f e q u i t ys h a r e si l i t h a s o u t s t a n d i nig l l yo r i u p a r t l y o n v e r t i b ld e b ti n s t r u m e n t st t h e t i m eo l m a k i n g i g h t s s s u e , n t e s s r n a s c e a r i u t madereservation equitysharesof the sameclassin favourof the holclers sucn of of outstanding convertjble debtjnstruments proportion the convertible ihereof. in part to The equity shares reservedfor the holdersof fully or partjallyconvertibleclebt i n s t r u m e n ts h a l l b e i s s u e da t t h e t i m e o f c o n v e r s i o n f s u c h c o n v e r t i b l d e b t s o e instruments the same terms on which the equity sharesofferedin the rights on i s s u e e r ei s s u e d . w

3 . Letter of offer, abridged letter of offer

The abridged letterol offer, alongwithapplication lorm,shallbe d slratcheci rough th r e g r s t e r ep o s to r s p e e dp o s tt o a l l t h e e x i s t i n g h a r e h o l d e ra t l e a s tt h r e ed a y s d s s b e f o r et h e d a t e o f o p e n i n g t t h e i s s u e .T h e l e t t e ro f o f f e rs h a l lb e g i v e nb y t h e o issuer leadmerchant kerto any existinq or ban shareholder who has rnacle request a i n t h i sr e g a r d T h e s h a r e h o l d e r sh o h a v en o t r e c e i v e dh e a p p l r c a l o no r mm a y . w t r a p p l yi n w r i l i n g n a p l a i np a p e r , l o n gw i t ht h e r e q u i s i t a p p l j c a | o n n o n e yI. h e o a e r s h a r e h o l d e rm a k i n g p p l i c a t i oo t h e r w i s eh a n o n t h e a p p l i c a t i ofn r ms h a l ln o t s a n t o renounce theirrights andshallnotutilise application for anypurpose the form including r e n u n c i a t i oe v e n i f i t i s r e c e i v e d u b s e q u e n . l f a n y s h a r e h o l d em a k e s a n n y s r a p p l i c a t i oo n a p p l i c a t i ofn r ma s w e l la s o n p l a i np a p e r t h e a p p l i c a t i oin l i a b i e o n o , s t be rejected.
A

Pricing p T h e i s s u e r i c es h a l lb e d e c i d e d e f o r e e t e r m i n i ntg e r e c o r c il a t e h i c hs h a l lb e b d h c w determined consultation in withthe designated stockexchange.

5 . Periodof subscriplion A r i g h t s s s u es h a l lb e o p e nf o r s u b s c r i p t i ofn r a m i n i m u m e r i o d i i i t t e e n a y s i p o o d and for a maximumperiodof thirtydays. 6 . Pre-lssueAdveftisementfor rights issue T h e i s s u e r h a l li s s u ea n a d v e r t i s e m e f o r r i g h t s s s u ed i s c l o s i ntg e f o l l o w i n g : s nt i h (a) the dateof completion despatch abridged of of letterol offerand the application form; (b) the centresotherthan registered of{iceof the issuerwherethe shareholders or the personsentitledto receivethe rightsentitlements may obtain duplicate copiesof the application formsin casethey do not receivethe application form w i t h i n r e a s o n a b ltem ea f t e ro p e n i n g f t h e r i g h t s s s u e ; a i o i

P P D D C C MJ u n e 2 0 1 1 7 . Obligationol issuer/intermediaries

12

T h e o b l i g a t i o n f i s s u e r / i n tre e d a r i e sf o r a r i g h t s i s s u e r , w i t h r e s p e c tt o o m i advertisement. appointmenl compliance ol officer, redressal investor grievances, ol post issue reports,post issue advertisements is same as the due diligence, etc o u b l i ci s su e . Answer 5(c) As givenin the problem, normally, quorum the boardmeetings thecompany the for of t h r e e w h i c hi s i n a c c o r d a n cw i t hS e c t i o n 8 7o l t h e C o m p a n i eA c t . T h e m e e t i n g i n , s e 2 s question was heldfor increasing strength boardto meetout the criteria prescribed the of , l o r q u o r u mw h e r e a sR e g u l a t i o7 5 o f T a b l e o f S c h e d u l t o t h e C o m p a n i eA c t ,1 9 5 6 , n A e s providesthat when the numberof directorsol the companylalls below the requisite quorum. continuing present the directors director or couldbe the quorumfor the purpose of increasing number directors the of required havea quorum, for no otherpurpose. to but l t w a s h e l di n l , 4 a n n a l Klh e t a n K e d a rN a t hK h e t a n 1 9 7 7 ) 7 C o m pC a s e s1 8 5 a v ( 4 ( S C )t h e o n l yp r o p o s atlh a tt h ec o n t i n u i nd i r e c t o rc o u l dh a v ec o n s i d e r eid t h e B o a r d g s n N4eeting to increase numberof directors was the and nothingelse and even the Board w i l h t h e q u o r u m s t a b l i s h e id t h a t m e e t i n g a n n o tc o n s i d e a n y i t e mo t h e rt h a nt h e e n c r qu a p p o i n t m e n ti d i r e c t o r f o rt h e p u r p o s e f c o n s t i t u t i n g o r u m . o s o Therefore, boardmeeting lhe wouldbe considered validandthe appointment two of additional directorsv/illalso be valid. However,decisionsif any taken in that board m e e t i n g t h e rt h a nt h e c o n s t i t u t i o no ll t h e b o a r dw o u l db e c o n s i d e r e n u l la n d v o i d , o a d e v e ni f i t i s i n t h e i n t e r e so f t h e c o m D a n v . t Question 6 (a) Mention the possible hurdles in carrying out a legal due diligence. (6 marks) (b) MPS Ltd. is an educational institutionregisteredas a societyunder the Societies Registration Act, 1860. lt wishes to make overseas investment in United Kingdom by establishing a wholly owned subsidiary to run schools in that country. Explainthe provisiansrelatingto overseasinvestmentsby a registeredsociety. (5 marks) (c) Mentionthe variousrecordsrequiredto be maintained depository pafticipants by (5 marks) under the DepositoriesAct, 1996. Answer 6(a) P o s s i b l eH u r d l e si n c a r r y i n go u t a l e g a ld u e d i l i g e n c ea n d r e m e d i a a c t i o n s l 1. Nan availabilityof information l n r n a n yo c c a s i o n sw h e n a p e r s o nc a r r i e so u t d u e d i l i g e n c et,h e r e q u i r e d , information may not be available insufficient derivea completepicture. or to 2. Unwillingnessof target company'spersonnelin providing the complete information personnel Non-co-operation targetcompany's of may also proveto be a major process. hurdle duringduediligence Sometimes, available the information would b e o r e l e n d e a s n o la v a i l a b l e . d

13 3. Providingof incorrectinformation

PP DDCClvl-June 1 201

Providing incorrectinformation the target personalalso acts as a major of by h u r d l e n t h e d u ed i l i g e n c p r o c e s s . i e 4. Complex tax oolicies and hidden liabilities s C o m p l e xa x p o l i c i e & s t r u c t u r em a yc r e a t e n u m b e r l h l d d e n a x t i a b r t r t r e s , t s a o t which may not be easy to track.

5. Multiple Regulationsand its applicability O w i n gt o t h e n e wa n d e m e r g i n ge g i s l a t i o nis , s d i f f i c u t t i n t e r p r ew h e t h e a l ti lo t r o s p e c i f i ce g i s l a t i oin a p p l i c a b lfe r b u s i n e s s n d g e t t i n g e g a lo p i n i o n n t h e l s a l o same would proveto be very costly. 6. Process in providing data Multiple Layersof reviewand scrutiny beforedata is provided due diligence for a l s oh i n d e r s n dd e l a y s h e d u ed i l i g e n c p r o c e s s . a t e 7. Absence of DroDer MIS p D u e d i l i g e n c e r o c e s s o u l db e c o m u i f l i c u litl t h e r ei s n o p r o p e rM I S i n t h e w d company. Actions to break hurdles in due diligence The following actionsmay breakthe aforesaid hurdles F o c u s o l l o wu p q u e s t i o n s . l professional Ask severalpeoplelhe same questionsand utiliseappropriate i s k ep t i c sm . Politepersistence may helpto overcome this attitude. I n d e p e n d e n h e c k i l h r e g u l a t o 'a u t h o / i l i e s . w y cl

e y c h C o n s i d e r i ntg j sh u r d l e si,t i s a d v i s a b l t o i n s e r t h e n e c e s s a r d i s c l a i m e rl a u s e s in the due diligence report. Answer 6(b) Overseasinvestmentby registeredsociety engagedin manulacturing educational sector/ Registered Trustsand Societies / in set up hospitalin Indiaare allowedmake investment the same sector(s)in a Joint Venture WhollyQwnedSubsidiary outsideIndia, withthe priorapproval the Fleserve of or h y a B a n k .T r u s t s / S o c i e t i s a t i s f y i ntg e e l i g i b i l i tc r i t e r i a s g i v e nb e l o wm a y s u b m i t h e es application/s Form ODI-PartI, throughtheir AD Category- | bank/s,to the Chief in F , B E D t, G e n e r a M a n a g e rF l e s e r v e a n ko f I n d i a , o r e i g n x c h a n g e e p a r t m e n O v e r s e a s l l n v e s t m e n t i v i s i o n , e n t r aO t fi c e ,A m a rB u i l d i n g , 5 tF l o o r F o r t ,N I u m b a i 4 00 0 1, f o r h , 0 D C l consideration: (i) The Societyshouldbe registered underthe Societies Registration Act, 1860. permitthe Society (ii) The [4emorandum Association :nd rulesand regulations of wfrich alsobe approved the governing by to makethe proposed investment should b o d y/ c o u n c io r a m a n a g i n g e x e c u t i v e o m m i t t e e . l / c

PP DDCCM-June 1 2O'i

14

(iii) TheAD Category lbank is satisfied the Society KyC (Know that your is Customer) compliant is engaged a bonaf activiry; and in ide (iv) TheSociety beenin existence least a period threeyears; has at for of (v) The Society has not comeunderthe adverse notice any Regulatory of / Enforcement agency theDjrectorate Enlorcement, etc. like of CBI Inaddition theregistration, activities to the which require special licensepermission / either fromtheMinistry Home of Affairs, Government India fromthe relevant of or local authority, the casemay be, the AD Category | bankshouldensurethat such as _ special license permission beenobtained theapplicant. / has by Answer 6(c) Depository Participant shourd maintain foflowing the records perodorfivevears: for (a) Formsubmitted theclient by for: Opening accounts. of Closing accounts. ol Freezing accounts. of Defreezing accounts of (b) Delivery Instructions givenby clients. (c) Records allactions ol taken theexception on generated thesystem. reports by A Register showing grievances details o{ received fromthe clients and their present status. received fromthe clearing te) lnstructlons member transfer to balances fromthe Pool Account theDelivery to Account theClearing of N4emberorder enable in to himto deliver these securitjes theclearing to corporation setflement trades. for ol (l)ln structrons givenby clearing member authorislng transfer securities the of fromthe poolaccount the account its clients. to of (s)Dematerialisation Forms Request (DRFs) Rematerialjsation and Request Forms (RBFs) filled clients. by (h) Forms received thecaseol pledge transmission securities. in and o{ (i) Details certif of icates sentfor dematerialisation. of of 0) Proof despatch DRFsandShare Certificates courier. by (k) Details certif of icates, sent for dematerialisation, received backalongwith objection memo fromvarious comoanies. Question 7 (a) Explainthe compliancesrequiredwith regardto any two ot the following: (i) . Removal a director. of 0i)'friangularmerger. (iii) Statutory meeting. (4 markseach)

t:)

201 PP-DDCCM-June 1

: (b) Writenoteson any twoof the following is investment prohibited ( sectors whereforeign (lDRs) receipts of for (ii) Eligibitity issuance lndiandepository ( markseach) of of (iii) Closure register members. Answer7(aXi) termbyol the lromollicebefore expiry hjS maybe removed A director Law or (b) Government; (c) Company (a) Shareholders theCompany; Central of Board. bY la\ Removal shareholders

Pursuanttosection2S4(1)oftheAct,theshareholdersotacompanymay'b betore a remove director meeting' at resolullon a general passing ordlnary an be cannot directors the of of iheexpiry theperiod hisollice However, following in the termsof their stipulated unless otherwise |'"tou"d by the company aooointment: 408; Section under Government by appointed theCenval {a) a director olf holding iceforlifeonthelirstdayof April' company of (b) a director a private .1g52 an under agelimitbyvirtue to or nothe is subjecl retirement whelher or articles otherwise; of the than not to of ilselt theoption appoint less has tne (c) where company availed ol the principle to according of of two-lhirds the totalnumber directors 265; under representation Seclion proportional I under Institution/Bank the termsof a by a Financial (d) a director appointed agreement. loan be cannot takenaway right 284 given Section is a statutory which by Theright and document if it or anycontract anyother or articles by bythememoranoum, provision be void will sucha to is sought be takenaway, Governmcnt by of b\ Removal directors the Central provrsrons 3888to 388Econtalns Section IVA Chapter of the Acl comprising ol personnel managerial remove to Government [g"toing po*", oftheCentral Law Board/ of the Company on Lotpiny tromoffice the recommendation " Tribunal. lTribunal Law (c\ Removal Company Board by of forprevention Law to on Where an application theCompany Board/Tribunal 398 Section of the under 397 Section andmismanagement ofpies"ionunder it to ought be granted, mayby order, thattherel;e{ tn" cLenriornal finds n"i, or with director managing a ol any or terminate selaside agreement thecompany as conditions it maythinkjusl suchtefmsand or director otnerpersonneion equitable. and

PP-DDCC[,4-June j 201 Answer 7(aXii) TriangularMereger

to

t n a n g u l a rM e r g e r m e a n s n t h e ^ . amalgamationf two compantes o orsappearing by whichfhe company merq-ed suosioiary rs into ot suiriuinJal"-punv uno sharehorders or the d'sapDearing company-recervu .nrr", li r-n""Jr_;;X;:;,.n0""". A n s w e r7 ( a X i i i ) StatutoryMeeting

months ,rr"*J,"? *i,j"i Ylt:l-l 9"'t9 nor-tor" from ti,-]ii tnecompany entitled commence is to generar uu.ine"s, meeting th" m".nbe r'otJa of which called staiut;tM;;;s. is jl^ol llerompany as statutory meering n.,oon,u ," life time thecompany or pttr," Jo,.np"","l arenotrequired no'o to .,u,rioil"r"Jltll; Answer 7(bXi)

n,",iJ"jt"i:[o::J,,'il:ii,?1":1111 companv bysuarantee 1ld"y".vless rimited and not onetont'

'",,Jil;'3ili;i:n"#;J'nt
( i i ) N r d h i r m p a n yo r r ,

"

isrreerv permifted inarmost sectors ail except rhe ror

(i) Business chit fund, ot or (iii) Agricuituraj plantation or activities, or (iv) Realestatebustness, or construction farm houses of (v) Tfadingin Transferable Development Rights Real EslateBusiness does I

resident,arlcon.me;"';i;;;;.1:*"1lliff;'"0'""t ortownships, construction or

investments ,",,iJa"J per as FEMA i:i:::lm:'J'lyffi:'#il'J, T:I?ns l"iiffi

0,";ffjj,lT"';"tfrxT,J:; flT[ent
(j)

inthe ofForeisn Investment torm Direct isarso

Betail Trading (except sjngle for orand product retailing) ( i i j Atomic Energy
iiji) (iv) (v)

Lottery Busjness Gambting Betting and Agricurturc (excruding Froricurture, Horticurture, Deveropmentseeds, of pisicutrure Cu[ivation, Husbandry, Animal and oJuug"rubl";, ilur,;ro,oii. controled unO", conditjons ,"ru,":.:^::,,","0 i" "r.. P l a n l 3 t r o n s t h e r "no (O
t h a nT e a p l a n t a r r o n.s )

"jr"_i.ju,iiiJ,l"",or'r1 "no

Answer 7(bXii) Eligibitity issueof lDRs for

17

PP-DDCCt4_June j AO.1

(a) pre-jssuepaid-up capitaland free reserves has ro

o
n'

exchanse country in parenr 3::i[:Til;:flil":::X,"J 's l,;'::fi!il:?y

tn*" ,iri"urr"o'"Liu precedrng year.:otP"ni"t Act' 1956'forat least five

,ff,ff3?:llili:i"jili;"Til$il:il""j3ffi ff:-$Jilili.:ffi',ili];;
of profits l,l"ck.recorddisrriburabre inrerms of

*;:?r1Tlffi"^31"-

Answer 7(b)(iii) ^. _

''J::,?H*:??i"" j;[!'":";:ffi jffi :j?ipl[,,? :[il#"1fi 3;H#

Question8

rhe ro'tv-ru" in but ,j"l""ii"g'r[ vear, j,l;::ff:i::", ,r1firn assresate ouy, ""t "u-"nahy four of thefottowino: (i) An tndian company planning lo makea pubtic nuht;. ^H^. in the orrer. Criticallyexamine and comment on

:T !,floi il i"fi?i!?ir;:ffi ::;:;ffi ff r"*lllfr $Hgtil:#ffnrffijx;:fi 'usi't"' ;"'fJ;;:i#l::J::i:fl;Iff: ;:fi:,"J"::;""fr"T#'";ri'"11::"1:'-:'h"

Amenca needno,,"n:l:,:i# r!:":;rf:"a L.rnited states or

Sectionl54of the Compan jesAct, 1956 contains procedu

(ii) The preferentiat allotm ent made to any person shall be tocked-infor a period of two years.

,,, ,::rri;::":l:rl:l|of thentead merchant banker ensurethe to clespatch share of

''

(iv) The depositorysystem functions very much

like thebanKng system.

Answer 8(i)

or provistons companies ot the 2:f ft!;i,i;!':!:f:"! :: :":'^vention the ascompared to wnicn aqliiir"iei navi 3:"lr';:;:;::i:,2!,i.uroon "oipnnii" g marks each)

This statement is not correct.

;tJff ,.rrrr""i"i.j"J' f]-"_t?:.ty.. as useor ;.t?:ix1ii*#1*#H""f i,ifi ?:ii{il[n%:Jf igfi such "T:il|::; information, ,"iiJ^". jdtri,.,1ft[ilil",.1,::t{ r:[: [1?i"31,x$;t5::::syjat""f,.:iffi
^_ ,

lndian Companies planning a

PP-DDCCM-June 1 201 Answer8(ii)

18

Thisstatemenl not correcl. is Asperchapter of sEBr(rcDR) vl fiegurat;ons thespecif securities 2009, ied alrotted onpreferential to promoter promoter basjs or group theequiiy and shares pursuant allotted to exercise oplions of attached.to warrants issued pretere,itiat to promotei on basis oi promoter group, shall locked-in a period three be for of years fromthedatecl allotment ot the specitied securities equity or shares a|ottedpriar"nt to exercise the option of attached warrant, thecasemaybe: to as It maybe noted thatnotmorelhantwenty centof thetotalcapital thejssuer per of shallbe rocked-in threeydarsfromthe for of Equity shares "rate atotment. atottedin excess the twenty cent.shallbe locked-in one year ot per for tromthe dateof their allotment pursuant exercise options othe'*ise, thecase to of or as maybe.Thespecified securities atotted preferentiar to persons on basis otherthanpromorer promoter and group theequity and shares pursuant exercise options aflotted to of attached warrants to rssued prelerential on basis suchpersons to shallbe locked for a peflod oneyear in ot fromthedateol theirallotment. Answer8(iii) Thestatemenl nol correcl. is Asperreguration ofsEBr(rcDR) 69 Reguration thepost-issue 2009, merchant banker shallensure thedespatch refund that of oiders, allotmenl letters share and certificates is doneby way of registered or certificate posting, may post of as be applicable. The post-issue merchant banker shalensure payment int"r"!ttoth" oi fordelayed drspatch alotment or retters, "ppt,""nts theotfer refund orders, as perthediscrosure etc. madeIn document. Answer8(iv) Thisstatement correct. is System functions muchlikethebanking very system. bankholds _ TheDepository A fundsin accounts whereas Depository a hords securities acdounts itscrients. in tor A Bank transfers funds between accounts whereas Depository a transters securities between accounts. bothsystems, transfer tundsor securities In the of happens without the actual handling funds securities. theBanks theDepository accountabre of or Both and are tor thesafekeeping fundsandsecuritjes ot respectivelv. Answer 8(v) This statement correct. is l\,4inistryCorporate of Atfairs institutes everyyear,a largenumber prosecutions of .The agarnst companies their icers defaurt contraventionvarious the and off ii1 for provisions of ofthecompanies Most thecompanies Act or against prosecutions instiruted which are areprivate limited companies small public or limited companies whichdo nothavethe benefit expert of professional services qualified of Company Secretaries. Appointmentwhore-time of company secretary seeking or professionar advice from a companysecretar-y practicerelivesthe companyand its directors in from the

19

Actin as have 8#il|":jj:"j"ssionarsupport "on'p",";l;;;;;:;;": vilnrcn aquariried

r,"cun"m"nts Jiiie;;iilil;'ffj:J'lRil:#1,:#f f ,iru;ii +,:.:l::l tnesma'er companies Drev viorationstne fa' to or fioJ;il; ;,;" companies

;"",'"'#Jil",,'_:i:ff:i1,:,!""#1""?:", ;iffl;ffi y#:!,flfl::i] o, pior"-.1'.i rhe i:.n:l !,iop"n company :Tff i:":""f?:l11" r*ror

pp_DDCCtr4*June 201 1

GOVERNANCE, BUSINESS ETHICS AND SUSTAINABILITY

Timeallowed:3hours

Maximum marks: 100

PABT A (Answer euestion No. 1 which is compulsory and any two of the restfrom thispaft) Question 1 @) ',fhe of fraucl thatis perpetrated by lhe person(s) running,nJ tnsuci situiiiori.Jihe' nanagement aeceplvay ?::lir, teads the stakehotdersbetieve a, tnat-ite cJiii,r, ,, Dengrunsuperbtv ,t.orj is successfutty, wnitein37!!v t3a to oa,nxruli[i.',)Withreference to the statement,examinetl in corpo'ate awemanieciini reteuant case(s) "t ""::r:;i:Z::l:.hattenses I ru marks) controttedmis-qovernanceis a type

(b) State,with reasonsin brief, whether thefollowing statemems are trueor false : (i) lnsurance is a method af risk avoidance. (ii) lnsider may not simply steal the earnings. (iii) Femuneration committee is constitutedto determine theremuneration of CEO onty.

(iv) ln terms of Clause 49 ofthe listing agreement,,rela.edpany tansactions, i:.e orohibited. (v) tltternal control plals imporl3nt role in preventing and detecting t'raud ?n and protectingthe organisation,sresources. o tciuulces
"'ve"roa'tvtt e marks each) Answer 1(a)

Conlroed misgovernance traud by runn,ing companyrnsuch i:.,i^,J,1"^S1 lhat rs perpetrared the person(s) the a situation managem"nio"i"iu"" tne the urr stakehorders rntoberieving theyruna superbry that .r"""s"trt"or"in"Js"l'uiin rearity is heading it rowards bankruptcy thenbecomes rt impossibte usto o"iJue tn"t tn" governance tor c)ifirmcouldhaveduped itsstakeholders. all Butthatis howcontrolled misgovernance is expected unfold thedaysto come. to In rhe grossJy rated inf numbers tte financiat in sta;;;;i;;;;Jiled oy documentation thatmakes outside auditors retyon tnemwnicn to i"lri" p.j0","" cover apparent ot for the perperrators thefraud. So, in sucn of isceilrio tn" regutarors :l,itlllY rnoependent and directors instead derenoing interests of the ortn"'r"u"!iora upadvocating ol themanagement. Wnen'ine trauo,.l"ro. "no LTi,,,iu"t"., oftenseekreduced "roli"r, casemisgovernance hightighted lackof inoependenr the ^.^.lT jn the -a:,Uy director,s Board processes, did;ot pfuY they in"t,,J" i" T:l::, manner the and consequences proceeded mere rhe meeting ciiteria "fficient ot oti"i"p""i'"""" ooes ensure not thatan independent director acting is inoepJnoenit. in"v vigirant bv rore "ii""rJ-p,uv " 20

.I

asenda askrhe :li#;3;iiil::lil?i i','"lii.lil? lnarvsinsthopapers' nshtquestions '""o.o"o have and separate
inoepenient oiiec;;;il;i;il1/,1Jf,1''
On the olher hand rhe auditors this in

P P _ G B E S J u n e 0 11 2

sessions or

case have tnetraud ,rom perpetratedthemanagementissuint triedto distancerhemselves by ,rr'r" ny a sialrn-Jnl',"ni, ,"presentations made theChairman other by and management-toarJiiors-Orring tne theaudit appear t'elalseand,therefore, no longer now to are

reliable.,, Someissues challenges needscrutiny and that are: (t) Roleof lndependent directors

lndependent directors are.knoy,n to an view deliberatjons. ?ring objective inboard Theyare required ensure to th.at tn"* i" o-"rr#i" ot onu individuar or speciar interest group the,stifring neartny ",i or or i["y.norro act as the guardtans theinterest allsharefrotOersd;-u;tJ. of of anO -o,i"i'" especially the stat<enoljers, in areasof potentiar confricr. Independent oir""t"" varuabre outside perspecttve thedeliberations to (ii) Holeof independent directors auditcommittee in directors,ptay cruciat a rotein l1!9n91o"nt The committee responslbleensure integrityAuditCommrttee. audit is to the oftrunJJ r"pon,ng, therefore, eachindependent director is a membeir auoit who oi com]tr,tte" snourd abre be to read andunderstand financrat statements. (iiitl Tenureof independent directors Excessively tenure independent lcng of djrectors may compromise their On being associat"o u rong ror' p;riod*ir?" l!."p"nq:ngg rn"r" i, a strong liketjhood independent rhat "ornp"ny, dir""tor"]J"" inlii iop",,u,,y.Ctause 49 doesspecify as.anon_mandatory .equirement tnl,'in" ,l,"ir^ termshould notexceed nineyears. (w) Flowof information theboard to Companies shouldensure that. timely, relevant and information is made avairabre independent,directoi. i'r.,"v complete to ,o ir.,"r to mate rntormeo decisions. The independent directors theirpa;t"rl"aol on ahorlO-"f.o question and seekclariflcations whenever doubt. In lv) Recording dissent of It is important where jndependent that an director notjn agreement the is with decision rhemajority, shouro ot he insist that-nis dii.""nt'oJ rr"oro"o. (vil Roleof Auditor Auditors expected work^with are to jnst andnotaga management, always while remaining professionally oblTtlve- tnatis t6 rn"ir professional skillsimpartially retaining critical and "ay, "ppty"rg a detachm"nt,unO i aon""iousness of theiraccountabitity thosewno rormarry to app;;;;;;;;. i,ranruining .u"n u professionat objective and retationship tn" ?".p"""tiliiiri Oorn i" ot boards oI

PP-cBES-June 1 ZO1

22

otrectors and of auditors, is that ol takingapproprjare as actionif the basisfor that relationship longerholds. no Auditsare a reassurance all who havea f inancial to jn interest companies, quite apartfrom theirvalueto boardsof directors .The roleof the audjtorsi" ;;ilr;j to go by the numberspresented the accounts in and stgn olt bogus accounts ratherthey need to verifythe facts presented Uytne co_pany. Even if there is a remotest possjbility that this may indeeobe the case then it must show the way iorwardfor auditors direcflf to interact with the banksand other institutions obtainthe requiredconfirmaiion to anOtor tne independent otrectors pay a majorrolein elfective to oversight bodyto holdthe management accountable the shareholders to

Answer1(bxi) False rtis nota method riskavoidance of rather is risk it transfer. vatue theinsurance The of thata firmcanobtain transterring an rnsurer, return Uy ro in l':..].^tl"Jl:T:l"t.security ror a premium the riskof losses for thatmightariseon the o"-"rrr"n." of a specified peril ln$rrance doesnotprotect firmagairist perits a a[ uuiit otiersresroration, aaeast In partot anyresultant economic loss. Answert(bXii) True The Securities Exch-ange and Board India(prohibition Insider ot ot Trading) Regurations, detine 1gg2, that "rnsider" anyper.on, is *no i" oi r"s connected the wrth anqwhois reasonably expected have to access unpublished to price-sensitive :-:llayl rnlormation aboutthe stockof that particular company, who has accessto such or unpublished sensitive price information. Answer1(bXiii) False Remuneration Committee Compensation or jttee Comm is constituted a company by to determine remuneration the packages directors of inctuoing executive icers. cirret otf Answer 1(bXiv) False 'rerated clause49 do nol prohibit party transactions' rather provides review it ' for of related party transaction AuditCommit'tee ifsOisctosuie. by anO Answer 1(bxv) True The systemot internalcontrolfacjlilates elfectiveness the and erficiency of operations, helps ensure reliability internal external the of and r;porting assists and in compliance lawsand regulations. wjth They helpto ensurethara companv not ts

23

PP-cBES-June 011 2

unnecessarily exposedto avoidable financialrisks and that lhe financialinformation used within the businessand for publication reliable.They also contributeto the is safeguarding assets,including prevention of the and detection trauds. of Question 2 (a) Writeshott notes on any three of the following: (i) CEQ/CFO cerlif ication (ii) Relationship between directorsand managers (iii) Task force on corporateexcellencethroughgovernance (iv) Corporatephilanthropyand corporatesocial responsibility(CSR). (3 marks each) (b) Describe the tools used by the institutionalinyestors fo assess the health of a company before investing resources in it. (6 marks) Answer 2(aXi) Clause of the Listing 49 Agreement requires the CEO,i.e., Managing that the Director or l/anager appointed termsof the Companies in Act, 1956andthe CFO i.e.the wholetime FinanceDirector any otherpersonheading financefunction or the discharging that functionshallcertifyto the Boardthat to the best of their knowledge: (a) the financial statements and the cash tlow statement reviewed them do not by containany materiallyuntruestatementor omit any materiallact or contain statements that mightbe misleading and that they presenta true and lair view o f t h e c o m p a n y ' sa f f a i r sa n d a r e i n c o m p l i a n c e i t h e x i s t i n ga c c o u n t i n g w standards, applicable lawsand regulations. (b) no lransactions enteredinto by the companyduringthe year are fraudulent, illegalor violative the company's of code ol conduct. (c) They have indicated the auditors to and the AuditCommittee any significant ol changesin anternal policies control,accounting over linancialreporling during the yea. or any insiances significant fraudof whichthey havebecomeaware of a n dt h e i n v o l v e m e nh e r e i n ; tt Answer 2(a)(ii) Directors and managersneedto work togetherbasedon mutualrespect, trustand commitment. boardprovides A counselto management and shouldnot get involved in theday-to-day affairs the organization. of Clearexpectations the boardandthedirector for n e e d t o b e e s t a b l i s h e d n d m a i n t a i n e db e c a u s ea b o a r d t h a t i s o v e r l ya c t i v ei n a , management can inhibitthe organization's effectiveness. Execr,ttive The Management canhelpthe board govern moreandmanage lessby adopting following the threemethods: Use a comprehensive strategicplan that has been developedin conjunction with the board,and supplement with regularprogressreports.This will keep it the board's sightsfocused the longtermgoalsand mission the organization. on of R e g u l a rr e p o r t sw i l l k e e p b o a r d m e m b e r sa p p r i s e do f p r o g r e s s t o w a r d goals, organizational partof the basisfor evaluation the executive and provide of management.

rr- ubr5-.June2o11 24 - Provide board the withrelevant materials before boardmeetings, explain and whythemateriars coming are totheattention theboard. board of Let members know.how specif agenda ic items relate theorgan-ii"iion.s ''i.sion,and to r"rg",, whatkindof action discussion desired t"ne or is ot OoarO eachitem. on - Facilitate board board and committee discussjons thattheboard so stays focused on the rarger issues. Referto set poricies define rimits the that the of board,s decision_making power, andstrive engage boardIn a djalogue to the among themselves leads consensus_bulldlni. that to Answer 2(aXiii) ln November 2000, TaskForce Corporate a on Excellence upbythegroup set under thechairmanship Dr.p.L. Sanjeev of Reddy, SJ"i;t, D-#inow MCA)produced a report containjngrange recommendationsraisjng a of for gou"rriun"" ,tundards among jn India. The groupexamined *uy" to:,o'p"raiionalrse concept 1|,::r?"ni"r the of corporate excellence a sustained.basis',, io .,sharpen on so as inora,s global competitive edgeandto funher develop corporate culture thecouniry,,. in A Summary Report TaskForce: of of 1. Higher delineation independence of criteria minimizationinterest_conllict and of ootential. 2. Directorial commitment accountability and through fewerand morelocussed board committee and membership. 3. [,4eaningful transparent and accounting.and reporting, improved annual report along withmoredetailed filing withregulatory authorn"ies 4. seningup of an independent, Autonomous centreforcorporate Excelence to accordaccreditation promote and policyresearch studies, and training and education, inthefieldof corporate etc., eicellence through improved corp"orate governance. 5. Introducing formal recognition Corporate ol Social Responsability. 6. Cleardistinction between. basjccomponents governance termso, two ol in policy making oversight and responsibirities boaidot directors. orthe 7 Apply highest toughest the and standards corporate of governance Listed to companies. 8. PSUS relieved be frommultiple_ surveillance agencjes srmultaneously and a commission appcinted draft suitable be to a cod-e public of behaviour. Answer2(aXiv) Difference between CSBand philanthropy/Charity corporate sociar Resporlsibirity is about howa company arigns varues sociar their to causes including collaborating their by and with investors, supplier!, Lmptoyees, regulators andthe society a whole. as The investment CSRmaybe on people in centric issues and/or ptanetissues. CSR initiatjves a corporate not a setfless ;i gj;;;; of ij ""t

rons-term llll!?ll*sd".,r:d r j v i n gt*,.51,:r r a l r v e s initiatjves ,liltili,jlll s e I I n t e r e w h i c hi s t h a v o n l,^1i.,,1.: 0 a n i e ""li rnr I nc o "sRm s

or neJJt ,J"i1"#""0, canbe ;:[:",J$:"riH:.yffil.,i::I!g "'o"iar ai beoy underserved, or rserved Philanthropy can an lnoiviouai
or dyl origin ,1,:.y^"j11.- Late . TheEtymotogicar Larin phitanthropia, Greek trom "t ll"m
oe equared benevotence charity with and ior rnepo-oi;;;"H;

p_ :1" :rr,:i;;;;ffi 1 : i""J,i."il,t:!!!i[""r.fl,fl111ir3fi l!?;?::fli#ilj phitanrhropy

O n t h e o t h e rh a n d ,p h i l a n t h

corporate.

SilT[',"'lii'i:T3|[il:i:XX'J::nsp'opretn;;;;].;"i'i.p*n,,'u"o"i"g
Answer 2(b) rnstjrurjonal invesrors ,"r"i1,:1"1^yf invesringa company; il" in they assess the investins resources

[X?jli,:i:ili:i:before

in,t.iorro",ng rne !|,e roors by used

(i) Oneto-one meetings The meetings between in^stitutional are .jnvestors rmportant a means communication and companres extremely as of O"rr""n in"i*i p". (iil Voting "". The rightto votewhichis attached to voting shares a basrc is prerogative of share ownership, is partic_urarry and ,np"nu'nigi";r'h;iu,.,on o, ownership {sharehorders) contror and (directors) tiremJoern'cJrioraton. rn The rightto vore can be seen as rund"r"ntul'tooi,jo;"J#;;i#"", or controrby sharehorders' institutionar The investors ,egi.ie, -. .'" oypo"tat can ir'eiiui"*. uoting, or,voteetectronicawhere faciljty y this is av;la;ie. (iii) Focus,sts A number institutional ol ,focus investors haveestablished lists,whereby they targetunderperforming companies in"iro" iilrll"" uno "Siil;;d ,,", o, companies which haveunderperformed jndex, a majn ;;;"" and poor,s. After being on thetocustist, .ornp"nt".'oft"n pur the L".J,,Z'ii*ur,,"O of the rnstitutionat investors may who "nentjon directors rhe on ""J;;;";;;';"rii'tls (iv) Corporate governance ratingsystems comeupwjththedevetopment 1i::!:Tf :*p"rate Soler3::e rajinssy-srems orcorporate governance. Examples suin-'rmswrrcrr ol rrJrlu'i"u",op"o governance systems Demjnor, rating are Stanoaro iili., "orpor"t" anJ eou"rnun"" t4etrics Internationat (GMl). ft,e ,ating";iti ;:" i" irrJr"r,L"no governments jdentifying in percejved tevetiofcorporuL gou"inun""in"tijr.oun,ry.o.p"r"o to othercountriestheir in reoion, outsjdeit, oi whose companls,"y oe for timited foreign investme-nt. A corporut" gou"rnun;;rliniiouro oea powerrur "ornpeting indicator theextent which comp".y of to a ;;";;il;; n". tn" oot"nt"r "olrf,"o,

PP-GBES-June 1 201 to addin thefuture, shareholder value. Thjsis because company good a wtth corporate governance generafly is perceived moreattractive inveitors as to than without. one Question 3 'The Global Corporate @) Governance Forum,smandateis to promoteglobal, regional localinitiatives improveCorporate and that Govemance pohcystandards andpractices developing in countries.,, Etucidate statement. (S marks) this (b) '"To enable better andmorefocused attention theaffairs thecompany, on of the Boad delegates particular maftersto committees theBoard set_up the of for purposebut the ultimate responsibility withthe Board." ln the tiqhtof the lies statement, discusstheneedandadvantages committee of manageient. (5 marks) 'riskretention' (c) what is ? Distinguish between'riskretention' and 'risktransfer,. (5 marks) Answer 3(a) TheGlobal Corporate Governance Forum Forum) founded 2O0ibythe (the was in worldBank theorganisation Economic and for co-operation Deveropment and (oEcD) following tlnancial the crises Asiaand Russia the latter in in partof the 1990's. was lt establishedpromote to initiatives raise to governance corporate slandards practices and indeveloping countries emerging princlples Corporate and markets, using OECD the of Governance thebasis itsworK. as for TheForum's mandate to promote is grobar, regionar rocar and initiatives improve that governance corporate policy standards practices developing and in countries. Forum The focuses thefollowing areas: on tour (a) raising awareness building and consensus implementation for ol reform lhrough meetings, policy papers, conlerences; brielings, and (b) sponsoring research relevant theneeds developing to of countries underpin to reformeffortsby soundanalysis throughsponsoring papersand bualding sustainable networks academics developing for in countries; (c) disseminating practice best materials publications guidelines and and developed withleading global specialisls practitioners: and and (d) supporting institution capacity and building providing and technicat asststance to ensure lmplemenlationthe fieldlev6l at through programs, training toolkits andother direct assistance. Answer 3(b) withtheglobalization reguratory the requirements become have more comorex and theonuson theboard immense. thisscenario needto delegatg is In the oversight a to board commitlee become has imperative. To enable better and morefocused attention the atfairs the company,the on of board delegates particular matters committees the board up for the purpose to of ser however ultimate the responsibility withtheboard. lies

27 Advantagesof Board Committee Managemenl

PP-cBES-June .l 201

'
.
.

Committees allowsthe boardto

with erriciencv bvhavins ll:H:'i.t'ii.1ilJ;:l*' orissues sreater experts

"O".lrl:,:il^Tse flsk management, financial reporting Devetop subje", onareas such compance as management,

Enhance obJectivity independence the and of the board,s judgment. Greater speciarization intricaciesot and modernboardworkis one of the Increased reasons for use of boardcommittees. The re*;;.-il;;;i . Responsibilities shared. are . . Moremembersbecomeinvolved.

of itsfocus themandate, on thr of thecommittee being relatjvely.r"frerin"nin" rroard tendto be more "ff""tiul..,." Answer3(c) RiskBetention It is alsoknown riskass as

un retains ta,wavsresponsiii,"'iilii{ :?t33:#?*.;*l,'""ff 1",',1 Tiil"ffi ildt

Specialized skillsol memberscan be used to best advantage. . lnexperienced membersgainconfidencewhlle servingon the committee. . Mattersmay be examinecl more in detailby a committee The committees focus acc

r1119:'"1t,*n"'0".'nJ#I?]li"!',"i",:T[13";i1"",iitl?J T.j ot rnere iro". retentjon ror merhods Ht"ffilil::::"#;Xo#L oo"'ation are-t*
"i
strategy ^oj-deliberate of possjble tosses causer. i. t"o*n as atler conscious and f"ni. active ot risk form :"t,;,il"" , ,) occurred throush nesfisence is known passive rhis as form of l;-,:ij:?::: Risk Transfer (i) Fisk retained as part management

co orra i;;j".; ::, uen o srJ ;;;fi *:,l usuairy, are3 majomj""^.^:l]?::,:l"rtli there : ffflii!!:q5:ft"*"uI,ffi :J.j;J,:: t,l e;""? (ti)Byconrract other "i.., main r,ans,er irTJlilTffiJiL?r,".""Jiflj;jp'f".:.tn"m"irioo'oin]sk insu,ance. is ,onnu r n,"i,,.n a sre roi",#.1"?ii:ijl.i.:Tii i" lJi: 3:xli*!,?""jru a specified rhus,insurance peril substitut". ."r,ir"-,"v r"lr"iJn",",r. Insurance "';nil*:i:: does

to legalassiqnm ce in losses another. to nsurance 'risks' ,o odror"li ?ll?lt-oj. rta potential The ot is

This refers

PP-GBES-June 1 201

2a

not protect firmagainstall perilsbut it offersresloration, a atleastin partof any resultant economrloss. c Question 4 (a) Elaboratethe provisionsin respect of the compositionof audit committeeunder the lollowing : (i) Listing agreementas prescribed by SEBI. (ii) NYSE listing rules. (3markseach) (iii) Section 2924 of the CompaniesAct, 1956. (b) Discuss the background stating some case laws, which brought about the (6 marks) developmentof insider tradinglaw. Answer4(a)(i) Composition ot Audit Committeeunder Listing Agreement audit committeeshall be set up, givjngthe terms ol A qualifiedand independent reference subjectto the following: 1. The auditcommitteeshall have minimumthree directorsas members.Twodirectors. shallbe independent thirdsot the membersof auditcommittee literateand at least one 2 . All membersof audit committeeshall be financiaily expertise. financial management or membershallhaveaccounting related literale"means the abilityto read and Explanation7 :The term "financially profit and lossaccount' i.e. sheet, statements balance basicf inancial understand of and statement cash flows. to 2 Explanation : A memberwill be considered have accountingor related in or experience finance il expertise he or she possesses management financial or professional in certification accounting, any other accounting, requisite or financial in whichresults the individual's or experience background comparable being or havingbeen a chief executlveofficer,chief including sophistica:ion, responsibilities. oversight officeror otherseniorofficerwith financial Jinancial director; shallbe an independent of The Chairman the AuditCommittee appropriate as suchof the executives, it considers mayinvite 4 . The audilcommlttee to at (andparticularly headof the financefunction) be present lhe meetings the but ol the committee, on occasionsit may also meet withoutthe presenceot auditand headot internal The linancedirector, of any executives the company. ot a representative the statutoryauditormay be presentas inviteesfor the m e e t i n g s f t h e a u d i tc o m m i t t e e : o to shallact as the secretary the committee. 5 . The CompanySecretary

Answer 4(a)(ii) Rules underNYSE of Composition Audit Committee ol musthavea minimum threemembers. committee Theaudit mustbe independent Committee ol Allthemembers theAudi't

29 -

pp_cBEs_June2011

E a c h m e m b e ro f t h e a u d i tc o m m i t t e e u s t b e f i n a n c i a l l yi t e r a t e , m l as such qualif icationis interpreted the company,s by boardin its bujinessjudgment, or must becomefinancia||y riterate withina reasonabre periodof time afterhis or her appointment the auditcommittee. to In addition, leastone memberof the auditcommittee at musrnave accounting or relatedf inancial management expertise, the company,s as board interpreti s u c hq u a l i f i c a t i o n i t s b u s i n e s su d g m e n t . j i

Answer 4(aXiii) Section2924 of CompaniesAct 1956 The committeesha consistof at reastthree directors and sucn numberof other drrectors the Boardmay determine. as Two-thirds the totarnumberot members the of of commrttee shaflbe directors otherthan managing whoretime directors. or Membersot the committee sharlerecta chairman from amongstthemserves. The AnnuarBeportof the Companyshalldisclosethe composition the AuditCommirree. of The auditors, internar the auditor, any, and the director-in if chargeof financesharl attendand participate meetings the Auditcommitteebut sha|lnot havethe rightto at of

VOIE,

Answer 4(b) l\4uch the deveropment insidertradingrawhas resurted of of rromcourtdecisions. In SEC v. TexasGutfSulphurCo. (1966)(U.S.A), federat a circuitcourtstatedthat anyonein possession insideintormation of musteitherdisclose information refrain the or f r o mt r a d t n g . ln united states v. carpenter(1996) u.s. supremecourt citedan earrier the ruring whileunanimously upholding andwirelraudconvictions a defendant mail for who received his information from a iournalist ratherthan lrom the companyitself.The journaljst R. Foster winanswasalsoconvicted, thegrounds he hadmisappropriated on that information belonging his employer, WallStreet to the Journal. thatwidelypublicized In case,Winans t r a d e d n a d v a n c e f ' H e a r d n t h e S t r e e t , , c o l u m a p p e a r i n gn t h eJ o u r n a l . i o o ns i ,,lt The courtruledin Carpenter: is well established, a generalproposition, a as that person who acquiresspecialknowledge information virtue of a confidential or by or liduciary relationship anotheris not f ree to exploit with that knowledge information or lor hrs own personar benefitbut must accountto his principre any profitsderivedthere for f r o m .' The misuseis subject varying to interpretations. insider-trading The alegation against Hindustan Lever (HLL)for purchasing eight rakhsharesof BrookeBond LiptonIndia (BBLIL)from UnitTrust of Indiaa monthbeforethe mergerof the two companies was a n n o u n c e ds a c a s ei n p o i n t . i HLL appeared against sEBIs orderto the Appe||ate Authority the Finance of Ministry clarming that a companycannotbe an insiderto itselfand that the shareswere boughi solelywith the intentot preserving parentcompany,Unirever's per cent stakethe 51 in HLL. lt was furtherarguedthat the reportson the HLL and BBLIL mergerhad already

PP-GBES-June 1 201

30

on or entities. it wasnotacting undisclosed unpublished So beenpublished various by information. Integrated Market has regulator put in placea comprehensive SEBIthe Market participanls slock datafromall the market to Surveillance System tracktrading participants, houses. custodians wellas dataof clearing as exchanges, depository PART B (AnswerANYTWOquestions fromthispart) Question 5 ethics organisational (a) Mostot the companies begintheprocessof establishing programme developing codes of conduct.Whatare the core valuesor by principlescontained these codes of conduct? B efly discussthe legal in (6 marks) in in of Drovisions respect codesol conduct lndiaand USA. : (b) Writeshortnoteson any threeof the following (i) Ethics production in (ii) TheCauxRoundTable (iii) Viftueethicstheory (3 markseach) decisions. of li Characteristics ethical Answer 5(a) expects whatan organizatlon that statements describe are Codes conduct formal of a lormsa codeof ethics, may Suchstatements takethreedifferent of its employees. ol and codeof conduct, a statement values. in or values principles addition about core six otten contain of codes ethics Corporale that Thesixvalues conduct of andexamples appropriate descriptions to more detailed (3) (2)respect, responsibility' (1) include: trustlvorthiness, ethics for of aredesirable codes (4)fairness, caring, (6)citizenship. (5) and that Agreement requires 49 ln India, Clause of theListing
The Boardshalllay down a code of conductlor all Boardmembersand senlor managementof the company.The code of conduct shall be posted on the websiteof the company. personnel shallatfirmcompliance ( i i ) All Boardmembersand seniormanagement on an annualbasis.The Annual Reportof the companyshall with the code to containa declaration this effectsignedby the CEO shallmeanpersonnel term"seniormanagement" Forthispurpose,lhe Explanation'. team exciudingBoard of membersof its core management ol the cornpanywho are one levelbelow this wouldcompriseall membersol management Direclors. Normally, heads. including functional all directors, the execulive ln the United States of America,Section406 of the SarbanesOxley Act,2002 to requirespubliccompanies disclosewhetherthey have codes of ethicsand also to any waiversof thosecodesfor certainmembersof seniormanagement. disclose

PP-cBES-June 1 201 Section 406(a) Flegulation requires ol S-K companjes disctose: to - whether have written they a code ethics appries their of that to principar executive officer, principal linancial principal officer, accounting officer controller, or or persons pertormjng sirnjlar functions; - anywajvers thecodeof ethics these ol for individuals; and - anychanges thecodeof ethics. to
\tl

ll companies not havea codeol ethics, do theymustexplain whytheyhavenot adopted A company either itscodeas an exhibit theannual one. may file to report, post thecod thecompany's siteoragree provide copyofthecode on Web to a upon request andwithout charge. Answer 5(bXi) Ethicsof Production Thisareaof business ethicsdealswiththe dutiesot a company ensure to that products production and processes notcause do harm. someofthemore acute drremmas rnthisarea arise ofthefactthatthereis usualy degree danger anyproducl out a of in or production process it is diff and icult def a degree permissibirity, degree to ine of or the of permissibirity depend thechanging ofpreventative may on state technoiogieschinging or perceptions acceptable socral of risk. - Defective, addictjve inheren dangerous y and products and - Ethicar rerations between company theenvironment the and incrude Dolution. environmental ethics, carbon emissions trading * Ethical problems arising of newtechnologles eg. Genetically out for modified food - Product testing ethics. The mostsystematic approach fostering to ethicar behavior to buird is corporate cultures linkelhical that standards business and practices. Answer 5(bXii) TheCauxRoundTable Thecaux Round rabre(cRT)is based theberief theworrd on that business community play should animportant inimproving role economic social and conditions. a statement As of itsaspirations, it deveroped a document aims express worrd that to a standard against which business behavior be measured. can ThecRT Principres Business for wereforma[y raunched 1994, presented in and at theunited Nations worrdsummit sociar on Development 1995. in TheciT principles for Business articuratecomprehensive of ethicar a set norms businesses for operating internationallyacross or multiple cultures. CRT principles Business Jhe for from series diarogues a of cataryzed thecauxRound by rabieduring rate ",n"rg"i the 1980,s ind early1990'sThe Principres comprehensive are statement responsibre of busrness practrce formulated business by leaders business for leaders.

PP-cBES-June 1 201 Answer 5(bXiii)

of moral rather rures consequenc.es, philosophythat emphasjzescharacter, than or asthetef !r",n""i rhinking.exampre An or standins "i ,. rornd :l,I- yt" : o:rson sood ;"s1;#;;"iilir, to someone Virtue Ethjcstheory is a branch

,r.'" *". i"X;#[Xin:l_"l?iflil?l; lorsafe-keeping, whereasirwere rr,"po.."r.ron ""ii," Ji""olrlin o,oorouur if rn character would ordubious it
be presumed he fru. .f ofen that Answer 5(b)(iv) "nlll.""'"' According Sueanne. to i",h:: g"?l Ethicat Dilemma, Characterjstics Theory (2008) and states characteristics of ethicar oecisions-wrr]cn as under: "?Li"ir"**o MostEthical Decisions Havel:4ixed. _ Outcornes ,,ltis commonty thought ethlcal that rssues management rargery in are antithetrcar, rii".t"rv *itn financiar returns andsocial costs. antitheti;tmoo"r ort"or" The ro,' "pp"sed Ju"rul,#f r"."n," erhical issues insharp tocus itdoesnotaccrr"r"ty but portray ;;;;g;;l *," ;,,"r,na. socialbenef its

erse oe"presumeo itwi' tnat

with a,most ,H":,,""lfi ::,l,iffi,i;I:id ;;J";p;;;;;;"",1oX,","0 a,, oi #:[

MostEthicar Decisions Have perso.nar _,,furost rmprications ethrcar decisions personar have imprications is commonry.lhoughi rt tn"t ol-rls In management targety are irnpersonat, divorced fromth" r""" ino 1","!,;;;i;;;.",,'"g"*. "tni""r Manypeopte betieve primaracte that ethicat il gi; ;..,i;n"#ly reouce protits tne thecompany nottheexecutives, l:^.:i:i.. of but " Jr satar;es rfreir ipport-uniti". prorotion.,, ro|. MostEthicalDecisions HaveMuttipleAlternative.s is commonty _ ,,lt thoughtthat ,,vur"" aieprimariry

:li:1iff:}i#nasemenr

oicnoromous, o,u "no, wjrh no " "noice,

Most Ethicat Decisions Have Extended Consequences _,,The resuttso, managerial decisions and acrionsOo not.t:!-lill.lirst_f"u"f ion."qi"nr".'. they extend throughout society, and extension constitutes ess"n"" oiiiJ "u,h"r, the argument: the decisions managershave an impact of upon others,both within",n,"ur the organization and within society. impao.^o^",r:9I_":liJri;;i,;;;;:'il;y the rhe shourd seriously be constdered when decisions madeby managers.,, are Most Ethical Decisions Have ,,lt Consequences_ js commonlythought .Unceriain lhat ethicalrssues_in management are,ree of riskand douUi, wiin a knownoutcomefor 'pr"i"birities-simprifies each arternatrve determrn A istic^m-oder-that.is, *rtn*, q" processof analysis, the but it does i

describe managerial the oitemma ls nol lt clear what conseqr"n"u. *ortorlttl|,lately Question 6

G'

it3t and it to #:i:l"z:?!? ?1".":!::i::':r:::gi^,;' toptey?t? communicatins ;;.;;;';;;; ;;';i;;: ::#fl,:; ":!:l: :: :,j::::^o^":l:i,!!: aii""ti,r.;'En;;;;i;i;"":;{:::::,;2 "", 2ZIii:::I::,:iTendentn.on.exec'uti," and state the functions of ethics committee.
and Freeman. ?::i::.,:::takehotder

,0,

concept, statins principr"s the iy Jr)"rl "nunci"tea marks) (5

(5 marks)

J.i pp_GBES_June 20.1 1 (c) Whatarethe challeng.e.s business of ethlcs ? What areme two control systems that can be embodied in an ethicsprogramme ? 6 marks) Answer 6(a) Codesof conductneed to be livingdocuments that are encouraged and valuedat the highesttevets. Board membersan-d senior lo set an examptefor t h e t y p e c o n d u c tt h e y e x p e c t t r o m o t h e r s . ";;";;;;.;;" ein""f i"p"". t h e h i g h e rl e v e l so f ro be perceived tacitpermission commir as " , rapses towerlevets. to l::i9"1:i,]:"d at renror management needsto horditserfto the higheststanoaios - -..' of conductbeforeit can demandsjmilarintegrityrom those at f lowerlivels Companies shouldhavea committee independent of non_executlve directors who jble are respons for ensuaing that,systems in placejn tf," corpony,o are araureemployee compttance with the Code ol Ethics Functions of Ethics Committee The oversightprocessof the Ethjcs Commjttee ol an organization involvesthe lollowing areasto be addressed it: by Reviewol the detinitions of standards and procedures The Commjttee shouldreviewthe organization,s areasof operatjon, activities the " that requirea tormalset of ethjcalstandafus and pro"uOrL. Ol:" the reviewis complete.and shortcomings any have come ro trghtthe ethics committee shourd assignthe creation revised or guideri'nL" i.',"uppropriate to personner Including designof a formar the methodfor comm"unicatrn!slnoiaros procedures ano to employees. Thisrnethod shouldensurethatemployees Uitf, ,nO"r.r"no ,nd acceptthe ethicsprogram. The ethicscommrttee can suggestbehaviors uppermanagement to that reinforce the organization,s guidelines. Facititate Comptiance T h e e t h j c sC o m m i t t e e a s t h e h .respo i l f o r o v e r a l lc o m p l r a n c el.t i s t h e ty responsibre authority ethicscompliance n s i biisi area otiuiisorction for within rt shourdserve as the courtof rastresonconcerning interpretations the organization's of standards and procedures. When and jf inconsistencies come to light, tfis |.nann"r, committee the shouldmakerecommendations improving on theexisirg ,o;pli;;"" ,echanisms,And, as always, thereshouldbe follow-up ensurethatcompliance to recommendations have beenunderstood accepted. and Due diligence of prospectiveemployees

andemptoyees against org"anizationis to avoid the neeo risks :1"]111rylt:"1tsknown that come lrompracing vioratorspositions discietionary in of resp;nsrbirity. incrudes This the oversight background of investigations on *no are being considered suchpositions. for "mptoyeesffiL"n,. Oversight communication trainingof ethicsprogramme of and Theethics committee should inemethods mechanisms communicating def and tor elhicar standards procedures. incrudes distiilui[n and This the oioo"rrunts (codes of

The ethicscommittee shoulddefjnehow the organization Datance will the rightsof

PP-GBES-June 1 201 34 conduct, example) ensure for to that everyemployee understands accepts and the organazation's guidelines. makecertain ethical To that published standards are understood, ethics the commjttee provide should regular trajning sessions well. as sincecommunicationtwo-way, ethics is the jder committee shourd soricit stakeho input regarding standards procedures derined enforced. thisconnection, how and are and In it is useful createwaysof providing to prootthal eachemployee received has the appropriate documents understands standards procedures and the and described. Monitorand auditcompliance Complianceanongoing is necessity theethics and committee should design controls .. whichmonilor, auditand demonstrate employees' adherence publlshed to itandards andprocedures. There shourd be mechanisms arso which check effectiveness the and reliability suchinternal of controls. To that goals, and do lict .. . warrant theorganization's objectives plans notconf withits ethical standards procedures, ethics and the committee shourd deverop merhods for regular review assessment. and Enforcement disciplinary of mechanism Disciplinary provrsions shourd in piace ensure be to consistent responses simirar to violationsstandards procedures against of and (as apprying different standards difrerent ro employees based theirposition, on performance, function, thelike). and Thereshould beprovisions those for whoignore weI asthose as whoviorate standards procedures. and Analysis and follow-up Whenviolations occur, ethlcs the committee should have waysto identify they why occurred.is alsoimportant lessons lt that Iearned prior lrom violations systematically are applied reduce chance similar lo the that violations takesplacein future. Answer6(b) jnvestors shareholders, Ina business context, customers, and employees, suppliers, government agencies, communities, manyothers and who havea ,,stake,'or claimin someaspect a company's of products, operalions, markets, industry, outcomes and are known stakeholders. as Thesegroups influenced business, theyalso are by but havethe ability affect to businesses. Freeman defined stakehorder group individuar canaffect is affected as'any or who or by the aciievement the organization,s of objectives'. concept This waselaborated by Evans Freeman thelollowing principles: & as two 1. Principlesol corporatelegitimacy The corporation shouldbe managed the benefit its stakeholders: for of its customers, suppliers owners, employees localcommunities. rights & The of thesegroups mustpartictpate, somesense, decisions substrntiallv in in that affect their are welf 2. Thestakeholderfiduciaryprinciple Management a fiduciary bears relationship to stakeholders to thecorporation and

35

pp_cBEs_June 011 2

as an abstractentity. rt must act in the interestof the stakehorders as their agent,and it mustact in the interests the corporation ensurethe of to survivar of the firm,safeguarding long_term the stakesof each group. subsequentry Freeman redefined stakehorder "Thosegroupswho are vitarto the as survival successof the corporation" the principles & and werJ alteredrenamed: 1. The stakeholder enabling principle _ Corporations shall be managed in the i n t e r e so f s t a k e h o l d e r s t 2. The Principleol DirectorResponsibitity Diectors ot a corporation shall have a duty of care to use reasonable judgmentto defineand directthe aflairsof the corporation accordance in withthe stakeholder enabling prjnciple. Answer 6(c) Organizataons have ethics programmeas a way of minjmizing risk of ethical the . m i s c o n d u co r w r o n g d o i n g y e m p l o y e e sT h e s e p r o g r a m m e s o n s i s t p o l i c i e s , t b . c of processes and education and traininginitiatives that exprain company'sbusiness the ethics. Theseprogrammes crarify how ethicsshourd transrate operatrng into procedures and workplace behaviour. focusof ethicsprogrammes compriance is iocused The is and o n r u l e s n dr e g u l a t i o n s . a A comparlymust have an effectiveethics programto ensurethat all employees understand valuesand compry its withthe poricies and codesof conductthatcreateits ethicalclimate. Two types of controlsystemscan be created. compliance orientation programme : A comprianceorientationcreates order bv requiring that emproyees identify with and committo specificrequired conduct.rt uses legalterms,statutes,and contracts that teach employees the rulesand penalties for noncompliance. Values Orientatian:Values Orientationstrivesto develop shared values. Although penalties attached, focusis moreon an abstractcore of idealssuch are the as respeit and responsibility. Insteadof relyingon coercion, the company'svaluesare seen as s o m e t h i n t o w h i c hp e o p t e i l l i n g ta s p i r e . g w y Question7 (a) "Dilenma is a situation that requires a choice between options that are seen equa y unfavourable or mutually exclusive". tn the tight of this statement, . etaboratethe ethical dilemma. State the steps to resolve an ethical ditemma. (5 marks) (b) Explainthe conceptof 'whisflebrower'.How shourda companyevorve itswhisle blowerpolicy? g narks) (c) How do good businessethicspractices help in aftractingand retaining talent in the organisationand achieve customer satisfaction? (S marks) Answer 7(a) Dilemmajs a situationthat requiresa choice betweenoptionsthat are or seem e q u a l l y n f a v o r a b lo r m u t u a l l y x c l u s i v e . u e e

PP-GBES-June 1 201
An ethicaldilemmainvolves

36

ourres responsibirities. diremmas or These canbe hifhv oirf to resorve. icurt ,wrong, rvotvea ?ight, versus answer; "".pi"- ""0 ethicat whereas, 5::::^OlTr": comptex djtemmas Invotve decision a between right andright. Stepsto Resolving EthicalOilemma an areas follows: 1, Whatare theoptions? Listthealternative courses action o, available. 2. Consider consequences the Think carefully about range positive negative the of and consequences ' " assocjated witheachof thedjfferent paths action of avaif a"Uie. - Who/what be helped wjll bywhatis done? - Who/what be hurt? will - Whatkinds benefits of andharms involved whataretheirrelative are and values ? - What theshort_term are andlong_term implications? 3. Analysetheactions Actions should analysed a diflerent be in perspective vjewing action i.e. the per sedrsregard consequences, the concentratjng instead theactions looking on and for thatoption which proDtematic. seems 4. Makedecision act withcommttment and Now,bothpartsof analysis should brought be togetherand a consciousand informed decision shouldbe made.Onceihe decisionls made, act on the decjsion assuming responsibjlity it. lor 5. Evaluate system the ' Thinkaboutthe circumstances whichledto the dilemma wrrh intention the o, identifying removing conditions ajlowed and the that it to arise. Answer 7(b) is who complains conceared .Awhisflebtower a person pubricry misconduct the on partof an organization bodvof people, or ,du"rryior *itnlnjiut.urn" organisatjon. This.misconduct be classified ,"ny *"y.ito,' may in ),o,ution a law,rule, of regulation ancyor direct a threat pubtic to inierest, ""#pi", " sucna. iriri, i""nnl."rety viorations, andcorruption. whistebrowers frequenty tit<ety iu"" i"rriiution sometimes are to at thehands theorganisation gro-up of or which theyhaveaccuseJ untess system in a is place wourd that ensure identiafitymaintain'eJ. in-tiL"lo","*t conf is il, whis ebrowers areoften protected under fromemployer law retallatjon. h Indla, clause oftheListing 49 Agreement provides under as wrth regard Whjsfle to Blower Policy: WhistleBlowerpolicy The company may establish mechanism employees report a lor to to the

,snt, i;iilil.;il;"i,1:ffi'j",l"':,lJ iil;"*ffi,.,Ii:? or wrons ffiffi:,: }ffi'J,,li.:

37

pp-GBES-June 1 201

management, concerns about unethical behaviour, actual suspected orviolation or fraud ol thecompany's codeof conduct ethics poricy. mechanism or This courd arsoorovide for adequate safeguards against viclimization emproyees avair of who this and arso provide direct access thechairman theAudil to of committee exceptional in cases.once established, existence themechanism beappropriately the of may communicated within the organization. is a non-mandatory This requirement. case the whisfle In Brower mechanism existing, audat is the committee responsible review functioning is to the of theWhistle Blower mechanism. Answer7(c) Retaining taient People aspire joinorganization high to with ethical values. ethical The climate matter tolheemployees. Ethical organizations anenvironment istrustworthy, create that making employees willing rely, to takedecisions acton thedecisions actions theco_ and and of employees.such workenvironment, In a employees expect betreated respect can to with andconsideration theircolleagues superiors.cultivates by and lt strong teamwork and productivjty support and growth. employee Retaining people as big a challenge getting talented is as themin the firstplace. Workis a means an endfor them,notan end in itself. to The relationship employees have withtheir employer mustbea mutual, win-win one,inwhich theirloyalty should not be takentor granted. people invest Talented will theirenergy and talentonly in organizations valuesand beliefs with that matchtheirown. In orderto achieve this match, managers needto buildcultures, compensation benefits packages, and and paths career thatreflect foster and certain shared values beliefs. and Customer satisfaction Customer satisfaction a vitalfactorin successful is business strategy. Repeat purchases/orders enduring and relationship ofmulual respect essential thesuccess is for ot lhe company. The nameof a company shouldevoketrust and respect among customers enduring for success. Thisis achieved a company adopts by that ethical practlces. Whena company because its belief highethics perceived such, of in is as anycrisis mishaps or the along wayis tolerated thecustomers a minor by as aberration. preferred Suchcompanies alsoguided theirethics survive critical are by to a situation. values identified are ensuring organizational that behaviors aligned those are with values. An organization a strong places customers, with ethical environment its interests as foremost. Ethical conduct towards customers bullds strongcompetitive position. a lt promotes strong public a image. PARTC Question 8 Attempt any fourof the following : Explain briefly roleof business sustainable the in development thelightof IJN in GlobalCompact initiative. '"fhe sustainability repoftingguidelines developed the GlobalReponing by 0i) lnitiative(GRl),Netherlands, a significant is system thatintegrates sustainability 0

PP-GBESr.June I 201

38

::;:;;;':"fl!ffi**r
(iii) State and enumerate col

orrepoftins " Enumerate steps use the to theGRI

sustainabititv assess'nenl criteria underthe Dow-Jones susta,r"o,,oilfJS'f. resutatory rramework the and tandmark cas6taws respect in
(5 marks each)

(tv) Write note on the ,Convention on Biological Diversity,.

,,

,;l:,;:::ll,:::

of waterpollution. Answer g(i)

.,ffi1ldi*:l;;#irT:;tr ;l:tkrT'#"rifj"il:l#'Jri,ffi
In this direction,tjnlted NatLns i 'q,,,q,, ovr,,sry as a ptvotal roleto ro,e play. to p,ay lJx1ffi:j:h:ly.',iff":: rfn,':l,TjrTyJT has a stratesic :":,"r' a,pivora,potily compact, ',i'?"nl]!l nitiarive The Global Compact a voluntary is corporate jnitia ve withtwo citizenship

ror businessos Y,I-Gl"o.?' j[?l I,.f,.*",H:*ff :j:":,:,T41,"" ::::tn,r,.",l^ililll'L1".1{i ru",j'!1"1j;i.'jffi ^-:i j:l.::ffi l;T ::iy1?::*"^',::Trl:.;;;;;;;i;il#ff;::l:T"1,::X technorogv il*i:ffi:i,l;:J.ll,',j"'i::':^,""-::jr:!,'i;;; and rinance advance that inwavs benefit "lillj"iiill.ij'?'.,1;1#TI econ;;;;r"";;.r#ii:'"t;il[ilfri?8.
the Global compact its principres of busrness and parl srrategy and
objectives:

"o"r#|lJ"n

amons stakeholders promotins kev and partnerships rrooS;"Jit;i',|:n""""",5.?ration in

A companythat signs_on the Global to Compactspecifically commjtsjtselfto: set ln motionchangesto busjness operatjons that the GlobalCompact so and become part

j|i$:Ir:"

ot ,nun"j"t"ni,

and ",.","s1/,';rftu.", day-to-day

pubtish itsannuat in ,"olj.?flT,]:iqubtic repon sustainabitity (e.g. report) description ways whichcorporate a jn of the rtissupport,.ft Global ' = the --Compact andtlsprincjples (Communication onerogr"..j, pubticly advocate c]:,?1t-Compact itsprinciples the and -. -" vracommunications vehjcles suchas press
releases, speeches. "t"

Answer8(ii)

ffiff:"[l?illffffrmance

A sustainabirity shourd report provide baranced reasonable a and representation of or reportins a

orsanizaiio;:;;]uiins ootf, positive and

G R I S u s t a j n a b i l i tR e p o r t i n g u i d e l i n e s , y G principres, Beportlng viz. Reportinguioun"" e anodianjrro"b]l",o"rr"s (incrudjng '"0'"ators) These three elements considered equal weight are toJe in l;l;;Til* and

T h e r ea r e t h r e ee l e m e n t s f t h e o

pp_cBEs_-June 1 201 Thesteps usetheGRIReporng Framework to areas follows: 1. ldentify topicsand related the indicators are relevant undergoing that by an interactjve processusingtne erincipres lr-rn'"t""i",,,y and stakehorder inclusiveness, sustainabilit cont"*t,unO n"po.t'el,inouriur. 2. Whenidentifying toprcs the consider relevance all jndicator the of aspects rdentif jn theGRtcuidetines appticaOL ied and s".tli.-uppr"."nt". 3. Fromthe set of relevant topics and indicators, the testslisted each use for Principte assess jchtop anO to jcs wh inOicators ai"ilateriaf 4 use.the principres prioritize to serected topicsand decidewhichwi||be emphasized. 5. Thespecific methods processes or used assessjng for matenality be_ - Djfferentiated andindentified tor by eachorganjzation. - Dpendent theguidance on andtests ,ound theGBl Reporting in princlples, _ Disclosed.

39

Answer8(iii) Jgl"s.sustainabitity Indices thefirst are gtobat indices ^^-]f -??* lracking tinancial the penormance thereading ot sustainaoirity-oriven comiJ". *oirorio", it wasraunched TheDowJonesSustainability_ Index World (DJSI comprises morethan300 conpanies represen*he t oz. ot *re teaoingWorld) rhat top .r;i;i;;;i;"",npanres ourof the --"", brggest 2500companies theDowJones in Worldn"OLr.'f Sustainability Assessment Crlteria under Dow_Jones the Indices as is unO"Cr:rOoru," Dimension Economic Criteria Codes ConductCompliance of / / CorruptionBribery & Corporate Governance Fisk& Crisis N4anagement6 hdustry Specifjc Criteria performance Environmental (Eco-Efficiency) Environmental Reporting. hdustrySpecilic Criteria ph Corporate Citizenshjp/ jtanthropy Labor Practice Indicators Human Capital Development Weighting(o/") 5.5 o.u .0 Depends on Industry 7.0 3.0 Depends on lndustry 3.5
J.U c.c

Environment

Social

PP-cBES-June 1 201

40 3.0 5.5 Depends on Industry

Sociat Reportjng. Tatent Attraction Retention & Industry Speciric Crjterja Documents jnclude: analyzed Sustainability reports Environmental reports Health saletyreports and Social reports Annual financial reports

Special reports on,inlellectual managemenl, (e.g. capital corporate governance, R&D, employee relations)

lffl'|il:i:"es
AnswerB(iv)

ofcompany informafion;inrernat e.g. documentation, brochures

The convention Bioroqicai on Diversity, knownintorma[y. the Biodiversity as convention, an internationar thatwa; is i,eary adopt"o nio J" laneiroInJune.1992. in TheConvention three has malngoals: 'I. conservalion biological of diversity; 2. sustainable of itscomponents; use and 3. tairandequltable sharing benefits of arising fromgenetic resources. is national strategies theconservation ^-_ | :.tn"ryotds, its objective to develop for

li3,#r;;i:fj"lseoI

biorosicat diversiry. rris'orten seenlL.l'#k"i oo"urn"nr resardins

Someof lhe issues dealt withunder convention the include: - Measures incenlives and forlheconservalion sustainabls and useol biological Begulaled access oenetic lo resources traditjonal and ^ knowledge, priorInrormed including Consen-r the partypi""io"s i".il;"l. of Sharing, a fairand in resufsof research devetopment and and the benetits "qyl,1,:Jur,rhe arising ,romthe iommercial Jinll, urif anO ization genetic of resources theContra,ctin_g providing with party .r"h i"-rorr"", (governments

ill;il::ffiililunities
-

that provid"o tn" t,"oltonuii'"*r"og" i,iii"Ji'"iriiy

i,aiit-'n"r r,no*i6os" ";ci

:iliJ:ff:frflHrocar

Access and transfer to inctuding biotechnotogy, to the ll*gl,:o,g9y,prouioec communities ti'it

41

Technical sclentltic and cooDeration. tmpacl assessment. Education publjc and awareness Provision financial of resources.

PP-cBES-June 1 201

National ieporting efforts implement on to treaty commitments. Answer8(v) Case-laws Waterpollulion on rhe M C Mehtav. Union tn^dia(l]R of lqg8 SC tO37) atsoknown TheKanpur as pollution Tanneries Ganga or caseis among mostsignillcant the water pollution case. Detaired scientific investioations the re"poris and *;;";;;;;;;o berore court of the Evidence. Supreme The iourt held: in interest ritigation owners some thetanneries of of drschargrng , ---|ngrg ouuric effruents in.canga and not setting a primary up rre"tm"ntptantin spjteof I:,T^,l:iiJi:,"r:"s oetng asked do so for several to yearsdid notcare,in spiieot notice them, to evento enter appearancestheSupreme in Court express to iheiiwiltingnessrateappropriate ro steps estabrish pre-treatment itwasherd lo the prants thatsofaiastheywere concerned on order directing to stop them working tanneries their snoulo passeo. wasobserved ue rt thatthe.eff discharged a tannery tentimes luent trom is noxjous 'rrlln'ur"ucompared the when wjth domesric sewage water which frows theriver into fromunf on itsbank. was rt lurther observed the financiar lhat capacity the tann;ries of -primary shourd considered be as irrelevant while requiring themto establish tre"t.""t pi""tr. In Vineet KumarMathurv. tJnion lnd,at(1996)1 SCC.l191, Court of the tooknote thecontinued vioration thestate,as we| ai industries coniinu,ng potute of of oy ro water bydischarging etFruents arso notsetting orcomm|nenluenr and in up lrealment pranls. Thecourtiniaary directed ofticers the6tat" poirrtion the of e-;"roto visittheporuting industriar estabrishments makea freshinspection and prants oitn.-" Eirir"ntrreatment installed thesaidestabrishments ortherr in and wo*ing.ntt"r rip""tion, if it wasround tharthetreatment prants dericient anyrespect are in orihedeficiency po,nted earrier out still continues, Boardwil| give reasonaui" the tir" toiir'r" industries cure the to deficiencies However, timeso given the shourd nor ;"-yono deadrine up the set by the court rhe Board "rt"no was directed fireits report to witnin'trrteen The court days. turther herd thatit theindustries notobtain do tne oi ini statepotution Board fof ftrnning units, their "in"ent before fixedtimerimi.heinor.tri"" .top runctioning the there "iii