cs professional programme group 4

8/3/2019 CS Professional Programme Group 4

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PROFESSIONALROGRAMMEXAMINATIONJUNE201

DUEDILIGENCENDCORPORATECOMPLIANCE ANAGEMENTTimeallowed:3hours Maximummarks 100NOTE Ans!.yerSlX uestionsncluding uestionNo.1whichs COM7I)LSOR(.Question

(a) State,with easonsnbrief whetherhe oltowing tatememsre rueor false(i) A companyegistered ndersection 5 of theCompaniesAct,1956shattbe requiredo haveminimum aid-up apital f.S akhorsuchhigher aid_up capitalas may beprescribed romtimelotime.(ii) Remateriarisationeans heconversion fphysicar otdings ack nto heelectronicholdings.(iii) All tees/compensation,f any,paid onon-executiverectorscanbe fixedby heBoardof diectorswithoutheprevious pproval f theshareholdersina generalmeeting.(iv) TheSecurities ontractsRegulation) ct, 956 states hat f a companvfails o cornplywith he istingconditionsor delistingconditionsorgrounjsor connnitsa breach hereof,t shallbe iable o apenaltynotexceeding20crorc.(v) A companynot eligible o raise unds romthe ndiancapitalmarketwill notbe eligible o issue oreigncurrencyconveftiblebonds

(b) Criticay examineand commenton the ollowing (2markseach)(i) A remunerationommitteemaybe set-upby theBoardof directors.(ii) Asper SEBI egulations,very ssuers requiredo submitaudit epoftona quanerlybasis. (S markseach)Answer'1(a)(i)

False: Accordingo Section (6 )of theCompanjesct ,a Companyegisleredunder ection 5 before ra{ter hecommencemEntf companes(Amendment)Act,i009, sl3! no t be required o have minimumpajd up capitat pecifiednderSection (6).Answer (axii)

False Remateriarisationeansonversionfdemateriarizedharesi.e. rectronicholdings)ntophysicalotdings.Answer (axili)

False: As perClause 9of the isting greement,ll ees/compensation,f any.paid o non-executiveirectors,ncludingndependentirectors,haI be ixedbv he


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PP-DDCCt/_June2011$'li1+##i*,['ffii'rii*Tfiff#Fiiry;*gAnswer (aXiv)

iii[i:;""ff!"fi:;ild[f[:,,,;#*l;fil:;,{{*H"""Answer (axv)::ii[dr;:iit"",.T?X#;J#.,i;ili::SfJ:::J,?:*x**n*":+l***#u,

Answer (bXi)

*#:*'":l'ni1;fl"g-,,fu,;,fr','t]'trtp:*i:,:;i"imlT'"#r**l$"'il":,Answer 1(b)(i i)

::f i{,:a-ii,ll.'.ilJlT'"x.jfT#ffl"l:?,?t":;ly,?,.".1ee6provdesiJ:i::',ffi'"1':l:U;:,*n::1,:*;,J"1"d..!i#ffiltasstotheconc"'n"J.'o"i;':ff#ilTft;::frlft1':#''ffi{f'{#iil:"?-:nda","".:.u#,#,T*1,ffi'.Hitililt'*,41;';it*****##*t*{*u#':'tr


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3 pp-DDcctvt_June2011Question 2'' [il:";:;,'"st appropriate answerrrom thesiven options in respect t the

(i) Where a company f:i!?.,t?.clnpty with the requireme ot titing theompttance errifcate.y:t! tl: R,eSiAra,"r i"ii"i,,i"", everyotticerof thelompany and thecompanyshau6e prri"niit" iui.i ii" whtchmay extend(a) < 250 per day duringwhich thedefault continues(b) < 1 000 per day duringwhich thedefault continues(c) T500 per day duringwhich thedefault continues(d) < 750per day duringwhich thedefault continues.( ) f:;:::::E4s:r the tistins sreement, theBoardor directorssha, meet

(a) 2 Times(b) 3 Times(c) 4 Times(d) S Times.

(iii) Whena chargeon the a-s^:,t::f th.e ompany s satisfied,which oneof theolowins forms s required o be fited;ft;;; ;;;t;i;;7.or companies _(a) Form No.10(b) Form No.t2(c) Form No.g(d) Fotm No.17.

fivl ,! lTy ygUl regutations,n ndianartyspermittedomake n nvestmentoverseasointventure/whollywned uLsiaiariiot.)r"rro,rg *.@) 1no/"(b) 200.a(c) 400%(d) 500%of itsnet worlhas on the date of the lastauditedbalance sheet.(v) Theproceedingsof eachgeneralmeetingof the ompanyshouldbe entered(a) 60 Days of the meeting(b) 45 Days ot the meeting(c) 90 Days of the meeting(d) 30 Days ofthe meeting.


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PP-DDCCN4--June011(vi) Which. f the foltowingActs does notcome undet thesecuritiesaws_(a) Securities ndExchange oardof tndiaAct,1gg2(b) ForeignContributionRegutation)Act, 976(c) Securities ontractsRegulation) ct,1956(d) Depositoriesct, 1996.(0 Distinguishetweenhe ollowing(i) 'Equityshares' nd sweatequityshares,.(ii) 'Buy-backof shares' nd redemptionof shares,. (5 markseach)Answer (aXi)

(c ) Rs.500perdayduring hichhedefauttontjnues.Answer (a)(ii)

(c ) 4 TimesAnswer (a)(iii)

(d) FormNo.17Answer2(a)(iv)

(c) 400%Answer (aXv)

(d) 30daysAnswer2(aXvi)

(b ) Foreign ontrlbutionRegutation)ct ,1976Answer (b)(i)EquityShare

AsperSection 5ol theCompaniesct1956, nequity hare apttatsonewhichf^:.?t^1p1"1::"*e hare apitat. hismeanshar h" norj"i" oi "qrity shares onotl]-1venyprererentiarights f eceivingividends.heywirr eceive ividendnry fterthepreterenceividend asbeen aid.Theyalsodo nothaveanyprrorrtyveipreferenceshares egardinghe repayment.ofapitat t the imeof iluiOltion , thecompany,Equity hareholdersave otingights.SweatEquityShares. SweatEquity haresmean quity haresssued y a companyo tsemployeesrdrrectort a discount r forconsideration,ther hancash oi proviOingnow_howrmaKrngvairabreightn henature^ofnterectuarropertyights r varue dditions,ywhatever ame a ed. Section 9 A of theCompanLJeci, lrmits ssue f Sweatequity.sharesoemployeesrdirectorsnrecognitionf hejr onkibutionorprovidingl(now-howtc.

purvrcwof the

(1markeach)


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Answer (bxii) 5Buy-Back f Shares^. .,1:. O: , Secrron 7 A of rheCompanies cr . 1956,aulhonzationf ttsArticles aypurcnasetsownshares

PP-DDCCM-June201 j

d;:#Hi:,:'jject '1ohe.r",9, J:'"1;:;::::rvesii ) he ecuririesremium ccount lij) he proceedsot any, Thebuy-back f sharessharehorcreisr ,,;r;;;;;Iil,f'iiffi#" L::ff: "sorsharesromxistins

',u:'fr":l;ffifl f1i:1":J",:'ffl 1n:XT?iJTl""?:T'\4eetsutho'znsRedemptionof Shares""fi:ffi f ::"11;i,'i:"::Iiili:.#,:;"11?$:::3:.,:Xi,""^,,ic,c(i) Proceeds t tresh ssueot shares_or(i i) out of profitsavailabteor dtvidend.

Further,no such sharescal;:x'"ffilE:::il;i$j,;;3.'i:i"'?i*lffI J:",i:l:,t:l:.,TL":,li:Question3

(4 :::fl:ni:X;i!:"""[u^'37l?toi.no.g"rtiticateotpractice.,hitessuinshecue ,e , i:i', ;i: f;:;?:i;: "f;# ?i,g";!; , ::l!: :li: ;*1st meeting2nd meeting3rdmeeting4th meeting5th meeting

26thFebruary;01030thMarch, 01026thMay,20t030th une,2010l st October, 010

(b)

(c)

6th meeting 2,th December,2010Do you feel that there s anv vi(I gs6 ? Exptain. 'lationof the provisionsof the companies Act,swadesh hasappIed for shares n(lcrptn^t^\,^^- ^.^^t. -.,.. (6 marks)yan9"oliitrI;;;;;;;;;7,;:iT,:ff:fZi;,1:1":f::;;*",:;,,:;?fJ,::;:::l:: ':,?i::i;:d' vnodcomment' ti""neix iiiJio, nin-t,ansreratirity'MCA2t offershe acitityoview-doc-umentsand atso""r"n"ro ",nJl,],,,,!,"1"tpubtic ocumentsntine.,.xD.tain_t.heratemenrii-nirri',J r," pro""orr"orexaminationf ecordsited yacompany ith hi ;;oiili "i6ffi,


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PP-DDCCM*June2011 aAnswer3(a)

Sectjon 95of heCompaniesAct,,956prescribesthat n hecaseof every ompany,meertng f the Boardof DirectorshallOeheldat teaslon""' in""u"ry nr"emonths ndt teast oursuchmeet ings ha be hetd " " ; ; ty ; '" " ' .

It has beenclarif ied o on oas fourboardmeetings re held na calendar ear,on en eachquarter; he nterval Jtween wo_meetjng.ut ;" ;;;e than3 months. Fornstance,f a meeting s heldon January 1,ti,e nexfmelting m-ay e heldon June30,he hi rd neon 1stJutyand he ourrh n" i " on n" g1;"OJ"" io"r .n]rriililiJ. irmust eensuredhatneach uarrerfacatendarear board eetrng

In the givencase, t i s observed ha t th e boardmeetingha s been held n eachuanerof thecalendar ea r20Og xcept n ,f,r"qr"n", iJrVrOS o SeptemOer S1.e .hersnoboardmeetingn he3rd ur.t"ror .ru[6sio "J,#b"|.og"f the arendarSo there s a violatjon f section g5 of th e Companies ct 1956.Answer3(b)Check points for Non_Transferabil i tyof Option under ESOS(i) Check ha toptiongrantedo an employee snot ransferaoteo any person.(ii) (a ) No pe;sonother ha n he employee o whom he option sgranted hallbentj ed to exercise he option.(b) under he cashlessspermttheempan""{ililil".F?:"li?;,llli"iT,Xll"T;whichsh a be adjusted gainsthesat" pro"""JJJi.orne or a theshares,ubject o the provisions f the Companie; ;i 1r;;:(i i j) Check ha t he optjongranted o,theemployee s not pledged, ypothecated,mongaged r otherwise lienatednan yothermanne1.- -'(iv) Check ha t n the eventof the deathof employeewhile n employment, l l theptions rantedo htm tllsuchdate ro,,o.i.-,ii-^-.;^;^:^, "thedeceased mp,ou"". t"n dateare vested n he egalheirsor nominees f

(v) Check that in case th e employeesuffersa permanent:-Tl]?lTglt, ail rheoption rantedo hi . ;. ;; i;;'Incapaci tat ion,hal l est n himon thatdav.rncapact ty hi le ndate of permanent

(vi) check ha t fanemproyeeesrgnsr s erminated,I options olvested sonhat ayexpire. owever,heemproyeeha[, ubjecto he erms no onditionsormutatedy compensaiionommittee, " "n,itf"J o-rltainal l the vestedptions.(vir) Ctl_eckhat,heoptionsranted,todirector,ho sanemployeeran nstitutionnd hasbeennomjnatedy thesaid n.t,trtion, u" nJi-deenenouncednavour f nst i tut ionominatinqim.


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Answer (c )MCA-21 ffershe acirityoviewdocumentsndarso earch ndother aciritiesfpubl ic ocuments.his aci l i tyshandyorusers ndbanks nd inancialnst i tut ionswhi le anctioningoans,This aciritynabresiewing fpubric ocumentsfcompaniesorwhich aymenthasbeenmadeby user. Thedocumentanbe viewed nlywithin daysafter itepayment asbeen onfirmed. lso, hedocumentsreavailableoronly3 hours tter heuserhasstarted iewinghe irstdocumentl thecompany.(a ) Userhas o access,4yMCAportal nd ogjno heMy MCApcrtal.(b) Cl ick n he'MyDocuments,tabfteroggjngntohesysrem.(c ) Listof company ameswiflbedisprayed,orwhich serhave rreadv airi orpubl ic iewing.talso isplays

(i) Dateof request.e , he date,whenusermade he requesto view hecompanyocument.(ii) Status f he equest.e.whether iewed r toview.

(d ) Click n heview inkunder tatusleld.(e ) Thedocumentsregrouped nder ivecategories.e.userhas oclickon hedesiredategorynderwhichhedocumentalls.(t)ll more hanonedocuments isted,heuser anarrangehemnamewiseordatewise.(g ) On clickinghedocumentame,hedocumenthall edisplayedor viewing.Thepublicocumentsnderhisacilityreavailableor iewingypublicnpaymentof equisiteee .Public ocumentsncludencorporationocuments,harge ocuments,annualeturns ndbalanceheet, hangendirectorsndother ocumenrs.

Question |(a) Whatdoyou meanby 'personsactingnconcert, Whowillbe deemedobepersonsacting n conceftas per the SEBI Substantial cquisition f Sharcs

and Takeovers)Regulations,1997?

PP-DDCCM-June01

(6 marks)(b) Sunil s a Company ecretary olding erlificate fpractice.He hasacceptedtheassignmentf secretarialuditofXyZ Ltd. or he inancialearended31stMarch, 010.He receivedhenoticeof hisassignmentn lSthAprit, 010andsigned heaudit eporton 30thJune,2010. t is noticedhat Sunil easedo bea Company ecretarynpractice rom st June,2010.Examinehe validitv ftherepoftdated30thJune,2010 ignedby Sunil. (S marXs)AmarPropefties vt.Ltd.was ncorporatedy Amarand his hreesons.Theissued ndpaid-up apitatvas


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PP DDCCM-June 011NameAmarAmar and his tirstsonAmar and hissecond onAmarand his hirdso n

No .of Shares10 0600600500LegTotal

On thedemise of Amar, his wife claimed hather atehusbandheld 1 800 equityshares ointly and severally. He had left behind a will and she accordinglyobtaineda probate n her favour n respectof the abovementionedshares romthe coun and applied o the company or transmissionof all the 1 800 shares nher tavour. The company transmittedonly 1A0shares in the name of Amar'swifebecause of complaintsmade by the other survivors.Amals wife has ileda petition under sections 111(2)and 111(4)ol the CompaniesAct, 1956challenging he actian of the company. Preparea note for the company aboutthe defences t may take. (5 marks)Answer4(a)

Accordingo Regulat ion(e)ooSEBI SAST) egulat ions,997, person ct ingnconcert" omprises,-(1) personswho, or a commonobjective r purposeof substantial cquisition fshares r vot ing ights rgain ing ontro l ver he arget ompany, ursuantoan .rqreementr understandingtormal r in formal) ,i rect ly r indi rect lyo-

operalcby acquiring r agreeingo acquire haresor voting ights n he argetcompany r contro l ver he arget ompa ny,(2 ) wilhoutprejudiceo thegenerality i thisdef nition,he ollowing ersonswlllbedeemed o be persons cling n concertwithotherpersonsn hesamecategory,Llnlesshe contrary s established:

(i ) a company,tsholding ompany, r subsidiary r such ompany r companyunder he samemanagement ither ndividuallyr ogetherwitheachother;( i i ) a companywi thany of i ts d i rectors, r any personentrusted i th hemanagement f the undsof the company;(i i i) directors f companies elerred o in sub-clause i)of clause 2) and heiras oc ates;(iv) mutual undwithsponsor r trustee r assetmanagement ompany;(v) foreign nstitutionalnvestors ithsub-account(s);(v i ) merchant ankers athhei r l ient(s)s acqui rer ;(vii) portlol iomanagers ith heirclient(s) s acquirer;(viii) venture apital undswith sponsors;(ix) bankswith inancia l dvisers, tockbrokers f heacquirer, r anycompanywhich sa hold ing ompany, ubsid iaryr re lat ive f heacqui rer :

Providedha tsub-clauseix ) hallno tapply o a bankwhose ole elationshipwi th he acqui rer r wi thany company, h ich s a hold ing ompany r a


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subsid iary f the -^^ . , , -^ - " . , PP-DDCCfr4 'June 01ilil "1ffi"T,#fii""",:i11iffi::,"JE ,,f :"?iijJj""."p,"n"".no,i;Jlffil:i"ffi"#irminsvaitabit,tvt'"J' n"".,1,"g(x) any nvestment(rundmanaser'"'S:,ii:li'a*liffi:'-ilx,#.xl:::?'j"";3f:Tf he ajd_upapiralf hat ompanV"i "i,n iu "ilrnwhichuch ",."on,r..,i,"."5;;i"1:i::1:1 :^?^ernv-estmentompanypaio-upapitart noJ1,::"ffi:1i" hordsoi eAsnan pe 'cent r h !Answer(b)The Boardappointed/tr.Sunilas Secretarial uditor.He wa sCompanySecretaryordingertifcate rpractice.wniresuniLereiv#; ^i;;J: on rsthAprir 01 heasPractisinsompany ecretallwherg s"; ,h""i;;';;;;;ng ofAuc,it eport easno tcompanv ecretarynpracticen ermso] 6;;;;;;!r"r",".es Act,1980.ence eport ubmittedscompany ecretarv" prJi";rJ. norvalid.Answer (c )SinceheprovjsionsfCompaniesct ,1956/Articlesrebindtng n hecompanyff#""Jf ,"J"JJ"'I,il:J,"Jf' "Ill't ,1' ,; i" "*i"i i, to 6 +6+ ).rui'ny,.r,,iu-";ffi :;fi:i",::'ii:J:'Y#iTim m::lniU:::i;ii#j;ffiff ilffn':J:i,v non","roi"i"i.*, ,,nliil."n,nsransm,ssion

.r",::1.; l ;:ll?Jif,i';"J$i*,,on,wife fAmarsenriiledoonryn espectf100onlythe0osharestoher.Th""^:a:^:- tATar 'The ompanyas rghtn ransmitt ingeoiro n nis "s"l". '" ' '' ' t ' complalnantannot etany eliefrorn ompany aiThispresentase ssimilaro thecase n Smt.Bivapyne . pynepropefties(p )td .andothersl2otl 94CLA192 CLB). .,r,,"""* blili"To in",,n" petitionerwas;::H:J::#ffiil:;,;" "n,r n espectlsharesnicn ere Jo n he oreamef

Question(a) Re-writehe ollowing entencesfter illing-inhe lankspaces ithappropriateord(s)/figure(s)

(i) promoters'contribution as -o e broughtn as per the SEBI uiclelinesbefore he___ ofpubtic iss,ie,.(ii) tndiandepositoo""",,y:?:n:^1!;_-_ ._-_- in theormofdepositoryeceipt reated ydomestic epositoryi nA^(iii) Thedepository articipant harr e.dresshe grievancesof thebenefi,atwnerswithin_ of thedateof ceipt it ,r, "orptuint.iv) Form No."'''i",i,iu"^;;u*"*,,',lniiL!:{:,LL:;r:!;i"!:::AX;",,1;'J


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PP-DDCCM,June2011 '10

(D)

/t \

(v) Legalduediligence s a__ operation hroughwhrchonecanhnow heslrenglhs nd weaknessesf a Company.(vi) F_vety ompany accepting deposits rom the public has to tite with theRegistrarof campanies the return of depositsunder sections6A of theCompanies ct,1956on or before_ _ evea, e)r.(1 nark each)Ka.treena td.,a ristedcompany,wants o make an issueof secuntasthrougha ngnts ssueand theaggregatevalueofthe securities ncludingpremium exceeds


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2 .

3.

6 .

A

5 .

11 PP-DDCCM-June01rssue. t may be noted hat the issuershall not withdraw iohts ssueafterannouncementf the recorddate.. lt he ssuerwithdrawshe rights ssueafterannouncingherecorddate, t shallno t make an applicationor l istingof any of it s speciliedsecurjties n anyrecognised tockexchangeora periodof twelvemonths rom he recorddateannounced.However, he ssuermay seek isting f iis equitysharesallottedpursuanto conversion r exchange f convertibleecuritiesssued rior o theannouncemenif the record ate,on herecognjsed tockexchangewhere tssecurities re isted.

Rstrictionon rights ssueNo issuer hal lmakea r ights ssueof equi ty hares l i t hasoutstandingul lyorpart ly onvert ib leebt nstrumentst he imeol making ightsssue, ntessrnasmade eservation f equity hares f he sameclass n avourof heholclers f sucnoutstandingonvertjbleebt nstrumentsnproportiono heconvertiblear t hereof.Th e equityshares reserved or the holdersof fully or partjal ly onvertible lebtinstrumentshal lbe issuedat the t imeof convers ion f such convert ib leebtinstruments n the same termson which he equitysharesoffered n the rightsissuewere ssued.Letterof offer, abridged etterof offerThe abridgedetter l offer ,alongwithapplicationorm,shallbe d slratc hecih oughregrsteredostor speedpost o a l l he ex is t ing hareholderst least hreedaysbefore he dateof opening t the ssue. he et te r f of fer hal lbe givenby theissuer r eadmerchant an er o any existinq hareholder ho has nacle requestin h is egard. heshareholdershohavenot receivedheappl rcalonormmayapply n wr i l ing n a pla inpaper, longwi th he requis i teppl jca|onnoney. heshareholders aking ppl icat iontherwisehanon theappl icat ionormshal lnotrenounceheir ights ndshall otuti l iseheapplicationor m oranypurposencludingrenunciat ionven f i t is received ubsequen . l f any shareholder akesanappl icat ionnappl icat ionormas wel las on pla in aper,heappl icat ions iabieobe rejected.PricingThe ssue r ice hal l edecided efore etermininghe ecorc ilate h ich hal l edeterminedn consultatio n ith hedesignated tockexchange.Periodof subscriplionA r ightsssue hal l e open orsubscr ipt ionor a minimum eriod i i i t teen aysand or a maximum eriodof thirtydays.Pre-lssueAdveftisement or rights ssueThe ssuer hal l ssue n advert isementor ightsssue isc los inghe ol lowing:(a) th edateof completion f despatch f abridgedetter l offerand he applicationform;(b) th ecentres ther han egistered f{ice f he ssuerwhere heshareholdersrth e personsentitled o receive he rightsentit lementsmay obtainduplicatecopiesof the applicationorms n case heydo not receive he applicationor m

with in reasonableimeafter pening f he r ightsssue;


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PP DDCCMJune201 127 Obligationol issuer/intermediaries

The obl igat ion f issuer/ intemedar ies or a r ights ssuer, wi th respect oadvertisement.ppointmenl l compliancefficer, edressal l investor rievances,due dil igence, ost issue reports,post ssueadvertisements tc is sameas theoubl icss e.Answer5(c)

As given n heproblem, ormally,hequorumor heboardmeetings f thecompanys three, hich s naccordance i thSect ion 87o l heCompanies ct .Themeet inginquestion as held or ncreasinghe strength f board o meetout he criteria rescribedlorquorum, hereas, egulat ion5ofTable of Scheduleo heCompaniesct ,1956provides hat when he numberof directors l th e company alls below he requisitequorum.hecontinuing irectors r director resent ouldbe hequorum or hepurposeof ncreasinghenumber f directorsequiredo havea quorum, ut or nootherpurpose.

l t was held n ,4annala lhetan KedarNathKhetan 1977) 7 CompCases185(SC) heonlyproposalhat hecont inuingi rectorsould ave onsideredn heBoardN4eetingas to increase he numberof directors nd nothing lseand even he Boardwi lh he quorum stabl ishedn hatmeet ing annot onsider ny temother han heappointmenti d i rectorsor hepurpose f const i tut inguorum.Therefore,he boardmeetingwouldbeconsidered alidand heappointmen t f woadditional irectors /illalso be valid. However, ecisions f any taken n that boardmeet ing ther han he const i tut ionall theboardwouldbe consideredul landvoid,even f t s n he nterest f the comDanv.

Question6(a) Mention hepossiblehurdles n carrying out a legaldue diligence. (6 marks)(b) MPS Ltd. s an educationalnstitution egisteredas a societyunder he SocietiesRegistration Act, 1860. lt wishes to make overseas investment in UnitedKingdom by establishing a whollyowned subsidiary to run schools in thatcountry.Explain heprovisians elating o overseas nvestmentsby a registeredsociety.(5 marks)(c) Mention he various ecords equired obe maintained y depository afticipantsunderthe DepositoriesAct, 1996. (5 marks)

Answer6(a)Possib leHurdles n carry ingout a legaldue di l igence nd remedial c t ions

1 Nan availabilityof informationln rnanyoccasions, hen a person arr ies ut due di l igence,he requi redinformation ay not be available r insufficiento derivea complete icture.

2. Unwillingnessof target company'spersonnelin providingthe complete nformationNon-co-operationf argetcompany's ersonnelmay alsoprove o be a majorhurdle uring uedil igence rocess. ometimes,he availablenformation ouldbeorelended s nolavai lable.


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13 PP DDCClvl-June0113. Providingof incorrect nformation

Providing f incorrectnformation y the targetpersonal lso acts as a majorhurdlen heduedi l igencerocess.4. Complex ax oolicies and hidden iabilities

Complexaxpol ic ies structures aycreate number l h lddenax iabrt r t res,whichmay not be easy o track.5. Multiple Regulationsand itsapplicability

Owing o henewandemergingegis lat ions,t sdi f f icu l to nterpret hetherspeci f icegis lat ions appl icableor business ndget t ingegal p in ion n thesamewouldprove o be very costly.6. Process n providingdataMultiple ayersof reviewand scrutiny eforedata s providedor due dil igencealsohinders nddelays heduedi l igencerocess.

7. Absence of DroDerMISDuedi l igence rocess ouldbecomu i f l icu l tl there s no properMIS n hecompany.

Actions to break hurdles in due dil igenceThe ollowing ctionsmay break he aforesaidhurdles- Focus ol low p quest ions.- Ask severalpeople he same questions nd uti l iseappropriate rofessionalskept icsm.- Politepersistencemay help o overcome his attitude.- Independenlheckwi lh egulato 'yutho/ i l ies.Consider ingh jshurdles,t sadvisableo nser the necessary isc la imerlausesin hedue dil igence eport.

Answer6(b)Overseas nvestmentby registered ociety

Registered rustsand Societies ngaged n manulacturing educational ectorset up hospital n Indiaare allowedmake nvestmentn the same sector(s) n a JointVenture rWhollyQwnedSubsidiary utside ndia,with hepriorapproval f he FleserveBank.Trusts/Societ iesat is fy inghe el ig ib i l i tyr i ter ia s givenbelowmaysubmit heapplication/sn Form ODI-Part , through heir AD Category | bank/s, o the ChiefGeneralManager, leserve ankof India, oreign xchange epartment, verseaslnvestment iv is ion, entra l t f ce,AmarBui ld ing,5thloor, or t ,NIumbai40001 orconsideration:(i ) The Society houldbe registered nder he SocietiesRegistration ct,1860.(ii) The [4emorandu m f Associationnd rulesand regulationsermit he Societyto make heproposednvestmentfrich hould ls obe approved y hegoverning

body counci l r a managingexecut iveommit tee.


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PP DDCCM-June O' i 1 4( i i i ) TheAD Categorylbank s satisf iedhat heSocietys KyC (Know ourCustomer)ompliantnd sengagedna bonafdeactiviry;(iv) TheSociety asbeen nexistencet eastora period f hree ears;(v) TheSociety as notcomeunder headverse otice f any RegulatoryEnforcementgencyike heDjrectoratef Enlorcement,BIetc.Inadditiono he egistration,heactivitieshichequirepecialicensepermissioneitherrom heMinistryf HomeAffairs, overnmentf ndia r om he elevantocalauthority,s the casemaybe, heAD Category | bankshould nsure ha tsuchspecialicensepermissionasbeen btainedy heapplicant.

Answer (c )Depositoryarticipanthourd aintainhe oflowingecordsorperodor ive ears:(a ) Form ubmittedy heclient or:Openingf accounts.

Closing l accounts.Freezingf accounts.DefreezingfaccountsDeliverynstructionsiven y clients.Recordsl allactionsaken n heexceptioneports eneratedy hesystem.A Registerhowing etails { grievanceseceivedrom he clients nd heirpresent tatus.lnstructlonseceivedrom heclearingmembero transfer alancesrom hePool ccounto heDeliveryccount f heClearing 4embernorder oenablehim odeliverhese ecuritjeso heclearingorporationorsetflementl rades.structronsivenby clearingmember uthorislnghe ransfer f securitiesfrom hepoolaccounto heaccount f tsclients.DematerialisationequestormsDRFs)ndRematerialjsationequestorms(RBFs)i l led ycl ients.(h) Forms eceivedn hecaseol pledge nd ransmission{securities.(i) Details f certifcates ent ordematerialisation.

0) Proof f despatchf DRFs ndShareCertificatesycourier.(k ) Details f certifcates, ent or dematerialisation,eceived ackalongwithobjection emo rom ariousomoanies.Question

(a) Explain hecompliancesequiredwith regard o any twoot the following(i) .Removal f a director.0i)'friangularmerger.(iii) Statutorymeeting.

(b)(c)

te)

(l)ln(s)

(4markseach)


15/42

t : ) PP-DDCCM-June01(b) Writenotes n any woof the ollowing( sectorswhere oreignnvestmentsprohibited

(ii) Eligibitityor issuancef ndiandepositoryeceipts lDRs)(iii) Closure f register fmembers. ( markseach)

Answer7(aXi)A director aybe removedromollice eforeheexpiry l hjS ermby-(a ) Shareholdersf heCompany;b)Central overnment;r (c )Company awBoard.la\ Removal Yshareholders

Pu rsuan t tosec t i on2S4(1 )of theAc t , thesha reho lde rso tacompanymay 'passing nordlnaryesolullont a generalmeeting'emove director etoreiheexpiry f heperiod f hisolliceHowever,he ollowingirectorsannot e|'"tou"d by the company nless therwisetipulatedn the termsof theiraooointment:{a ) a directorppointedy heCenvalGovernmentnder ection08 ;(b ) a directorfa privateompanyoldinglf ce or ifeon he irstdayofApril'.1g52whelher rno the s subjeclo retirementnder nage imit yvirtue

of hearticles r otherwise;(c) wherenecompanyasavailedlselt f heoptiono appoint ot esshantwo-lhirds f the totalnumber f directors ccordingo the principle lproportionalepresentationnder eclion65 ; I(d) a director ppointedya Financialnstitution/Banknderhe ermsof aloan greement.The ight iven y Section84 sa statutoryightwhich annot e aken wayby hememoranoum,rticlesrbyanycontractr anyother ocumentnd f tis soughtobe aken way, ucha provision illbevoid

b\ Removal f directorsy heCentralGovernmcntChapterVAof heAcl comprisingection 888 o 388E ontalns rovrsrons[g"toing po*", of heCentral overnmentoremove anagerialersonnell" Lotpiny tromoffice n therecommendationf the Company aw

Board/Tribunal.

(c\ Removal y Company awBoardTribunalWhere nanapplicationo heCompanyawBoard/Tribunalorpreventionfofpies"ionunderSection 97andmismanagementnderSection 98of hen"i, tn" cLenriornal findsha t he el;e{ ughto begranted,tmaybyorder,terminaterse laside nyagreementl he ompany ith directorrmanagingdirector r otnerpersonneionuch efmsandconditionss it may hinkus landequitable.


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PP-DDCC[,4-June20 1Answer7(aXii)TriangularMereger

t o

. tnangularMergermeansnthe malgamat ionof two compantes y which hersappearingompanysmerq-ednto uosioiarytsuiriuinJal"-punv un osharehordersr th ed'sapDearingcompany-recervu.nrr", l i r-n""Jr_;;X;:;,.n0""".Answer7(aXi i i )StatutoryMeetingn,",iJ"jt"i:[o::J,,'il:ii,?1":1111ld y".v ompanvimitedy uaranteendmonthsromrr" J,"? *i,j"iYlt:l-l 9"'t9 not ess ne ont' nor-tor" i,-]iigenerareetingf h"m".nbetne ompanysentitledocommenceu.ine"s,'otJastatutoryeering"n.,oon,ul^ol lerompany hichscalledsstaiut;tM;;;s.arenot equiredono'o,u,rioil"r"Jltll;life ime r he ompany ttr," Jo,.np"","lAnswer(bXi)'",,Jil;'3ili;i:n"#;J'nt " is reervermiftednarmostilsectorsxceptorhe

(i) Business t chit und,or( i i ) Nrdhr rmpany, r(iii) Agricuituraj r plantationactivities, r(iv) Realestatebustness, r constructionf farmhouses(v ) Tfading nTransferable evelopment ightsRealEslateBusiness oesresident,arlcon.me;"';i;;;;.1:*"1lliff;'"0'""t or ownships,onstructionr

,",,iJa"J:i:::lm:'J'lyffi:'#il'J,"iiffiT:I?nsnvestmentsserEMA0,";ffjj,lT"';"tfrxT,J:; flT[ent in heormfForeisnirectnvestmentsarso

Betail radingexceptorsjngle rand roductetailing)Atomic nergyLottery usjnessGambtingndBettingAgricurturcexcrudingroricurture,orticurture,everopmentfseeds, nimalusbandry,isicutrureandCu[ivation,Juug"rubl";,lur,;ro,oii.

"r..unO",ontroledonditjons"no "ru,":.:^::,,","0" "jr"_i.ju,iiiJ,l"",or'r1"noPlanl3tronsOtherhanTeaplantarrons.

(j )( i i j

i i j i )(iv)(v)


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1 7Answer (bXii)Eligibitityor issueof lDRs

PP-DDCCt4_JuneAO.1

(a ) pre-jssuepaid-up apitaland ree reserves as ro t,ff ff3?:llili:i"jili;"Til$il:il""j3ffiff:-$Jilili.:ffi',ili];;o 3::i[:Til;:flil":::X,"Jl,;'::fi!il:?yexchansensparenrountryn' *;:?r1Tlffi"^31"- l,l"ck.recordfdisrriburabrerofitsn ermsfprecedrngfive ear.:otP"ni"tAct'1956' orat eastn* " ,iri"urr"o'"Liu''J::,?H*:??i""j;[!'":";:ffi:j?ipl[,,?ffi :[il#"1fi;H#nswer 7(b)(i i i)

^. _ Section54of the CompanesAct,1956contains roceduff "*lllfrHgtil:#ffnrffi,fl:;:;ffilx;:fi"fi?i!?ir;:ffiT;:fi:,"J"::;""fr"T#'";ri'"11::"1:'-:'h"usi't"'i"'fJ;;:i#l::J::i:fl;Iff:vear,ut"" t j"l""ii"g'r[,l;::ff:i::", ,r1firnhe ssresateo'tv-ru"uy,n"u-"n-Question8

Criticallyexamineand commenton ahy four of the ottowino(i) An tndian company planning lo makea nuht;. ^H^. .Amenca eedno,,"n:l:,:i#r!:":;rf:"a pubtic rrern theL.rnitedtates r(ii) Thepreferentiat allotmtwo years. entmade to anyperson shallbe tocked-in or a periodof,,, ,::rri;::":l:rl:l|of thenteaderchantankeroensure he lespatchfshare(iv) The depositorysystemfunctionsvery much like thebanKng system.'' 2:f ft!;i,i;!':!:f:"! :: :":'^ventionr he rovistonst theompanieswnicn avi qliiir"iei :"lr';:;:;::i:,2!,i.uroonascomparedo"oipnnii"Answer 8(i) g marks each)

This statement s not correct.^_ , ndianCompanies lanning;tJff.t?:ix1ii*#1*#H""f,ifigfi?:ii{il[n%:Jf"T:il|::;nformation,.rrr""i"i. "J' ,"iiJ^".]-"_t?:.ty..uch suseor[1?i"31,x$;t5::::syjat""f,.:iffi:[:dtri,.,1ft[ilil",.1,::t{


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PP-DDCCM-June01 18Answer (ii)Thisstatemenls no tcorrecl.Asperchapter l ofsEBr(rcDR)iegurat;ons009,hespecifedsecuritieslrottedonpreferentialasjsopromoterrpromoterroup nd heequiiyhares llottedursuanttoexercisef oplions ttached.toarrantsssued npretere,itiatasiso promotei ipromoterroup, hall e ocked-inora period f hree earsrom hedate l allotmentot thespecitiedecuritiesr equity hares |otted riar"nt to exercise f theoptionattachedowarrant, s hecasemaybe:It maybe notedhatno tmorehan wenty ercentof he otal apital f he ssuershallbe rocked-inor hree dars rom he"rate f atotment. quity hares tottednexcess t the wenty ercent. hallbe ocked-inor oneyear rom he dateof theirallotmentursuantoexercisefoptionsrothe'*ise, s hecasemaybe.The pecifiedsecuritiestotted n preferentiarasiso persons ther hanpromorerndpromotergroup nd heequity hares flottedursuantoexercisefoptionsttachedowarrantsrssued nprelerentialasisosuchpersons hall e ockedn ora peflod toneyearfrom hedateol their llotment.

Answer (iii)Thestatemenls nol correcl.

Asper eguration9ofsEBr(rcDR)eguration009,hepost-issueerchantankershall nsureha t hedespatchf refund iders, llotmenletters ndshare ertificatesis doneby wayof registeredos tor certificatef posting, s maybe applicable.hepost-issueerchantankerha lensure aymenti nt"r"!t o h" "ppt,""ntsordelayeddrspatchralotmentetters,efund rders, tc .as per hediscrosureade n heotferdocument.Answer (iv)Thisstatements correct._ TheDepositoryystemunctionserymuchike hebankingystem. bank oldsfundsnaccounts hereas Depositoryords ecuritiesnacdountsor tscrients.Bankransfersunds etweenccounts hereas Depositoryranstersecuritiesetweenaccounts.n bothsystems,he transfer f tundsor securitiesappenswithoutheactual andlingf unds rsecurities.othheBanks nd heDepositoryreaccountabretor hesafekeeping t unds ndsecuritjesespectivelv.Answer (v )Thisstatements correct.

.The\,4inistryf Corporatetfairsnstitutesvery ear, large umber fprosecutionsagarnsthecompaniesnd heir ff cersi1 efaurtorcontraventionfvarious rovisionsof hecompanies ct Most r hecompaniesgainst hich rosecutionsre nstirutedareprivateimitedompaniesrsmall ublicimitedompanieshich o nothave hebenefit fexpert rofessionalervices fqualified ompany ecretaries.Appointmentfwhore-timeompanyecretaryrseeking rofessionardviceroma company ecretar-yn practice elives he company nd its directorsromthe


19/42

19 pp_DDCCtr4*June201;iff ;ffi"",'"'#Jil",,'_:i:ff:i1,:,!""#1""?:"i:.n:l#:!,flfl::i]:Tff i:":""f?:l11", *ror ior"-.1'.i,iop"nhe ompanyr,"cun"m"ntsiie;;iilil;'ffj:J'lRil:#1,:#f+,:.:l::l ,iru;iine ma'er ompaniesa' Drevoviorationsr ne ioJ;il; ;,;" companiesct n8#il|":jj:"j"ssionarsupports"on'p",";l;;;;;:;;": vilnrcnavequariried


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GOVERNANCE,USINESS THICS NDTimeal lowed:3hours SUSTAINABILITYMaximummarks 100PABTA

(Answereuestion No. 1 which s compulsoryand any two of the rest rom thispaft)Question 1@) ',fhe controttedmis-qovernance s a type of fraucl that s perpetrated by lheerson(s)unning,nJ

?::lir,tnsuci situiiiori.Jihe'anagementeceplvayeads , thestakehotders,t.o etievenat-ite Jiii,r, ,, Deng unsuperbtvuccessfutty, niten37!!v rj is t3ato oa,nxruli[i.',)With eferenceo thetatement,examine lreteuantase(s)"t ""::r:;i:Z::l:.hattenses

incorpo'ate wemanieciiniI ru marks)(b) State,with reasonsn brief whether the ollowing statememsare trueor false :(i) lnsurance s a methodaf riskavoidance.(ii) lnsidermay not simply steal the earnings.

(iii) Femunerationcommittee s constitutedo determine the emunerationofEO onty.(iv) ln termsof Clause49 ofthe listingagreement, rela.edpany tansactions,i:.e orohibited.(v) tltternalcontrol plals ?n imporl3ntrole in preventing and detecting'raudand protecting he organisation,s esources.

Answer 1(a)" 've"roa'tvtt o tciuulces e marks each)

Conlro d misgovernancei:.,i^,J,1"^S1raudhat sperpetraredy theperson(s)unn,inghe ompany nsuch situationhemanagem"nio"i"iu""ur rnestakehordersnto erievinghat hey una superbryr"""s"trt"or"in"Js"l'uiin rearityt is headingowardsankruptcy t henbecomesmpossibteorus oo"iJue n" t n" governancec)i irmcould ave uped ll tsstakeholders.Bu t ha t show ontrolled isgovernancesexpectedounfoldn hedays ocome.he grossJynf ated umbersn te financiatta;;;;i;;;;Jiled oydocumentationha tmakes utside uditorso rety n nemwnicn"lri" p.j0","" cover tapparent:l,itlllY fo r heperperratorsf the raud.So , nsucn sceilrio tn" regutarorsndnoependentirectorsnstead fderenoinghe nterestsrtn"'r"u"!iora"no upadvocatingLTi,,,iu"t"., l themanagement. nen'inerauo .l"ro. "roli"r, often eek educed

^.^.lT -a:,Uy casemisgovernanceightightedhe ackof inoependenrirector,sT:l::, jn theBoard rocesses,heydid ot pfuYn"t,,J" i" "fficientmanner nd heonsequencesroceededhe meremeetingtciiteria ti"i"p""i'"""" ooes otensurehatan ndependentirectorsactingnoepJnoenit.n"v "ii""rJ-p,uv vigirantore v20


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. I PP_GBESJune 01:li#;3;iiil::lil?i i','"lii.lil?narvsinsthosendaapers'skrheshtquestionsinoepenientiiec;;;il;i;il1/,1Jf,1'' '""o.o"o nd aveeparateessionsrOn the olherhand heauditorsn thiscasehave ried o distance hemselvesro mne raud erpetratedy hemanagementy ssuint sialrn-Jnl',"ni,rr'r","presentationsade y heChairmanndothermanagement-tonearJiiors-Orringheaudit owppearo 'e alse nd , herefore,reno ongereliable.,,Somessues ndchallengeshatneed crutiny re:(t) Roleof ndependent irectors

lndependentirectorsre.knoy,no?ring nobjectiveiewnboard eliberatjons.heyarerequiredo ensureh.atn" * i" ", i o-"rr#i" ot onu ndividuarrpeciarnterest roup r the,stifringrneartny;-u;tJ.["y.norro ac tas heuardtansf he nterestfal lsharefrotOersnO tat


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PP-cBES-JuneO1 22otrectors nd of auditors, s is thatol takingapproprjarection f th e basis orthat elationship o ongerholds.Auditsarea reassuranceo allwh ohavea f nancialnterestncompanies, uiteapart ro m heirvalue o boardsof directorsThe oleof theaudjtors" ;;i lr; jto go by the numberspresentedn the accounts ndstgnolt bogusaccountsrather hey need o verify he actspresentedUy ne co_pany.Even f there s a remotest ossjbilityhat hi s ma y ndeeobe the case hen tmustshow he wa y orward or auditorso direcflf nteractwith he banksandother nstitutionso obtain he required onfirmaiion nO or tne independentotrectorso paya major ole nelfective versight ody o hold hemanagementaccountableo the shareholders

Answer (bxi)False

rt snotamethod f isk voidanceathert s isk ransfer.he atue f he nsurancel':..].^tl"Jl:T:l"t.securityhata firm anobtainUy ransterringoan nsurer,nreturnro ra premiumor heriskof ossesha tmight riseon theo"-"rrr"n."of a specifiedperil n$rrance oesnotprotect firmagairist [ perits uiitotiers esroration,aeastInpartot any esultantconomicoss.Answer (bXii)True

TheSecuri t iesndExch-angeoard t India prohibi t iont Insider rading)Regurations,gg2,detinehat"rnsider"sanyper.on, no i" oi r"s connectedrthhe:-:llayl anqwho s reasonablyxpectedohave ccesso unpublishedrice-sensitivernlormationbout he stockof thatparticularompany, r whohasaccesso suchunpublishedrice ensitivenformation.Answer (bXiii)False

RemunerationommitteerCompensationommtteeisconstitutedya companytodeterminehe emunerationackagesfdirectorsnctuoingirret xecutivetfcers.Answer (bXiv)Falseclause 9dono lprohibitreratedpartyransactions'athertprovidesor eview frelated artyransactionyAuditCommit'teenOfsOisctosuie.'

Answer (bxv)True

The systemot internal ontrol acjlilateshe elfectivenessnd erficiency foperations,elps nsurehe reliabilityf nternalndexternal;porting ndassistsncompliance jth awsand regulations.heyhelp o ensure hara companvs not


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23 PP-cBES-June 011unnecessarilyxposed o avoid able inancial isksand that he financial nformationused within he businessand for publications reliable.They also contribute o thesafeguardingf assets, ncludinghe prevention nddetection f trauds.Question2

(a) Writeshott notes on any three of the following(i) CEQ/CFO cerlif cation(ii) Relationship etweendirectorsand managers(iii) Task orce on corporateexcellence hroughgovernance(iv) Corporatephilanthropyand corporatesocialresponsibilityCSR).(3 marks each)(b) Describe he tools used by the nstitutionalnyestorsfo assess the healthof acompanybefore nvesting resources n it. (6 marks)

Answer2(aXi)Clause 9of he Listing greementequireshat heCEO, .e., heManaging irectoror /anagerappointedn ermsof the Companies ct, 1956and heCFO .e . hewhole-timeFinanceDirector r any otherpersonheadinghe inance unction ischargingha tfunction hallcertify o the Board hat o the bestof theirknowledge:(a) th e inancial tatements nd hecash low statement eviewed y themdo no tcontainany materially ntruestatement r omitany material act or containstatementshat mightbe misleading nd hat he ypresenta trueand air viewof the company's f fa i rsand are in compl iancewi th ex is t ing ccount ingstandards, pplicableawsan dregulations.(b) no lransactions ntered ntoby th e companyduring he year are fraudulent,illegal r violative f th e company's ode ol conduct.(c) They have ndicatedo the auditors nd heAuditCommittee l any significantchanges n anternalontrol, ccounting olicies ver inancial eporl ing uringthe yea.or any nsiances f significantraudof which hey havebecomeawareand he nvolvementherein;

Answer2(a)(i i)Directors nd managers eed o work ogether asedon mutual espect, rustan dcommitment. boardprovides ounsel o management nd shouldno tget nvolvedntheday-to-day ffairs f heorganization.lear xpectationsor heboardand hedirectorneed o be establ ished nd mainta ined, ecause board hat s over lyact ive nmanagement an nhibit heorganization's ffectiveness. he Execr,ttive anagementca nhelp heboard overnmoreandmanagees sby adoptinghe ollowinghreemethods:- Us e a comprehens ive trategic lan hat has been developed n conjunctionwith he board,and supplementt with regularprogress eports.Thiswill keepth eboard's ightsocused n he ong ermgoalsan dmission f heorganization.Regular eportswi l l keep board membersappr isedof progress owardorganizationaloals, ndprovide ar tof he basis orevaluation f he executivemanagement.


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rr- ubr5-.June2o11 24- Provideheboardwith elevant aterialsefore oardmeetings,ndexplainwhythemateriarsrecomingotheattentionf heboard. etboardmembersknow.howpecifcagendatemselateo heorgan-ii"iion.s"rg",,'i.sion,andwhatkindof action rdiscussionsdesired t "ne oarOn each tem.- Facilitateoard ndboard ommitteeiscussjonso hat heboard taysocusedon therargerssues. efer o se tporicieshatdefinehe rimits f heboard,sdecision_makingower, ndstriveo engageheboard na djaloguemongthemselvesha t eadsoconsensus_bulldlni.Answer (aXiii)

lnNovember000, TaskForce nCorporatexcellenceetupby hegroup nderthechairmanshipf Dr .p.L.Sanjeev eddy, J"i;t, D-#inow MCA) roducedeport ontainjngrange f ecommendationsor aisjng ou"rriun""tundards mong1|,::r?"ni"r jn India. he groupexamineduy" to:,o'p"raiionalrsehe concept fcorporatexcellencena sustained.basis',,oas o ,sharpeninora,s lobal ompetitiveedge nd o unher eveloporporateulturen hecouniry,,.A Summaryf Report f TaskForce:1 Higher elineationf ndependenceriteria ndminimizationf nterest_conllictootential.2. Directorialommitmentndaccountabilityhroughewerandmore ocussedboard nd ommittee embership.3. [,4eaningfulnd ransparentccounting.andeporting,mprovednnualeportalongwithmore etailedlingwith egulatoryuthorn"ies4. sening pofan ndependent,utonomousentre orcorporate xcelenceoaccord ccreditationnd promote olicy esearch nd studies,raining ndeducation,tc., n he ield fcorporateicellencehroughmprovedorp"orategovernance.5. IntroducingormalecognitionlCorporateocial esponsability.6. Cleardistinctionetween.wo basjc omponentsl governancen termso,policymaking ndoversightesponsibiritiesr heboaid t directors.7 Applyhehighest nd oughest tandardsfcorporateovernanceo Listedcompanies.8. PSUS e relievedrommultiple_urveillancegencjes ndsrmultaneouslycommissioneappcintedodraft suitableod-efpublic ehaviour.Answer2(aXiv)

Differenceetween SBandphilanthropy/CharitycorporateociarResporlsibiritysabout owa companyrignsheir aruesosociarcausesy ncludingnd ollaboratingithheirnvestors,upplier!,mptoyees,egulatorsand hesociety s a whole. he nvestmentnCSRmaybe on people entricssuesand/or ptanetssues.CSR nitiatjvesf a corporatej no ta setfless"" t ;i gj;;;;


25/42

llll!?ll*d".,r:ons-term,.51,:l,^1i.,,1.:sRnitiatjves""li ,liltili,jllleI Interest h ich s dr jv inghavon rnrrra l rvesncom0aniesOn heother and, hi lanth:1" _rr,:i ;;;ffi""J,i."il,t:!!!i[""r.fl,fl111ir3fi!?;?::fli#iljeequared ithbenevotencendcharityor nepo-oi;;;"H; phitanrhropycanbe;:[:",J$:"riH:.yffil.,i::I!gor"'o"iareJJti J"i1"#""0,nderserved,rcorporate.

rservedPhilanthropyanbeoyan noiviouairdy l. TheEtymotogicarrigin"t ,1,:.y^"j11.-ll"m Late arin hitanthropia,romGreekSilT[',"'lii'i:T3|[il:i:XX'J::nsp'opretn;;;;].;"i'i.p*n,,'u"o"i"

Answer(b)rnstjrurjonalnvesrors"r"i1,:1"1^yfl" invesringna company;hey ssesshe[X?jli,:i:ili:i:before nvestinsesourcesn t.iorro",ng|,e ne oorssedy(i) Oneto-onemeetings

The meetings etweenn^stitutional.jnvestorsnd companresre extremelymportantsa means fcommunication"rr""n n"i*i p" . "" .iil VotingTheright o votewhich sattachedo voting haress a basrc rerogativeofhare wnership,nd spartic_urarrynp"nu'nigi";r'h;iu,.,on o, ownership{sharehorders)ndcontrordirectors)n iremJoern'cJrioraton.Theright oorecan be seenas rund"r"ntul'tooi, o;"J#;;i#"", or controrbyharehorders'he nstitutionarnvestorsan egi.ie,r'eiiui"*. oypo"tat oting,r,voteetectronicawherehis aciljtysav;la;ie. -. .'"(iii) Focus sts

A number l institutionalnvestorsave stablishedfocuslists,wherebyheyargetunderperformingompaniesno n"iro" iilrll"" ,,",o, companieshich aveunderperformedmajnndex,;;;"" "Siil;;d andpoor,s.Aftereing uron he ocus ist,he ornp"nt".'oft"n ".J,,Z'ii*ur,,"O"nentjon fhe rnstitutionatnvestors homay""J;;;";;;';"rii'tls directorsn rhe(iv) Corporateovernanceatingsystems

1i::!:Tf :*p"rate Soler3::e rajins y-sremsomeupwjth hedevetopmentrcorporateovernance.xampleslsuin-'rmswrrcrrrJrlu'i"u",op"o"orpor"t"overnanceatingystemsreDemjnor,tanoaronJ ili., "noeou"rnun""4etricsnternationatGMl).t,e ,ating" it i ;: " i" irrJr"r,L governmentsindentifyingpercejvedeveti fcorporuL ou"inun""n"tijr.oun,ry o.p"r"ooothercountriesn heir eoion, i outsjdeit, hose ompanls "y oe"ornpetingor imitedoreignnvestme-nt.corporut" ou"rnun;; liniiouro oea powerrurndicatorf heextentowhich comp".y ;";;il;; "olrf,"o, n" . tn "oot"nt"r


26/42

to add n he uture, hareholderalue. hjs sbecause company tthgoodcorporate overnances generaflyerceiveds moreattractiveo inveitorsthan newithout.Question

'The GlobalCorporateGovernance orum,smandates to promoteglobal,regional nd ocal nitiativeshat mproveCorporateGovemance ohcystandardsandpracticesndevelopingountries.,, tucidatehisstatement. (S marks)'"Toenable etter ndmore ocused ttention n theaffairs f thecompany,heBoad delegates articularmafters o committees f theBoardset_upor thepurposebut theultimateesponsibilityieswith heBoard." n the tiqht f thestatement, iscussheneedandadvantages fcommitteemanageient.(5marks)(c) what s 'riskretention' Distinguishetweenriskretention' nd 'risktransfer,.(5marks)Answer (a )TheGlobal orporate overnanceorum theForum) as oundedn2O0iby heworldBank nd heorganisationorEconomico-operationndDeveropmentoEcD)followinghe lnancialrisesnAsiaandRussian he atter ar tof the1990's.t wasestablishedopromotenitiativeso raise orporateovernancelandardsndpracticesindevelopingountriesndemerging arkets,singheOECD rinclplesofCorporate

Governances hebasisor tsworK.TheForum's andates opromoterobar,egionarnd ocarnitiativeshat mprovecorporateovernanceolicy tandardsndpracticesndevelopingountries.heForumfocuses n he ollowingourareas:raisingwarenessndbuildingonsensusor mplementationl reformhroughmeetings,rielings,olicy apers,ndconlerences;sponsoringesearchelevanto heneeds f developingountrieso underpinreformeffortsby soundanalysishrough ponsoring apersand bualdingsustainableetworksoracademicsndevelopingountries;disseminatinges t ractice aterialsndpublicationsndguidelinesevelopedwith eading lobal pecialislsndpractitioners:ndsupportingnstitutionndcapacity uildingndprovidingechnicatsststanceto ensuremplemenlationt he ield ev6lhroughraining rograms,oolkitsandother irect ssistance.

Answer (b )with heglobalizationhe eguratoryequirementsave ecome ore omorexndtheonuson heboards mmense.n his cenarioheneed odelegatgversightoaboard ommitleeasbecomemperative.

PP-GBES-June01

To enable etter ndmore ocused ttentionn theatfairs fboard elegatesarticular atterso committeesf theboard erhoweverheultimateesponsibilityieswith heboard.

@)

(b)

(a)(b)

(c)(d)

th e company, heup for the purpose


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27Advantagesof BoardCommitteeManagemenlCommittees llows heboard o

PP-cBES-June201 l

' ll:H:'i.t'ii.1ilJ;:l*' or ssuesith reaterrriciencvvhavinsxperts. Devetopubje","O".lrl:,:il^Tse nareasuch scomp ncemanagement,lsk management,inancial eporting. Enhance he obJectivitynd ndependenceof the board,sudgment.Greater peciarizationnd ntricaciesot odern oardwork soneof he reasonsorncreased seof boardcommittees. he re*;;.-i l ;;; i. Responsibilitiesar eshared.. Moremembersbecome nvolved.. Specialized killsol members an be used o bestadvantage.. lnexperienced embers ainconfdencewhlleserving n thecommittee.. Mattersma ybe examinecln moredetailby a committeeThe committeesocusac cuna,wavsetainsesponsiii,"'iilii{ildt?t33:#?*.;*l,'""ffiil"ffi1",',1f ts ocus n hemandate,hrrroardend obemore"ff""tiul..,." of hecommitteeeing elatjvely.r"f erin"nin"Answer3(c)

RiskBetentionIt salsoknown s riskassr1119:'"1t,*n"'0".'nJ#I?]li"!',"i",:T[13";i1"",iitl?.jHt"ffilil::::"#;Xo#L otoo"'ationnerere-t*ro"."i retentjonerhodsor(i ) Fisk retainedas part^oj-deliberate anagementstrategyatler conscious:"t,;,il"" ofpossjbleossesnd auser."ni. . t"o*n asactiveorm trisk

, ,) l;-,:ij:?::: occurredhroushesfisencehis sknown spassiveorm fRisk ransfer

This refers o legalassiqnmnsurancet risks'is ,o odror"li ?ll?lt-oj. e tanpotentialossesoanother.hecooo a rJ;;j".;;;fi ::,ffflii!!:q5:ft: l"*"uI, fi:J.j;J,::suairy,here re3 majomj""^.^:l]?::,:l"rtli "i.., t,le;""? (ti)ByconrracttherirTJlilTffiJiL?r,".""Jiflj;jp'f".:.tn"ain"irioo'oin]sk,ans,ersnsu,ance.,o n en,"i,,.no" ",#.1"?ii:ijl.i.:TiiJi::xli*!,?""jru"';nil*:i::specifiederil hus, nsuranceubstitut"."r,ir"-,"v"lr"iJn",",r. Insuranceoes


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PP-GBES-June 011 2anot protect firmagainst l lperilsbut t offers esloration,tleast n partof any resultanteconomrcoss.Question4

(a) Elaborate heprovisions n respectof the compositionof audit committeeunderthe lollowing(i) Listing agreementas prescribedby SEBI.(ii) NYSE istingrules.(iii) Section2924 of the CompaniesAct, 1956. (3markseach)

(b) Discussthe background stating some case laws, which brought about thedevelopmentof insider rading aw. (6 marks)Answer4(a)(i)Composition ot Audit Committeeunder Listing Agreement

A qualified nd independent uditcommittee hallbe set up, givjng he terms olreference ubject o the ollowing:1. The auditcommittee hallhave minimum hree directorsas members.Two-thirdsot themembersof auditcommittee hallbe ndependent irectors.2. All membersof auditcommittee hall be fina nciailyiteratean d at least onemember hallhaveaccounting r relatedinancialmanagement xpertise.

Explanation :The term "financiallyiterale"means he abil i ty o read andunderstandasic nancial tatements.e.balance heet, rofit nd ossaccount'and statement f cash lows.Explanation : A memberwill be considered o have accounting r relatedfinancialmanagementxpertisel he or shepossesses xperiencen inance raccounting, r requisite rofessionalertificationn accounting, r any othercomparable xperience r background hich esultsn he ndividual'sinancialsophistica:ion,ncluding eingor havingbeena chief executlve fficer, hiefJinancial ff icer r otherseniorofficerwith inancial versightesponsibilities.The Chairman f the AuditCommittee hallbe an ndependentirector;Th eaudil ommlttee ay nvite uchof heexecutives,s tconsidersppropriate(andparticularlyheheadof the inance unction)o be present t he meetingsol the committee, uton occasions t may also meetwithout he presence tany executives f the company. he inancedirector, ea dot nternal uditanda representativet the statutoryauditormay be presentas invitees or themeet ings f theaudi t ommit tee:The CompanySecretary hallact as the secretaryo the committee.

Answer (a)(ii)Composition f AuditCommittee nderNYSERules

- Theaudit ommittee us thavea minimum l threemembers.- All hemembers l theAudi't ommittee us tbe ndependent

4.

5 .


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29 pp_cBEs_June20 11- Eachmemberof the audi tcommit teemust be f inancia l lyi terate, s suchqualifcations nterpretedy he company,s oard n ts bujiness udgment, rmustbecome inancia||yiterate ithina reasonabre eriodof timeafterhis orhe rappointmento the auditcommittee.- In addition, t leaston ememberof theauditcommitteemusrnaveaccountingor related nancialmanagement xpertise, s thecompany,s oard nterpretisuchqual i f icat ionn tsbusinessudgment.

Answer4(aXiii)Section2924 of CompaniesAct 1956

The committeesh a consistof at reast hreedirectors nd sucn numberof otherdrrectorss he Boardmaydetermine. wo-thirds f the otar umber t members f thecommrttee haflbe directors ther hanmanaging r whore imedirectors.Membersotth ecommittee harl recta chairmanro mamongsthemserves.he AnnuarBeportofth e Company halldisclose he composition f the AuditCommirree.The auditors,he nternar uditor,f any,and hedirector-inhargeof finance harlattendand participatet meetings f theAuditcommitteebu tsha|lnot have he right oVOIE,

Answer4(b)l\4uch f the deveropment f nsider rading awha s resurtedromcourtdecisions.InSEC v. TexasGutfSulphurCo . 1966) U.S.A), federat ircuit ourtstated hatanyone npossession f nside ntormation us teither isclosehe nformationr ref ainfrom radtng.ln unitedstates v. carpenter(1996)he u.s. supremecourt citedan earrieruringwhileunanimouslypholding ailan dwire raudconvictionsora defendant ho eceivedhis informationro ma iournalist ather ha n rom th e company tself.Th e ournaljstR.Foster inanswa salso onvicted,n hegroundshathe hadmisappropriatednformationbelongingo hisemployer,heWallStreet ournal.n ha twidely ublicizedase,Winanstraded nadvance f 'Heardon heStreet , ,columnsppear ingn heJournal .The court uled n Carpenter:,ltis wellestablished,s a general roposition,hatapersonwho acquiresspecialknowledge r information y virtueof a confidential rliduciary elationship it hanother s not ee o exploit ha tknowledge r nformationorhr sow npersonar enefitbut mustaccount o his principreor any profits erived heref om.Themisuse ssubjecto varyingnterpretations.he nsider-tradinglegation gainstHindustan ever (HLL) or purchasing ight akhsharesof BrookeBondLipton ndia(BBLIL) rom UnitTrustof Indiaa monthbefore he mergerof the two companieswasannounceds a case n point .HLLappeared gainst EBIs order o theAppe||ate uthority f he FinanceMinistryclarmingha ta company annotbe an insider o itselfand hat he shareswereboughisolelywith he ntent t preservinghe parent ompany,Unirever's 1 percentstake-nHLL. t was urtherargued hat he reports n the HL L and BBLILmergerhad already


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PP-GBES-June01been ublishedyvarious ntities. o twasno tacting n undisclosedr unpublishedinformation.SEBI he Market egulatoras pu t n placea comprehensiventegrated arketSurvei l lanceystemo track rading ata romall he market art ic ipanlslockexchanges,epositoryarticipants,ustodiansswellas dataof clearingouses.

PARTB(AnswerANYTWOquestionsrom hispart)

Question(a) Mostot the companiesegin heprocess f establishingrganisationalthicsprogramme y developing odes of conduct.Whatare the core valuesorprinciples ontainedn thesecodes of conduct? B efly discuss he legalDrovisionsn respect f codesol conductn lndiaand USA. (6 marks)(b) Write hortnotesonany hreeof the ollowing(i) Ethicsnproduction(ii) TheCauxRoundTable(iii) Viftueethics heory

li Characteristicsf ethical ecisions. (3 markseach)Answer (a)

Codes fconduct re ormal tatementshat escribe hat norganizatlonxpectsof tsemployees.uch tatements ay ake hreedifferentormsa codeof ethics,codeof conduct, nda statementl values.Corporaleodes fethics tten ontainbout ixcore alues rprinciplesnadditionto more etailedescriptionsndexamplesf appropriateonduct hesixvalueshataredesirableorcodes fethicsnclude:1) rustlvorthiness,2) espect,3) esponsibility'(4) airness,5) ar ing,nd 6) i t izenship.ln India, lause 9of heListing greementequiresha t

The Boardshall ay downa codeof conduct or all Boardmembers nd senlormanagement f the company.The code of conductshall be postedon thewebsiteof the company.Al lBoardmembers nd seniormanagement ersonnel hallat f rmcompliancewith the code on an annualbasis.The AnnualReportof the companyshallcontaina declarationo thiseffectsignedby the CEO

Explanation'.orthispurpose,lheer m seniormanagement"hallmeanpersonnelol the cornpanywho are membersof its core managementea m exciudingBoardofDireclors.Normally,hiswouldcomprise ll members l management ne evelbelowthe execulive irectors,ncluding ll unctional eads.ln th e UnitedStatesof America,Section406 of the SarbanesOxley Act,2002requires ubliccompanieso disclosewhether hey have codesof ethicsand also odisclose nywaiversof thosecodes or certainmembersof seniormanagement.

30

( i i )


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PP-cBES-June01t lSection 06(a) l Flegulation-K equiresompanjesodisctose:- whetherhey ave writtenode fethicsha t pprieso heir rinciparxecutiveofficer, rincipalinancial fficer, rincipalccountingfficer r controller,rpersonsertormjngirnjlarunctions;- anywajvers l thecodeof ethicsor hesendividuals;nd- anychangeso thecodeof ethics.ll companieso nothavea codeol ethics,heymustexplain hy heyhavenotadoptedne .A company ayeitherile tscode sanexhibito heannualeport, ostthecod n hecompany's eb iteoragreeoprovide copy f hecodeupon equestandwithoutharge.

Answer (bXi)Ethicsof Production

Thisareaof business thics ealswith he duties t a companyo ensureha tproductsndproductionrocessesonot ause arm. ome f hemore cute rremmasrn hisarea rise utof he act hatheresusualy degree fdangernanyproducl rproductionrocess nd t sdiffcultodef nea degree fpermissibirity,r hedegree fpermissibirityay ependn he hangingtate fpreventativeechnoiogiesrchingingsocral erceptionsfacceptableisk.- Defective,ddictjvend nheren dangerousroductsnd- Ethicarerationsetweenhecompanynd heenvironmentncrude olution.environmentalthics,arbon missionsrading* Ethical roblemsrising utof new echnologlesoreg.Geneticallyodifiedfood- Productesting thics.Themostsystematicpproacho fosteringthicar ehaviors to buird orporateculturesha t inkelhical tandardsndbusinessractices.

Answer (bXii)TheCauxRoundTable

ThecauxRoundabre cRT) sbased n heberiefhat heworrd usinessommunityshould lay n mportantole n mprovingconomicnd ocial onditions.sastatementof tsaspirations,tdeveropeddocumentha taimso express worrd tandardgainstwhich usinessehavioranbemeasured.ThecRTPrincipresorBusinessere orma[y aunchedn1994, ndpresentedttheunitedNations orrd ummit nsociarDevelopmentn1995. heciT principlesforBusinessrticuratecomprehensiveetof ethicar ormsorbusinessesperatinginternationallyr acrossmultipleultures.he CRTprinciplesfor Business",n"rg"irom series fdiaroguesataryzedy hecauxRoundabieduringhe ate 980,sndearly1990'sThe Principresre comprehensivetatement f responsibreusrnesspractrceormulatedy businesseadersorbusinesseaders.


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PP-cBES-June201Answer (bXiii)

G' #:i:l"z:?!? ?1".":!::i::':r:::g it3t op ey?t?ndommunicatinstto":! l: :: :,j:::: o^":l:i,!!:"", ^, ' ;;.;; ' ; ;;' i ;: ::# l :;22ZIii:::I::,:iTendentn.on.exec'uti,"ii""ti,r.;'En;;;;i;i;"":;{:::::,and state the functionsof ethicscommittee. (5 marks),0, ?::i::.,:::takehotder concept,tatinshe rincipr"s"nunci"teay Jr)"rl(5marks)

VirtueEthjcs heory s a branchof moralphilosophy hat emphasjzes haracter,atherhanuresrconsequenc.es,s he ef !r",n""i"i "iilir, rhinking.nexampre:l,I- yt" : o:rsonrsoodtandins.rornd"s1;#;;o omeonersetwi'oe"presumeonatr.'"""ii," ". i"X;#[Xin:l_"l?iflil?l;orsafe-keeping,hereasf rweren r,"po.."r.ron i""olrlin o,oorouurrdubiousharactertwould epresumedhathe ru . fof n"nlll.""'"'nswer (b)(iv)Accordingo Sueanne.",h:: g"?l Ethicat ilemma, haracterjsticsndTheory2008) tates haracteristicsfethicarecisions-wrr]cn"?Li"ir"**o as under:MostEthicalDecisions ave :4ixed.utcornes ,,ltiscommontyhoughthatethlcalssuesnmanagementre argeryntithetrcar,it n rii".t"rv"pp"sed inanciareturnsndsocial osts. heantitheti;tmoo"r o, ' rt"or" Ju"rul,#f r"."n," erhicalssuesnsharpocus ut tdoes otaccrr"r"ty ortray," ;;;;g;;l ;,,"r,na. social enefts,H":,,""lfi:[ ::,l,iffi,i;I:id ;;J";p;;;;;;"",1oX,","0with,most,, i

MostEthicar ecisionsaveperso.narrmprications,,furostethrcarecisionsaveersonarmpricationst scommonry.lhoughitn"t "tni""rol-rls In managementreargetyrnpersonat,ivorcedrom h" r""" ino 1","!,;;;i;;;.",,'"g"*. Many eopteetievehatprima acte thicatl:^.:i:i.. il " gi; ;..,i;n"#ly reoucene protits fhecompanyutno t heexecutives,atar;esr rfreirpport-uniti".o| . rorotion.,,MostEthicalDecisionsHaveMuttipleAlternative.s,,ltis commontyhoughthat:li:1iff:}i#nasemenr aieprimariryicnoromous," ,,vur""o,u"no,"noice,jrh oMostEthicatDecisionsHaveExtended Consequences,,Theresuttso, managerialecisions nd acrionsOonot.t:!-lil l.l irst_f"u"f ion."qi"nr".'. "u,h"r, they extendhroughout ociety, nd extension onstituteshe ess"n"" oiiiJ ",n,"urargument:heecisions f managers ave an impactuponothers,bothwithin he organizationndithinhesociety.he mpao ^o^",r:9I_":liJri;;i,;;;;:'il;y shourdeseriouslyonstdered he ndecisions re madebymanagers.,,MostEthicalDecisions ave.UnceriainConsequences_,lt s commonly houghthat ethical ssues_in anagement re,reeof riskand douUi,wiina knownoutcomeorac harternatrve determrnstic^m-oder-that.is,q" *rtn*, 'pr"i"birities-simprifiesth erocessof analysis, ut t doesclear hat onseqr"n"u.orto lttl|,latelydescribehemanagerialitemmat sno lQuestion

and Freeman.


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J. i pp_GBES_June20.1(c) Whatarethe challeng.e.sf business thlcs ? What areme two control systemsthatcan be embodied n an ethicsprogramme? 6 marks)Answer6(a)Codesof conductneed o be livingdocumentshatareencouraged ndvaluedathe highest evets.Boardmembersan-d enior";;";;;;.;;" lo se t an exampte orhe type conduct hey expect rom others.e in"" f i "p"" . " , the higher evelso fl::i9"1:i,]:"d robe perceived s tacitpermissiono commir apses t tower evets.enror management eeds o hord tserf o the highest tanoaiosof conductbefore tan demand jmilar ntegrity om hoseat lower ivels - -..'Companies houldhavea committee f independent on_executlveirectorswhore esponsbleforensuainghat,systemsre nplace n f, " corpony,o araureemployeecompttance ith he Codeol EthicsFunctionsof Ethics CommitteeThe oversightprocessof the EthjcsCommjttee l an organizationnvolves heollowing reas o be addressed y t:Reviewol th e detinitionsof standardsand proceduresThe Commjttee hould eview he organization,sreasof operatjon,he activitiesthatrequire tormalse tof eth calstandafus nd pro"uOrL. "

- Ol:" th e review s complete.andny shortcomings avecomero trght he ethicscommittee hourd ssign hecreation r revised uideri'nL"o .',"uppropriateersonnerIncludinghedesignof a formarmethod orcomm"unicatrn!slnoiarosan oproceduresoemployees. hi s nethod hould nsure ha temployees itf, nO"r.r"no,nd accept heethicsprogram.Th e ethics ommrttee an suggestbehaviorso uppermanagementhatreinforcetheorganization,suidelines.

FacititateComptianceThe ethjcsCommit tee as the .responsib i l i tyor overal l omplrance.t is theresponsibreuthorityorethics ompliance ithin is areaotiuiisorction tshourd erveas th ecourtof rast esonconcerningnterpretationsf heorganization'standards ndrocedures.When an d f inconsistenciesome o light, tfis |.nann"r,he committee

shouldmake ecommendationsn mprovingheexisirg ,o;pli;;"" ,echanisms,And,as always,hereshouldbe ollow-upo ensure ha tcomplianceecommendationsavebeenunderstoodndaccepted.Due diligenceof prospectiveemployees

Theethicscommittee houlddefjnehow heorganization il lDatancehe rightsof:1"]111rylt:"1ts andemptoyeesgainstheorg"anizationiseeo oavoid iskshatcomerompracingnown ioratorsnpositionsfdiscietionaryesp;nsrbirity.hisncrudesthe oversight f backgroundnvestigationsn "mptoyeesffiL"n,. *no arebeingconsideredorsuchpositions.Oversight f communicationnd rainingof ethicsprogrammeTheethics ommitteehould ef nemethodsndmechanismsorcommunicatingelhicartandardsndprocedures.his ncrudeshedistiilui[noioo"rrunts (codes f


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PP-GBES-June01 34conduct,or example)o ensureha teveryemployee nderstandsnd acceptsheorganazation'sthical uidel ines.o makecertainhatpubl ishedtandardsreunderstood,heethics ommjtteehould rovideegularrajningessionsswell.sincecommunications wo-way,heethics ommitteehourd oricit takehoderinputegardingow tandardsndproceduresrederinedndenforced.n hisconnection,it is useful o createwaysof providingroot ha leachemployee as receivedheappropriateocumentsndunderstandshestandardsndproceduresescribed.Monitor ndauditcompliance. . Compliancesanongoingecessitynd heethicsommitteehould esignontrolswhichmonilor, uditanddemonstratemployees'dherenceo publlshedtandardsandprocedures.here hourd rso emechanismshich heckheeffectivenessndreliabilityf such nternalontrols... .Towarranthat heorganization'soals, bjectivesndplans onot on fic twith tsethical tandardsndprocedures,heethics ommitteehourd everop erhodsorregulareview ndassessment.

Enforcementf disciplinarymechanismDisciplinaryrovrsionshourde npiaceoensure onsistentesponsesosimirarviolationsfstandardsndproceduresasagainstppryingifferenttandardsodifrerentemployeesased n heirposition,erformance,unction,nd he ike). here houldbeprovisionsor hosewho gnore sweIas hosewhovioratetandardsndprocedures.

Analysis nd ollow-upWhen iolationsccur,heethlcs ommitteehould aveways o dentify hy heyoccurred.t salsomportantha tessonsearnedromprior iolationsresystematicallyappliedo reducehechancehatsimilar iolationsakes lacen uture.Answer6(b)

Inabusinessontext,ustomers,nvestorsand hareholders,mployees,uppliers,governmentgencies,ommunities,ndmany therswhohavea ,,stake,'orclaim nsomeaspect f a company's roducts,peralions, arkets,ndustry,ndoutcomesare known s stakeholders.hese roups re nfluencedy business,ut heyalsohave heabilityo affect usinesses.Freemanefinedtakehorders'any roup r ndividuarho anaffect r saffectedby heaciievementf heorganization,sbjectives'.hi sconcept aselaboratedyEvans Freemans he ollowingwoprinciples:1 Principlesol corporateegitimacyThe corporationhould e managedor the benefit f its stakeholders:tscustomers,upplierswners, mployees local ommunities.he rights fthese roupsmustpartictpate,nsome ense,ndecisionsha tsubstrntiallvaffectheirwelf re2. Thestakeholderiduciaryprinciple

Managementears duciaryelationshipostakeholdersnd o he orporation


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35 pp_cBEs_June2011as an abstractentity. t must act in th e interestof the stakehorderss theiragent,and t mustact n he nterests f he corporationo ensure he survivar fthe irm,safeguardinghe ong_termtakesof eachgroup.subsequentry reemanedefinedtakehorders "Those roupswh oarevitar o thesurvival& successof thecorporation"nd heprinciples er Jaltered enamed:1. The stakeholderenablingprinciple _ Corporationsshall be managed in theinterest f s takeholders2. ThePrincipleol DirectorResponsibitity Diectors ot a corporationshallhaveadutyof care o use reasonableudgmento defineanddirect he aflairsof th ecorporationnaccordance it h hestakeholdernabling rjnciple.Answer6(c)

. Organizataonsav eethicsprogramme s a way of minjmizinghe risk of ethicalmisconduct r wrongdoing y employees. heseprogrammes onsistof pol ic ies,processes nd education nd training nitiativesha texprainhe company's usinessethics. heseprogrammesrarify owethics hourdransratent ooperatrng roceduresandworkplace ehaviour. he ocusof ethics rogrammesscompriancend s ocusedon ru les nd egulat ions.A comparlymusthavean effective thicsprogram o ensure ha t all employeesunderstandtsvaluesand comprywith he poricies nd codesof conduct hatcreate tsethical limate.Two ypesof control ystems an be created.compliance orientation programme : A comprianceorientationcreates order bvrequiringhatemproyeesdentifywithand commit o specific equired onduct. t useslegal erms,statutes, nd contracts hat eachemployeeshe rulesand penaltiesornoncompliance.ValuesOrientatian:ValuesOrientationstrives o developsharedvalues.Althoughpenalties re attached,he ocus s moreon an abstract oreof ideals uc has respeitand responsibili ty.nstead f relyingon coercion, he company's aluesare seen assomethingo which eopte i l l ingtyspi re.

Question7(a) "Dilenma is a situation hat requiresa choicebetween options thatare seen. equa y unfavourableor mutually exclusive". tn the tight of this statement,etaborate he ethicaldilemma. State he steps o resolvean ethicalditemma.(5 marks)(b) Explain he conceptof 'whisflebrower'.How shourda companyevorve tswhisleblowerpolicy? g narks)(c) How do good businessethicspracticeshelp n aftractingand retaining talent nthe organisationand achievecustomer satisfaction? (S marks)

Answer7(a)Dilemma s a situation hat requiresa choicebetweenoptions hat are or seem

equal ly nfavorabler mutual ly xc lus ive.


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PP-GBES-June01 36An ethicaldilemma nvolves,snt,rwrons;iil l.;il;"i,1:ffi'j",l"':,lJfiffi:,:il;"*ffi,.,Ii:?ffi'J,,li.:urresr esponsibirities.hese iremmasanbehi fhv "".pi"- ""0 oirfcurtoresorve.5::::^OlTr": rvotvea?ight,ersuswrong,answer; hereas,omptexthicat jtemmasnvotve decisionetweenight nd ight.Steps o Resolving nEthicalOilemma reas ollows:1 Whatare heoptions?List healternativeourses ,action vailable.2. Considerheconsequences

Think arefullybouthe ange fpositive ndnegativeonsequencesssocjatedwitheachof hedjfferentaths faction vaif "Uie.' "- Who/what jl lbe helped ywhat sdone?- Who/what il lbe hurt?- What inds fbenefitsndharms re nvolvedndwhatare heir elativevalues- What re heshort_termnd ong_termmplications?3. Analyse heactionsActionshould eanalysednadiflerent erspective.e. jewingheaction ersedrsregardheconsequences,oncentratjngnsteadn heactionsnd ookingfor hatoption hich eems roDtematic.4. Makedecision ndact withcommttmentNow,bothpartsof analysishould e broughtinformed ecision hould e made.Once hedecjsionssumingesponsibjlityor t.5. Evaluatehesystem' Think bout hecircumstanceshich ed o thedilemma rrhhe ntention,identifyingnd emovingheconditionsha ta lowedit oarise.Answer (b ).Awhisflebtowersa person hopubricryomplainsonceared isconductn hear tof an organizationr bodvof people,du"rryor *itnln iut.urn" organisatjon.This.misconductaybeclassifiedn "ny *"y.ito,' ""#pi", " ),o,utionf a aw, ule,regulationncyordirecthreatopubticnierest,ucn . riri, i""nnl."rety viorations,andcorruption.histebrowersrequenty re it


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37 pp-GBES-June201management,oncernsbout nethicalehaviour,ctual rsuspectedraud rviolationol thecompany'sodeof conduct r ethics oricy. hismechanismourd rso rovidefo r adequateafeguardsgainst iclimizationf emproyeeshoavair hisandarsoprovide irect ccesso hechairmanf heAudil ommitteenexceptionalases.onceestablished,heexistencef hemechanismaybeappropriatelyommunicatedithinthe organization.his s a non-mandatoryequirement.n case he whisfleBrowermechanisms existing,heaudatommitteesresponsibleo reviewhe unctioningftheWhistle lowermechanism.Answer7(c)RetainingaientPeoplespireo oinorganizationith igh thical alues. heethical limate atterto heemployees.thicalrganizationsreate nenvironmentha t s rustworthy,akingemployeesillingo rely, akedecisionsndacton hedecisionsndactions f heco_employees.nsuch work nvironment,mployeesanexpectobe reated ith espectandconsiderationy heir olleaguesndsuperiors.t cultivatestrongeamworkndproductivjtyndsupport mployeerowth.

Retainingalented eoples as biga challenges gettinghem n he irstplace.Work sa means oan end or hem,notan end n tself. he elationshipmployeeshavewith heir mployer ust ea mutual, in-winne, nwhichheir oyaltyhould otbe taken or granted. alented eople i l l nvestheirenergy nd alent nly norganizationsithvaluesandbeliefsha tmatch heirown. n order o achievehismatch,managerseed o build ultures, ompensationndbenefits ackages,ndcareer athshat eflect nd oster ertain hared alues ndbeliefs.Customer atisfaction

Customer atisfactions a vital actor n successful usiness trategy. epeatpurchases/ordersndenduringelationshipfmulualespectsessentialor hesuccessot lhe company. he nameof a company houldevoke rustand respect mongcustomersor enduringuccess. his s achieved y a companyhatadopts thicalpractlces. hena company ecause f ts beliefn highethicss perceiveds such,anycrisis rmishapslongheway s oleratedy hecustomerssa minor berration.Such ompaniesrealsoguided y heir thicso survive critical ituation.referredvalues re dentifiednsuringhat rganizationalehaviorsrealigned ith hose alues.An organizationitha strong thical nvironmentlacests customers,nterests sforemost. thical onductowards ustomersullds strong ompetitiveosition.tpromotesstrong ublicmage.

PARTCQuestion

Attempt ny ourof the ollowing0 Explain rieflyhe oleof businessnsustainableevelopmentn the ightof IJNGlobalCompactnitiative.0i) '"fhesustainabilityepoftingguidelines eveloped y theGlobalReponing

lnitiative GRl),Netherlands,s a significant ystem hat ntegrates ustainability


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PP-GBESr.June01 38::;:;;;':"fl!ffi**r orrepoftinsEnumeratehestepso useheGRI

(iii) State and enumeratecolDow-Jonesusta,r"o,,oilfJS'f.sustainabititvssess'nenlriteria nder he(tv) Write note on the ,Convention on Biological Diversity,.,, ,;l:,;:::ll,::: resutatoryrameworknd heandmarkas6awsnrespectf waterpollution.Answerg(i) (5 marks each)

;l:tkrT'#"rifj"il:l#'Jri,ffi,ffi1ldi*:l;;#irT:;tlJx1ffi:j:h:ly.',iff"::fn,':l,TjrTyJT":,"r' aspivora,o,eo ,ayn this direction, jnlted NatLns i 'q,,,q,, vr,,sry as a,ptvotal ol e o play.nitiariveor usinessosn,r,.",l^ililll'L1".1,I-Gl"o.?'ompact,stratesicotilyI,.f,.*",H:*ff:::[?lj:":,:,T41,""-:-{i ru",j'!1"1j;i.'jffi,i'?"nl]!ll;T:l.::ffi::iy1?::*"^',::Trl:.;;;;;;;i;il#ff;::l:T"1,::il*i:ffi:i,l;:J.ll,',j"'i::':^,""-::jr:!,'i;;;lillj"iiill.ij'?'.,1;1#Technorogvndinancedvancenwavshat enefitcon;;;;r"";;.r#ii:'"t;il[ilfri?8.The GlobalCompactsa voluntaryorporateitizenshipnitiave with woobjectives:"o"r#|lJ"n

theGlobal ompact nd ts principresar lof busrnessrrategyndrrooS;"Jit;i',|:n""""",5.?rationmons evstakeholdersndpromotinsartnershipsn

A company hatsigns_ono th e GlobalCompact pecifically ommjts tselfto:- se t n motion hangeso busjness peratjons o that he GlobalCompact ndj| i$:Ir:" becomeart t nun"j"t"ni, ",.","s1/,';rftu.",ndday-to-day- pubtishn tsannuat"olj.?flT,]:iqubticcorporateepone.g. ustainabitityeport)descriptionf hewaysnwhicht ssupport,.ftheGlobal ompactnd lsprincjplesCommunicationnerogr"..j, -- ' =- pubticlydvocatehec]:,?1t-Compactnd tsprinciplesra ommunicationsvehjclesuchas press eleases,peeches."t "-. -"Answer (ii)

Asustainabirityeport hourd rovide barancednd easonableepresentationfffiff:"[l?illffffrmanceor eportinsrsanizaiio;:;;]uiinsotf,ositivendThereare threeelements f the GRI Sustajnabi l i tyeport ing uidel ines,iz .eportlngrincipres,Reportinguioun"" nodianjrro"b]l",o"rr"sincrudjngl;l;;Til* '"0'"ators)hesehree lementsre onsideredoJeequalnweightnd


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39 pp_cBEs_-June201Thestepsouse heGRIReporng Frameworkreas ollows:1. ldentifyhe opics nd relatedndicatorsha tare relevant y undergoingnnteract jverocess sing ne erincipresr-rn '" t"" i " , , ,y nd stakehordernclusiveness,ustainabilitont"*t, nO "po.t'el,inouriur.2. When dentifyinghe oprcs onsiderhe relevancef al l ndicatoraspectsdentifed n heGRtcuidetinesndappticaOL".tli.-uppr"."nt".3. From he setof relevantopics nd ndicators,se he ests istedor eachrincipteoassess h chtopcsanOnOicatorsi"ilateriaf4 use. he principresto pr ior i t izeerectedopics nddecidewhichwi| |bemphasized.5. Thespecific ethodsrprocessessedorassessjng atenalitye_- Djfferentiatedorand ndentifiedyeach rganjzation.- Dpendentn heguidancend estsoundn heGBl Reportingrinclples,

_ Disclosed.Answer (iii)^^-]f -??*Jgl"s.sustainabitityndicesre he irst tobatndicesrackinghe inancialenormanceot he eadingustainaoirity-orivenomiJ". *oirorio", it was aunched

TheDow onesSustainability_orldndex DJSIWorld) omprises ore han300onpanieshat epresen*heop oz.ot*re eaoingr;i;i;;;i;"",npanres ourof herggest500 ompaniesn heDow onesWorldn"OLr.'---"",unO"Cr:rOoru,"Sustainabilityssessmentrlteria nderhe Dow_JonesndicessasDimension CriteriaEconomic

Environment

Codes fConductComplianceCorruptionBriberyCorporateovernanceFisk& CrisisN4anagement6hdustrySpecifjc riteriaEnvironmentalerformance(Eco-Efficiency)Environmentaleporting.hdustrySpecilic riteriaCorporateitizenshjp/h tanthropyLaborPracticendicatorsHumanCapital evelopment

Weightingo/")5.5o.u.0DependsnIndustry7.03.0Dependsnlndustry3.5J .Uc .c

Social


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PP-cBES-June201Sociat eportjng.Tatent ttraction RetentionIndustry peciric rjterja

Documentsnalyzednclude:- Sustainabilityeports- Environmentaleports- Health ndsalety eports- Socialeports

- Annualinancialeports

403.05.5DependsnIndustry

- Specialeportse.g. n,inlellectualapital anagemenl,orporateovernance,R&D, mployeeelations)- lffl'|il:i:"es ofcompanynformafion;.g.nrernatocumentation,rochuresAnswerB(iv)

The convention n Bioroqicai iversity, nown ntorma[y.s the Biodiversityonvention,san nternationar,earyha twa; adopt"onnioJ" laneiro nJune 1992.TheConventionas hreemaln oals:'I. conservalionfbiologicaliversity;2. sustainableseof tscomponents;nd3. tairandequltableharing fbenefitsrisingrom eneticesources.

^-_ | :.tn"ryotds, tsobjectives to develop ationaltrategiesor heconservationli3,#r;;i:fj"lseoI biorosicativersiry.rs'orteneenlL.l'#k"io"urn"nresardinsSome f he ssues ealtwithunderheconventionnclude:- Measuresnd ncenlivesor heconservalionnd ustainablsseol biological- Begulaledccesso oeneticesourcesnd raditjonalnowledge,ncludingriorInrormed onsen-rf hepartypi""io"s i".il;"l. ^- Sharing,na fairand"qyl,1,:Jur,rhe resufsof researchnddevetopmentand hebenetits risingrom he ommercial nO inll, urifzation f geneticresources ith heContra,ctin_gartyprovidingr"h i"-rorr"", (governmentsill;il::ffiililunities hat rovid"on","oltonuii'"*r"og",iii"Ji'"iriiy- Accesso and ransferl l*gl,:o,g9y, inctudingiotechnotogy,o the:iliJ:ff:frflHrocar communitiesi'itprouioec,aiit-'n"r,no*i6os"";ci


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4 1 PP-cBES-June01- TechnicalndsclentlticooDeration.- tmpacl ssessment.- Educationndpubljc wareness- Provisionf inancialesources.- Nationaleportingneffortso mplementreaty ommitments.Answer8(v)

Case-lawsnWater ollulionrhe M C Mehtav. Union f n^dia(l]Rqg8SC O37) tso nown sTheKanpurTanneriesrGanga ollutioncase samonghemost ignillcantater ollutionase.Detairedcientificnvestioationsnd the re"poris;;";;;;;;;o berorehe courtofEvidence.heSupremeourt held:, ---|ngrg inouuricnterestitigationwnersfsome f he anneriesrschargrngffruentsI:,T^,l:iiJi:,"r:"s in.canga ndnotsetting pa primaryre"tm"ntptantn spjteofoetng skedo do so orseveral ears idno tcare, nspiieot noticeo hem, ven oenter ppearancesn heSupreme ourtoexpressheiiwiltingnesso ateappropriatestepsoestabrishhepre-treatmentrantstwasherdha t o aias heywere oncernedonorder irectinghemostopworkingheiranneriesnoulo epasseo.twasobservedthat he.effuent ischargedrom tannerys en imes oxjous hen ompared jth hedomesricewage aterwhichrowsntohe iverrom nf'rrlln'ur"u on tsbank. twaslurther bservedhat he inanciarapacity f he ann;ries hourd econsideredsirrelevanthile equiringhem oestablish-primarytre"t.""t pi""tr.In Vineet umarMathurv. tJnion f nd,a (1 96)1SCC l191,heCourtooknoteofthecontinuediorationf hestate, swe| ai industriesyconiinu,ngopotutewaterbydischargingtFruentsndarsonnotsetting porcomm|nenluenrrealment ranls.Thecourt niaary irectedheofticers f he6tat"poirrtione-;"ro o visit heporutingindustriarstabrishmentsndmake f esh nspectionitn.-" irir"nt reatment rantsinstalledn hesaidestabrishmentsndor herr o*ing.ntt"rrip""tion, if twas oundthar he reatmentrantsredericientnany espect rihedeficiencyo,ntedutearrierstillcontinues,he Boardwil|givereasonaui"ir " toiir'r" industrieso cure hedeficiencies owever,he ime ogiven hourd or"rt"no ;"-yonohedeadrineetupby thecourt rhe Boardwasdirectedo fire ts reportwitnin'trrteenays.Thecourtturther erdhat t he ndustriesono tobtainne"in"ent oi ni statepotutionBoardfof trnningheir nits, eforehe xed ime imi.he nor.tri"""iii .top unctioninghere


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