Q1.

The following information of a company is given to you:

a) Loan given Rs 10,00,000/- @ 7% fixed rate

b) Bank Loan ‘A’ Rs 25,00,000/- @ 10.50% floating
c) Bank Loan ‘B’ Rs 55,00,000/- @ 12.0% fixed
Analyze the risk, and recommend a strategy, under two scenarios :
a) Interest rate increases by 1.5%
b) Interest rate decreases by 0.50%

Q2. What are the Corporate Governance reporting requirements for a listed company, as per
SEBI?

Q3. A Company manufactures components for the electronics industry. The chip and a few
other inputs used in the product are imported from Taiwan. Imports account for nearly
70% of the total cost of the finished product. The imports are invoiced in US Dollars. The
supplier gives a credit of 60 days to the Indian importer. There are no exports. The
company had taken a Foreign Currency Loan of which USD 1.5 million is to be repaid in
2009. The loan has a floating rate cost of LIBOR plus 0.50%.

a) What are the financial risks of the company?

b) Analyse the financial risks under scenario of reduction in interest rates.
c) What strategies can the company use to manage financial risks?

Ans. A) 1000000*7%=70000
B) 2500000*10.50%=262500
2500000*12%=300000
2500000*10%=250000
C) 5500000*12%=660000

Ans. Committees on corporate governance =>In India uptil now we had 3 different committees
on corporate governance=>

Kumar Mangalam Birla Committee=> It is almost a truism that the adequacy and the quality of
corporate governance shape the growth and the future of any capital market and economy. The
concept of corporate governance has been attracting public attention for quite some time in India.
The topic is no longer confined to the halls of academia and is increasingly finding acceptance for its
relevance and underlying importance in the industry and capital markets. Progressive firms in India
have voluntarily put in place systems of good corporate governance. Internationally also, while this
topic has been accepted for a long time, the financial crisis in emerging markets has led to renewed
discussions and inevitably focussed them on the lack of corporate as well as governmental
oversight. The same applies to recent high-profile financial reporting failures even among firms in the
developed economies. Focus on corporate governance and related issues is an inevitable outcome
of a process, which leads firms to increasingly shift to financial markets as the pre-eminent source
for capital. In the process, more and more people are recognizing that corporate governance is
indispensable to effective market discipline. This growing consensus is both an enlightened and a
realistic view. In an age where capital flows worldwide, just as quickly as information, a company
that does not promote a culture of strong, independent oversight, risks its very stability and future
health. As a result, the link between a company's management, directors and its financial reporting
system has never been more crucial. As the boards provide stewardship of companies, they play a
significant role in their efficient functioning. 
1.2. Studies of firms in India and abroad have shown that markets and investors take notice of well-
managed companies, respond positively to them, and reward such companies, with higher
valuations. A common feature of such companies is that they have systems in place, which allow
sufficient freedom to the boards and management to take decisions towards the progress of their
companies and to innovate, while remaining within a framework of effective accountability. In other
words they have a system of good corporate governance.

1.3 Strong corporate governance is thus indispensable to resilient and vibrant capital markets and is
an important instrument of investor protection. It is the blood that fills the veins of transparent
corporate disclosure and high-quality accounting practices. It is the muscle that moves a viable and
accessible financial reporting structure. Without financial reporting premised on sound, honest
numbers, capital markets will collapse upon themselves.

1.4 Another important aspect of corporate governance relates to issues of insider trading. It is
important that insiders do not use their position of knowledge and access to inside information about
the company, and take unfair advantage of the resulting information asymmetry. To prevent this from
happening, corporates are expected to disseminate the material price sensitive information in a
timely and proper manner and also ensure that till such information is made public, insiders abstain
from transacting in the securities of the company. The principle should be ‘disclose or desist’. This
therefore calls for companies to devise an internal procedure for adequate and timely disclosures,
reporting requirements, confidentiality norms, code of conduct and specific rules for the conduct of
its directors and employees and other insiders. For example, in many countries, there are rules for
reporting of transactions by directors and other senior executives of companies, as well as for a
report on their holdings, activity in their own shares and net year to year changes to these in the
annual report. The rules also cover the dealing in the securities of their companies by the insiders,
especially directors and other senior executives, during sensitive reporting seasons. However, the
need for such procedures, reporting requirements and rules also goes beyond corporates to other
entities in the financial markets such as Stock Exchanges, Intermediaries, Financial institutions,
Mutual Funds and concerned professionals who may have access to inside information. This is
being dealt with in a comprehensive manner, by a separate group appointed by SEBI, under the
Chairmanship of Shri Kumar Mangalam Birla.

1.5  The issue of corporate governance involves besides shareholders, all other stakeholders. The
Committee's recommendations have looked at corporate governance from the point of view of the
stakeholders and in particular that of the shareholders and investors, because they are the raison de
etre for corporate governance and also the prime constituency of SEBI. The control and reporting
functions of boards, the roles of the various committees of the board, the role of management, all
assume special significance when viewed from this perspective. The other way of looking at
corporate governance is from the contribution that good corporate governance makes to the
efficiency of a business enterprise, to the creation of wealth and to the country’s economy. In a
sense both these points of view are related and during the discussions at the meetings of the
Committee, there was a clear convergence of both points of view.

1.6  At the heart of the Committee's report is the set of recommendations which distinguishes the
responsibilities and obligations of the boards and the management in instituting the systems for good
corporate governance and emphasises the rights of shareholders in demanding corporate
governance. Many of the recommendations are mandatory. For reasons stated in the report, these
recommendations are expected to be enforced on the listed companies for initial and continuing
disclosures in a phased manner within specified dates, through the listing agreement. The
companies will also be required to disclose separately in their annual reports, a report on corporate
governance delineating the steps they have taken to comply with the recommendations of the
Committee. This will enable shareholders to know, where the companies, in which they have
invested, stand with respect to specific initiatives taken to ensure robust corporate governance. The
implementation will be phased. Certain categories of companies will be required to comply with the
mandatory recommendations of the report during the financial year 2000-2001, but not later than
March31, 2001, and others during the financial years 2001-2002 and 2002-2003. For the non-
mandatory recommendations, the Committee hopes that companies would voluntarily implement
these. It has been recommended that SEBI may write to the appropriate regulatory bodies and
governmental authorities to incorporate where necessary, the recommendations in their respective
regulatory or control framework.

1.7  The Committee recognised that India had in place a basic system of corporate governance and
that SEBI has already taken a number of initiatives towards raising the existing standards. The
Committee also recognised that the Confederation of Indian Industries had published a code entitled
"Desirable Code of Corporate Governance" and was encouraged to note that some of the forward
looking companies have already reviewed or are in the process of reviewing their board structures
and have also reported in their 1998-99 annual reports the extent to which they have complied with
the Code. The Committee however felt that under Indian conditions a statutory rather than a
voluntary code would be far more purposive and meaningful, at least in respect of essential features
of corporate governance.

1.8   The Committee however recognised that a system of control should not so hamstring the
companies so as to impede their ability to compete in the market place. The Committee believes that
the recommendations made in this report mark an important step forward and if accepted and
followed by the industry, they would raise the standards in corporate governance, strengthen the
unitary board system, significantly increase its effectiveness and ultimately serve the objective of
maximising shareholder value. 

CII Committee=>
Cadbury Committee=>

Cadbury Committee Report (1992)

The 'Cadbury Committee' was set up in May 1991 with a view to overcome the huge problems of
scams and failures occurring in the corporate sector worldwide in the late 1980s and the early
1990s. It was formed by the Financial Reporting Council, the London Stock of Exchange and the
accountancy profession, with the main aim of addressing the financial aspects of Corporate
Governance. Other objectives include: (i) uplift the low level of confidence both in financial
reporting and in the ability of auditors to provide the safeguards which the users of company's
reports sought and expected; (ii) review the structure, rights and roles of board of directors,
shareholders and auditors by making them more effective and accountable; (iii) address various
aspects of accountancy profession and make appropriate recommendations, wherever necessary;
(iv) raise the standard of corporate governance; etc. Keeping this in view, the Committee
published its final report on 1st December 1992. The report was mainly divided into three parts:-

 Reviewing the structure and responsibilities of Boards of Directors and

recommending a Code of Best Practice The boards of all listed companies should
comply with the Code of Best Practice. All listed companies should make a statement
about their compliance with the Code in their report and accounts as well as give reasons
for any areas of non-compliance. The Code of Best Practice is segregated into four
 sections and their respective recommendations are:- 

1. Board of Directors - The board should meet regularly, retain full and effective
control over the company and monitor the executive management. There should
be a clearly accepted division of responsibilities at the head of a company, which
will ensure a balance of power and authority, such that no one individual has
unfettered powers of decision. Where the chairman is also the chief executive, it
is essential that there should be a strong and independent element on the board,
with a recognised senior member. Besides, all directors should have access to the
advice and services of the company secretary, who is responsible to the Board for
ensuring that board procedures are followed and that applicable rules and
regulations are complied with.
2. Non-Executive Directors - The non-executive directors should bring an
independent judgement to bear on issues of strategy, performance, resources,
including key appointments, and standards of conduct. The majority of non-
executive directors should be independent of management and free from any
business or other relationship which could materially interfere with the exercise of
their independent judgment, apart from their fees and shareholding.
3. Executive Directors - There should be full and clear disclosure of directors’ total
emoluments and those of the chairman and highest-paid directors, including
pension contributions and stock options, in the company's annual report, including
separate figures for salary and performance-related pay.
4. Financial Reporting and Controls - It is the duty of the board to present a
balanced and understandable assessment of their company’s position, in reporting
of financial statements, for providing true and fair picture of financial reporting.
The directors should report that the business is a going concern, with supporting
assumptions or qualifications as necessary. The board should ensure that an
objective and professional relationship is maintained with the auditors.

 Considering the role of Auditors and addressing a number of recommendations to

the Accountancy Profession 

The annual audit is one of the cornerstones of corporate governance. It provides

an external and objective check on the way in which the financial statements have
been prepared and presented by the directors of the company. The Cadbury
Committee recommended that a professional and objective relationship between
the board of directors and auditors should be maintained, so as to provide to all a
true and fair view of company's financial statements. Auditors' role is to design
audit in such a manner so that it provide a reasonable assurance that the financial
statements are free of material misstatements. Further, there is a need to develop
more effective accounting standards, which provide important reference points
against which auditors exercise their professional judgement. Secondly, every
listed company should form an audit committee which gives the auditors direct
access to the non-executive members of the board. The Committee further
recommended for a regular rotation of audit partners to prevent unhealthy
relationship between auditors and the management. It also recommended for
 disclosure of payments to the auditors for non-audit services to the company. The
Accountancy Profession, in conjunction with representatives of preparers of
accounts, should take the lead in:- (i) developing a set of criteria for assessing
effectiveness; (ii) developing guidance for companies on the form in which
directors should report; and (iii) developing guidance for auditors on relevant
audit procedures and the form in which auditors should report. However, it should
continue to improve its standards and procedures.

 Dealing with the Rights and Responsibilities of Shareholders 

The shareholders, as owners of the company, elect the directors to run the
business on their behalf and hold them accountable for its progress. They appoint
the auditors to provide an external check on the directors’ financial statements.
The Committee's report places particular emphasis on the need for fair and
accurate reporting of a company's progress to its shareholders, which is the
responsibility of the board. It is encouraged that the institutional
investors/shareholders to make greater use of their voting rights and take positive
interest in the board functioning. Both shareholders and boards of directors should
consider how the effectiveness of general meetings could be increased as well as
how to strengthen the accountability of boards of directors to shareholders.

Ans3 A)Financial risk of the company includes the following risk=>

 Risk of foreign exchange transaction
 Since the loan is on floating rate of interest rate risk
 Foreign currency exchange risk
 Import risk
B) In the event of reduction in the interest rates following are the financial
risk that may arise=>
 Impoters may become more costlier
 Since the floating rate is based upon LIBOR therefore the company may have
to pay a very high amount of interest as compared with the total cost of the
project.
 Since the company does not have any expoters they cannot hedge themselves
against reduction in the rate of interest.
C) Following are the various strategies which the company can use to
manage financial risk=>
 Hedging
 Maintaining fixed rate of interest
 If the rate of interest, compulsorily to be floating than it should not be based
upon LIBOR.