CS Professional Guideline Answers for Governance, Risk Management, Compliances and Ethics:
CS Professional Guideline Answers for Governance, Risk Management, Compliances and Ethics: This excellent blog gives you complete knowledge, improve your skills in preparing and answering for Governance, Risk Management, Compliances and Ethics in CS Professional.
This blog contains model answers for Governance, Risk Management, Compliances and Ethics given by expert faculty of CS Professional.
We hope that these CS Professional guideline answers will assist the students in preparing for the Institute’s examinations.
PART – I
- P Pvt. Ltd. was incorporated under the Companies Act, 1956 on 3rd October, 2011. The Authorised Share Capital of the Company is `75 The present paidup Share Capital of the Company is `60 crore. The turnover of the company for financial year 2017-18 was `150 crores and because of good overseas marketability of the company’s product, the turnover of the company for the year ended 31st March, 2019 increased to `210 crores.
The Secretarial Auditor of the company advised that the company should have internal audit in place, but the Managing Director of the company argued that since it is a private company, so it is not required.
Based on the facts in the above case, answer the following questions :
- Whether internal audit is compulsory for the Private Limited ? (1 mark)
- In the above case if the company had been an Unlisted Public Limited and Turnover for year ended 31st March, 2019 would be `190 crore, what would have been your answer ? (2 marks)
- Can Company Secretary be appointed as Internal Auditor in an Unlisted Public Company where he is already appointed as Key Managerial Personnel? (2 marks)
- M Ltd. was registered in the year 2001 as a Private Limited Company and continuing with the same status. It is having a paid-up share capital of `65 crore as on 31st March, 2019. The present company’s auditor, X, Chartered Accountant, (a Proprietor Firm) who was appointed as auditor of the company in the year 2014. The term of the said auditor is going to expire and company wants to re-appoint the same person, since he is having well acquaintance with the company’s officials and its working.
Based on the above facts, answer the following questions :
- Whether X can be reappointed as Statutory Auditor of the Company ?
- In the above case if, instead of the Individual Person as an auditor, the company would have appointed any Firm of Chartered Accountants, and now the tenure of the said firm is expiring, whether this firm is eligible for reappointment ? (2 marks)
- In the given case, if the paid-up capital of the company is `5 crore and having cash credit limit and term loan facility from a bank to the tune of `55 crore, what would have been your answer ? (2 marks)
- RST recently issued the Equity Shares on basis of right issue. Due to this, the paid-up capital of the Company has been increased from `7.5 crore to `15 crore. The Company Secretary in the Board Meeting put up the proposal for constitution of various committees including Audit Committee and Nomination & Remuneration Committee. All members of the Committee were proposed to be Independent Directors. In the scope of Nomination & Remuneration Committee, it was inter-alia added that the Committee shall also evaluate the performance of Chairman & Managing Director (CMD) of the company. The Directors present in the Board meeting strictly objected on the said proposal. CMD has also expressed dissent on the proposal.
In view of this, check the validity of the proposal of the Company Secretary.
- Under the Energy Department, Govt. of Tamil Nadu, three Companies as Government Company were incorporated as below :
A Ltd. for Generation of Electricity
B Ltd. for Transmission of Electricity C Ltd. for Distribution of Electricity.
Further, three subsidiaries namely X Ltd., Y Ltd. and Z Ltd. were incorporated as wholly owned subsidiary companies of C Ltd. C Ltd. purchases the Power (Electricity) from A Ltd. and sale all Power to subsidiary Companies. Subsidiary Company through B Ltd. distributes the Power in the State.
Apart from that, C Ltd. also purchases cables from manufacturer and sells it to Subsidiary Companies with margin of 5% on sale price. In the power supply, C Ltd. also charge 0.05 paisa per unit as service charge from Subsidiary Companies.
During the Audit, Auditors raised the question that there are lot of related party transactions and directors and members are same in all the Companies. Further, Chairman is also common. Neither the Board nor the Members of the Company approved any transaction which comes under the definition of Related Party Transaction. The Company Secretary replied that the transactions are pre- approved by Energy Department, Govt. of Tamil Nadu but Auditor is dissatisfied with this reply.
In such situation, check the validity of the transactions between related parties.
As per section 138 of the Companies Act, 2013 read with rule 13(1)(c) of The Companies (Accounts) Rules, 2014 every private company having-
- turnover of two hundred crore rupees or more during the preceding financial year; or
- outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the preceding financial year shall be required to appoint an internal auditor.
As the turnover of the P Pvt. Ltd is more than Rs. 200 crore, for the year ended 31st March, 2019 it is mandatory to appoint an internal auditor.
As per section 138 of the Companies Act, 2013 read with rule 13(1)(b) of The Companies (Accounts) Rules, 2014 every unlisted public company having-
- paid up share capital of fifty crore rupees or more during the preceding financial year; or
- turnover of two hundred crore rupees or more during the preceding financial year; or
- outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or
- outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year shall be required to appoint an internal
In the mentioned case, as the paid up capital is more than Rs. fifty crores hence the company needs to appoint the internal auditor.
Section 138 of the Companies Act, 2013 states that an internal auditor, shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board. Further explanation to Rule 13 of The Companies (Accounts) Rules, 2014 states that the internal auditor may or may not be an employee of the company.
In view of the above the Company Secretary who is appointed as Key Managerial Personnel in the company can be appointed as an internal auditor of the company.
Section 139(2) of the Companies Act, 2013 read with Rule 5(b) of the Companies (Audit and Auditors) Rules, 2014 provides that:
all private limited companies having paid up share capital of rupees fifty crore or more shall not appoint or re-appoint
- an individual as auditor for more than one term of five consecutive years; and
- an audit firm as auditor for more than two terms of five consecutive
Also, an individual auditor who has completed his term of five consecutive years shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term.
In view of the above as the paid up share capital of the company is more than Rs.50 Crore, Mr. X cannot be appointed as Statutory Auditor for the second term.
Section 139(2) of the Companies Act, 2013 read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014 provides that:
all private limited companies having paid up share capital of rupees fifty crore or more shall not appoint or re-appoint
- an individual as auditor for more than one term of five consecutive years; and
- an audit firm as auditor for more than two terms of five consecutive
An audit firm which has completed its term shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term:
Provided further that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years.
In view of the above the firm of Chartered Accountants will not be eligible for the reappointment for five years on the completion of the term.
Section 139(2) of the Companies Act, 2013 read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014 provides that no listed company or the following classes of companies excluding one person companies and small companies:-
- all unlisted public companies having paid up share capital of Rs. ten crores or more or
- all private limited companies having paid up share capital of Rs. fifty crores or more or
- all companies having paid up share capital of below threshold limit mentioned in
- and (b) above but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more shall not appoint or re-appoint—
- an individual as auditor for more than one term of five consecutive years and
- an audit firm as auditor for more than two terms of five consecutive years
Since in the present case the company is having paid up share capital of Rs. 5 crore
i.e. within the threshold limit of Rs.50 crors but the company have borrowing facility from a bank of Rs 55 crores (i.e. exceeding the threshold limits of Rs. 50 crores), hence the company cannot re-appoint X as auditor.
As per rule 6 of the Companies (Meeting of Board and its power) Rules, 2014 read with rule 4 of the Companies (Appointment and qualification of Directors) Rule 2014, every listed company or public company having :
- Paid up capital of 10 crore or more or
- Turnover of 100 Crore or more or
- Aggregate outstanding loan, debenture and deposit exceeding Rs.50 Crore Shall constitute the Audit Committee and Nomination and Remuneration Further, as per section 178 of the Companies Act, 2013 Nomination and Remuneration
Committee shall have at least three members out of which not less than one half shall be Independent Director.
Section 178 (2) of the Companies Act, 2013 stipulates that the Nomination and Remuneration Committee shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance.
The performance of the Chairperson is linked to both the functioning of the Board as a whole as well as the performance of each director. The Nomination and Remuneration Committee provides that the Independent Director should review the performance of the Chairperson of the company taking into account the views of the executive directors and non-executive directors.
In view of this, the proposal of the Company Secretary is valid as per the law.
According to Section 2(76) of Companies Act 2013, “related party”, with reference to a company includes any body corporate which is —
- a holding, subsidiary or an associate company of such company; or
- a subsidiary of a holding company to which it is also a subsidiary; or
- an investing company or the venture of the
Transactions referred to in the question are covered under Section 188 (1) of the Companies Act, 2013 which deals with the related party transactions.
All related party transactions require the approval of the Audit Committee as per section 177 of the Companies Act, 2013 except to a transaction, other than a transaction referred to in section 188 of the Companies Act, 2013, between a holding company and its wholly owned subsidiary company, as stated under fourth proviso to section 177(4) of the Companies Act, 2013. Up to certain limits, the approval of the Board is required and above the limits, approval of the members must be taken.
As per proviso two of section 188(1) of the Companies Act, 2013 member of the company shall not vote where he is related party. However as per proviso three of the section 188(1) of the Companies Act, 2013 , if 90% or more members are related party, members can vote. As per proviso four of the section 188(1) of the Companies Act, 2013, the approval of the Board is not required where the transactions are on arms length basis in ordinary course of business. Further, as per proviso five of the section
188(1) of the Companies Act, 2013, the approval of members is not required in case of transaction between holding and wholly owned subsidiary.
Further, as per the exemption notification dated 5th June, 2015 issued by Ministry of Corporate Affairs, the first and second proviso to sub-section(1) to section 188 of the Companies Act, 2013 shall not apply to
- a Government Company where the contracts/arrangements to be entered into by it with any other Government Company;
- a Government company ( other than a listed company) , in respect of contracts/ arrangements other than those mentioned in (a) above, if it has obtained approval of the administrative ministry of the concerned Central/ State
In this case, C Ltd, being a Government company has entered into the following transactions:
- Purchase of power from A ( Government Company)
- Sale of power to subsidiary companies ( all Government companies, as they are subsidiaries of a Government company)
- X Ltd, Y and Z Ltd (wholly owned subsidiaries, being Government companies) distribute power through B Ltd.( Government company)
- Purchase of cables from a manufacturer and sale to its Subsidiary companies (Government companies)
- Levy of service charges at 0.05 paise per unit on its Subsidiary companies (Government companies)
Therefore, in the present case, assuming that the transactions are at arm’s length and in the ordinary course of business, neither the approval of the Board nor the members of the company is required and the related party transactions would be valid.
Attempt all parts of either Q. No. 2 or Q. No. 2A
- In year 2017, the SEBI has constituted a Committee on Corporate Governance under the Chairmanship of Uday Kotak with the aim of improving standards of Corporate Governance of listed companies in India. List out the recommendations given by this Committee.
- With what mission, International Corporate Governance Network (ICGN) was incorporated ? Describe the purpose of the
- To protect the interest of the Stakeholders, SEBI has taken various initiatives and Code of Fair Disclosure is one of the important step under Regulation 8 of SEBI (Prohibition of Insider Trading) Regulations, Prepare a note on Code of Fair Disclosure. (5 marks each)
OR (Alternate question to Q. No. 2)
- KLM in its 64th Board meeting held on 30th June, 2019 has constituted
Risk Management Committee with objective of mitigation of risk and recommendation of preventive measures comprising of two Independent Directors and one Whole Time Director. In the first Meeting of the Committee held on 6th July, 2019, Whole Time Director could not be present and sought the leave of absence. The Board proposal about the constitution was silent with respect to Chairman of the Committee and quorum of the Meeting of Committee. The remaining two members held the Meeting and the Seniormost Director present in the Meeting was selected as Chairman of the Committee. The Committee also approved the policy for Systematic Risk Management. Whether, the decision of the Committee is valid in light of the approved Secretarial Standards as issued by the ICSI ? (5 marks)
- The big investors, FIIs engages the Proxy Advisory Firms to get the important information and recommendations which lead the protection of their interest and safeguard of their fund. Prepare a brief note on reasons for engaging the Proxy Advisory Firms. (5 marks)
- Compliance Management is the most important part of any Highlight the risk of non-compliances. (5 marks)
In 2017 the SEBI had constituted a Committee on Corporate Governance under the Chairmanship of Mr. Uday Kotak with the aim of improving standards of corporate governance of listed companies in India. The recommendations of the Committee were as follows:
- Composition and Role of the Board of Directors e. Minimum no. of Directors on a Board, Gender Diversity on Board, Attendance of Directors, Quorum for Board Meetings, Minimum no of Board Meetings, Maximum no. of Directorships etc.
- The Institution of Independent Directors i.e. Minimum nos. of Independent Directors, Eligibility Criteria for Independent Directors, Minimum compensation to Independent Directors, Lead Independent Directors, Casual vacancy of Independent Directors
- Board Committees e. Composition and Role of Audit Committee, Nomination, Remuneration and Stakeholder Relationship Committee etc.
- Enhanced Monitoring of Group Companies i.e. Obligation on the Board of the Listed with respect to subsidiaries, Secretarial Audit) etc.
- Promoters/ Controlling Shareholders and Related Party Transactions i.e. Disclosure and Approval of Related Party Transactions, Royalty and Brand Payments to Related Party, Remuneration to Executive Promoters Directors and Non- Executive Directors
- Disclosures and Transparency pertaining to Submission of Annual reports, Disclosures pertaining to Credit Rating, Disclosures pertaining to Directors, Disclosures pertaining to Disqualification of Directors, Disclosures pertaining to Subsidiary Accounts, Prior Intimation of Board meeting to discuss Bonus Issue, Disclosure on Website
- Accounting and Audited related issues i.e. Audit Qualifications, Independent External opinion by Auditors, Group Audits, Quarterly financial controls, Internal financial control, IND-AS adoption, Disclosure of Audi fees of Auditors
- Investors participation in Meetings of Listed Entities i.e. Timeline for AGM in listed entities, E-voting and webcast of proceedings of meeting, Treasure Stock, Stewardship code).
- Governance aspects of Public Sector
- Capacity building in SEBI for enhancing Corporate Governance in Listed
In its board meeting on March 27, 2018, SEBI, after detailed consideration and due deliberation, accepted several recommendations of the Kotak Committee without any modifications and accepted a few other recommendations with certain modifications as to timelines for implementation, applicability thresholds among others.
The International Corporate Governance Network (“ICGN”) founded in 1995 is a not- for-profit company limited by guarantee and not having share capital under the laws of England and Wales.
ICGN’s mission is to promote effective standards of corporate governance and investor stewardship to advance efficient markets and sustainable economies world- wide.
ICGN’s positions are guided by the ICGN Global Governance Principles and Global Stewardship Principles, which were first published in 2003, as a statement on shareholder stewardship responsibilities both of which are implemented by:
- Influence policy by providing a reliable source of investor opinion on governance and
- Connect peers at global events to enhance dialogue between companies and investors around long term value
- Inform dialogue through education to enhance the professionalism of governance and stewardship
It has four primary purposes:
- To provide an investor-led network for the exchange of views and information about corporate governance issues internationally;
- To examine corporate governance principles and practices;
- To develop and encourage adherence to corporate governance standards and guidelines; and
- To generally promote good corporate
Note on Code of Fair Disclosure
As per Code of Fair Disclosure under Regulation 8 of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015:
- The board of directors of every company, whose securities are listed on a stock exchange, shall formulate and publish on its official website, a code of practices and procedures for fair disclosure of unpublished price sensitive information that it would follow in order to adhere to each of the principles set out in Schedule A to the regulation on Prohibition of Insider Trading, without diluting the provisions in any
This provision intends to require every company whose securities are listed on stock exchanges to formulate a stated framework and policy for fair disclosure of events and occurrences that could impact price discovery in the market for its securities. Principles such as, equality of access to information, publication of policies such as those on dividend, inorganic growth pursuits, calls and meetings with analysts, publication of transcripts of such calls and meetings, and the like are set out in the schedule to the Regulations on Prohibition of Insider Trading.
- Every such code of practices and procedures for fair disclosure of unpublished price sensitive information and every amendment thereto shall be promptly intimated to the stock exchanges where the securities are
This provision is aimed at requiring transparent disclosure of the policy formulated in sub-regulation (1) of Regulation 8 of (Prohibition of Insider Trading) Regulations, 2015
SCHEDULE A [Sub-regulation (1) of regulation 8]
Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of Unpublished Price Sensitive Information
- Prompt public disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concrete information comes into being in order to make such information generally
- Uniform and universal dissemination of unpublished price sensitive information to avoid selective
- Designation of a senior officer as a chief investor relations officer to deal with dissemination of information and disclosure of unpublished price sensitive information.
- Prompt dissemination of unpublished price sensitive information that gets disclosed selectively, inadvertently or otherwise to make such information generally
- Appropriate and fair response to queries on news reports and requests for verification of market rumours by regulatory
- Ensuring that information shared with analysts and research personnel is not unpublished price sensitive
- Developing best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures
- Handling of all unpublished price sensitive information on a need-to-know
The Secretarial Standard 1 (SS-1) deals with the Meetings of the Board of Directors. Clause 3.5 of Secretarial Standard 1 (SS-1) which relates to the Meetings of
Committees provides as under:
“Unless otherwise stipulated in the Act or the Articles or under any other law, the Quorum for Meetings of any Committee constituted by the Board shall be as specified by the Board. If no such Quorum is specified, the presence of all the members of any such Committee is necessary to form the Quorum”.
In the given case of the company KLM Ltd, it is mentioned in the question itself that “The Board proposal about the constitution was silent with respect to Chairman of the Committee and quorum of the Meeting of Committee”.
Since the quorum was not specified, hence as per the clause 3.5 of SS-1, where no such quorum is specified, the presence of all the members of such committee is necessary to form the quorum. Therefore, the meeting was held by the Risk Management Committee (RMC) without the presence of adequate quorum and in view of this the decision taken by the RMC is also invalid.
Proxy advisory firms are independent research outfits that evaluate the pros and cons of corporate matters such as mergers, acquisitions, top appointments and CEO pay, which shareholders are expected to vote on in AGMs, EGMs or court-convened meetings.
Institutional investors contract with these firms to carry out comprehensive reviews of voting proposals that the investors themselves have neither the time nor the resources to undertake.
Following are few reasons why institutional investors engage proxy advisors:
- Proxy advisors generally offer variety of services consisting of both, analyzing the proposals at general meetings and recommending voting
- The recommendations of proxy advisors help the investors to obtain a more considered understanding of different agenda items and to arrive at an informed voting decision, allowing them to optimise their own limited resources and cast their votes in a timely and informed
- Considering that institutional investors invest in multiple companies in different industry range and across the globe, it may not be feasible for those investors
to have informed knowledge of the corporate governance specifications of that country and hence there may be an inability to understand the need and impact of a particular agenda item. Proxy advisors help to combat this issue as well through their informed consultancy. Due to cross border voting investors may face issues in terms of language of a country. The proxy advisors can assist in mitigating the language issues as well. Further, they may also enable the investors to have a voting platform in cases where electronic voting is a pre-requisite at general meetings.
- Apart from the above, general meetings across the globe may be concentrated during a certain period of the year and therefore the investors may not be in a position to gather information and knowledge about all the companies and hence, may not be in a position to take informed decision while Proxy services industry emerged and expanded with the growth of institutional investors and shareholder activism. Proxy services firms play an important role in the proxy voting system. Such firms offer valuable services which includes analysing of the proposals for general meetings and providing voting recommendations, either based on the their own voting policy or on the investor’s customised voting policy.
Proxy advisers also influence boards’ decision making. They do a good job of policing the boards and governance records of the firms they track, and nudging institutional investors to take a stand on governance issues.
Failing to comply with rules, regulations, and specifications could have costly consequences. In the famous Sahara case, the Group was accused of failing to refund over 200 billion rupees to its more than 30 million small investors that it had collected through two unlisted companies of Sahara. In 2011, SEBI ordered Sahara to refund this amount with interest to the investors, as the issue was not in compliance with the requirements applicable to the public offerings of securities. Later in 2014, Mr Subrata Roy, the chairman of Sahara was arrested for the said fraud. His proposal to settle the matter was rejected by the court and SEBI.
Thus non-compliance with the laws of the land can have multi-faceted consequences, ranging from penalties, additional fines to prosecution.
Following are some of the risks of non compliance :
- Penalties and Fines : Penalties include financial fines, limitations on activities, additional barriers to approval and even
- Criminal Charges : Criminal charges are a potential consequence for certain regulatory non-compliance.
- Reputational Damage : A business’ public image is a key to its When a company is thrust into the public eye for failing to comply with regulations, there are reputational repercussions, which eventually lead to distrust.
- Access to Markets and Product Delays : Non-compliance across enterprise and business network could result in exclusion from the tendering processes and
supplier databases. In addition, companies that place value on corporate compliance may avoid doing business with companies which are non compliant as they would want to ensure that they meet their own regulatory obligations.
- Roadblock in Funding : A company cannot get funded, even in the seed investment level, whose compliances are not up to
- Prepare a brief note on National Foundation for Corporate Governance (NFCG) and Board of Trustees of
- “Better Stakeholder engagement ensures Good Governance”. In light of this sentence, elaborate the role of stakeholders in
- Now the days, protection of the Investors’ wealth is big challenge before the In insurance sector, under IRDA’s Regulation, various committees are mandatorily required to be constituted by the Companies. Highlight the name of the committees and describe the role of With Profit Committee.
- Prepare a detailed note on ICSI Recommendations to strengthen Corporate Governance
- What are the material disclosures of which information should be disclosed to Stock Exchange within 24 hours of conclusion of the Board Meeting as per SEBI (LODR) Regulations, 2015 ? (3 marks each)
With the goal of promoting better corporate governance practices in India, the Ministry of Corporate Affairs, Government of India, has set up National Foundation for Corporate Governance (NFCG) along with Confederation of Indian Industry (CII), Institute of Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI). In the year 2010, stakeholders in NFCG have been expanded with the inclusion of Institute of Cost Accountants of India and the National Stock Exchange of India Ltd. The Vision of NFCG is “Be the Key Facilitator and Reference Point for highest standards of Corporate Governance in India.”
The internal governance structure of NFCG consists of Governing Council, Board of Trustees and Executive Directorate.
Board of Trustees
Board of Trustees deal with the implementation of policies and programmes and lay down the procedure for the smooth functioning. It is chaired by Secretary, Ministry of Corporate Affairs, Government of India.
The members of the Board of Trustees are:
- Director General, Confederation of Indian Industry (CII)
- Secretary, Institute of Chartered Accountants of India (ICAI)
- Secretary, Institute of Company Secretaries of India (ICSI) and
- Secretary, The Institute of Cost Accountants of India (ICAI-CMA)
- Representative, National Stock Exchange (NSE)
- Director General & CEO, Indian Institute of Corporate Affairs (IICA)
Stakeholders are characterized by their relationship to the company and their needs, interests and concerns, which will be foremost in their minds at the start of an engagement process. However, as the process unfolds they soon take a particular role with related tasks and responsibilities. The following are just some of the different roles that stakeholders can play:
- Experts, such as academicians, who have been invited to contribute knowledge and strategic advice to the company’s
- Technical advisors with expertise on the social and environmental risks associated with particular technological and scientific developments invited to sit on scientific and ethical panels in science-based
- Representatives of special interests, such as employees, local communities or the environment, commonly invited to participate in stakeholder panels to review company performance and/or reporting
- Co-implementers, such as NGOs, who have partnered with the company to implement a joint solution or program to address a shared
Stakeholders can only be well informed and knowledgeable if companies are transparent and report on issues that impact stakeholders. Both parties have an obligation to communicate sincerely and attempt to understand, not just be understood.
IRDA advises all insurers that it is mandatory to establish Committees for Audit, Investment, Risk Management, Policyholder Protection, Nomination and Remuneration, Corporate Social Responsibility (only for insurers earning profits).
Following are the names of few committees:
- Audit Committee (mandatory)
- Investment Committee (mandatory)
- Risk Management Committee (mandatory)
- Policyholder Protection Committee (mandatory)
- Nomination and Remuneration Committee (mandatory)
- Corporate Social Responsibility Committee (‘CSR Committee’) (mandatory)
- With Profits Committee:
With Profits Committee
The Authority has issued IRDA (Non-Linked Insurance Products) Regulations 2013, which lay down the framework about the With Profit Fund Management and Asset sharing,
among other things. In terms of these Regulations, every Insurer transacting life insurance business shall constitute a With Profits Committee comprising of an Independent Director, the CEO, The Appointed Actuary and an independent Actuary. The Committee shall meet as often as is required to transact the business and carry out the functions of determining the following:
- The share of assets attributable to the
- The investment income attributable to the participating fund of
- The expenses allocated to the
The report of the With Profits Committee in respect of the above matters should be attached to the Actuarial Report and Abstract furnished by the insurers to the Authority.
ICSI Recommendations to strengthen Corporate Governance framework suggests for constitution of Corporate Compliance Committee on mandatory basis in respect of all public limited companies having a paid-up capital of Rs.5 crore or more.
The charter of the committee may include:
- To oversee the Company’s compliance efforts with respect to relevant Company policies, the Company’s Code of Conduct, and other relevant laws and regulations and monitor the Company’s efforts to implement legal obligations arising from agreements and other similar
- To review the Company’s overall compliance programme to ensure that it is well communicated, supports lawful and ethical business conduct by employees, and reduces risk to the Company for non compliance with laws and regulations related to the Company’s
- To review complaints received from internal and external sources, regarding matters other than the financial matters which are within the purview of the Audit
- To periodically present to the Board for adoption appropriate changes to the policies, and oversee implementation of and compliance with these
- To review regularly the company’s compliance risk assessment
- To investigate or cause to be investigated any significant instances of non- compliance, or potential compliance violations that are reported to the
- To coordinate with other committees regarding matters brought to the committees attention that relate to issues of compliance with applicable laws and
- Regularly report to the Board on the Committee’s activities, recommendations and
- To discuss any significant compliance issues with the Chief Executive
- To periodically report to the Board and CEO on the adequacy and effectiveness of the company’s compliance
- To retain at the company’s expense, independent advisors to assist the committee with carrying out its responsibilities from time to
- To perform such other duties and responsibilities as may be assigned to the committee by the
Regulation 30(6) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 clarifies that the listed entity shall first disclose to stock exchange(s) of all events, as specified in Part A of Schedule III, or information as soon as reasonably possible and not later than twenty four hours from the occurrence of event or information.
- Commencement or any postponement in the date of commencement of commercial production or commercial operations of any unit/division.
- Change in the general character or nature of business brought about by arrangements for strategic, technical, manufacturing, or marketing tie-up, adoption of new lines of business or closure of operations of any unit/division (entirety or piecemeal).
- Capacity addition or product
- Awarding, bagging/ receiving, amendment or termination of awarded/bagged orders/contracts not in the normal course of
- Agreements (viz. loan agreement(s) (as a borrower) or any other agreement(s) which are binding and not in normal course of business) and revision(s) or amendment(s) or termination(s)
- Disruption of operations of any one or more units or division of the listed entity due to natural calamity (earthquake, flood, fire etc.), force majeure or events such as strikes, lockouts
- Effect(s) arising out of change in the regulatory framework applicable to the listed
- Litigation(s) / dispute(s) / regulatory action(s) with
- Fraud/defaults etc. by directors (other than key managerial personnel) or employees of listed entity.
- Options to purchase securities including any ESOP/ESPS
- Giving of guarantees or indemnity or becoming a surety for any third
- Granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory
- Liquidity and Solvency are altogether different. Do you agree ? Discuss the types of liquidity (5 marks)
- Your company is running its corporate office in a rented business premises. The Landlord of the building has increased the rent of other companies and there are 80% chances of increase in the rent of the office occupied by your company within the next
If this happens, it will cost your business an extra `5,00,000 over the next year. Calculate the risk value. (5 marks)
- What is Systematic Risk and Unsystematic Risk ? Give examples. (5 marks)
- Write the relevant provisions of the Companies Act, 2013 relating to the reporting of (5 marks)
Yes, Liquidity and Solvency are two different aspects.
Solvency signifies the capability of the organization to pay its debt and dues. It represents the financial soundness of the organization. Whereas the liquidity risk arises due to mis-matches in the cash flow i.e. absence of adequate funds. Liquidity is altogether different from the word solvency. A firm may be in sound position as per the balance sheet, but if the current assets are not in the form of cash or near cash assets, the firm may not make payment to the creditors which adversely affect the reputation of the firm.
Types of Liquidity Risk : The liquidity risk may be of two types, trading risk and funding risk.
- Trading Risk : It may mean the absence of the liquidity or enough products or securities etc to actually undertake buy and sell e.g. in the context of securities trading inability to enter into derivative transactions with counter parties or make sales or purchase of securities.
- Funding Risk : It refers to the inability to meet the obligations e.g. inability to manage funds by either borrowing or the sale of assets/securities. It arises where the balance sheet of a firm contains illiquid financial assets which cannot be turned in to cash within a very short
The formula for calculating the Risk Value is:
Risk Value = Probability of Event x Cost of Event By putting the values, we get:
0.80 (Probability of Event) x Rs.500, 000 (Cost of Event) = Rs. 400,000 (Risk Value)
Risk may be classified according to controllability, i.e Controllable risk and Uncontrollable risk. In other words, the Controllable risk is categorized as Unsystematic Risk and Uncontrollable risk is categorized as Systemic Risk. The concept of Systematic and Unsystematic risk may be further explained as under:
Systematic Risk Unsystematic Risk
It is not fully uncontrollable by an It is usually controllable by an organisation. organisation.
It is not entirely predictable It is reasonably predictable.
It is usually of a macro nature. It is normally micro in nature.
It usually affects a large number of If not managed it directly affects the organisations operating under a individual organisation first.
It cannot be fully assessed and It can be usually assessed well in advance anticipated in advance in terms of with reasonable efforts and risk mitigation timing and gravity. can be planned with proper understanding
and risk assessment techniques.
The example of such type of risks is The examples of such risk are Compliance Interest Rate Risk, Market Risk, risk, Credit Risk, Operational Risk.
Purchasing Power Risk
Section 143(12) of the Companies Act, 2013 read with rule 13 of the Companies (Audit and Auditors) Rules, 2014 provides that if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving an amount of rupees one crore or above, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government.
Rule 13(2) of Companies (Audit and Auditors) Rules, 2014 provides that the auditor shall report the matter to the Central Government as under:
- Reporting the matter to the Board/ Audit Committee immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within 45
- on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board / Audit Committee along with his comments to the Central Government within 15 days from the date of receipt of such reply or
- in case the auditor fails to get any reply or observations from the Board / Audit Committee within the stipulated period of 45 days, he shall forward his report to the Central Government along with a note containing the details of his
- the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same
- the report shall be on the letter-head of the auditor containing postal address, e- mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number, and
- the report shall be in the form of a statement as specified in Form ADT-4.
Rule 13(3) of Companies (Audit and Auditors) Rules, 2014 further states that in case of a fraud involving lesser than one crore rupees, the auditor shall report the matter to Audit Committee / Board immediately but not later than two days of his knowledge of the
fraud and he shall report the matter specifying the nature of Fraud with description, approximate amount involved; and Parties involved and the same shall also be disclosed in the Board’s Report.
The provisions of Rule 13 of the Companies (Audit and Auditors) Rules, 2014 shall mutatis mutandis apply to a cost auditor conducting cost audit under section 148 and a company secretary in practice conducting Secretarial Audit under section 204 of the Companies Act, 2013.
Penal Provisions : The person guilty of the offence shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.
Attempt all parts of either Q. No. 5 or Q. No. 5A
- “Integrated reporting would build on the existing financial reporting model to present additional information about a company’s strategy, governance, and ”
In light of above sentence, prepare a note on purpose of Integrated reporting and guiding principles for preparation of such report.
- Compliance should be ethical and in spirit of good intention for compliance of laws. In view of this, describe the term ‘Compliance with Spirit of Law’.
- Elucidate principles on Internal Control enunciated by Committee of Sponsoring Organizations of the Treadway Commission (COSO).
- What are the major sections of Business Responsibility Report (BRR) ?
(5 marks each)
OR (Alternate question to Q. No. 5)
- Prepare a brief note on National Guidelines on Responsible Business Conduct (NGRBC).
- “Corporate Compliance Management should broadly include compliance of various laws”. In view of this, what are the Commercial Laws and Fiscal Laws, which should be complied with by every organization ?
- “Compliance Management plays the significant role to comply with a steady stream of complex regulations”. What can be added to the significance of the Corporate Compliance Management ?
- Why the Information System is the most essential component of Internal Control?
(5 marks each)
Integrated reporting is founded on integrated thinking, which helps demonstrate
interconnectivity of strategy, strategic objectives, performance, risk and incentives and helps to identify sources of value creation. It is a concept that has been created to better articulate the broader range of measures that contribute to long-term value and the role, organisations play in society.
Purpose of Integrated Reporting
The primary purpose of an integrated report is to explain to providers of financial capital how an organisation creates value over time. An integrated report benefits all stakeholders interested in an organisation’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators and policy-makers.
An integrated report aims to provide insight about the resources and relationships used and affected by an organisation — these are collectively referred to as “the capitals” in this Framework.
It also seeks to explain how the organisation interacts with the external environment and the capitals to create value over the short, medium and long term. The capitals are stocks of value that are increased, decreased or transformed through the activities and outputs of the organisation. They are categorized in this Framework as financial, manufactured, intellectual, human, social and relationship, and natural capital, although organisations preparing an integrated report are not required to adopt this categorization or to structure their report along the lines of the capitals.
Guiding Principles : The following Guiding Principles underpin the preparation and presentation of an integrated report, informing the content of the report and how information is presented. These Guiding Principles are applied individually and collectively for the purpose of preparing and presenting an integrated report; accordingly, judgement is needed in applying them, particularly when there is an apparent tension between them (e.g., between conciseness and completeness).
- Strategic focus and future orientation : An integrated report should provide insight into the organisation’s strategy, and how it relates to the organisation’s ability to create value in the short, medium and long term and to its use of and effects on the capitals.
- Connectivity of information : An integrated report should show a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organisation’s ability to create value over
- Stakeholder relationships : An integrated report should provide insight into the nature and quality of the organisation’s relationships with its key stakeholders, including how and to what extent the organisation understands, takes into account and responds to their legitimate needs and
- Materiality : An integrated report should disclose information about matters that substantively affect the organisation’s ability to create value over the short, medium and long
- An integrated report should be concise : An integrated report includes sufficient context to understand the organisation’s strategic governance, performance and prospects without being burdened with less relevant
- Reliability and completeness : An integrated report should include all material matters, both positive and negative, in a balanced way and without material
- Consistency and comparability : The information in an integrated report should be presented:
- On a basis that is consistent over
- In a way that enables comparison with other organisations to the extent it is material to the organisation’s own ability to create value over
It is true to say that ‘Compliance should be ethical and in spirit of good intention for compliance of laws’. The enterprise response to compliance mandates seems to be to create and implement whatever compliances are prescribed – to ‘get it done’. The goal is to simply meet the ‘letter of the law’. The effort is directed towards completing Compliance tasks as quickly as possible so all could return to ‘real’ business tasks. But ensuring compliances as per the “spirit of law” is more important.
In the context of corporate governance, compliance means adhering to the law. Ethics is the intent to observe the spirit of law. In other words, it is the expressed intent to do what is right. In the wake of recent corporate scandals, a program that strongly emphasizes both ethics and compliance is good business.
An ethical compliance management programme ensures that the mechanisms are in place to provide early warning of deviations from guidelines and regulations. It is essential to create or expand a culture of trust, enthusiasm, and integrity – critical attributes that can produce measurable results in terms of productivity, employee satisfaction, customer satisfaction, and, ultimately, brand equity.
COSO is the abbreviation of The Committee of Sponsoring Organizations of the Treadway Commission (COSO).
COSO’s (original framework, which identified five components of internal control, became widely adopted for use in assessing the effectiveness of internal controls. Its more recently updated framework identifies 17 principles mapped to the original components. These Principles are as under:
Component 1: Control Environment
- Demonstrates commitment to integrity and ethical values
- Exercises oversight responsibility
- Establishes structure, authority, and responsibility
- Demonstrates commitment to competence
- Enforces accountability
Component 2: Risk Assessment
- Specifies suitable objectives
- Identifies and analyzes risk
- Assesses fraud risk
- Identifies and analyzes significant change
Component 3 : Control Activities
- Selects and develops control activities
- Selects and develops general controls over technology
- Deploys control activities through policies and procedures
Component 4 : Information & Communication
- Uses relevant information
- Communicates internally
- Communicates externally
Component 5 : Monitoring Activities
- Conducts ongoing and/or separate evaluations
- Evaluates and communicates deficiencies
SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 has mandated the requirement of submission of Business Responsibility Report (BRR) for top 500 listed entities describing initiative taken by them from an environmental, social and governance perspective in the prescribed format [Regulation 34(2)(f)].
The Business Responsibility Report framework is divided into five sections:
- Section A : General Information about the Organisation – Industry Sector, Products & Services, Markets, other general
- Section B : Financial Details of the Organisation – Paid up capital, Turnover, Profits, CSR (Corporate Social Responsibility)
- Section C : Other Details – Business Responsibility initiatives at Subsidiaries and Supply-chain
- Section D : Business Responsibility Information – Structure, Governance & Policies for Business
- Section E : Principle-wise Performance – Indicators to assess performance on the 9 Responsibility principles as envisaged by the National Voluntary Guidelines (NVGs)
The Ministry of Corporate Affairs has revised the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011 (NVGs) and has released the National Guidelines on Responsible Business Conduct (NGRBC) in
March 2019. These guidelines urge businesses to actualise the principles in letter and spirit. The annexure 3 of the Guidelines details the reporting framework associated with the National Guidelines for Responsible Business Conduct.
It consists of three sections:
- Section A – General Disclosures, covering operational, financial and ownership related
- Section B – Management and Process Disclosures covering the structures, policies and processes to integrate the Guidelines and
- Section C – Principle-wise Performance Indicators covering how well businesses are performing in pursuit of these
Businesses may use this reporting framework to voluntarily disclose their commitment to and performance against their economic, social and environmental impacts. A growing number of businesses are already doing this and are reporting several benefits, internal and external, as a result of their commitment to disclosure and reporting.
With reference to Corporate Compliance Management, the following Commercial Laws should be complied by an organization:
- Indian Contract Act, 1872
- Transfer of Property Act 1882
- Arbitration and Conciliation Act, 1996
- Negotiable Instruments Act, 1881
- Sale of Goods Act, 1930
Following Fiscal Laws should be complied with by an organization:
- Income Tax Act, 1961
- Central Excise Act, 1944
- Customs Act, 1962
- GST Act, 2017
As the organizations face mounting pressures that are driving them towards a structured approach to enterprise wise compliance management, the key drivers of compliance management encompass, the complexity of today’s business, dependency on IT and hi-tech processes, growth in business partner relationships. Increased liability and regulatory oversight has amplified risk to a point where it demands continuous evaluation of compliance management systems. Furthermore, the multiplication of compliance requirements that organizations face increases the risk of non-compliance, which may have potential civil and criminal penalties.
The following may add to the significance of the corporate compliance management:
- Image building of a responsible corporate
- Stake holders can trust in the working of the
- Prevent improper conduct in the
- It keeps things running smoothly and minimizes
- It helps the company in maintaining a good
- Real time status of legal/statutory
- Prevent unintended non compliances/
- Higher Productivity in the
- Building Positive
- It enhances credibility/creditworthiness being a law abiding
- Proper compliance management avoids the penal
- Saves cost in litigation by avoiding penalties/fines.
- It lays down the foundation for the control
- Enjoys healthy returns through employee and customer
- Benefits of compliance program far outweigh its
An information system consists of infrastructure (physical and hardware components), software, people, procedures, and data. Many information systems make extensive use of information technology (IT).
The information system relevant to financial reporting objectives, which includes the financial reporting system, encompasses methods and records that:
- Identify and record all valid
- Describe on a timely basis the transactions in sufficient detail to permit proper classification of transactions for financial
- Measure the value of transactions in a manner that permits recording their proper monetary value in the financial
- Determine the time period in which transactions occurred to permit recording of transactions in the proper accounting
- Present properly the transactions and related disclosures in the financial statements.
The quality of system-generated information affects management’s ability to make appropriate decisions in managing and controlling the entity’s activities and to prepare reliable financial reports.
Communication, which involves providing an understanding of individual roles and responsibilities pertaining to internal control over financial reporting, may take such forms as policy manuals, accounting and financial reporting manuals, and memoranda. Communication also can be made electronically, orally, and through the actions of management.
- Describe the following terms :
- “Foreign Public Official” as per ICSI Anti-Bribery Code
- “Disciplinary Mechanism” under ICSI Anti-Bribery Code
- “Ethical Dilemma”
- “Indian Ethos”
- “Environment, Social, Governance (ESG) Index”.
- Define the term “Sustainable Development”. What are the fundamental principles of Sustainable Development ? (5 marks each)
- Foreign public official : It means any person holding a legislative, executive, administrative or judicial office of a foreign country, whether appointed or elected, whether permanent or temporary, whether paid or unpaid and includes a person who performs a public function or provides service for a foreign
- Disciplinary Mechanism : As per clause 9 ‘Sanctions for Non-compliance’ of ICSI Anti Bribery Code any non-compliance of the Code is subject to disciplinary The company shall set up disciplinary mechanism as approved by its Board, for non-compliance of any part of t he Corporate Anti- Bribery Code.
The disciplinary mechanism shall include:
- Nature of offence
- Penalty of the office
- Competent Authority
- Ethical Dilema : An ethical dilemma is a moral situation in which a choice has to be made between two equally undesirable It is a decision-making problem between two possible moral imperatives, neither of which is unambiguously acceptable or preferable. The complexity arises out of the situational conflict in which obeying one would result in transgressing another.
- Indian Ethos: Indian Ethos in Management refers to the values and practices that can contribute to service, leadership and management. The essence of good governance and leadership lies not in the paraphernalia of systems and procedures but on the quality of people who create, govern or operate the systems, which is knows as Sanathana Dharma (the eternal essence), and have been influenced by various strands of Indian
- Environment, Social, Governance (ESG) Index : ESG describes the environmental, social and corporate governance The ESG index employs a unique and innovative methodology that quantifies a company’s ESG practices and translates them into a scoring system which is then used to rank each company against its peers in the market. Its quantitative scoring system offers investors complete transparency on Environmental, Social & governance issues of a company.
The ESG Performance indicators are:
- Environment – Energy use and efficiency, Greenhouse gas emissions, Water use, Use of ecosystem services – impact & dependence and Innovation in environment friendly products and
- Social – Employees, Poverty and community impact and Supply chain
- Governance – Codes of conduct and business principles, accountability, transparency and disclosure and Implementation – quality and
Sustainable development is a broad concept and it combines economics, social justice, environmental science and management, business management, politics and law. Sustainable Development indicates development that meets the needs of the present generation without compromising with the ability of the future generations to meet their needs. The principle behind it is to foster such development through technological and social activities which meets the needs of the current generations, but at the same time ensures that the needs of the future generation are not impaired.
The contribution of sustainable development to corporate sustainability is twofold:
- First, it helps set out the areas that companies should focus on: environmental, social, and economic
- Secondly, it provides a common societal goal for corporations, governments, and civil society to work towards ecological, social, and economic
Four fundamental Principle of Sustainable Development agreed by the world community are as under:
- Principle of Intergenerational equity : Need to preserve natural resources for the future
- Principle of sustainable use : Use of natural resources in a prudent manner without or with minimum tolerable impact on
- Principle of equitable use or intra-generational equity : Use of natural resources by any state / country must take into account its impact on other
- Principle of integration : Environmental aspects and impacts of socio-economic activities should be integrated so that prudent use of natural resources is
CS Professional Exam Resources
Best Pen drive Classes: https://cakart.in/cs-professional-classes
Dedicated Telegram channel: https://t.me/cs_professional_icsi
Complete study mat with MCQ App : https://cakart.in/cs-professional-app