Ethics in Finance

by:-
Anita
Roll no.
6390
Mba II sec
(e)
 Meaning of Ethics

Ethics is the study of human behavior which is right or wrong. In

general, ethics means doing right things to others, being honest to
others, being fair and justice to others. Even ethics in finance is a
compartment to general ethics. Ethics are very important to maintain
constancy in social life, where people work together with one another.
In the process of social development we should not be conscious of
ourselves but also conscious to take care of others.
 WHAT IS FINANCE

Finance means fund or other financial resources; it deals with matter

related to money and the market. The field of finance refers to the
concept of time, money and risk and how they are interrelated. Banks
are the main facilitators of funding. Funding means asset in the form
of money
Finance is the set of activities that deals with the management of
funds. It helps in making the decision like how to use the collected
fund. It is also art and science of determining if the funds of an
organization are being used in a right manner or not. Through financial
analysis, any company or business can take decision in making financial
investments, acquisition of company, selling of company, to know the
financial standing of their business in present, past and future. It helps
to stay competitive with others in making strategic financial decisions.
Finance is the backbone of business; no business can run without
finance.
WHAT IS ETHICS IN FINANCE

Ethics in finance is one of the main things which everyone has to

follow from the small, medium and big level company because
almost all the country depend up on the financial background of
the country because without financial component no business can
run for a long time. The assumption of modern financial-
economic theory runs counter to the ideas of honesty, devotion,
dependability and loyalty. Ethics in finance may vary from different
industries to different industries but everyone is liable to-do their
work at utmost good faith. Peoples who involved in finance activity
have to serve both their company and their customers at utmost
good faith.
 Code of Ethics in Finance
1.Act with honesty and integrity, avoiding real or
clear conflicts of interest in personal and professional
relationships.
2.To provide information which is full, fair, accurate,
complete, objective, relevant, timely and understandable,
including in and for reports and documents that the
Company files with, or submits to, the other public
communications made by the Company.
3.Act in accordance with all applicable laws, rules and
regulations of governments, and other appropriate private
and public regulatory agencies.
4.Act in good faith, responsibly, with due care, competence
and carefulness, without misrepresenting material facts
or allowing my independent judgment to be subordinated.
 5.Respect the confidentiality of information
acquired in the course of business except when
authorized or otherwise legally obligated to
disclose the information. It should not be used for
personal advantage.
 6.To promote ethical behavior among our
associates.
 7.Adhere to and promote this Code of Ethics
Characteristics of Management
Prone to Fraud
 Unduly aggressive financial Targets
Pressure to reduce tax liabilities
Non-Financial personnel involved in accounting matters
Aggressive accounting practice to keep stock
prices high
 Ethical issues in Finance

 Financial statements

 Financial Markets

 Insider Trading

 Hostile Takeovers
 Fraud in Financial Statements
 Fictitious Revenues

 Concealed Liabilities and Expenses

 Fraudulent Asset Valuations

 Improper or Fraudulent Disclosures or Omissions.

 Example : The Satyam Computer Services scandal was a corporate

scandal that occurred in India in 2009 where Chairman Ramalinga
Raju confessed that the company's accounts had been falsified. CID
told in court that the actual number of employees is only 40,000 and
not 53,000 as reported earlier and that Mr. Raju had been
withdrawing 20 crore (US$4 million) every month for paying these
13,000 non-existent employees.
Duties of an Auditor
 To give an accurate statement to the members

about the state of affairs of a company

 To meet the objectives of the Companies Act

1956 and also the Articles of Association.

 To be reasonably skillful and careful in

identifying the true nature of the accounts.

Ethical Issues in Financial Markets
 Deception: act of misrepresenting relevant
information
 Churning: Excessive or inappropriate
trading for clients account by a broker who
has control over the account with intent to
generate commissions rather than to benefit
client.
 Unsuitability
 Unfairness in Markets
HARSHAD MEHTA SCAM
HARSHAD MEHTA SCAM
 Harshad Shantilal Mehta was an Indian stock broker.On
April 23, 1992, journalist Sucheta Dalal exposed Mehta's
illegal methods in a column in The Times of India. Mehta was
dipping illegally into the banking system to finance his buying.
In this scam Mehta needed banks which issued fake BRs (Not
backed by any government securities). “Two small and little
known banks - the Bank of Karad (BOK) and the Metropolitan
Co-operative Bank (MCB) - came in handy for this purpose.
These banks were willing to issue BRs as and when required,
for a fee,once these fake BRs were issued, they were passed
on to other banks and the banks in turn gave money to
Mehta, assuming that they were lending against government
securities when this was not really the case. This money was
used to drive up the prices of stocks in the stock market.
When time came to return the money, the shares were sold
for a profit and the BR was retired. The money due to the
bank was returned.
 This went on as long as the stock prices kept going up, and
no one had a clue about Mehta’s operations. Once the scam
was exposed, though, a lot of banks were left holding BRs
which did not have any value - the banking system had been
swindled of a whopping 4,000 crore (US$728 million). When
Introduction Insider trading

Insider trading essentially denotes dealing in a

company’s securities on the basis of confidential
information relating to the company which is not
published or not known to the public used to make
profit or loss. It is fairly a breach of fiduciary duties
of officers of a company or “connected” persons as
defined under the SEBI regulations,1992, towards
the shareholders.
Cont’d
 Insider terms actually includes both legal and
illegal conduct.
 The legal version is when corporate insider officer,
directors , and employees buy and sell stock in
their own companies. when corporate insiders
trade in their own securities , they must report their
trades to SEBI.
 Illegal insider trading refers generally to buying or
selling a security , in breach of fiduciary duty or
other relationship of trust and confidence, while in
possession of material , non public information
about the security.
Who are insider traders ?????

Remember this ‘STONE COLD’ guy????????

Who are insider traders?
 Corporate officers, directors , and
employees who traded the corporations
securities after learning of significant ,
confidential corporate developments.
 Friends , business associates, family
members , and other types of such officers ,
directors , and employees, who traded the
securities after receiving such information.
Cont’d
 Employees of law, banking , brokerage and
printing firms who were given such
information to provide services to the
corporation whose securities they traded.
 Govt employees who learned of such
information because of their employment by
the Govt .
 Other persons who misappropriated ,and
took advantage of, confidential information
from their employers.
RAJAT GUPTA SCAM
Hostile Takeovers
 A hostile takeover is an acquisition in
which the company being purchased
doesn’t want to be purchased, or doesn’t
want to be purchased by the particular
buyer that is making a bid. How can
someone buy something that’s not for
sale? Hostile takeovers only work with
publicly traded companies. That is, they
have issued stock that can be bought
and sold on public stock markets.
Examples hostile takeover
Anti-takeover defense measures
 Poison Pills

 Green mail

 Buy back

 People Pill
Poison Pills
 A strategy used by corporations to discourage hostile
takeovers. With a poison pill, the target company attempts to
make its stock less attractive to the acquirer. There are two
types of poison pills:
1. A "flip-in" allows existing shareholders (except the acquirer)
to buy more shares at a discount.
2. A "flip-over" allows stockholders to buy the acquirer's shares
at a discounted price after the merger.

 Example : Netflix the video-streaming and DVD rental

company adopted a shareholder rights plan commonly known
as a poison pill, to fend off the activist investor Carl C. Icahn to
keep things exciting and place a shareholder-friendly spin on
the event.
Greenmail
 Like blackmail, greenmail is money that is paid to an
entity to make it stop an aggressive behavior. In
mergers and acquisitions, it is an antitakeover
measure where the target company pays a premium,
known as greenmail, to purchase its own stock
shares back (at inflated prices) from a corporate
raider.

Once the raider accepts the greenmail payment,

generally it agrees to stop pursuing the takeover and
not to purchase any more shares for a specified
number of years. The term "greenmail" stems from a
combination of blackmail and greenbacks (dollars).
The great number of corporate mergers that
occurred during the 1980s led to a wave of
greenmailing. During that time, it was suspected that
example
 The St. Regis Paper Company provides an
example of greenmail. When an investor group
led by Sir James Goldsmith acquired 8.6% stake
in St. Regis and expressed interest in taking over
the paper concern, the company agreed to
repurchase the shares at a premium. Goldsmith's
group acquired the shares for an average price of
$35.50 per share, a total of $109 million. It sold its
stake at $52 per share, netting a profit of $51
million.
Buy Back
 A buyback allows companies to invest in
themselves. By reducing the number of shares
outstanding on the market, buybacks increase the
proportion of shares a company owns. Buybacks can
be carried out in two ways:
1. Shareholders may be presented with a tender offer
whereby they have the option to submit (or tender) a
portion or all of their shares within a certain time
frame and at a premium to the current market price.
This premium compensates investors for tendering
their shares rather than holding on to them.
2. Companies buy back shares on the open market
over an extended period of time.
 People Pill
 A defensive strategy to ward off a hostile takeover.
The target company's management team threatens
that, in the event of a takeover, the entire team will
resign. The purpose of a people pill is to
discourage the acquiring company from completing
the takeover, by introducing the possibility of
having to put together an entirely new
management team. This strategy is only effective if
the acquiring company wants to keep the existing
management.
The first use of the people pill anti-takeover
strategy is attributed to a food company called the
Borden Corporation. In 1989, the company's board
of directors approved a people pill that Borden
could use to demand that an acquiring company
pay a fair value for the company's shares and that
it not fire or demote any of Borden's existing
conclusion
 No business and company can run
without finance. It is lifeblood for all the
organization. So if almost all the field in
finance follows ethics in their duty
almost all other process will function
very well without any discrepancies.