CASE STUDY

Total Marks: 100 Time: 4½ Hours

Instructions:

1. Check that your question paper contains all the exhibits as mentioned in page 3. The consec-
utive page numbering May be found under the base line at the foot of each page.

2. Use the answer script provided by the Institute. Write your name, roll no., registration no. and
name of the subject on the upper portion of the cover page of the answer script.

3. Candidates are asked not to write any particulars of identification in any other place of the
answer script and additional pages if taken.

4. Questions must be answered in English.

5. The answer should be referenced to the relevant workings.

6. Answer script and additional page(s) taken to write answer, used or unused, must not be re-
moved or taken away from the Examination Hall.

1
Requirements & Marks Allocation:

You are Shamim Khandakar, a senior articled student of Rahman Shahbuddin & Co., Chartered
Accountants. The partner of the firm, Mr. Fazlur Rahman FCA has been appointed as an advisor of
Dhaka Beverages & Confectionary Ltd. (DBCL). He has received an assignment e-mail from Mr. Mustaq
Ahmed, Managing Director (Exhibit-1) of DBCL. Mr. Fazlur Rahman FCA has asked you, Shamim
Khandakar, to prepare a report covering all the requirements stated in the e-mail of Mr. Mustaq Ahmed.

Requirements:

You are required to prepare a draft report to your principal Mr.Fazlur Rahman FCA. Your report should
comprise the following elements:

 An executive summary
 Your responses to the detailed requirements (a), (b) and (c) set out in Exhibit-1.
 State clearly any assumptions that you make.

Marks Allocation:
All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated
broadly as follows:

Requirements Professional Skills Total

Assimilatin Structuring Applying Conclusions Integrative &
g and using Problems Judgment and making multidiscipline
information and recommendati - ry skills
solutions ons
Executive 3 5 4 3 - 15
Summary
Requirement (a) 7 12 9 5 1 34

Requirement (b) (i) 3 4 4 5 - 16

(ii) 4 4 4 2 1 15
Requirement (c) 3 5 4 5 3 20
Total 20 30 25 20 5 100

In planning your report, you should be aware that not attempting one of the requirements, including an
executive summary, will have a significantly detrimental effect on your chances of success. In
addition, as indicated above, all four skills areas will be assessed under each of the four elements of
your report.
You should be clear that marks are awarded for demonstrating your professional skills, not for
reproducing facts from the case. In order to be successful, you will need to:
 Demonstrate your knowledge of the case material and make use of your analysis.
 Carryout relevant analysis of the problems and structure your proposed solutions.
 Apply your judgment on the basis of the analysis that you have carried out
 Draw conclusions from your analysis and judgment, and develop them into practical commercial
recommendations.
 Ethical issues may cover the following topic-
- Lack of professional independence or objectivity
- Conflict of interest among stakeholders
- Doubtful accounting or commercial practice or market competition or Market proximity
- Inappropriate pressure to achieve a reported result.
- Compliance of local laws and regulations
 Integrative & multidisciplinary skills may cover the following social and economic areas-
- Depletion and wastage of natural resources and its impact on employment generation,
sustainable economy, environment and climate change;
- Impact on consumers’ health & productivity and its impact on national health budget.

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 LIST OF EXHIBITS

Exhibit Description Page

reference

1 E-mail from Mr. Mustaq Ahmed, Managing Director of Dhaka 4-6

Beverages & Confectionary Ltd. (DBCL) to Fazlur Rahman FCA,
Partner in Rahman Shahbuddin & Co., Chartered Accountants dated 10
September 2019.

2 Summarized Financial Statements of Dhaka Beverages & 7-9

Confectionary Ltd.

3 Food and Beverage Industry in Bangladesh and DBCL Operations and 10-11
Governance

4 E-mail dated 10 September 2019 from Chief Financial Officer to Mr. Fazlur 12
Rahman FCA regarding year end accounting issues with a copy to Mr.
Mustaq Ahmed, Managing Director, DBCL.
5 E-Mail dated 10 September 2019 from General Manager- Operations to 13
Mr. Fazlur Rahman FCA on Operational Issues with a copy to Mr.
Mustaq Ahmed, Managing Director, DBCL.
6 E-mail from Mr. Mustaq Ahmed, Managing Director of DBCL to Fazlur 14-15
Rahman FCA dated 10 September 2019 on Business Expansion and
Financing Options.

7 Social and Economic Aspects of Food and Beverage Industry in Bang- 16

ladesh

8 Newspaper Cutting relating to Food and Beverage Industry 17

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 EXHIBIT– 1
E-MAIL

From : Mr. Mustaq Ahmed, Managing Director, DBCL.

To : Mr. Fazlur Rahman FCA, Partner

Subject : Evaluation of business modernisation and expansion proposal and

investment viability based on past Performances & future prospects of the
company and associated issues.

Date :10 September 2019

_________________________________________________________________________

Dear Mr. Rahman,

I am pleased to inform you that the Board of Directors of Dhaka Beverage & Confectionary Ltd.
(DBCL) appointed you as its advisor on business modernisation and expansion projects. Your areas
of works include: facilitating initial public offering (IPO) of shares or issuance of bond; evaluating
investment options; advising on strategic issues including risk management, governance, due
diligence relating to modernisation & expansion of business of DBCL. You will also be required as an
advisor to carryout negotiation on behalf of the company with the Government agencies including
Bangladesh Bank, Bangladesh Securities and Exchange Commissions, DSE, CSE, BIDA, etc.on the
above areas of works.

Your remuneration will be Tk. 5,00,000 for evaluation of modernisation & expansion plan of DBCL and
for providing related services for obtaining DBCL’s IPO approval at highest possible premium or issu-
ing subordinated bond, as the case may be and Tk. 300,000 per month for next 2 years will be given
for providing the advisory services for business efficiency and strategic decisions.

Please find the extracts of financial statements of DBCL for the year ended 30 June 2019 and five
years historical data (Exhibits-2).Besides the issues mentioned below, please take into consideration
the relevant information provided in Exhibits 3 to 8 for your analysis, drawing conclusion and
recommendations for the requirements stated at the end this e-mail:

Brief history of company

After completion of my university graduation in Biochemistry in Canada, I returned back to Bangladesh

and discussed many business ideas with my family members and relatives. Finally we formed DBCL in
2015 for producing, selling and distribution of soft drinks and confectionary products in Bangladesh. My
relatives contributed more than 50 percent of the capital of the company.

Shareholders and key management issue

I am the Managing Director and Chairman of the Board of Directors of DBCL. The board of the com-
pany currently consists of five shareholder directors and two independent directors.The independent
directors are mechanical engineers and my close friends. There were several board meetings without
the independent directors. This situation is largely due to the belief of the directors that independent
directors are not really needed as they do not have any stake in the company.

The authorized share capital of DBCL is Tk. 800 million, the value per share is Tk. 10. The paid up
capital is Tk. 30 million.The shareholding position as on 30 June 2018 was as follows:

 40% of paid up capital is owned by me.

 60% of paid up capital is contributed equally by my following relatives, namely, (i) Mr. Kamal
Siddiki (nephew), (ii) Mr. Rashedul Huq (Brother-in-law) (iii) Mr. A.K. Azad (uncle) and (iv) Mr.
Kamrul Hassan (cousin brother).

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  The independent directors, Mr. Rakibul Hassan and Mr. Manirul Hassan do not hold any
share in the company. However, on 01 June 2019, Mrs. Rakibul Hassan purchased 20% of
shares of DBCL equally from the two directors namely, Mr. A.K. Azad and Mr. Kamrul Hassan
but the same is not registered yet with the Registrar of Joint Stock Companies (RJSC). It is
widely believed that Mrs. Rakibul Hassan bought the shares on behalf of a politically exposed
person (PEP) who did not want to identify now. It is expected that after the IPO, DBCL’s share
value will be higher. Thus, by selling the shares through capital market, gains so earned will
be shared with the PEP. It is expected that the PEP will lobby for the DBCL to get IPO
approval with premium from BSEC.

External Audit and auditors of the company

PQR & Co. Chartered Accountants has audited the company for the last 2 years. The financial
statements of DBCL as at/for the year ended on 30 June 2019 are expected to be signed by the
auditors with an unqualified opinion. The accounts are expected to be placed in the Annual General
Meeting (AGM) dated 30 November 2019 after necessary approval by the Board.

The existing auditor is eligible to be reappointed for the year 2019-20 and they have expressed their
willingness to be the auditor of the company at the existing fees. However, Mr. Rakibul Hassan is
keen to change the auditor. He wants to appoint ABC & Co. Chartered Accountants who is experi-
enced in handling IPO particularly preparing prospectus and financial statements required for IPO ap-
plication. ABC & Co. has good connection with the Issue Managers and Authorities to obtain IPO ap-
proval at premium. Mr. Rakibul Hassan has meanwhile discussed with ABC & Co. who has agreed to
prepare required financial statements showing the paid up capital of DBCL to Tk. 300 million without
injection of new funds from the sponsors. For this purpose, ABC & Co. has agreed to show necessary
paper transactions of buying inventories for DBCL from suppliers. The suppliers will be shown paid by
increasing paid up capital. Moreover, the existing auditor has made some observations on corporate
governance (refer to exhibit 3) in the last year’s letter to the management. The directors of the com-
pany did not agree with the auditors’ assertions. They claimed the statements are idealistic and not
pragmatic or legally binding. We need your assistance on corporate governance to provide clarity to
the statements made by PQR & Co.

Business Strategy
The board of directors of DBCL decided to address the quality complain from the consumers and of
Bangladesh Standards and testing Institutions (BSTI) by setting up an automatic bottling plant to
ensure same quantity in each bottle and changing PET bottle from the existing glass bottle. They also
expect to export some quantity to the European countries. For these, the existing plant needs to be
modernised and expanded for which DBCL needs Tk. 360 million.

Financing strategy:
Last year, one of the competitor companies, TBL Beverage, got IPO approval at 20% premium. DBCL
expects approval from BSEC for its premium at a similar rate. DBCL will go for initial public offering of
shares of Tk. 300 million to modernise and expand the factory. The advisor is expected to handle the
matter diligently with ABC & Co. to obtain premium approval from BSEC. Alternatively, DBCL may
borrow for longer term by issuing subordinate bond at 10% per annum.

Environmental and Safety policy

Environmental protection is now a key requirement for maintaining production license and meets the
legal and societal demand. The company has recently implemented an environmental and safety pol-
icy, which is monitored through an audit system to ensure that its policies are being executed. It is the
aim of the company to have operational standards which match with the best industry’s standard.
Training of management and staff is seen as a priority within the organization’s environmental and
safety policy. This has become a major concern for the company, because of customer anxiety about
the safety of the drinks and foods.

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Corporate Social Responsibility

DBCL has adopted a Corporate Social Responsibility (CSR) Policy in 2016, which acts as a guide
towards planning and executing the company’s CSR activities. DBCL runs extensive volunteering
works for the improvement of the under privileged people of the country. Under this program, the
company arrange health awareness seminar, fire awareness seminar etc. In 2018-2019 the company
did the following:

 The company paid a donation of Tk. 150,000 to a NGO which works for HIV where one of the
directors of DBCLis a trustee.
 The company contributed Tk. 200,000 each year to the Health Program at Char Area of a
district from which one of the directors hails from, for the free treatment of the poor people in
this locality.
 DBCL supported the medical expenses for treatment of under privileged and poor people in
the country since inception. During the last year it spent Tk. 1.2 million for this purpose. The
company is under cost pressure.
 In addition to audit fees, DBCL provides financial support at a rate of Tk. 10,000 per month
per student to three students of CA Firm whoever engaged as a statutory auditor.

You are required to –

(a) Prepare a draft report including an executive summary, after evaluating the performances and
the viability of the modernisation and expansion plan of DBCL, suggesting the best alternative
to finance the said plan.

(b) (i) Evaluate the strengths, weaknesses, opportunities and threats (SWOT) of DBCL and
based on the SWOT analysis, recommend to the Board with justification, modernisation
and expansion of DBCL.

(ii) Advise the Board of the DBCL regarding appointment of ABC & Co. Chartered
Accountants as statutory auditors for the company at the existing fees for the year 2019-20,
in lieu of existing auditor, PQR & Co. and comment on the observations made by PQR &
Co. on corporate governance issues.

(c) Assess the economic and social contribution of DBCL to build a sustainable economy and
evaluate the ethical issues with regard to the business operations, capital raising and IPO
approval.

I look forward to receiving your draft report on or before 05 December 2019.

Yours sincerely,

Mustaq Ahmed
Managing Director

6
 Exhibit -2

Dhaka Beverages & Confectionary Ltd.

Statement of Financial Position
As at June 30

Unaudited Audited
Assets 2019 2018
Non-current assets Taka Taka
Property, plant and equipment 58,072,238 56,650,202
Lease rental paid in advance 1,100,841 1,152,921
Investment property 1,528,814 1,379,294
Intangible assets 1,076,964 1,079,792
Non-current financial assets 1,758,848 1,121,771
Other non-current assets 6,134,555 4,670,603
69,672,260 66,054,583
Current assets
Inventories 27,248,690 24,948,441
Trade and other receivables 16,349,403 11,395,398
Other current assets 11,944,625 5,287,576
Short-term investments 7,162,932 5,009,620
Cash and cash equivalents 4,564,511 2,122,652
67,270,161 48,763,687
Total assets 136,942,421 114,818,270

Equity and liabilities

Paid up capital 30,000,000 30,000,000
Revaluation reserve 2,815,750 1,050,000
Retained earnings 37,857,874 30,973,934
Total equity 70,673,624 62,023,934

Non-current liabilities
Interest bearing loans and borrowings 5,253,675 1,116,675
Deferred tax liabilities 7,940,142 6,876,156
Employee benefit liabilities 2,533,062 3,999,471
Other non-current liabilities 1,238,447 1,284,255
16,965,326 13,276,557
Current liabilities
Trade and other payables 31,588,816 22,666,539
Income tax liabilities 1,382,528 3,794,910
Interest bearing loans and borrowings 2,800,000 1,068,669
Other current liabilities 7,757,127 8,301,433
Bank overdraft 5,775,000 3,686,228
49,303,471 39,517,779
Total equity and liabilities 136,942,421 114,818,270

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 Dhaka Beverages & Confectionary Ltd.
Income statement
For the year ended 30 June

Unaudited Audited
2019 2018
Taka Taka

Revenue 342,667,150 277,330,760

Cost of sales (301,547,092) (238,504,504)

Gross profit 41,120,058 38,826,256
Other operating income 10,838,884 10,137,176
Total operating income 51,958,942 48,963,432

Selling and distribution expenses (11,741,205) (9,051,084)

Administrative expenses (9,916,228) (8,507,184)

Other operating expenses (5,318,887) (5,193,034)

Operating profit before interest and tax 24,982,622 26,212,130

Finance cost (1,594,544) (759,822)

Finance income 734,419 879,312
Changes in fair value of investment property 149,520 599,466
Profit before tax 24,272,017 26,931,086

Tax expense (6,228,719) (8,576,960)

Profit for the year 18,043,298 18,354,126
Other comprehensive income

Actuarial gain/(loss) on employee benefits 129,934 (322,175)

Revaluation of land and buildings 1,765,750 -

Tax on other comprehensive income (876,792) (53,802)

Other comprehensive income for the year, net of tax 1,018,892 (375,977)
Total comprehensive income for the year 19,062,190 17,978,149

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 Dhaka Beverages & Confectionary Ltd.
Five years at a glance
Years ended/as at 30 June

Particular Unaudited Audited Audited Audited Audited

2019 2018 2017 2016 2015

Gross revenue
342,667,150 277,330,760 228,427,857 181,710,130 156,310,581
Gross profit 41,120,058 38,826,256 41,117,013 32,707,822 28,135,905
Operating profit before interest
and tax 24,982,622 26,212,130 25,127,067 18,171,013 15,631,056
Profit before tax 24,272,017 26,931,086 24,259,039 19,079,564 14,849,506
Tax expense
(6,228,719) (8,576,960) (6,792,534) (4,960,690) (3,860,871)
Profit after tax 18,043,298 18,354,126 17,466,505 14,118,874 10,988,635

Assets, equity and liabilities

Property, plant & equipment 58,072,238 56,650,202 51,484,615 46,735,731 43,806,840

Investment property 1,528,814 1,379,294 779,828 661,199 598,374
Other non-current assets 10,071,208 8,025,087 6,602,806 6,491,177 7,759,682
Net current assets 17,966,690 9,245,908 6,347,474 3,298,743 1,408,638
87,638,950 75,300,491 65,214,723 57,186,850 53,573,534

Long-term loans
(5,253,675) (1,116,675) (787,640) (1,114,806) (1,297,359)
Other non-current liabilities
(11,711,651) (12,159,882) (9,968,798) (8,092,021) (7,475,762)
Net assets 70,673,624 62,023,934 54,458,285 47,980,023 44,800,413

Represented by:

Paid-up capital 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000

Revaluation reserve 2,815,750 1,050,000 1,050,000 1,050,000 1,050,000
Retained earnings 37,857,874 30,973,934 23,408,285 16,930,023 13,750,413
Shareholders' funds 70,673,624 62,023,934 54,458,285 47,980,023 44,800,413

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 EXHIBIT-3

Food and Beverage Industry in Bangladesh and DBCL Operations and Governance

Bangladesh Economy

Bangladesh is a developing country having more than 168 million people. The urbanization rate is
38%. Around 14 million people live in Dhaka, the capital of Bangladesh and average temperature of
the country is 30 degree. The government of Bangladesh has taken mega projects and it is expected
to complete those by 2021. The main projects are- Padma Bridge, 4 lane high way projects, Metro
rail, Coal based power plant, new sea port at Pyara, etc. which will be remarkable for the infrastruc-
tural development of the country. The country expects high business growth in coming years.

Soft drinks market in Bangladesh

DBCL manufacturer’s carbonated soft drinks and frozen confectionery for domestic market where its
current market share is 35% of carbonated soft drinks and 18% of confectionery products. All the
company products are branded under the trademark “Teisseire”. The two main products produced un-
der the brand name are soft drinks and ice cream. DBCL offers 5 flavors of soft drinks and 4 flavors of
ice cream to its consumer.

DBCL has implemented a continuous improvement system for its products and processes. The com-
pany attempts not only to provide a product, but also to deliver pleasure and nutrition through its excit-
ing and superior products. The company is keen on building strong relationships with its stakeholders,
driven by the openness and trust it has maintained and its commitment towards all of them.

Supply chain management

Accessibility to DBCL’s products was enhanced through a well-spread network of 170 distributors of
soft drinks and frozen confectionery products and 25 retail outlets situated in the main cities that were
negotiated on a long-term lease. DBCL always strives to obtain high quality raw materials. This is
achieved through stringent quality controls and good practices stipulated in the quality control policy
of the company. Furthermore, the company actively engages in the improvement of its suppliers who
are key stakeholders of the company. Since DBCL has implemented the continuous improvement
system, it keeps improving its recipes, thereby providing more options for consumers who prefer
healthier drinks with low sugar. Thus it can be observed that DBCL drives a more value-based culture
that covers a number of stakeholders. The company has also built very strong relationships with local
suppliers including dairy farmer. DBCL’s annual budget allocates a significant amount of money for
CSR program in order to develop livelihoods, build community infrastructure, reduce the carbon foot-
print, and look after the health of farmers by providing health care services regularly. Since 2015, the
retail outlets of DBCL aim to empower and support local charities and small entrepreneurs by provid-
ing a platform to sell their products.

Sales and distribution

The entire distribution is done using DBCL’s own delivery vehicles. During the year 2018-19, two mo-
tor vans were disposed of and one van was given to the Managing Director’s wife. The sales and dis-
tribution function is headed by Mr. Samin Ahmed, the Managing Director’s son.

Governance issues in the family business

DBCL is a family business. The company and family relationships are not clearly distinguished. Exist-
ing governance related policies are informal. This has led to the reliance on key people rather than on
structures and processes. Such common understandings may not continue in the future generations
when the ownership changes. As a result, there could be some uncertainty for the external investors
and non-family employees.Weaknesses in the governance systems of this company is most evident in
its internal controls, internal audit and risk management practices. Since the business is managed by
the founders and their children and relatives, the control environment is largely tailored to their needs.

10
The problem therefore is that the controls do not grow along with the company, as the business be-
comes more complex. This gap is primary areas of concern for external investors.Some of the key
concerns in governance is:

 Family directors are resistant to change;

 Inability to keep family issues out of the business;
 Growth is sacrificed for control;
 Directors’ unprofessional attitude to the fellow management staff.

Auditors Observation on Corporate Governance

The auditor, PQR & Co. made the following comments in its letter to the management:

“The roles of the board’s chairman and the managing director should be held by two different individu-
als. The board chairman performs critical functions to ensure that the board functions effectively. The
managing director is the chief executive officer. The board should be composed of at least one-third
of independent director.”

Future growth and expansion

DBCL is planning to further expand its local operations in order to meet the increased demand for soft
drinks and frozen foods of confectionary products. In view of this, the company is hoping to open 16
new standalone shops in the next few years. The locations are yet to be determined.

Complains against the company

The competitor companies alleged that DBCL is very aggressive in marketing its products and DBCL
is not hesitant to market the expired products and drinks and offering gifts to the dealers and distribu-
tors to promote its drinks and food items. The consumers complain about the quantity variations and
poor quality of the glass bottle. There are similar complaints from Bangladesh Standards & Testing
Institutions (BSTI). If the company fails to address the complaints, it may be penalized and also its li-
cense may be revoked.

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 EXHIBIT- 4

EMAIL

Dated : 10 September 2019

From : Chief Financial Officer, DBCL
To : Mr. Fazlur Rahman FCA, Advisor
Copy to : Mr. Mustaq Ahmed, Managing Director, DBCL
Subject : Yearend Accounting Issues of DBCL
__________________________________________________________________________________

Dear Mr. Rahman,

Reference to the discussion, year-end pending issues are summarized below:

1. The intangible assets of DBCL includeTk.3 lakh of training and marketing expenditure incurred
during the year ended 30 June 2019. The directors of DBCL believe that these should be
capitalised as they relate to the start-up period of a new business venture, and be amortised in
five years commencing 1 July 2019.
2. On 1 July 2019, DBCL purchased a customer list from the liquidator of a competitor at Tk. 3
lakh which is expected to generate sales revenue for at least two years. An independent valuer
valued the customer list at Tk.5 lakh and estimates 5 years as its length of revenue generation.
DBCL wants the list to be revalued to the higher amount.
3. During the year to 30 June 2019, DBCL sold goods to an Event Management Company for
Tk.10 million adding a profit of 25% but the company returned the goods of Tk. 4 million. The
DBCL, instead of issuing a credit note, recorded the returned goods as a new purchase debiting
the Event Management Company. The goods are included in inventory without any value
adjustment.
4. On 1 July 2015, DBCL entered into a lease agreement to rent a vehicle for six years, with
annual payments of Tk.368,400 to be made at the beginning of the year. The market price of
the vehicle was Tk.1,720,000 when it was leased. The present value of the lease payments
came to Tk.1,680,000, discounted at the implicit interest rate shown in the lease agreement of
12.5%. DBCL expected to sell goods using the vehicle for four years. No adjustment for
impairment of the leased assets has been made in the books of accounts.
5. On the 31 July 2019, Tk.500,000 was paid to Mr. Huq as compensation who was removed as
General Manager-Marketing of DBCL on 30 June 2019. In addition, a customer of DBCL went
into liquidation owing DBCL Tk.1 million at 30 June 2019. Information in relation to the
liquidation suggests that there is little chance of recovery from the debtor.
6. DBCL offers 10% contributory provident fund (PF) and no gratuity scheme is offered as per
Labour Act 2006. National Board of Revenue (NBR) recognized the PF. However, company
must serve 5 years continuously to get the company portion in the fund. Since the age of the
company is less than 5 years, the company management does not want to provide for the re-
quired provisions for the company’s contribution to PF amounting to Tk. 1 million per year.
7. The company submitted Income Tax Return for the accounting year 2016-17 showing net profit
before tax 22,120,050. As per return the tax liability showed Tk. 5,828,120. The DCT completed
assessment on 12 June 2019 under section 84 of I.T.O. 1984 calculating net profit Tk.
26,750,200. The tax rate for unlisted company for assessment year 2017-2018 was 35%. The
company paid-off the demanded tax. Excess tax paid over tax provisions was debited as over-
head expenses in the financial statements.

8. DBCL has to pay 6 percent of sales as franchise fee on a quarterly basis. DBCL’s also obliged
to make reimbursement of common advertisement telecast in the global television channel and
sponsorship expenses of Tk. 5 million during the year to 30 June 2019. But the taxation author-
ity will not allow more than 5% of sales as license fees and global telecast advertisement ex-
penses.

12
 EXHIBIT- 5

EMAIL

Dated : 10 September 2019

From : General Manager - Operations
To : Mr. Fazlur Rahman FCA
Copy to : Mr. Mustaq Ahmed, Managing Director, DBCL
Subject : Operational Issues
_________________________________________________________________________________

Dear Mr. Rahman,

Reference to the discussion on the pending operational Issues relating to year end 30 June 2019:

Market complain
The distributor receives complain from the retailers that unequal bottles are found in the packed which
create dissatisfaction and choice of the customers. Since the bottling is not automated, bottle to bottle
quantity variation occurs. Also to cover-up about one-third of 15 percent wastage for manual bottling
is adjusted by such variations and remaining two-third portion is drained out as wastage. The environ-
mentalists have raised objections for such draining out as it is polluting the eco-environment.

Seasonal Impacts
The demand of the products normally increased during festival months by 15%. The company
arranges additional supply to cater the increased demand by sub-contracting during that period. The
sales also affected during winter while it dropped around 15 percent. DBCL could not be able to
arrange sub-contract to utilize the idle capacity during winter.

Trade Union or Collective Bargaining Agent (CBA)

At DBCL there is no trade union or CBA but trade union or CBA is required to export beverage and
confectionary items abroad.

Diversity & Inclusion

The company did not employ female workers fearing lower productivity and safety during night shifts.

Risk Management
The risk management committee incurred a large sum of money to mitigate all the possible risks.
However, MD was not happy with the above approach. MD always mentioned that although the com-
pany should take all the necessary steps to avoid and mitigate risks, the company cannot spend such
a large sum of money just to avoid all the possible risk factors.

New product and appointing Brand Ambassador

The ‘Teisseire’ brand currently competes successfully with several rival local and international brands
and the company has appointed two brand ambassadors to promote their products. Recently, under
frozen confectionery, DBCL has also introduced two sugar-free ice creams (vanilla and chocolate).

Export opportunity
DBCL is currently pursuing export opportunities in international markets such as the Maldives and Vi-
etnam. However, tightening monetary conditions and maximum prices imposed on some essential
goods have negatively impacted the gross margins of the company.

Brand value
At a recent board meeting Kamrul Hassan (director) pointed out that the brand value was not ac-
counted for under intangible assets. He requested to record it in the financial statements for the year
ended 30 June 2019, as there was a significant value created through growing business and demand.

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 EXHIBIT- 6

EMAIL

Dated : 10 September 2019

From : Mr.Mustaq Ahmed, Managing Director
To : Mr.Fazlur Rahman FCA
Subject : Business Expansion and Financing Options
_________________________________________________________________________________

Dear Mr. Rahman,

The CFO, an unqualified accountant, instructed his subordinate, anassistant accountant who had just
completed the CA Professional Level examinations, to prepare forecast income statements and state-
ments of financial positionas at 30 June for the next five accounting years starting from 2019-20 by
considering the following.

(i) Inflation rate

Year 2019/20 2020/21 2021/22 2022/23 2023/24

Inflation rate 5% 6% 7% 6% 5%

Material costs will remain in proportionate to sales of 2018-19.

All other cash expenses including salaries and wages will be increased by 2% plus inflation rate over
the previous year.

(ii) Capital expenditure, working capital requirement and employment generation.

Year 2019/20 2020/21 2021/22 2022/23 2023/24

Capital expenditure 260 - - - -
(Tk. million)
Working capital require- 50 50 - - -
ment (Tk. million)
New employment (No.) 225 25 20 20 10

Cost of new employment 3,375,000 375,000 300,000 300,000 150,000

(Tk.)
Cumulative employment 600 625 645 665 675
(no.)

(iii) The sales after modernization and expansion plan will grow as follows.

Year 2019/20 2020/21 2021/22 2022/23 2023/24

Increase of sales over pre- 30% 15% 10% 5% 0%
vious year

Financing Options

Offer price per share Tk. 12.00

Number of shares 30,000,000
Face value per share Tk. 10 per share
Purpose of raising fund Modernisation and Expansion plan

Scheme 1: Initial Public Offer (IPO) of shares: DBCL is keen to go for IPO of shares for Tk.
300 million at an expected premium of 20% subject to approval of Bangladesh Secu-
rities & Exchange Commission (BSEC). As per BSEC regulation minimum paid up
capital subscribed by the sponsor directors must be Tk. 300 million before processing
14
 the IPO application. ABC & Co. has agreed with Mr. Rakibul Hassan, Independent
Director to do the necessary paper transactions to comply with this requirement be-
fore IPO even the same is not reflected in the audited statement of financial position
as on 30 June 2019. The company is expected to declare dividend at a rate of 15%
per annum after the successful IPO.

Scheme 2: Issue of Subordinate Bond: The management of DBCL consulted the investment
plan with the existing investment banker, underwriters, leasing companies for financing
through bond issue of Tk. 360 million at 10% per annum.

Market risk and expected return

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the
market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the
expected rate of return of an asset based on its beta and expected market returns. The average risk
free rate of return is 6%. The expected beta (β) for DBCL Bank Ltd. is 1.25. The average expected
market return from investment in similar securities (comprising of dividend and capital gain yield) is 10%
per annum.

Present value factors of Tk. 1 for 5 years as follows:

Discount rate % Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

10 0.909 0.826 0.751 0.683 0.621 0.564 0.513
11 0.901 0.812 0.731 0.659 0.593 0.535 0.482
12 0.893 0.797 0.712 0.636 0.567 0.507 0.452
13 0.885 0.783 0.693 0.613 0.543 0.480 0.425

The market capitalization of all securities listed in DSE Ltd. as on 30 June 2019 was Tk. 2,451,137
million and market P/E Ratio is 11.91 where Food and Beverage sector’s Market Capitalization was Tk.
385,972 million and Price earnings (P/E) ratio was 10.78. The Food and Beverage sector’s dividend
yield was 2.5 percent per annum and Sector’s 12 months’ average return was 5 percent. Other similar
stock’s market price and EPS in DSE were as follows:

Sl. Company name Face NAV(Taka) Market Price EPS for the
No. Value 30 June (July 2018 – June year ending
(Taka) 2019 2019: 30 June
(12 months 2019
average)
(Taka)
a b c D e f
1 TBL Beverages Ltd. 10 17.28 34.00 2.60
2 Akij Foods & Beverage 10 13.25 75.93 2.82
Ltd.
3 Rahim Foods Ltd. 10 15.85 18.71 3.31
4 Deshbondhu Foods Ltd. 10 21.25 15.87 2.85
5 Bashundhara Foods Ltd. 10 11.15 35.32 1.55

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 EXHIBIT- 7

Social and Economic Aspects of Food and Beverage Industry in Bangladesh

The food and beverage industry encompasses manufacturers, distributors and retailers who sell soft
drinks to the public in restaurants, supermarkets and shops. Across these functions the industry di-
rectly supports Tk. 4.4 billion contribution to Bangladesh GDP. It also provides jobs for 233,000 peo-
ple. But impact does not end there: the effects of this activity ripple out through the economy, in total
supporting a contribution to GDP of Tk. 7.3 billion and 347,000 jobs.

It was proven in several studies that people who have dietary problems have much higher chance to
become obese if they are drinking a lot of diet soda. This is happening because of the presence of ar-
tificial sweeteners that can disturb the way our metabolism process food. This changes calorie intake
and can cause people to over eat more and more, with their body craving more and more sugar. As
such the government has announced new tax rate on sugar will be applied to soft drinks which con-
tain added sugar and have total sugar content above certain thresholds. The government is introduc-
ing the levy in an effort to tackle obesity by reducing the consumption of drinks with added sugar, and
to encourage manufacturers to reduce the sugar content of their products.

Just over one-fifth of the soft drinks sold (by volume) could be subject to the levy. This proportion is
significantly higher for certain types of drinks-most notably energy drinks and those categorized as
‘still and juice’. The levy could add just under 50 paisa per liter to the price of the drinks on which it is
payable.

Due to excess tax on sugar, the sales might be reduced. The changes in sales volumes and patterns
of consumption equate to a reduction in the average daily calorie intake of five calories per person.
The consumers may switch their consumption towards fruit juices and milk, which do not fall within the
scope of the levy, but nonetheless contain naturally-occurring sugars. However, the soft drinks tax
can be expected to result in more than 4,000 job losses across the country.

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 EXHIBIT-8

Newspaper Cutting relating to Food and Beverage Industry

A study published in the daily newspaper that people who drank more than two sugar-sweetened soft
drinks a day had higher rates of death from digestive diseases. Another study found that consumption
of total sugar-sweetened and artificially sweetened soft drinks was positively associated with all-cause
deaths in the western countries.

Dental Decay – Increased presence of sugar (glucose, fructose, sucrose), sweeteners and some
additives that are present in soft drinks can cause build-up bacteria that feed on them. Result of their
presence in our mouths is appearance of plaques, which can lead to the appearance of gum disease
and cavities. Also, large amount of soft drinks are acidic, making them excellent material for eroding
tooth enamel that is a crucial line of defence against many kind of dental decay.

Bone density and bone loss – Phosphoric acid in soft drinks can destabilize our body’s ability to
absorb calcium, making our bones softer, causing appearance of cavities and even osteoporosis.

Stomach problems – Phosphoric acid also interferes with our digestion system, preventing regular
processes of stomach acids, slowing digestion and blocking nutrient absorption.

Kidney problems – Large studies have shown that regular intake of two cans of diet cola per day can
cause two-fold increase of kidney decline risk.

Changes in metabolism – Some studies have shown that regular drinkers of soda drinks (even one
diet soda can per day) can increase their risk of metabolic disorders by 34%. Some of the symptoms
are belly fat, higher cholesterol, heart disease and more.

Caffeine –Caffeine in soft drinks can is a proven source of large mood changes that can be caused in
individuals.

Hangovers – Cocktails that contain both alcohol and diet soft drinks can make you much faster than
other beverages because sugar-free mixture allows liquor to enter your bloodstream faster than drinks
that contain sugar. This will make you not only drunker faster, but you will absorb much more alcohol.

Hypokalemia – In some rare extreme cases, users who drank between 4 and 10 liters of soft drinks
per day managed to severely destabilize their metabolism by dangerously reducing their potassium
levels.

The beverages increase blood sugar levels rapidly and affect the pleasure centers of the brain in a
similar way as heroin. More recent research adds to the evidence of a link between sugary drinks and
diabetes and seems to confirm the adverse effects of these drinks on brain, kidney, and liver activity.

17