GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME

JUNE 2023
YYY
MODULE 1
These answers have been written by competent persons and the Institute hope that the
GUIDELINE ANSWERS will assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers are to be treated as model
answers and not as exhaustive and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and published herein.

The Guideline Answers contain the information based on the Laws/Rules applicable at the time of
preparation. However, students are expected to be updated with the applicable amendments which
are as follows:
CS Examinations Applicability of Amendments to Laws
December Session upto 31 May of that Calender year
June Session upto 30 November of previous Calender Year

CONTENTS
Page

MODULE 1

1. Governance, Risk Management, Compliances and Ethics

2. Advanced Tax Laws

3. Drafting, Pleadings and Appearances

 PROFESSIONAL PROGRAMME EXAMINATION

JUNE 2023

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES AND ETHICS

Time allowed : 3 hours Maximum marks : 100

NOTE : Answer ALL Questions.
PART I

Question 1
Zion Ltd., is one of the listed leading companies in the pharmaceutical sector. Meta Ltd. acquired 75%
Equity shares of Zion Ltd. five years ago and is being retained by Meta Ltd. till date. The shareholding
pattern of Meta Ltd. includes the following:
The Government of Punjab and Government of Haryana each hold 18% of the paid-up share capital.
The Government of Rajasthan’s share is 15.5%. During the course of audit for the financial year 2019-
20, the Auditors made the following observations:
(i) The company was not maintaining proper records with respect to the fixed assets. The value of
fixed assets of the company amounts to approx. ` 1.50 crore.
(ii) The physical verification of the assets was not carried out at regular intervals. The last physical
verification was conducted on 31st July 2018. On 29th June 2020, Mr. Sam, the Auditor of Zion
Ltd., resigned from his post, citing medical reasons. However, he had forgotten to inform about
his resignation to the concerned authorities. Casual vacancy so created was filled up with the
appointment of RMT & Co. Chartered Accountants as statutory, auditors of Zion Ltd.
As far as RMT & Co. Chartered Accountants are concerned, Mr. R, who is one of the partners of
the firm had borrowed a sum of ` 3.00 lakh from Meta Ltd. He had also purchased goods worth `
1.89 lakh from the company. Both the sum borrowed and the cost of the goods bought are not
yet paid by Mr. R does not sign the financials of Zion Ltd. In the above circumstances:
(a) Whether the process of resignation by the Auditor was correct? Explain the provisions under
the Companies Act 2013 with regard to resignation and communication by the Auditor. Who and
by what time the resignation has to be informed?
(b) Whether the appointment of Mr. R as the Auditor is a valid one?
(c) What should the auditor do for reporting of the fraud?
(d) Discuss the role of Audit Committee in such situation
(5 marks each)
Answer 1(a)
As per the provisions of Section 140 of the Companies Act – “The auditor who has resigned from the
company shall file within a period of thirty days from the date of resignation, a statement in the prescribed
form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section
139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating
the reasons and other facts as may be relevant with regard to his resignation”.
Further, as per Rule 8 of Companies (Audit and Auditors) Rules, 2014 - “when an auditor has resigned from
the company, he shall file a statement in Form ADT-3”.
According to the above, under the provisions of Companies Act, 2013 it is the responsibility of the auditor
to inform about his resignation to the Company and to the Registrar of Companies within 30 days of his
resignation by filing e-form ADT 3 indicating the reasons and other facts as may be relevant with regard to
his resignation; and hence
(a) the process of resignation of auditor appears to be incorrect as the auditor has forgotten to inform about
his resignation to the concerned authorities;
(b) and (c) the provisions with regard to resignation and communication of Auditor as contained in Section
140 and provisions as to the person responsible to give information and the timelines prescribed are
outlined above.
Answer 1(b)
Section 141 of the Companies Act, 2013 contains provisions relating to eligibility, qualifications and
disqualifications of auditors.
It is given to understand here that one of the partners of the Statutory Audit firm had borrowed a loan of Rs.
3 lakhs from the Company and also purchased goods worth 1.89 lakhs which are due to be paid to the
Company.
In the given context, Section 141 contains that - a person shall not be eligible to be appointed as the auditor
of the Company if he, or his relative or partner is indebted to the company, or its subsidiary, or its holding
or associate company or a subsidiary of such holding company, in excess of rupees five lakhs.
As the indebtedness does not exceed the prescribed threshold of rupees five lakhs, it appears from the
above provision that the appointment of M/s. RMT & Co. as statutory auditors is not affected by the reason
of Mr. R being indebted to the company.
Answer 1(c)
It is the duty of the auditor to verify whether the financial statements are prepared in accordance with the
applicable financial reporting framework and to express an opinion on the financial statements audited by
him as to whether the financial statements provide a true and fair view on the financial position of the
company. If during the course of the audit, the auditor comes across fraudulent activities or offence involving
the fraud, he shall report the same to the management of the company and Central Government as
appropriate.
Section 143(12) of Companies Act, 2013 and Companies (Audit and Auditors) Rules 2014 lays down the
procedure for reporting of fraud. The same has been explained below-
Amount involved in fraud is more than Rs. 1 Crore
If during the course of audit, the auditor has reason to believe that an offence of fraud involving an amount
exceeding Rs. 1 crore or more is being or has been committed against the company by the officers or
employees of the company, then the auditor shall report the matter to the Central Government.
The matter shall be reported to the Central Government in the following manner-
The auditor is required to report fraud to the management within 2 days from the date of his knowledge of
fraud, asking them to reply within a period of 45 days.
Upon receipt of reply from the management, the auditor shall forward his report along with reply from the
management and his comments on such reply to the Central Government within a period of 15 days from
the date of receipt of such reply from the management.
If the auditor fails to get any response from the management within a period of 45 days, he shall forward
his report to the Central Government along with the details of the report earlier forwarded to the
management for which he has not received any reply.
The repost shall be forwarded to the Secretary, Ministry of Corporate Affairs in a sealed cover either by
registered post or by speed post. It shall be followed by an email in confirmation of the same. Such a report
forwarded shall be on the letter head of the auditor containing the postal address, email address and
telephone number.
The report shall also be signed and sealed and shall indicate his membership number. The report shall be
in form ADT-4
Amount involved in fraud is less than Rs. 1 Crore
If the amount involved in fraud is less than Rs. 1 crore, the auditor shall report the matter to the audit
committee or Board within a period of 2 days from the date of his knowledge of fraud.
The report shall include the following-
 Nature of Fraud
 Amount involved in fraud
 Parties involved
Further, in case of fraud in which the amount involved is less than Rs. 1 crore, the board report shall include
the following-
 Nature of Fraud Amount involved in fraud
 Parties involved
 Remedial Actions Taken Reporting
Requirements under CARO 2020
CARO 2020 provides for specific requirements for reporting of fraud under clause 11. The same has been
provided below-
1. Has there been any fraud by the company or any fraud done on the company. If any such
fraud has been noticed or reported any time of the year. If yes, nature and amount involved have
to be reported.
2. Whether the auditors of the company have filed a report in Form ADT-4 with the Central
Government as prescribed under the Companies (Audit and Auditors) Rules, 2014.
Answer 1(d)
Under Section 177(4) of the Companies Act, 2013, the role of audit committee with respect to appointment
of auditors, review of financial statements and reporting of fraud is as below:
Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board.
Terms of reference as prescribed by the board shall inter alia, include-
(i) the recommendation for appointment, remuneration and terms of appointment of auditors of the
company:
(ii) review and monitor the auditor's independence and performance., and effectiveness of audit process:
(iii) examination of the financial statement and the auditors’ report thereon:
(iv) approval or any subsequent modification of transactions of the company with related parties;
Provided that the Audit Committee may make omnibus approval for related party transactions proposed to
be entered into by the company subject to such conditions as prescribed under rule 6A of the Companies
(Meetings of Board and its Powers) Rules. 2014:
Provided further that in case of transaction, other than transactions referred to in section 188, and where
Audit Committee does not approve the transaction, it shall make its recommendations to the Board:
Provided also that in case any transaction involving any amount not exceeding one crore rupees is entered
into by a director or officer of the company without obtaining the approval of the Audit Committee and it is
not ratified by the Audit Committee within three months from the date of the transaction, such transaction
shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any
director or is authorised by any other director, the director concerned shall indemnify the company against
any loss incurred by it.
 Attempt all parts of either Q. No. 2 or Q. No. 2A
Question 2
(a) Discuss the institutional mechanism for prevention of insider trading under the relevant Insider Trading
laws in India.
(5 marks)
(b) For greater accountability and effectiveness performance, review of the board and individual director is
essential. What is the scope of evaluation of director’s performance?
(5 marks)
(c) National Infrastructure Ltd., a Government Company appointed Z, a senior retired IAS officer on its Board
as an Independent director. The retired IAS officer wants to know the qualifications of an independent
director and also wishes to know any code of professional conduct with reference to the provisions of the
Companies Act, 2013. State the same.
(5 marks)
OR (Alternate question to Q. No. 2)
Question 2A.
(i) Mr. A is appointed as an Actuary in PQR Ltd. under IRDA (Appointed Actuary) Regulations, 2000. Mr.
A, the appointed actuary shall provide professional advice or certification to the Board of Directors of PQR
Ltd. on certain items. Discuss role of Appointed Actuaries and indicate such items on which Actuary may
provide professional advice or certification to the Board of Directors.
(5 marks)
(ii) “The corporate governance framework should protect and facilitate exercise of shareholders’ rights and
ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All
shareholders should have the opportunity to obtain effective redressal for any violation of their rights.”
Explain the provisions of the Companies Act, 2013 to protect the interests of minority shareholders.
(5 marks)
(iii) X Ltd., the holding company of B Ltd. (having 51% of its shareholding in B Ltd.), wants to appoint A as
Chief Finance Officer over there. A is related to one of the Directors of the holding company. Will it be
considered a related party transaction under the provisions of the Companies Act, 2013? If so, what is
the procedure to be followed by the Board of X Ltd.? Would your answer differ, assuming it is an associate
company or wholly owned subsidiary company?
(5 marks)
Answer 2(a)
Institutional Mechanism for Prevention of Insider trading (Regulation 9A of the Securities and
Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015):
(1) The Chief Executive Officer, Managing Director or such other analogous person of a listed Company,
intermediary or fiduciary shall put in place adequate and effective system of internal controls to ensure
compliance with the requirements given in these regulations to prevent insider trading.
(2) The internal controls shall include the following:
(a) all employees who have access to unpublished price sensitive formation are identified as
designated person;
(b) all the unpublished price sensitive information shall be identified and its confidentiality shall be
maintained as per the requirements of these regulations;
(c) adequate restrictions shall be placed on communication or procurement of unpublished price
sensitive information as required by these regulations;
 (d) lists of all employees and other persons with whom unpublished price sensitive information is
shared shall be maintained and confidentiality agreements shall be signed or notice shall be served
to all such employees and persons;
(e) all other relevant requirements specified under these regulations shall be complied with;
(f) periodic process review to evaluate effectiveness of such internal controls.
(3) The board of directors of every listed company and the board of directors or head(s) of the
organisation of intermediaries and fiduciaries shall ensure that the Chief Executive Officer or the Managing
Director or such other analogous person ensures compliance with regulation 9 and sub- regulations (1) and
(2) of this regulation.
(4) The Audit Committee of a listed company or other analogous body for intermediary or fiduciary shall
review compliance with the provisions of these regulations at least once in a financial year and shall verify
that the systems for internal control are adequate and arc operating effectively.
(5) Every listed company shall formulate written policies and procedures for inquiry in case of leak of
unpublished price sensitive information or suspected leak of unpublished price sensitive information, which
shall be approved by board of directors of the company and accordingly initiate appropriate inquiries on
becoming aware of leak of unpublished price sensitive information or suspected leak of unpublished price
sensitive information and inform the Board promptly of such leaks, inquiries and results of such inquiries.
(6) The listed company shall have a whistle-blower policy and make employees aware of such policy to
enable employees to report instances of leak of unpublished price sensitive information.
(7) If an inquiry has been initiated by a listed company in case of leak of unpublished price sensitive
information or suspected leak of unpublished price sensitive information. the relevant intermediaries and
fiduciaries shall co-operate with the listed company in connection with such inquiry conducted by listed
company.
Answer 2(b)
Board evaluation is a key means by which boards can recognize and correct corporate governance
problems and add real value to their organizations. A properly conducted board evaluation can contribute
significantly to performance improvements on organisational; board and individual member level.
Board evaluation typically examines the roles of the Board and the entailing responsibilities, and assesses
how effectively these are fulfilled by the Board. Board evaluation contributes significantly to improved
performance at three levels – organizational, Board and individual Board member level. It also improves the
leadership, teamwork, accountability, decision- making, communication and efficiency of the board. A
commitment to annual evaluation is powerful change.
1. The Role of the Nominations and Remuneration Committee in performance evaluation of directors
Section 178 (2): 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 or by the Nomination and Remuneration Committee or by an independent external agency and
review its implementation and compliance.
2. Independent Directors’ role in performance evaluation of Boards, non-independent directors and
Chairperson
Schedule IV [Part II (2)] : Independent directors are required to bring an objective view in the evaluation of
the performance of board and management.
Schedule 1V (Part VII) : The independent directors of the company shall hold at least one meeting in a
financial year. without the attendance of non-independent directors and members of management. All the
independent directors of the company shall strive to be present at such meeting. The meeting shall:
(a) review the performance of non-independent directors and the Board as a whole:
(b) review the performance of the Chairperson of the company. taking into account the views of executive
directors and non-executive directors;
(c) assess the quality, quantity and timeliness of flow of information between the company management
and the Board that is necessary for the Board to effectively and reasonably perform their duties.
3. Performance evaluation of Independent Directors
Schedule IV Part V: Re appointment - The reappointment of the independent directors would be based on
their report of performance evaluation.
Schedule IV Part VII : Evaluation mechanism The performance of the independent directors would have to
be done by the entire Board excluding the director to be evaluated. On the basis of the report of performance
evaluation. the continuance or extension of the term of appointment of the independent director would be
determined.
4. Inclusion of Performance evaluation in Board’ Report
According to Rule 8 (4) of the Companies (Accounts) Rules. 2014 Every listed company and every other
public company having a paid up share capital of twenty five crore rupees or more calculated at the end of
the preceding financial year shall include in the report by its Board of directors, a statement indicating the
manner in which formal annual evaluation has been made by the Board of its own performance and that of
its committees and individual directors.
Provisions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with
respect to Board Evaluation
It also requires Boards to conduct an annual performance evaluation and its disclosure in the annual report
through the following provisions:
1. Regulation 4(2)(N(i1) (9) states the Key functions of the board of directors which includes: Monitoring
and reviewing board of director's evaluation framework.
2. Regulation 17(10) mandates that evaluation of independent directors shall be done by the entire board
of directors which shall include-
a. performance of the directors: and
b. fulfilment of the independent criteria as specified in these regulations and their independence from the
management.
In the above evaluation process, the directors who are subject to evaluation shall not participate.
3. Regulation 19(4) read with Part D of Schedule II - It provides that the role of Nomination and
Remuneration committee shall, inter-alia, include the following:
(1) formulation of the criteria for determining qualifications. positive attributes and independence of a
director and recommend to the board of directors a policy relating to, the remuneration of the Directors,
key managerial personnel and other employees;
(2) formulation of criteria for evaluation of performance of independent directors and the board of directors;
(3) devising a policy on diversity of board of directors;
(4) identifying persons who are qualified to become directors and who may be appointed in senior
management in accordance with the criteria laid down, and recommend to the board of directors their
appointment and removal.
(5) whether to extend or continue the term of appointment of the independent director, on the basis of the
report of performance evaluation of independent directors;
(6) recommend to the board all remuneration, in whatever form, payable to senior management.
4. Disclosure on Performance evaluation criteria for independent directors has to be made under head
Nomination and Remuneration Committee in the section on the corporate governance of the annual report.
Answer 2(c)
Qualifications of Independent Director
As per Section 149(6) - An independent director in relation to a company, means a director other than a
managing director or a whole-time director or a nominee director who, in the opinion of the Board, is a
person of integrity and possesses relevant expertise and experience.
Further, as per Rule 5 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 -
An independent director shall possess appropriate skills, experience and knowledge in one or more fields
of finance, law, management, sales, marketing, administration, research, corporate governance, technical
operations or other disciplines related to the company’s business.
Code for Independent Directors
Section 149 (8) of the Companies Act. 2013 states that the company and independent directors shall abide
by the provisions specified in Schedule IV, which contains the Code for Independent Directors.
Schedule IV - Code for Independent Directors
The Code is a guide to professional conduct for independent Directors. Adherence to these standards by
independent Directors and fulfilment of their responsibilities in a professional and faithful manner will
promote confidence of the investment community, particularly minority shareholders, regulators and
companies in the institution of independent Directors.
An independent director shall:
(1) uphold ethical standards of integrity and probity:
(2) act objectively and constructively while exercising his duties:
(3) exercise his responsibilities in a bona fide manner in the interest of the company:
(4) devote sufficient time and attention to his professional obligations for informed and balanced decision
making;
(5) not allow any extraneous considerations that will vitiate his exercise of objective independent Judgment
in the paramount interest of the company as a whole while concurring in or dissenting from the collective
judgment of the Board in its decision making;
(6) not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining
direct or indirect personal advantage or advantage for any associated person.
(7) refrain from any action that would lead to loss of his independence;
(8) where circumstances arise which make an independent director lose his independence, the independent
director must immediately inform the Board accordingly:
(9) assist the company in implementing the best corporate governance practices.

Answer 2A (i)
IRDAI has brought out detailed Regulations on Appointed Actuary vide IRDA (Appointed Actuary)
Regulations. 2000, detailing the procedure for his appointment, qualifications, powers along with his duties
and obligations.
The Regulations also stipulate that prior approval of the Authority shall be taken for the appointment of the
Appointed Actuary. The Board should ensure that the requirements are scrupulously complied with.
In brief, it reiterated that:
 The Appointed Actuary should qualify and satisfy the “Fit & Proper” criteria and other eligibility
conditions as mentioned in IRDA (Appointed Actuary) Regulations, 2000, as amended from time to
time.
  The insurance companies shall clearly set forth the Appointed Actuary’s responsibilities and any
advisory role vis-a-vis the Board or the management as well as his/her rights and obligations. These
shall be in addition to the duties of the Appointed Actuaries as specified in the IRDAI Regulations and
any other directions of IRDA in the matter.
 As soon as the Appointed Actuary realizes that the entity does not comply or is likely to fail in complying
with the requirements of solvency and other parameters of sound operations, he/she shall inform the
Board of the insurer. If no viable/acceptable action is taken by the Board, then he/she has to inform
the same to IRDAI.
 The Board shall interact directly with the Appointed Actuary wherever it considers it expedient to
secure his advice. it may do so in such manner as it may deem fit.
The Appointed Actuary shall provide professional advice or certification to the board with regard to: -
- Estimation of technical provisions in accordance with the valuation framework setup by the insurer.
- Identification and estimation of material risks and appropriate management of the risks.
- Financial condition testing.
- Solvency margin requirements.
- Appropriateness of premiums (and surrender value).
- Allocation of bonuses to with-profit insurance contracts.
- Management of participating funds (including analysis of material effects caused by strategies and
policies).
- Product design, risk mitigation (including reinsurance) and other related risk management roles
While the areas of advice/certification listed above are with specific reference to life insurance companies,
the appointed actuaries in case of non-life insurance companies shall provide such advice/certification to
the extent applicable. In order to facilitate the Appointed Actuary in discharging his/her responsibilities, he/
she shall at all times be provided access to the information as required.
Answer 2A (ii)
As an equity shareholder, minority have the right to:
 participate in the profits of the company.
 information about the company.
 participation in general shareholder meetings and influence corporate actions through
voting on proposal.
Companies Act, 2013 provides for some measures to protect the interest of minority shareholders which
are discussed as under: -
(1) Oppression and Mismanagement: Part XVI consisting of Sections from 241 10 246 of Companies Act,
2013 deals with prevention of Oppression and Mismanagement. When a shareholder's rights are violated
it can be termed as oppression. Oppression occurs when the majority shareholders misuse their rights and
take company’s business as their personal property resulting in loss to the minority shareholders
(2) Class Action Suit: A class action suit is a legal proceeding in which shareholders bring suit as a group
against the company or its directors or officers and the judgment or settlement received from the suit covers
all the shareholders equally.
(3) Special Rights: As “the will of the majority prevails’ the decision of majority shareholders in a company
binds the minority. They exercise their rights without considering the interests of minority. They may misuse
their power to exploit the rights of minority. Hence Companies Act. 2013 provides some special powers to
small shareholders to prevent exploitation of their rights.
(4) Representation on Board: Section 151 provides that a listed company may have one director elected
by such small shareholders as prescribed under Rule 7 of the Companies (Appointment and Qualification
of Directors) Rules. 2014.
(5) E-Voting: Voting by electronic means is a facility given to the members of a company with more than
1000 shareholders to cast their votes on the resolutions through electronic mode. It provides an opportunity
to shareholders residing in far-flung area to take part in the decision-making process of the company.
Shareholder scan therefore exercise their voting rights even when they cannot be physically present for
meetings and without spending too much time or money.
(6) Exit Rights: In the event of an acquirer, or a person acting in concert with such acquirer, becoming
registered holder of 90% or more of the issued equity share capital of a company, or in the event of any
person or group of persons becoming ninety percent majority or holding 90% of the issued equity share
capital of a company, by virtue of an amalgamation, share exchange. conversion of securities or for any
other reason, such acquirer, person or group of persons, as the case may be, shall notify the company of
their intention to buy the remaining equity shares [Section 236(1)].
(7) Related Party Transactions: Section 188(1) provides that except with the consent of the Board of
Director given by a resolution at meeting of the Board, not company shall enter into any contract or
arrangement with a related party with respect to(a) sale, purchase or supply of any goods or materials; (b)
selling or otherwise disposing of, or buying, property of any kind (c) leasing of property of any kind, (d)
availing or rendering of any services; (e) appointment of any agent for purchase or sale of goods, materials,
services or property; (f) such related party's appointment to any office or place of profit in the company, its
subsidiary company or associate company; and (g) underwriting the subscription of any securities or
derivatives thereof, of the company.
(8) Application to Tribunal for Relief:
Section 244(1) provides that any member of a company who complains that —
(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest
or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial
to the interests of the company;
or
(b) the material change, not being a change brought about by, or in the interests of, any creditors. including
debenture holders or any class of shareholders of the company, has taken place in the management or
control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership
of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever,
and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner
prejudicial to its interests or its members or any class of members, may apply to the Tribunal, provided such
member has a right to apply under section 244, for an order under Chapter XVI.
Answer 2A (iii)
As per the provisions of Section 2(76), "related party", with reference to a company, includes —
(i) a director or his relative;
(ii) key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director or manager is a director or and holds along with his relatives, more
than two per cent of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in
accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given
in a professional capacity;
Further, as per section 188, the following transaction is deemed to be related party transaction:
(f) related party's appointment to any office or place of profit in the company, its subsidiary company or
associate company; and where the expression “office or place of profit” includes any office or place—
(ii) where such office or place is held by an individual other than a director or by any firm, private company
or other body corporate, if the individual, firm, private company or body corporate holding it receives from
the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free
accommodation, or otherwise;
In the given scenario, relative of director of X ltd. is going to be appointed as CFO in subsidiary company
of X ltd. and hence as per the above provisions, the same is a related party transaction under the Act.
Procedure to be followed by X Ltd.
 Consent of Board of Directors to be taken at a meeting of the Board of Directors;
The agenda of the Board meeting at which the resolution is proposed to be moved shall disclose-
(a) the name of the related party and nature of relationship;
(b) the nature, duration of the contract and particulars of the contract or arrangement;
(c) the material terms of the contract or arrangement including the value, if any;
(d) any advance paid or received for the contract or arrangement, if any;
(e) the manner of determining the pricing and other commercial terms, both included as part
of contract and not considered as part of the contract;
(f) whether all factors relevant to the contract have been considered, if not, the details of
factors not considered with the rationale for not considering those factors; and
(g) any other information relevant or important for the Board to take a decision on the proposed
transaction.
The director who is interested in the contract or arrangement with a related party, shall not be present at
the meeting during discussions on the subject matter of the resolution relating to such contract or
arrangement.
 Where the transaction is for appointment to any office or place of profit in the company, its
subsidiary company or associate company at a monthly remuneration exceeding two and a half
lakh rupees as mentioned in clause (f) of sub-section (1) of section 188, prior consent of members
by means of a resolution should also be obtained.
Any member of the company who is a related party shall not vote on such resolution, to approve any
contract or arrangement which may be entered into by the company:
The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section
101 shall contain the following particulars, namely:-
 name of the related party;
 name of the director or key managerial personnel who is related, if any;
 nature of relationship;
 nature, material terms, monetary value and particulars of the contract or arrangements;
 any other information relevant or important for the members to take a decision on the
proposed resolution.
Every contract or arrangement entered into under sub-section (1) of Section 188 shall be referred to in the
Board’s report to the shareholders along with the justification for entering into such contract or arrangement.
The requirement of seeking approvals as above shall not apply to any transactions entered into by the
company in its ordinary course of business other than transactions which are not on an arm’s length basis.
The requirement of passing the member’s resolution shall not be applicable for transactions entered into
between a holding company and its wholly owned subsidiary whose accounts are consolidated with such
holding company and placed before the shareholders at the general meeting for approval. In case of wholly
owned subsidiary, the resolution passed by the holding company shall be sufficient for the purpose of
entering into the transaction between the wholly owned subsidiary and the holding company. For associate
company, no specific difference from above procedure has been prescribed.
Question 3.
(a) What are the methods by which IRDA exercises control over significant ownership?
(b) What are the Classes of Companies and bodies corporate governed by the National Financial Reporting
Authority (NFRA)?
(c) What are the provisions under Sarbanes-Oxley Act 2002 for protection of Whistle Blowers?
(d) What are the committees required to be constituted by Non-Banking Financial Companies?
(e) You have been appointed as a Company Secretary for a Company formed a month ago. As the
secretary, you are required to list out the items of business for the agenda for first meeting of Board of the
Company.
(3 marks each)
Answer 3(a)
IRDAI prescribes a minimum lock-in period of 5 years from the date of certificate of commencement of
business of an insurer (R3) for the promoters of the insurance company and no transfer of shares of the
promoters is permitted within this period without the specific approval of the Authority. Section 2 (7A) of the
Insurance Act, 1938 has prescribed the ceiling of Foreign Investment in Indian Insurance Companies at
74%, subject to the Indian Insurance Company being Indian owned and controlled. The manner of
computation of Foreign Investment to satisfy this requirement is specified in the Rules and Regulations
issued by the Government and IRDAI from time to time.
It has to be demonstrated through express provisions in the agreements between the promoters/
shareholders and/ or the Articles of Association of the Insurance companies that the ownership as well as
control does not lie with foreign entities but ultimately rests with resident Indian citizens at all times.
The Insurance Act, 1938 stipulates prior approval of the IRDAI for registration/transfer of shares, exceeding
one per cent and /or which involve holding of share capital, after such transfer, in excess of 5 per cent of
the paid-up capital of the company. The Board of Directors of the company shall ensure that the registration
of shares is in compliance with the above provisions of the Act, Regulations and circulars issued by IRDAI
from time to time.
Answer 3(b)
Classes of Companies and bodies corporate governed by the National Financial Reporting Authority
(NFRA) as per Rule 3 of the National Financial Reporting Authority Rules. 2018 (NFRA Rules) are as below:
1. companies whose securities are listed on any stock exchange in India or outside India;
2. unlisted public companies having paid-up capital of not less than rupees five hundred crores or having
annual turnover of not less than rupees one thousand crores or having, in aggregate, outstanding loans,
debentures and deposits of not less than rupees five hundred crores as on the 31st March of immediately
preceding financial year;
3. Insurance companies, banking companies, companies engaged in the generation or supply of electricity,
companies governed by any special Act for the time being in force or bodies corporate incorporated by an
Act.
4. Any body corporate or company or person, or any class of bodies corporate or companies or persons.
on a reference made to the Authority by the Central Government in public interest: and
5. A body corporate incorporated or registered outside India, which is a subsidiary or associate company
of any company or body corporate incorporated or registered in India as referred to in clauses (a) to (d), if
the income or net worth of such subsidiary or associate company exceeds twenty percent, of the
consolidated income or consolidated net worth of such company or the body corporate, as the case may
be.
6. A company or a body corporate other than a company governed under this rule shall continue to be
governed by the Authority for a period of three years after it ceases to be listed or its paid-up capital or
turnover or aggregate of loans, debentures and deposits falls below the limit stated therein.
Answer 3(c)
Sarbanes Oxley Act of 2002 is an Act enacted by U.S. congress to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other
purposes. Section 302 of the said Act contains following provisions for whistle-blowers:
 Make it illegal to “discharge, demote, suspend, threaten, harass or in any manner discriminate
against” whistle-blowers.
 Establish criminal penalties of up to 10 years for executives who retaliate against whistle-blowers.
 Require board audit committees to establish procedures for hearing whistle-blower complaints
 Allow the secretary of labour to order a company to rehire a terminated employee with no court
hearing.
 Give a whistle-blower the right to a jury trial, by passing months or years of administrative hearings.
Answer 3(d)
1. Audit Committee: All Applicable NBFCs shall constitute an Audit Committee, consisting of not less than
three members of its Board of Directors. The Audit Committee must ensure that an Information System
Audit of the internal systems and processes is conducted at least once in two years to assess operational
risks faced by the NBFCs.
2. Nomination Committee: All Applicable NBFCs shall form a Nomination Committee to ensure “fit and
proper’ status of proposed/ existing directors. The Nomination Committee constituted under this paragraph
shall have the same powers, functions and duties as laid down in Section 178 of the Companies Act, 2013.
3. Risk Management Committee: To manage the integrated risk, all Applicable NBFCs shall form a Risk
Management Committee, besides the Asset Liability Management Committee.
Few other committees are prescribed in other regulations depending on asset base or other parameter. For
example - Asset Liability Management Committee (ALCO) for NBFCs with asset base of Rs. 100 cr or more
& NBFC- D as per Para 1 of Asset Liability Management (ALM) System for NBFCs – Guidelines.
Stakeholders Relationship Committee for NBFCs having more than 1000 shareholders, debenture holders,
deposit-holders and any other security holders at any time during the FY as per Section 178(5) of
Companies Act, 2013, CSR Committee for NBFCs with net worth of rupees five hundred crore or more, or
turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any
financial year as per Section 135 of Companies Act, 2013, Committees as per Listing regulations for Listed
NBFCs etc.
Answer 3(e)
The first meeting of the board may contain the following agendas:
1. To appoint the Chairman of the Meeting, ascertain quorum and grant leave of absence, if any
2. To note the Certificate of Incorporation of the company, issued by the Registrar of Companies.
3. To take note of the Memorandum and Articles of Association of the company as registered.
4. To note the situation of the Registered Office of the company and ratify the registered document of the
title of the premises of the registered office in the name of the company or a Notarised copy of lease/ rent
agreement in the name of the company.
5. To note the first Directors of the company.
6. To read and record the Notices of disclosure of interest given by the Directors.
7. To consider appointment of Additional Directors, if any.
8. To consider appointment of the Chairman of the Board.
9. To consider appointment of the first Auditors.
10. To adopt the Common Seal of the company, if any.
11. To appoint Bankers and to open bank accounts of the company.
12. To authorise printing of share certificates and correspondence with the depositories, if any.
13. To authorise the issue of share certificates to the subscribers to the Memorandum and Articles of
Association of the company on receipt of subscription money.
14. To approve and ratify preliminary expenses and preliminary agreements.
15. to take note of secretarial standards.
16. To authorise personnel for GST and other registrations
17. To delegate powers for day-to-day operations of Company
15. To approve the appointment of the Key Managerial Personnel, if applicable and other senior officers

PART-II

Question 4
A Chocolate Company since inception in 1990 has been largely responsible for satisfying the country’s
demand for Chocolates and Sugar Confectionery. The plant has various lines producing a wide range
of confectionery like Éclairs. Toffees, Fudges. Caramels, Hard Boiled Candy and Enrobed Chocolates.
These products are available in attractive packaging and premium Gift Boxes making them ideal for
gifting as well as for own consumption. Most of the packaging in the Gift Pack segment has been
carefully selected to ensure its enduring utility, thereby giving our valued customers an added benefit.
The confectionery is produced by experienced personnel under stringent quality control and hygiene
standards. State-of-theart manufacturing facilities ensure products of international quality. The
company in its relentless pursuit of quality obtained relevant Certification in April, 2004.
The Company, through its uncompromising stand on quality and competitive pricing, has
successfully penetrated countries all over the Gulf, the African continent. Asia, Australia, New
Zealand, Canada, South Africa, USA and the UK.
The principal business processes involved are:
• Procurement of raw materials and consumables, Production and Quality Control.
• Distribution and marketing, Inventory Management, Pricing and cost control.
• Feedback from consumers and redressal systems, Publicity and promotional activities, Investor
relations.
• Recruitment and HR, Finance & Administration.
• Corporate communications and public relations, Legal and secretarial matters.
 Maintenance of equipment and other assets, Capital expenditure for equipment and other
purposes.
 • IT systems and telecommunications, Transportation and Logistics.
Today, manufacturing sector companies like chocolate manufacturing operates in increasingly
complex, competitive and global markets. The ability to manage risks across geographies,
products, assets, customer segments and functional departments is of paramount importance. The
inability to manage these risks can cause irreparable damages. Chocolate company will always
face the likelihood of being impacted by uncertain or adverse future events. These uncertainties
will have an impact on a company’s ability to generate capital and shareholders returns. The
company Board expects that management will not only look at where the company may be exposed
to risk, but also how these risks can be managed to influence favorable business outcomes.
Considering the above, answer the following questions:
(a) What are the fundamental principles to be considered by company to develop an appropriate
Risk Policy Framework for the Company?
(b) What are the various risks, the company is exposed to?
(c) Discuss some approaches for risk impact assessment.
(d) What do you understand by Liquidity Risk? What are the techniques to control liquidity risk?
(5 marks each)
Answer 4(a)
Effective risk management plays a crucial role in any company's pursuit of financial stability and superior
performance. The adoption of a risk management framework that embeds best practices into the firm's risk
culture can be the cornerstone of an organization's financial future.
There are at least five crucial components that must be considered when creating a risk management
framework. They include risk identification; risk measurement and assessment; risk mitigation; risk reporting
and monitoring; and risk governance.
Risk Identification
The first step in identifying the risks a company faces is to define the risk universe. The risk universe is
simply a list of all possible risks. Examples include IT risk, operational risk, regulatory risk, legal risk, political
risk, strategic risk, and credit risk.
After listing all possible risks, the company can then select the risks to which it is exposed and categorize
them into core and non-core risks. Core risks are those that the company must take in order to drive
performance and long-term growth. Non-core risks are often not essential and can be minimized or
eliminated completely.
Risk Measurement
Risk measurement provides information on the quantum of either a specific risk exposure or an aggregate
risk exposure and the probability of a loss occurring due to those exposures. When measuring specific risk
exposure, it is important to consider the effect of that risk on the overall risk profile of the organization.
Some risks may provide diversification benefits while others may not. Another important consideration is
the ability to measure an exposure. Some risks may be easier to measure than others. For example, market
risk can be measured using observed market prices, but measuring operational risk is considered both an
art and a science.
Specific risk measures often give the profit and loss ("P/L") impact that can be expected if there is a small
change in that risk. They may also provide information on how volatile the P/L can be.
Common aggregate risk measures include value-at-risk (VaR), earnings-at-risk (EaR), and economic
capital. Techniques such as scenario analysis and stress testing can be used to supplement these
measures.
Risk Mitigation
Having categorized and measured its risks, a company can then decide on which risks to eliminate or
minimize, and how many of its core risks to retain. Risk mitigation can be achieved through an outright sale
of assets or liabilities, buying insurance, hedging with derivatives, or diversification.
Risk Reporting and Monitoring
It is important to report regularly on specific and aggregate risk measures in order to ensure that risk levels
remain at an optimal level. Financial institutions that trade daily will produce daily risk reports. Other
institutions may require less frequent reporting. Risk reports must be sent to risk personnel who have the
authority to adjust (or instruct others to adjust) risk exposures.
Risk Governance
Risk governance is the process that ensures all company employees perform their duties in accordance
with the risk management framework. Risk governance involves defining the roles of all employees,
segregating duties, and assigning authority to individuals, committees, and the board for approval of core
risks, risk limits, exceptions to limits, and risk reports, and also for general oversight.
Answer 4(b)
Different types of risks the company is exposed to:
I. Market Risks: It is the risk that the value of the company will be adversely affected by movements in
market rates or prices. foreign exchange rates, national & global fluctuations, credit spreads and/or
commodity prices resulting in a loss to earnings and capital. The market risks identified at this chocolate
company are as follows:
 Government Policy risks
 Product Risks
 Environmental risks
 Volatility of export orders
 Price Competition in the local & export market
 Currency fluctuation for export orders

II. Operational Risks: The operational risks identified at chocolate company are as follows:
 Fire & Allied Risks
 Machinery breakdown/ obsolescence
 Volatility of Raw material & Packing material prices
 Quality/ Ageing risks of Raw material/ Packing material
 Delivery risk of Suppliers
 Loss of data & information- IT security
 Manpower Availability risks
 Accidents
 Inventory carrying risk
III. Reputation Risks: These are risks arising from negative public opinion resulting from failures of
process, strategy or corporate governance. The Reputation risks identified at this company are as follows:
 Contamination-hygiene
  Product expiry/Shelf life
 Corporate Governance

IV. Credit Risks: Non receipt of receivables or delay in receipts is the credit risks attributable to the
company. These may be identified as:
 Payment risk [rom customers-local
 Payment risk from Customers- export
 Security from customers
 Advance to Suppliers
V. Liquidity Risks: The possibility is that the company will be unable to fund present and future financial
obligations. These may be identified as:
 Cash flow & working capital management
 FOREX decisions
 Cost overruns

VI. Strategic Risks: Risk those are arising from adverse business decisions or the improper
implementation of such decisions. These may be identified as follows:-
 Business Plan forecasts.
 Attrition of key people.
Answer 4(c)
The following are approaches for risk impact assessment: -
1. Critical Self-Assessment (CSA): This is one of the common qualitative bottom-up approaches where
line managers of the company can critically analyse their business processes given specific scenarios to
identify potential risks and gaps in their risk management processes. Tools like questionnaires, checklists
and workshops are used to help the managers analyze the risk profile of their business units. The key idea
behind this method is that businesses managers of this company are in the best position identify and
manage the Operational Risks pertaining to their business units.
2. Risk Audit: Employing the services of external (or internal) auditors to review the business processes
of a business unit is another approach. This process not only helps identify risks but also helps put in place
the oversight organization for the manageable risks.
3. Key Risk Indicators (KRI): Using the KRI approach the company can blend the qualitative and
quantitative aspects of Operational Risk management. Factors that have predictive value and that can be
easily measured with minimum time lag can serve as risk indicators. Key indicators are identified from
several potential factors and are tracked over time. The predictive capabilities of the indicators are tested
through regression analysis on historical loss data and indicator measurements. Based on such analysis,
the set of indicators of the company being tracked can be modified suitably. Over time. as the model gets
refined, the set of indicators can provide early warning signals for operational losses.
Answer 4(d)
Liquidity risk is the risk that a company will not have enough cash to meet its financial obligations (pay its
debts) on time. Liquidity refers to the ease at which an asset can be converted into cash without negatively
affecting its market price; the risk arises when a company cannot buy or sell an investment in exchange for
cash fast enough to pay its debts.
An effective liquidity risk management would include systems to identify measure. Monitor and control its
liquidity exposures. Management should be able to accurately identify and quantify the primary sources of
the company liquidity risk in a timely manner. To properly identify the sources. management should
understand both existing as well as future risk that it can be exposed.
Key elements of an effective risk management process should include an efficient MIS system to measure,
monitor and control existing as well as future liquidity risks and reporting them to senior management. An
effective management information system (MIS) is essential for sound management decisions. Information
should be readily available for day-to-day liquidity management and risk control, as well as during times of
stress. Data should be appropriately consolidated, comprehensive vet succinct, focused, and available in
a timely manner.
An effective measurement and monitoring system is essential for adequate management of liquidity risk.
Consequently, intends to institute systems that will enable it to capture liquidity risk ahead of time, so that
appropriate remedial measures could be prompted to avoid any significant losses. Some commonly used
liquidity measurement and monitoring techniques are:
 Contingency Funding Plans: In order to develop a comprehensive liquidity risk management
framework, the company should have way out plans for stress scenarios. A CFP is a projection of
future cash flows and funding sources of the company representing management's best estimate of
balance sheet changes that may result from a liquidity event. A CFP can provide a useful framework
for managing liquidity risk both short term and in the long term. Further it helps ensure that a financial
institution can prudently and efficiently manage routine and extraordinary fluctuations in liquidity.
 Cash Flow Projections: At the basic level the company may utilize flow measures to determine their
cash position. A cash flow projection estimates company's inflows and outflows and thus net deficit
or surplus (GAP) over a time horizon.
 Liquidity Ratios and Limits: The Company may use a variety of ratios to quantify liquidity. These
ratios can also be used to create limits for liquidity management. However, such ratios would be
meaningless unless used regularly and interpreted taking into account qualitative factors. Internal
Controls: In order to have effective implementation of policies and procedures, the company should
institute review process that should ensure the compliance of various procedures and limits
prescribed by senior management.

PART-III

Attempt all parts of either Q. No. 5 or Q. No. 5A

Question 5
(a) “Financial Reports are one of the important documents detailing the performance of a company but still
many other significant aspects are left out.” Critically analyse the statement.
(b) Discuss the various forms of capital and what are the guidelines given by SEBI towards improving
disclosure standards?
(c) “A number of controls falling under operational controls can also be administrative controls.” Explain.
(d) “Risks are mitigated by implementing internal controls as appropriate to the business environment.
These type of controls must be integrated in the IT solution implemented at the Bank’s branches.” Indicate
five examples of Internal Control in a branch of Bank as well as five IT related controls in Bank.
(5 marks each)
 OR (Alternate question to Q. No. 5)
Question 5A
(i) As a Company Secretary of a growing multinational deeply rooted with the belief of Triple Bottom Line
(TBL) approach, specify the areas where and how the company can focus.
(5 marks)
(ii) What are the new norms under Rule 7 of the Companies (Amendment) Act, 2020 introduced for carrying
forward and setting off excess CSR expenditure?
(5 marks)
(iii)What do you understand by corporate sustainability? What is SDG India Index?
(5 marks)

(iv)“Certain Universal Standards forms part of Global Reporting Initiative (GRI )Standards.” Discuss the
statement mentioning its internal and external benefits.
(5 marks)
Answer 5(a)
Financial reporting is the process of producing statements that disclose an organisation's financial status
to management, investors and the government. Financial reporting serves two primary purposes. First, it
helps management to engage in effective decision- making concerning the company’s objectives and
overall strategies. The data disclosed in the reports can help management discern the strengths and
weaknesses of the company, as well as its overall financial health.
Second, financial reporting provides vital information about the financial health and activities of the company
to its stakeholders including its shareholders, potential investors, consumers, and government regulators.
It’s a means of ensuring that the company is being run appropriately. The financial reporting model is like
“looking in the rear-view mirror.” when in fact the road ahead is very turbulent and there are huge impacts
on the company, both societal and environmental.
It is not necessarily the volume of information, but the lack of a comprehensive story, which is where
improvements in corporate reporting are needed. Investors expect information about:
 Business model and strategy.
 Intangible factors and sustainability (i.e., economic, environmental, social) commitments.
 Impacts and performance that affect a company’s value today and its ability to create value
in the future.
 Key aspects of corporate governance.
 Internal controls.
 Human rights / diversity practices and policies.
 Key financial ratios.
Non-financial reporting is an opportunity to communicate in an open and transparent way with stakeholders.
In their non-financial reports, firms volunteer an overview of their environmental and social impact during
the previous year. The information in non-financial reports contributes to building up a company’s risk-return
profile.
Non-financial reporting includes-
 Board’s Report: The Board's Report should avoid repetition of information. If any information
is mentioned elsewhere in the financial statement, a reference thereof should be given in
Board's Report instead of repeating the same. A board’s report should typically include
 information under following heads- Company Specific Information, General Information, Capital
and Debt Structure, Credit Rating of Securities, Investor Education and Protection Fund (IEPF),
Management. Disclosures Relating to Subsidiaries, Associates and Joint Ventures, Details of
Deposits, Particulars of Loans, Guarantees And Investments, Particulars of Contracts or
Arrangements with Related Parties. Conservation of Energy, Technology Absorption, Foreign
Exchange Earnings and Outgo. Details of Establishment of Vigil Mechanism, Material Orders
of Judicial Bodies /Regulators. Auditors Report, Secretarial Audit Report and so on.
 Corporate Social Responsibility Report:
1. A brief outline of the company’s CSR policy including overview of projects or programs proposed to be
undertaken and a reference to the web-link to the CSR policy and projects or programs.
2. The Composition of the CSR Committee.
3. Average net profit of the company for last three financial years.
4. Prescribed CSR Expenditure (two per cent of the amount as in item 3 above).
 Corporate Sustainability Reporting: Comparing performance internally, and between
Organizations and sectors External benefits of sustainability reporting can include:
 Mitigating — or reversing — negative environmental, social and governance impacts.
 Improving reputation and brand loyalty.
 Enabling external stakeholders to understand the organizations true value, and tangible and
intangible assets.
 Demonstrating how the organization influences, and is influenced by, expectations about
sustainable development.
Answer 5(b)
All organizations depend on various forms of capital for their success. It is important that all such forms of
capital are disclosed to stakeholders to enable informed investment decision making. IIRC (International
Integrated Reporting Council) has categorized the forms of capital as follows:
 Financial capital
 Manufactured capital
 Intellectual capital
 Human capital
 Social and relationship capital
 Natural capital
It has been observed that certain listed entities in India and other jurisdictions have already
been making disclosures by following the principles of integrated reporting. Towards the
objective of improving disclosure standards, in consultation with industry bodies and stock exchanges, the
listed entities have been advised to adhere to the following by the SEBI:
(a) Integrated Reporting may be adopted on a voluntary basis from the financial year 2017-18 by top 500
companies which are required to prepare BRR.
(b) The information related to Integrated Reporting may be provided in the annual report separately or by
incorporating in Management Discussion & Analysis or by preparing a separate report (annual report
prepared as per IR framework).
(c) In case the company has already provided the relevant information in any other report prepared in
accordance with national/international requirement / framework, it may provide appropriate reference to the
same in its Integrated Report so as to avoid duplication of information.
(d) As a green initiative, the companies may host the Integrated Report on their website and provide
appropriate reference to the same in their Annual Report.
Answer 5(c)
A number of controls falling under operational controls can also be administrative controls. Examples of
operational controls are: quality control, works standards, periodic reporting, policy appraisal etc.
Administrative controls are very wide in their scope. They include all other managerial controls concerned
with decision- making process. They are concerned with the authorisation of transactions and include
anything from plan of organisation to procedures, record keeping. distribution of authority and the process
of decision-making. They include controls such as time and motion studies, quality control through
inspection, performance budgeting, responsibility accounting and performance evaluation etc.
Administrative controls have an indirect relationship with financial records and the auditor may evaluate
only those administrative controls which have a bearing on the financial records. However, for the purposes
of understanding the internal control we may study it in four parts as:
1. Accounting controls.
2. Operational controls.
3. Internal checks.
4. Internal audit.
1. Accounting controls pertain purely to the accounting system which enter finally in the preparation of
financial statements and information which are subject to the expression of opinion by the auditors.
2. Operational controls are those which help in improving the efficiency, productivity and not necessarily
enter the accounting systems. Works standards, quality control, methods study and motion study, critical
path method etc. may be many examples of operational controls.
3. Internal check is a built-in device in the day to day working by separating the duties and functions of the
staff in such a way that the work of one is automatically checked by the other e.g. posting of cash
transactions in the ledger is done by a person other than who handles the cash and writes the cash book
— the cashier.
4. Internal audit is an appraisal function to be performed on the principles and practices of audit. The scope
of this extends to all the quantifiable information.
Answer 5(d)
Internal Controls in Banks
Risks are mitigated by implementing internal controls as appropriate to the business environment. These
types of controls must be integrated in the IT solution implemented at the bank’s branches. Some examples
of internal controls in bank branch are given below: -
 Work of one staff member is invariably supervised/ checked by another staff member, irrespective
of the nature of work (Maker Checker process).
 A system of job rotation among staff exists; Financial and administrative powers of each official/
position is fixed and communicated to all persons concerned;
 Branch managers must send periodic confirmation to their controlling authority on compliance of the
laid down systems and procedures.
 All books are to be balanced periodically. Balancing is to be confirmed by an authorized official.
IT Controls in Banks
IT Risks need to be mitigated by implementing the right type and level of controls in the automated
environment. This is done by integrating control into IT. Sample list of IT related controls are:-
 The system maintains a record of all log ins and log outs.
 If the transaction is sought to be posted to a dormant (or operative) account, the processing is
halted and can be proceeded with only with a supervisory password.
 The system checks whether the amount to be withdrawn is within the drawing power.
 The system flashes a message if the balance in lien account would fall below the lien amount
after the processing of the transaction.
 Access to the system is available only between stipulated hours and specified days only.

Answer 5A (i)
Within the broader concept of corporate social responsibility, the concept of Triple Bottom Line (TBL) is
gaining significance and becoming popular amongst corporates. Coined in1997 by John Ellington, “People”
(Human Capital) pertains to fair and beneficial business practices toward labour and the community and
region in which a corporation conducts its business.
“Planet” (Natural Capital) refers to sustainable environmental practices. It is the lasting economic impact
the organization has on its economic environment. A TBL enshrined company endeavours to benefit the
natural order as much as possible or at the least do no harm and curtails environmental impact.
Therefore, the company can work for any issues addressing to the needs in any manner. For people issues
faced by the organisation includes —
 Health
 Safety
 Diversity
 Ethnicity
 Education and literacy
 Prevention of child labour
 Differently-abled.
The planet concerns include-
 Climate change
 Energy
 Water
 Biodiversity and land use
 Chemicals, toxics and heavy metals
 Air pollution
 Waste management
 Ozone layer depletion
 Ocean and fisheries
 Afforestation.
The Profit includes-
 Creating Employment
 Generating Innovation
 Paving Taxes
 Wealth Creation.

Answer 5A(ii)
New norms introduced for carry forward and set-off excess CSR expenditure
(2) According to Rule 7 of the Companies (CSR Policy) Rules, any surplus arising out of the CSR activities
shall not form part of the business profit of a company and shall be ploughed back into the same project or
shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action
plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period
of six months of the expiry of the financial year.
Where a company spends an amount in excess of requirement provided under sub- section (5) of section
135, such excess amount may be set off against the requirement to spend under sub-section (5) of section
135 up to immediate succeeding three financial years subject to the conditions that —
(i) the excess amount available for set off shall not include the surplus arising out of the CSR activities, if
any, in pursuance of sub-rule (2) of this rule.
(ii) the Board of the company shall pass a resolution to that effect.

Answer 5A(iii)
Everything that we need for our survival and well-being depends, either directly or indirectly, on our natural
environment. Sustainability creates and maintains the conditions under which humans and nature can exist
in productive harmony that permits fulfilling the social, economic and other requirements of the present and
future generations.
Corporate sustainability indicates new philosophy, as an alternative to the traditional growth and profit-
maximization model, under which sustainable development comprising of environmental protection, social
justice and equity, and economic development are given more significant focus while recognizing
simultaneous growth of the corporate and profitability.
It is a business approach that creates long-term shareholder value by embracing opportunities and
managing risks deriving from economic, environmental and social developments. Corporate sustainability
describes business practices built around social and environmental considerations.
Corporate sustainability encompasses strategies and practices that aim to meet the needs of the
stakeholders today while seeking to protect, support and enhance the human and natural resources that
will be the need of the future. Corporate sustainability leaders achieve long-term shareholder value by
gearing their strategies and management to harness the market's potential for sustainability products and
services while at the same time successfully reducing and avoiding sustainability costs and risks.
The UN Sustainable Development Solutions Network (SDSN) partners with a variety of organizations to
assess progress towards SDG achievement at the national level and the local level. Both official and
unofficial metrics are used to measure distance to targets for each of the SDGs to identify priorities for
action, understand key implementation challenges, track progress, ensure accountability, and identify gaps
that must be closed in order to achieve the SDGs by 2030. The SDG India Index 2020-21 is developed in
collaboration with the United Nations in India.
The NITI Aayog launched its index in 2018 to monitor the country’s progress on the goals through data-
driven assessment, and foster a competitive spirit among the States and Union Territories in achieving
them. The index represents the articulation of the comprehensive nature of the Global Goals under the
2030 Agenda while being attuned to the national priorities. The SDG India Index 2020-21 is also live on an
online dashboard, which has cross-sectoral relevance across policy, civil society, business, and academia.
 Methodology:
The SDG India Index computes goal-wise scores on the 17 SDGs for each State and Union
Territory.
These scores range between 0-100, and if a State/UT achieves a score of 100, it signifies it has
achieved the 2030 targets.
The higher the score of a State/UT, the greater the distance to target achieved.
States and Union Territories are classified in four categories based on their SDG India Index score:
Aspirant (0-49). Performer (50-64), Front-Runner (65-99), Achiever (100).

Answer 5A(iv)
Universal Standards: The GRI Standards begin with three Universal Standards to disclose general
information about an organization and its approaches to sustainability management.
Further topic-specific standards outline approaches to disclosing qualitative and quantitative information
deemed material to each reporting organization.
GRI-101: Foundation: The starting point for using the GRI Standards.
GRI-102: General Disclosure: Used to report contextual information about the organization.
GRI-103: Management Approach: Used to disclose how the organization manages impacts related to each
of its material topics.
Internal benefits for companies and organizations can include:
 Increased understanding of risks and opportunities.
 Emphasizing the link between financial and non-financial performance.
 Influencing long term management strategy and policy and business plans.
 Streamlining processes, reducing costs and improving efficiency
 Benchmarking and assessing sustainability performance with respect to laws, norms, codes,
performance standards, and voluntary initiatives.
 Avoiding being implicated in publicized environmental, social and governance failures
 Comparing performance internally, and between organizations and sectors.

External benefits of sustainability reporting can include:

 Mitigating — or reversing — negative environmental, social and governance impacts.
 Improving reputation and brand loyalty.
 Enabling external stakeholders to understand the organization's true value, and tangible and
intangible assets.
 Demonstrating how the organization influences, and is influenced by, expectations about
sustainable development.
 PART-IV
Question 6
(a) What is Communication on Progress? How does it help to incorporate transparency and accountability
amongst participants? Answer the questions with reference to UN Global Compact transparency and
accountability policy.
(b) A newly established car manufacturing company sold 1000 cars of new variant; but subsequently it was
found that the product has a major defect, which can be fatal in certain cases. If the company calls back its
products it will face huge losses which may lead to its closure. Advise the company to bail out of this
situation.
(5 marks each)
Answer 6(a)
UN Global Compact incorporates a transparency and accountability policy known as the Communication
on Progress (COP). The Communication on Progress (COP) is an annual disclosure to stakeholders on
progress made in implementing the ten principles of the UN Global Compact in the areas of human rights,
labour, environment and anti-corruption, and in supporting broader UN development goals. The COP is
posted on the Global Compact website by business participants. Failure to issue a COP will change a
participant's status to non-communicating and can eventually lead to the expulsion of the participant.
Joining the Global Compact is a widely visible as commitment to the ten principles. A company that signs-
on to the Global Compact specifically commits itself to:
— set in motion changes to business operations so that the Global Compact and its principles become part
of management, strategy, culture and day-to-day operations;
— publish in its annual report or similar public corporate report (e.g., sustainability report) a description of
the ways in which it is supporting the Global Compact and its principles (Communication on Progress),
— publicly advocate the Global Compact and its principles via communications vehicles such as press
releases, speeches, etc.
Ideally, COPs should be integrated into a participant's existing communication with stakeholders. such as
an annual or sustainability report. However, in case a participant does not publish such reports, a COP can
be a standalone report that is made available for stakeholders through other public communication channels
(e.g., websites. Newsletters, intranets, company notice boards. included with payroll, etc.). COPs should
be issued in the company’s working language and if the company determines a need, in additional
languages.
Participants are asked to supply a URL link to their COP and to upload the COP itself (as a PDF,
PowerPoint. or word document) to the Global Compact website in order to meet the COP submission
requirement.
Answer 6 (b)
This area of business ethics deals with the duties of a company to ensure that products and production
processes do not cause harm. There is usually a degree of danger in any product or production process
and it is difficult to define a degree of permissibility, or the degree of permissibility may depend on the
changing state of preventative technologies or changing social perceptions of acceptable risk. Defective,
addictive and inherently dangerous product sand Ethical relations between the company and the
environment including pollution, environmental ethics, carbon emissions trading. Ethical problems arising
out of new technologies for e.g. genetically modified food. Product testing ethics.
It is a case of ethical dilemma. This decision needs to be cross checked with the company seniors and
policies and prevailing legal provisions. A win-win situation is attainable if the new technology adopted by
the entrepreneur benefits the clients and business. What matters in the end, are profits and customer
satisfaction. There is nothing wrong about growing and automating and bombarding the market with newer
models. However, the company must take steps to mobilize its resources and to maintain his/her reputation
— the company’s goodwill might suffer a major setback in the market share owing to the mass sales of
defective and inferior product. Instead, the company may try to avail any beneficial schemes for writing off
at least some part of such losses. In fact, may offer customer higher exchange value of those defective
models.
Specifically, steps for resolving ethical dilemma are:
1. Considering the options available
2. Considering the consequences of each option
3. Analysing the Actions
4. Decision making and commitment
5. Evaluate the system.
*****
GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME

DECEMBER 2022

MODULE 1

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
Phones : 41504444, 45341000; Fax : 011-24626727
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These answers have been written by competent persons and
the Institute hope that the GUIDELINE ANSWERS will assist
the students in preparing for the Institute's examinations. It is,
however, to be noted that the answers are to be treated as
model answers and not as exhaustive and the Institute is not
in any way responsible for the correctness or otherwise of the
answers compiled and published herein.

The Guideline Answers contain the information based on the

Laws/Rules applicable at the time of preparation. However,
students are expected to be updated with the applicable
amendments which are as follows:

CS Examinations Applicability of Amendments to Laws

December Session upto 31 May of that Calender year
June Session upto 30 November of previous Calender Year

C O N T E N T S
Page
MODULE 1

1. Governance, Risk Management, Compliances and Ethics 1

2. Advanced Tax Laws 26

3. Drafting, Pleadings and Appearances 52

 1 PP–GRMC&E–December 2022
PROFESSIONAL PROGRAMME EXAMINATION
DECEMBER 2022

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES

AND ETHICS
Time allowed : 3 hours Maximum marks : 100
NOTE : Answer ALL Questions.

PART I
Question 1
Singh & Associates LLP, a firm of practicing chartered accountants, being statutory
auditors of Decent Industries Ltd., a listed entity since last 4 years. The auditors
have proposed for hefty increase in their audit fees which the company is not in a
position to accept. They expressed their inability to continue as statutory auditors
and submitted their resignation to the company addressed to the BOD on 6th August,
2021. The next board meeting of the company was scheduled to be held on 9th
August, 2021 to consider its quarterly results. The company secretary of the company
informed the stock exchanges about said resignation without bringing to the knowledge
of the audit committee as well as the Board. The chairman of the audit committee
took a strong objection and pointed out a serious lapse on the part of the company.
He suggested the ways to avoid such a lapse without any non-compliance. The
company secretary placed the proposal before the Audit Committee & Board of
Directors for appointment of New Auditors in casual vacancy arisen due to resignation
of current Auditors (Outgoing).
(a) What are the issues involved in terms of SEBI (LODR) regulations, 2015 ?
(b) What steps could have been taken to avoid such a lapse ?
(c) Whether Audit Committee and the Board should take cognizance of the
resignation when it is already intimated to the SEs before such meetings ?
(d) Whether the authority, powers and structure of Audit Committee and the Board
are undermined ?
(5 marks each)
Answer 1(a)
As per Regulation 30 of SEBI (LODR) Regulations, 2015 read with Schedule III
thereof, in case of resignation of the auditor of a listed entity, detailed reasons for resignation
of auditor, as given by the said auditor, shall be disclosed by the listed entities to the
stock exchanges as soon as possible but not later than 24 hours of receipt of such
reasons from the auditor. Further, as per Regulation 18(3) of SEBI (LODR) Regulations,
2015 read with Schedule II thereof, recommendation for appointment, remuneration and
terms of appointment of auditors of a listed entity falls within the role of the Audit Committee.
In the given case, it has been informed that while the intimation to the Stock Exchange
was done, the information regarding resignation of auditor was not placed before the
1
PP–GRMC&E–December 2022 2
Audit Committee and the Board. However, the proposal for appointment of New Auditors
in casual vacancy was placed before the Audit Committee and Board.
Accordingly, the provisions of the SEBI (LODR) Regulations, 2015 seems to have
been complied with respect to intimation to Stock Exchange, however. Further, it would
have been a better practice on part of the Company Secretary to also keep the Audit
Committee and the Board informed about the resignation of the Statutory Auditors forthwith
on intimation to Stock Exchange.
Answer 1(b)
The next Board Meeting of the Company was scheduled to be held on 9th August
2021 to consider its quarterly results i.e., after 3 days of receipt of the notice of resignation
of Statutory Auditors. The Company Secretary could have taken the following steps in
this matter –
1. Immediately on receipt of the notice of resignation of statutory auditors inform to
the Chairman of the Audit Committee and Chairman of the Board of Directors
about the resignation of statutory auditors by way of an email and also that
same will be intimated to Stock Exchange within 24 hours as required by SEBI
(LODR) Regulations, 2015;
2. As soon as possible and not later than 24 hours, intimate to Stock Exchange
the detailed reasons for resignation of the Statutory Auditors in terms of Regulation
30 of SEBI (LODR) Regulations, 2015 read with Schedule III thereof;
3. Place the information relating to resignation of statutory auditors before the Board
in the meeting scheduled on 09th August and apprise them regarding the further
course of action to be taken in the matter the requirement for calling for an Audit
Committee Meeting.
Answer 1(c)
Intimation to stock exchange within 24 hours is a statutory requirement whereas
Board and Audit Committee meetings cannot be convened immediately to intimate such
matters. As and when the next meeting happens only, the matter can be placed before
the meeting. Thus, in the given situation, the Company Secretary being a Compliance
Officer has carried out his duty in intimating to the Stock Exchange.
However, the Chairman, Audit Committee may think fit and appropriate to take note
of it with a serious notice to the Company Secretary to be careful in future and may also
advise the Managing Director of the Company to ensure that such matters are strictly
complied with.
Answer 1(d)
The Company Secretary being the Compliance Officer of the Company was duty
bound to intimate the Stock Exchange about the resignation of Statutory Auditors as
soon as possible and not later than 24 hours of receipt of such reasons from the auditor.
There is no requirement under the SEBI (LODR) Regulations, 2015 to first intimate the
same to Board or the Audit Committee. There appears an apparent undermining of
authority, power or structure of the Audit Committee and the Board in the given situation.
Company Secretary could have also simultaneously intimated this resignation to the
 3 PP–GRMC&E–December 2022
Chairman of the Audit Committee and the Board by way of an email. Bypassing and
adopting of a shortcut approach are of grave concern from compliance point of view.
Company Secretary realised his mistake and assured the Audit Committee and the
Board that he will take care in future.
Attempt all parts of either Q. No.2 or Q. No.2A
Question 2
(a) ABC Pvt. Ltd. is a Company having 175 shareholders and eight directors on its
Board. The said Company has voluntarily proposed to adopt ‘‘Green initiative in
Corporate Governance’’ that allows paperless compliance by companies for legal
validity of compliances under the Companies Act, 2013 through electronic mode.
A Board Meeting was convened on July 14, 2022 to discuss amongst other
subjects, inter alia, to consider and take on record the following businesses of
the agenda :
(i) To adopt ‘Green Initiative’ in corporate governance especially for
disseminating communication and annual reports to the shareholders.
(ii) To approve the unaudited financial statements of the company for the first
quarter ended 30-06-2022.
(iii) To enter into certain contracts with a Company whereby one of the director
is interested.
In the said Board Meeting, two directors attended the meeting physically, one
interested director attended through video conferencing after disclosing his
interest and the rest six directors expressed their inability to attend the meeting
and hence sought leave of absence.
In the light of the above inputs, answer the following under the provisions of the
Companies Act,
(i) What shall be the quorum for the said Board Meeting ? Can the Board
Meeting validly transact the businesses of the agenda ?
(ii) Maintenance of attendance register of Board Meetings and meetings of
Committee, wherein directors could attend the meeting either physically or
through electronic mode ?
(5 marks)
(b) XYZ Ltd., is a profit making, dividend paying, export oriented, Public Company
engaged in manufacturing of food processors. As per the latest Audited Financial
Statements for the year ended 31-03-2022, the following is the summary of
financial highlights :
(` in crore)
Paid up Equity Share Capital 410.00
Free Reserves and Surplus 103.00
Current Liabilities 112.75
Tangible Fixed Assets 1,500.00
Turnover 1,250.00
Outstanding Secured Loans 65.00
Net Profit 6.75
PP–GRMC&E–December 2022 4
On 10-10-2022, the Company constituted a CSR Committee comprising of the
following Director :
Name and Designation in the Board Status in the CSR Committee
Mr. X, Executive Chairman Chairman
Mr. Y, Non-Executive, Non-Independent Member
Mrs. Z, Non-Executive, Non-Independent
Women Director Member
At the time of its constitution, the Company had 6 directors on it Board including
two Independent Directors. With reference to the above and in the light of the
provisions of the Companies Act, 2013, answer the following :
(i) Is the CSR Committee validly constituted ? If not, state how the CSR
Committee should be constituted.
(ii) What is the role of Independent Directors as enumerated in Part II of Schedule
IV of the Companies Act, 2013 ?
(5 marks)
(c) M/s X & Company, a firm of practicing company secretaries is appointed as a
Lead Manager (LM) to the issue of ABC Limited. State the disclosures which X
& Company is required to make in the draft offer document and offer document.
(5 marks)
OR (Alternate question to Q. No. 2)
Question 2A
(i) Omega Private Limited Company (OPLC) is a professionally managed Company
ensuring good corporate governance, integrity and transparency in all its dealings.
The Comapny is engaged in developing customised software package for
automobile manufacturers. It has a paid-up share capital of `55 crore and
borrowings from Banks and Financial Institutions to the tune of `56 crore as at
31st March, 2022. Mr. Ropher, an American Citizen, a qualified Certified Public
Accountant (CPA) honoured in Australia and a Member of ICAI, holding Certificate
of Practice was appointed as the Statutory Auditor of OPLC at the Annual General
Meeting (AGM) of the Company convened on 18-11-2017 for a period of five
consecutive years. Since his term of office is getting expired on completion of
five years, the Company is proposing to re-appoint Mr. Ropher for a second term
of five consecutive years at the AGM to be convened on 29-09-2022 considering
his excellent audit work and professional knowledge. With reference to the
provisions of the Companies Act, 2013, answer the following :
(i) Is the re-appointment of Mr. Ropher for a second term of five years valid in
Law ?
(ii) Will your answer differ, if a different firm of auditors have been appointed as
the Statutory Auditors in the year 2017 and whether the firm is eligible for re-
appointment for a second term of five years, if Mr. Ropher is appointed as a
partner in the audit firm in the year 2022 ? (5 marks)
 5 PP–GRMC&E–December 2022
(iii) EXCEL Finance Ltd. a listed entity, along with other companies, has promoted
a company called ACTIVE Trading Ltd.
Following is the composition of Board of ACTIVE Trading Ltd. a listed
company as on 31st March, 2022 :
Mr. A – Non-Executive Chairman
Mr. B – Managing Director
Mr. C – Executive Director
Mr. D – Nominee Director (Standard Lease Finance Ltd.)
Ms. E – Independent Director
Mr. Z, an Independent Director, has resigned w.e.f. 28th Feb., 2022.
Mr. A, Chairman of the company is also an independent director of EXCEL
Finance Ltd., a listed Company. Examine the composition of the Board of
ACTIVE Trading Ltd. and advise for due compliance with various regulatory
provisions.
(5 marks)
(iv) Reserve Bank of India (RBI) has taken a vital step by introducing the post
of Chief Risk Officer (CRO) in Non-Banking Financial Companies (NBFCs).
Explain the essentials which NBFCs shall strictly adhere at the time of
appointment of CRO. (5 marks)

Answer 2 (a)(i)

In terms of Section 17 of the Companies Act, 2013 the Quorum for a Meeting of the
Board shall be one-third of the total strength of the Board, or two Directors, whichever is
higher. Directors participating through Electronic Mode in a Meeting shall be counted for
the purpose of Quorum, unless they are to be excluded for any items of business under
the provisions of the Act or any other law.

In the present case, the Company is a Private Limited Company and out of eight
directors on the Board, two directors attended the meeting physically and one interested
director attended through video conferencing after disclosing his interest. In other words,
three director attended the meeting which satisfies 1/3rd of the total strength. (1/3 of 8 =
2.66 or 3 directors).

A Director shall neither be reckoned for Quorum nor shall be entitled to participate in
respect of an item of business in which he is interested. However, in case of a private
company, a Director shall be entitled to participate in respect of such item after disclosure
of his interest pursuant to Section 184 of the Act, provided, it has not committed default
in filing its financial statements under section 137 of the Act or Annual return under
section 92 of the Act, with the Registrar of Companies. In other words, in the case of a
Private Company, if a director is interested in a contract and has disclosed his interest,
then, he is entitled to participate in respect of such item, and his presence would form
part of the quorum.

In view of the above, the Quorum is satisfied as per the above provision of law and the
Board meeting can validly transact the businesses of the agenda.
PP–GRMC&E–December 2022 6
Answer 2(a)(ii)
• Every company shall maintain attendance register for the Meetings of the Board
and Meetings of the Committee.
• The attendance register shall contain the following particulars: serial number
and date of the Meeting; in case of a Committee Meeting name of the Committee;
place of the Meeting; time of the Meeting; names and signatures of the Directors,
the Company Secretary and also of persons attending the Meeting by invitation
and their mode of presence, if participating through Electronic Mode.
• The attendance register shall be deemed to have been signed by the Directors
participating through Electronic Mode, if their attendance is recorded in the
attendance register and authenticated by the Company Secretary or where there
is no Company Secretary, by the Chairman or by any other Director present at
the Meeting, if so authorised by the Chairman and the fact of such participation
is also recorded in the Minutes.
• The attendance register shall be maintained at the Registered Office of the
company or such other place as may be approved by the Board.
• The attendance register is open for inspection by the Directors. Even after a
person ceases to be a Director, he shall be entitled to inspect the attendance
register of the Meetings held during the period of his Directorship.
• The attendance register shall be preserved for a period of at least eight financial
years from the date of last entry made therein and may be destroyed thereafter
with the approval of the Board.
• The attendance register shall be in the custody of the Company Secretary.
• Leave of absence shall be granted to a Director only when a request for such
leave has been communicated to the Company Secretary or to the Chairman or
to any other person authorised by the Board to issue Notice of the Meeting.
Answer 2(b)(i)
As per the Section 135 of the Companies Act, 2013 every company having:
(i) Net worth of rupees five hundred crore or more, or
(ii) Turnover of rupees one thousand crore or more or
(iii) Net profit of rupees five crore or more
during the immediately preceding financial year shall constitute a Corporate Social
Responsibility Committee of the Board consisting of three or more directors, out of which
at least one director shall be an independent director.
Provided that where a company is not required to appoint an independent director
under section 149(4), it shall have in its Corporate Social Responsibility Committee two
or more directors. In other words, all unlisted public companies on which Independent
director is not mandatory, are exempted from having Independent director in their CSR
Committee.
 7 PP–GRMC&E–December 2022
Further, as per Rule 4 of the Companies (Appointment and Qualification of Directors)
Rules, 2014, the following classes of companies shall have atleast two directors as
Independent Directors.
(i) Public Companies with paid up capital of Rs. 10 Crore or more
(ii) Public Companies with turnover of Rs. 100 crores or more
(iii) Public companies with aggregate outstanding loans, debentures and deposits
exceeding Rs.50 crore.
As per the information given, the Company satisfies the requirement of Rule 4 and is
thus required to appoint Independent Directors and have so appointed the Independent
Directors.
Further, in the present case, for the year ended 31.03.2022, the Net Worth of the
Company (i.e. Paid Up Capital + Free Reserves and Surplus) is Rs. 513 Crore (i.e. Rs.
410 Cr+ Rs. 103 Cr) and the Turnover of the Company is Rs. 1,250 Crore and the Net
Profit is Rs.6.75 Crore, the provisions of Section 135 of the Companies Act 2103 applies
and accordingly, the Company needs to constitute a separate CSR Committee comprising
of at least three directors out of which at least one director shall be an Independent
Director.
Whereas, the present constitution of the CSR Committee is without an Independent
Director. Therefore, the present constitution of the CSR Committee is not validly constituted
and the Company needs to re-constitute the CSR Committee by including at least one
Independent Director in the Committee.
Answer 2(b)(ii)
Role of independent directors as specified in part II of schedule IV are as under:
The independent directors shall:
(1) help in bringing an independent judgment to bear on the Board's deliberations
especially on issues of strategy, performance, risk management, resources,
key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and
management;
(3) scrutinise the performance of management in meeting agreed goals and objectives
and monitor the reporting of performance;
(4) satisfy themselves on the integrity of financial information and that financial
controls and the systems of risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key managerial
personnel and senior management and have a prime role in appointing and where
necessary recommend removal of executive directors, key managerial personnel
and senior management;
PP–GRMC&E–December 2022 8
(8) moderate and arbitrate in the interest of the company as a whole, in situations of
conflict between management and shareholder's interest.
Answer 2(c)
Regulation 24 of Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018 states the following:-
(1) The draft offer document and offer document shall contain all material disclosures
which are true and adequate to enable the applicants to take an informed
investment decision.
(2) Without prejudice to the generality of sub-regulation (1), the red-herring
prospectus, and prospectus shall contain: (a) disclosures specified in the
Companies Act, 2013 and; (b) disclosures specified in Part A of Schedule VI.
(3) The lead manager(s) shall exercise due diligence and satisfy themselves about
all aspects of the issue including the veracity and adequacy of disclosure in the
draft offer document and the offer document.
(4) The lead manager(s) shall call upon the issuer, its promoters and its directors or
in case of an offer for sale, also the selling shareholders, to fulfil their obligations
as disclosed by them in the draft offer document and the offer document and as
required in terms of these regulations.
(5) The lead manager(s) shall ensure that the information contained in the draft offer
document and offer document and the particulars as per restated audited financial
statements in the offer document are not more than six months old from the
issue opening date.
Answer 2A(i)(i)
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 50 crore or more shall not appoint or re-appoint-
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years.
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, Mr. Ropher, as an Individual, cannot be re-appointed as the
Statutory Auditor of the company for the second term of five years.
Answer 2A(i)(ii)
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 50 crore or more shall not appoint or re-appoint-
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years.

Thus, an audit firm which has completed one term of five consecutive years, is
 9 PP–GRMC&E–December 2022
eligible for reappointment as auditor in the same company for a second term of five years
after the completion of the first term.

Further, Section 139 of the Companies Act, 2013 provides that – “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.”

Since the firm was holding office as Auditor for the first term of five years from 2017-
2022, it can still be re-appointed for the second term as for a firm two terms are permitted
and given that Mr. Ropher would not have held office in this company as 2017-2022 also
the firm was only holding office.
Answer 2A(ii)
As per the provisions of SEBI (LODR) Regulations, 2015,
• Board of Directors shall have an optimum combination of executive and non-
executive directors with at least one woman director and not less than 50%. of
the board of directors shall comprise of non-executive directors;
In the case presented, there are totally 6 directors till 28.02.2022 out of which 2
are executive and 4 are non-executive thus requirement of 50 % of Non-Executive
Directors is complied. Since Ms. E is there on Board, the requirement of woman
director is also complied.
• Where the chairman of the board of directors is a non-executive director, at least
one-third of the board of directors shall comprise of independent directors and
where the listed entity does not have a regular non-executive chairman, at least
half of the board of directors shall comprise of independent directors:
Where the regular non-executive chairman is a promoter of the listed entity or is
related to any promoter or person occupying management positions at the level
of board of director or at one level below the board of directors, at least half of the
board of directors of the listed entity shall consist of independent directors.
An independent director who resigns or is removed from the board of directors of
the listed entity shall be replaced by a new independent director by listed entity
at the earliest but not later than three months from the date of such vacancy.
In the case presented, Mr. A is the Non-Executive Chairman and thus Board is
required to have atleast 1/3rd as Independent Directors which condition is satisfied
till 28.02.2022. On resignation of Mr. Z, there is requirement to appoint another
Independent Director within 3 months.
Answer 2(A)(iii)
1. Appointment of Chief Risk Officer (CRO) for NBFCs
With the increasing role of NBFCs in direct credit intermediation, there is a need
for NBFCs to augment risk management practices. While Boards of NBFCs
should strive to follow best practices in risk management, it has been decided
PP–GRMC&E–December 2022 10
that NBFCs with asset size of more than Rs. 50 billion shall appoint a CRO with
clearly specified role and responsibilities. The CRO is required to function
independently so as to ensure highest standards of risk management.
2. The NBFCs shall strictly adhere to the following instructions in this regard:
a) The CRO shall be a senior official in the hierarchy of an NBFC and shall
possess adequate professional qualification/ experience in the area of risk
management.
b) The CRO shall be appointed for a fixed tenure with the approval of the Board.
The CRO can be transferred/removed from his post before completion of the
tenure only with the approval of the Board and such premature transfer/
removal shall be reported to the Department of Non-Banking Supervision of
the regional office of the Bank under whose jurisdiction the NBFC is registered.
In case the NBFC is listed, any change in incumbency of the CRO shall
also be reported to the stock exchanges.
c) The Board shall put in place policies to safeguard the independence of the
CRO. In this regard, the CRO shall have direct reporting lines to the MD &
CEO/ Risk Management Committee (RMC) of the Board. In case the CRO
reports to the MD &CEO, the RMC/ Board shall meet the CRO without the
presence of the MD & CEO, at least on a quarterly basis. The CRO shall not
have any reporting relationship with the business verticals of the NBFC and
shall not be given any business targets. Further, there shall not be any 'dual
hatting' i.e. the CRO shall not be given any other responsibility.
d) The CRO shall be involved in the process of identification, measurement and
mitigation of risks. All credit products (retail or wholesale) shall be vetted by
the CRO from the angle of inherent and control risks. The CRO's role in
deciding credit proposals shall be limited to being an advisor.
e) In NBFCs that follow committee approach in credit sanction process for
high value proposals, if the CRO is one of the decision makers in the credit
sanction process, the CRO shall have voting power and all members who
are part of the credit sanction process, shall individually and severally be
liable for all the aspects, including risk perspective related to the credit
proposal.
Question 3
(a) Mention disclosures to be made by a listed company with respect to Demat
Suspense Account. (3 marks)
(b) Explain the role of the lead independent director to enhance Board Effectiveness.
(3 marks)
(c) Explain the procedure of passing of Resolution by Circulation. (3 marks)
(d) ‘‘The Independent Directors of the company shall hold at least one meeting in a
financial year without the attendance of non-independent director and member
of management.’’ Discuss the statement and also mention the agenda items to
be taken upon such a meeting as per the relevant provisions of SEBI (LODR),
Regulations, 2015. (3 marks)
 11 PP–GRMC&E–December 2022
(e) Mention any six of ‘Clarkson Principles of Stakeholders Management’.
(3 marks)
Answer 3(a)
The listed entity shall disclose the following details in its annual report, as long as
there are shares in the demat suspense account or unclaimed suspense account, as
applicable:
(a) Aggregate number of shareholders and the outstanding shares in the suspense
account lying at the beginning of the year;
(b) Number of shareholders who approached listed entity for transfer of shares from
suspense account during the year;
(c) Number of shareholders to whom shares were transferred from suspense account
during the year;
(d) Aggregate number of shareholders and the outstanding shares in the suspense
account lying at the end of the year;
(e) That the voting rights on these shares shall remain frozen till the rightful owner of
such shares claims the shares.
Answer 3(b)
The lead independent director is a highly versatile and act as an intermediary between
the chair, the board and the board's stakeholders. The lead independent director must
keep a keen eye on whether the chair is performing their role to the board's satisfaction
without losing objectivity or independence.
They monitor the relationship between the Chair and the CEO, and ensure that it is
a well- functioning working relationship without becoming too close or powerful. The lead
independent director also coordinates the activities of other non-employee directors and
advises the chairman on issues ranging from the schedule of board meetings to
recommending retention of advisors and consultants to the management.
Role of the lead independent director
• Acts as the principal liaison between the independent directors of the Board and
the Chairman of the Board;
• Develops the agenda for and preside over executive sessions of the Board's
independent directors;
• Advises the Chairman of the Board regarding appropriate schedule for Board
meetings, seeking to ensure that the independent directors can perform their
duties responsibly while not interfering with the flow of Company operations;
• Approves with the Chairman of the Board the agenda for Board and Board
Committee meetings and the need for special meetings of the Board;
• Advises the Chairman of the Board with respect to the quality, quantity and
timeliness of the information submitted by the Company's management that is
necessary or appropriate for the independent directors to effectively and
responsibly perform their duties;
PP–GRMC&E–December 2022 12
• Recommends to the Board on the retention of advisors and consultants who
report directly to the Board;
• Interviews, along with the chair of the Nominating and Corporate Governance
Committee, all Board candidates, and make recommendations to the Nominating
and Corporate Governance Committee;
• Assists the Board and Company officers in ensuring better compliance with and
implementation of the Governance Guidelines;
• Serves as Chairman of the Board when the Chairman is not present; and
• Serves as a liaison for consultation and communication with shareholders.
Answer 3(c)
Procedure : A Resolution proposed to be passed by circulation shall be sent in
draft, together with the necessary papers, to all the Directors including Interested Directors
on the same day.
The draft of the Resolution to be passed and the necessary papers shall be circulated
amongst the Directors by hand, or by speed post or by registered post or by courier, or
by e-mail or by any other recognised electronic means.
Each business proposed to be passed by way of Resolution by circulation shall be
explained by a note setting out the details of the proposal, relevant material facts that
enable the Directors to understand the meaning, scope and implications of the proposal,
the nature of concern or interest, if any, of any Director in the proposal, which the Director
had earlier disclosed and the draft of the Resolution proposed. The note shall also indicate
how a Director shall signify assent or dissent to the Resolution proposed and the date by
which the Director shall respond.
Approval : The Resolution is passed when it is approved by a majority of the Directors
entitled to vote on the Resolution, unless not less than one-third of the total number of
Directors for the time being require the Resolution under circulation to be decided at a
Meeting.
Answer 3(d)
1. The independent directors of the company shall hold at least one meeting in a
financial year, without the attendance of non-independent directors and members
of management;
2. All the independent directors of the company shall strive to be present at such
meeting;
3. The meeting shall:
(a) review the performance of non-independent directors and the Board as a
whole;
(b) review the performance of the Chairperson of the company, taking into account
the views of executive directors and non-executive directors;
(c) assess the quality, quantity and timeliness of flow of information between
the company management and the Board that is necessary for the Board to
effectively and reasonably perform their duties.
 13 PP–GRMC&E–December 2022
Answer 3(e)
Clarkson Principles of Stakeholders' Management are as under:
• Principle 1 : Managers should acknowledge and actively monitor the concerns
of all legitimate stakeholders, and should take their interests appropriately into
account in decision-making and operations.
• Principle 2 : Managers should listen to and openly communicate with stakeholders
about their respective concerns and contributions, and about the risks that they
assume because of their involvement with the corporation.
• Principle 3 : Managers should adopt processes and modes of behavior that are
sensitive to the concerns and capabilities of each stakeholder constituency.
• Principle 4 : Managers should recognize the interdependence of efforts and
rewards among stakeholders, and should attempt to achieve a fair distribution of
the benefits and burdens of corporate activity among them, taking into account
their respective risks and vulnerabilities.
• Principle 5 : Manages should work cooperatively with other entities, both public
and private, to insure that risks and harms arising from corporate activities are
minimized and, where they cannot be avoided, appropriately compensated.
• Principle 6 : Managers should avoid altogether activities that might jeopardize
inalienable human rights (e.g., the right to life) or give rise to risks which, if
clearly understood, would be patently unacceptable to relevant stakeholders.
• Principle 7 : Managers should acknowledge the potential conflicts between (a)
their own role as corporate stakeholders, and (b) their legal and moral
responsibilities for the interests of stakeholders, and should address such
conflicts through open communication, appropriate reporting and incentive
systems, and, where necessary, third party review.
PART II
Question 4
(a) ‘‘Risk Identification should involve continuous implementation as new phases,
experiences, and viewpoints are introduced.’’ Explain the essentials to risk
identification that guarantee maximum results.
(b) Explain the steps involved in managing strategic risks which must be integrated
within the strategic planning.
(c) ‘‘Responsibilities and accountabilities of the person handling risks need to be
identified and assigned.’’ Explain the ways of handling the different types of risk
existing in the business.
(d) ISO 31000 (International Standards for Risk Management) helps in the success
of an organization. Explain.
(5 marks each)
Answer 4(a)
Identification is a process of brainstorming. It isn't an exact science and should
PP–GRMC&E–December 2022 14
involve continuous implementation as new phases, experiences, and viewpoints are
introduced. Being vital to the management process, there are some essentials to risk
identification that guarantee maximum results.
1. Team Participation : Face-to-face interactions between the project managers
and the team, which promises better and more comprehensive communication.
The team must feel comfortable to find and share hidden or elusive risks.
2. Repetition : Information changes appear as the risk management process
proceeds. Keeping identified risks current and updated means the system is
focused on mitigating the most prevalent issues.
3. Approach : Certain objectives require distinct approaches to best combat
identification failure. One method is to identify all root causes, undesirable events
and map their potential impacts. Another is to identify essential functions the
project must enact, then find possible issues with each function or goal. Both
methods work well, but the latter may be easier due to its defined scope.
4. Documentation : Consistent and exhaustive documentation leads to
comprehensive and reliable solutions for a specific project or future risk
management team's analysis. Most communication is recorded by a project
manager and data is copied, stored, and updated for continued risk prevention.
5. Roots and Symptoms : It is essential in the risk identification phase to find the
root causes of a risk instead of mistaking them with the symptoms. A symptom
can be confused with the root cause, making it critical to discover the origin of
risks and denote what are their symptoms. Other essentials of risk identification
involve the analysis phase. This is where identified risks are further researched
and understood.
6. Project Definition Rating Index (PDRI) : PDRI is a risk assessment tool that
helps develop mitigation programs for high-risk areas. It facilitates the team's
risk assessment within the defined project scope, budget and deadlines. It also
provides further detail of individual risks and their magnitude, represented by a
score. The summation of scores is statistically compared to the project
performance as a certainty level for the entire project
7. Event Trees : Commonly used in reliability studies and probabilistic risk
assessments; event trees represent an event followed by all factors and faults
related to it. The top of the tree is the event and it is supported by any condition
that may lead to that event, helping with likelihood visibility.
Answer 4(b)
Managing strategic risk involves five steps which must be integrated within the strategic
planning and execution process in order to be effective:
1. Define business strategy and objectives. There are several frameworks that
companies commonly use to plan out strategy, from simple SWOT analysis to
the more nuanced and holistic Balanced Scorecard. The one thing that these
frameworks have in common, however, is their failure to address risk. It is crucial,
then, that companies take additional steps to integrate risk at the planning stage.
 15 PP–GRMC&E–December 2022
2. Establish key performance indicators (KPIs) to measure results. The best KPIs
offer hints as to the levers the company can pull to improve them. Thus, overall
sales make a poor KPI, while sales per customer lets the company drill down for
answers.
3. Identify risks that can drive variability in performance. These are the unknowns,
such as future customer demand, that will determine results.
4. Establish key risk indicators (KRIS) and tolerance levels for critical risks. Whereas
KPIs measure historical performance, KRIS are forward-looking leading indicators
intended to anticipate potential roadblocks. Tolerance levels serve as triggers for
action.
5. Provide integrated reporting and monitoring. Finally, companies must monitor
results and KRIS on a continuous basis in order to mitigate risks or grasp
unexpected opportunities as they arise.
Answer 4(c)
The ownership of risk should be allocated. Responsibilities and accountabilities of
the person handling risks need to be identified and assigned. The person concerned
when the risk arises, should document it and report it to the higher ups in order to have
the early measures to get it minimized. Risk may be handled in the following ways:
1) Risk Avoidance : Risk Avoidance means to avoid taking high risk project or
choosing of less risky business/ project. For example, one may avoid investing
in stock market due to price volatility in stock prices and may prefer to invest in
debt instruments.
2) Risk Retention/Absorption : The enterprise handles the unavoidable risk internally
and the firm bears/absorbs it due to the fact that either insurance cannot be
purchased of such type of risk or it may be too expensive to cover the risk and
much more cost-effective to handle the risk internally.. Usually, retained risks
occur with greater frequency, but have a lower severity. An insurance deductible
is a common example of risk retention to save money, since a deductible is a
limited risk that can save money on insurance premiums for larger benefit. There
are two types of retention methods for containing losses as under:
- Active Risk Retention: Where the risk is retained as part of deliberate
management strategy after conscious evaluation of possible losses and
causes.
- Passive Risk Retention: Where risk retention occurred through negligence.
Such type of retaining risk is unknown or because the risk taker either does
not know the risk or considers it a lesser risk than it actually is.
3) Risk Reduction : In many ways physical risk reduction (or loss prevention, as it
is often called) is the best way of dealing with any risk situation and usually it is
possible to take steps to reduce the probability of loss. The ideal time to think of
risk reduction measures is at the planning stage of any new project when
considerable improvement can be achieved at little or no extra cost. The cautionary
note regarding risk reduction is that, as far as possible expenditure should be
PP–GRMC&E–December 2022 16
related to potential future savings in losses and other risk costs; in other words,
risk prevention generally should be evaluated in the same way as other investment
projects.
4) Risk Transfer : This refers to legal assignment of cost of certain potential losses
to another. The insurance of 'risks' is to occupy an important place, as it deals
with those risks that could be transferred to an organization that specialises in
accepting them, at a price. Usually, there are 3 major means of loss transfer
viz.,
• By Tort,
• By contract other than insurance,
• By contract of insurance.
The main method of risk transfer is insurance. The value of the insurance lies in the
financial security that a firm can obtain by transferring to an insurer, in return for a
premium, the risk of losses arising from the occurrence of a specified peril. Thus, insurance
substitutes certainty for uncertainty. Insurance does not protect a firm against all perils
but it offers restoration, at least in part of any resultant economic loss.
Answer 4(d)
ISO 31000 contains 11 key principles that position risk management as a fundamental
process in the success of the organization.
ISO 31000 is designed to help organizations:
• Increase the likelihood of achieving objectives
• Encourage proactive management
• Be aware of the need to identify and treat risk throughout the organization
• Improve the identification of opportunities and threats
• Comply with relevant legal and regulatory requirements and international norms
• Improve financial reporting
• Improve governance
• Improve stakeholder confidence and trust
• Establish a reliable basis for decision making and planning
• Improve controls
• Effectively allocate and use resources for risk treatment
• Improve operational effectiveness and efficiency
• Enhance health and safety performance, as well as environmental protection
• Improve loss prevention and incident management
• Minimize losses
 17 PP–GRMC&E–December 2022
• Improve organizational learning
• Improve organizational resilience.
• Proactively improve operational efficiency and governance.
PART III
Attempt all parts of either Q. No.5 or Q. No.5A
Question 5
(a) What is Risk Based Internal Audit (RBIA) ? Explain its significances in the
effective risk management of the banks.
(b) Discuss the guiding principles of International Integrated Reporting Council (IIRC)
which underpin the preparation of an Integrated report, specifying the contents
of report and how information is to be presented.
(c) Sustainability reporting can help organizations to measure, understand and
communicate their economic, environmental, social and governance
performance, set goals, and manage change more effectively, but many
organizations find it difficult to prepare sustainability. Explain the challenges
which may be considered in the mainstreaming sustainability reporting.
(d) Write a note on Entity’s Risk Assessment Process.
(5 marks each)
OR (Alternate question to Q. No. 5)
Question 5A
(i) Internal control is a process for assuring achievement of an organization’s
objectives in operational effectiveness and efficiency, reliable financial reporting,
and compliance with laws, regulations and policies. In this reference explain the
control activities, that may relevant to an audit, which may be categorized as
policies and procedures. (5 marks)
(ii) Internal Control System is a topical issue following global fraudulent financial
reporting and accounting scandals in both developed and developing countries.
A proactive preventive approach to the problem required a critical evaluation of
existing internal control structures in organizations to determine their capacity
to ensure that the organizational activities are carried out in accordance with
established goals, policies and procedures. Explain the prevention measures
which can be taken into consideration to prevent improprieties in an organization.
(5 marks)
(iii) ‘‘A sustainability report is the key platform for communicating sustainability
performance and impacts.’’ Explain the benefits of sustainability reporting for an
organization. (5 marks)
(iv) ‘‘Non-financial reporting is the practice of measuring, disclosing and being
accountable to internal and external stakeholders for organizational performance
towards the goal of sustainable and inclusive development of a company.’’ Critically
analyze. (5 marks)
PP–GRMC&E–December 2022 18
Answer 5(a)
The Institute of Internal Auditors defines Risk Based Internal Auditing (RBIA) as a
methodology that links internal auditing to an organization's overall risk management
framework and that allows internal audit to provide assurance to the board that risk
management processes are managing risk effectively, in relation to the risk appetite
Compliance Procedures are tests designed to obtain reasonable assurance that those
internal controls on which audit reliance is to be placed are in effect.
The auditor needs to ensure that internal control exist and that the internal control is
operating effectively and being operating continuously throughout the period under audit
to ensure that they can be relied upon. In summary, by doing Compliance Tests, the
auditor can then able to ascertain the existence, effectiveness and continuity of the
internal control system. Compliance Procedures are tests designed to obtain reasonable
assurance that those internal controls on which audit reliance is to be placed are in
effect.
The significance of risk-based approach of the internal audit function in Banks are as
follows:
• It appropriately defines the audit universe and identifies the auditable branches
within the Bank for which these analyses would be carried out.
• It assists the management in identification of appropriate risk factors to reflect
the managements concerns.
• It results in development of an appropriate format for evaluating risk factors so
that the more important risk factors play a more prominent role in the risk
assessment process than less important risk factors.
• It develops a combination rule for each branch, which will properly reflect its
riskiness over several risk factors that have been identified and a method of
setting up audit priorities for the branches.
• It results in appropriate audit coverage plan, which provides a roadmap for the
management of internal audit staff skills so that they are available to carry out
audits of appropriate scope when they are needed the most.
This risk-based internal audit results in a process oriented audit with a risk management
perspective, which gives advice to management on the steps to be taken for effective risk
management on a bank-wide basis.
Answer 5(b)
The International Integrated Reporting Council (IIRC) has prescribed Guiding Principles
which underpin the preparation of an integrated report, specifying the content of the
report and how information is to be presented are as under:
• Strategic focus and future orientation : An integrated report should provide insight
into the organization's strategy and how it relates to the organization's ability to
create value in the short, medium and long term, and to its use of and effects on
capital.
• Connectivity of information : An integrated report should show a holistic picture
 19 PP–GRMC&E–December 2022
of the combination, interrelatedness and dependencies between the factors that
affect the organization's ability to create value over time.
• Stakeholder relationships : An integrated report should provide insight into the
nature and quality of the organization's relationships with its key stakeholders,
including how and to what extent the organization understands, takes into account
and responds to their legitimate needs and interests.
• Materiality : An integrated report should disclose information about matters that
substantively affect the organization's ability to create value over the short, medium
and long term.
• Conciseness : An integrated report should be concise.
• Reliability and completeness : An integrated report should include all material
matters, both positive and negative, in a balanced way and without material
error.
• Consistency and comparability : The information in an integrated report should
be presented:
(a) on a basis that is consistent over time; and
(b) in a way that enables comparison with other organizations to the extent it is
material to the organization's own ability to create value over time.
• All organizations depend on various forms of capital for their success. It is
important that all such forms of capital are disclosed to stakeholders to enable
informed investment decision making.
Answer 5(c)
The Sustainability Reporting is relatively a new concept. Many organizations find it
difficult to prepare sustainability REPORT. Following may be considered as the challenges
in mainstreaming sustainability reporting:

1. Government Encouragement : In many jurisdictions, there are no guidelines on

sustainability reporting to encourage the corporate sector to prepare sustainability
report. While on the other hand, there are voluntary as well as mandatory
guidelines from regulators for reporting on Sustainability aspects like in India we
have SEBI framework of Business Responsibility Report. In South Africa, listed
companies are required to prepare Integrated Report which is one step ahead of
sustainability reporting. It is the need of the hour that governments should
encourage the corporate in their jurisdiction to adopt the sustainability reporting
as a measure of good corporate governance.

2. Awareness : lack of awareness about the emerging concept of sustainability

reporting is also a major challenge which the government and corporate
governance bodies need to address by arranging the sustainability awareness
programme for the Professionals, Board of Directors and Management in the
corporate sector, as these are the persons who will drive sustainability reporting
initiative for an organisation. The government/regulators should organize such
awareness programme jointly with the experts in the field of Sustainability
Reporting.
PP–GRMC&E–December 2022 20
3. Expertise Knowledge : Sustainability Reporting is relatively a new concept in
many jurisdictions and organization found it very difficult to prepare a sustainability
report in the absence of expert guidance on the subject. The Sustainability
Reporting concept is emerging as a good tool to showcase the corporate
governance practices of an organisation and this area demand professionals
having expert knowledge of sustainability reporting. The professional bodies in
various jurisdictions should impart the expert knowledge of sustainability reporting
to their members to develop a good cadre of experts in this emerging area of
sustainability reporting.
4. Investor Behaviour : It is a recognized principle that investors should consider
the Environmental, Social and Governance (ESG) issues while making investment
decisions. There are specific regulators guidelines for the institutional investor to
be vigilant on voting aspects and be concerned about the governance practices
of the companies in which they invest. However, the investor behaviour may vary
from company to company and sometimes they invest in companies without
considering the ESG issues either due to lack of awareness on ESG issues or
some other business reasons. It should be made a practice that the investor
fund flow to those organization following the good governance including reporting
on sustainability aspects.
Answer 5(d)
For financial reporting purposes, the entity's risk assessment process includes how
management identifies business risks relevant to the preparation of financial statements
in accordance with the entity's applicable financial reporting framework, estimates their
significance, assesses the likelihood of their occurrence, and decides upon actions to
respond to and manage them and the results thereof. For example, the entity's risk
assessment process may address how the entity considers the possibility of unrecorded
transactions or identifies and analyzes significant estimates recorded in the financial
statements.
Risks relevant to reliable financial reporting include external and internal events,
transactions or circumstances that may occur and adversely affect an entity's ability to
initiate, record, process, and report financial data consistent with the assertions of
management in the financial statements. Management may initiate plans, programs, or
actions to address specific risks or it may decide to accept a risk because of cost or
other considerations. Risks can arise or change due to circumstances such as the
following:
• Changes in operating environment : Changes in the regulatory or operating
environment can result in changes in competitive pressures and significantly
different risks.
• New personnel : New personnel may have a different focus on or understanding
of internal control. New or revamped information systems: Significant and rapid
changes in information systems can change the risk relating to internal control.
• Rapid growth : Significant and rapid expansion of operations can strain controls
and increase the risk of a breakdown in controls.
• New technology : Incorporating new technologies into production processes or
information systems may change the risk associated with the internal control.
 21 PP–GRMC&E–December 2022
• New business models, products, or activities : Entering into business areas or
transactions in which an entity has little experience may introduce new risks
associated with internal control.
• Corporate restructurings : Restructurings may be accompanied by staff reductions
and changes in supervision and segregation of duties that may change the risk
associated with internal control.
• Expanded foreign operations : The expansion or acquisition of foreign operations
carries new and often unique risks that may affect internal control, for example,
additional or changed risks from foreign currency transactions.
• New accounting pronouncements : Adoption of new accounting principles or
changing accounting principles may affect risks in preparing financial statements.
Answer 5A(i)
Generally, control activities that may be relevant to an audit may be categorized as
policies and procedures that pertain to the following:
• Performance reviews : These control activities include reviews and analyses of
actual performance versus budgets, forecasts, and prior period performance;
relating different sets of data - operating or financial - to one another, together
with analyses of the relationships and investigative and corrective actions;
comparing internal data with external sources of information; and review of
functional or activity performance.
• Information processing : The two broad groupings of information systems control
activities are application controls, which apply to the processing of individual
applications, and general IT controls, which are policies and procedures that
relate to many applications and support the effective functioning of application
controls by helping to ensure the continued proper operation of information
systems.
• Physical controls : Controls that encompass:
- The physical security of assets, including adequate safeguards such as
secured facilities over access to assets and records.
- The authorization for access to computer programs and data files.
The periodic counting and comparison with amounts shown on control records
(for example, comparing the results of cash, security and inventory counts with
accounting records).
• The extent to which physical controls intended to prevent theft of assets are
relevant to the reliability of financial statement preparation, and therefore the
audit, depends on circumstances such as when assets are highly susceptible
to misappropriation.
• Segregation of duties : Assigning different people the responsibilities of authorizing
transactions, recording transactions, and maintaining custody of assets.
Segregation of duties is intended to reduce the opportunities to allow any person
to be in a position to both perpetrate and conceal errors or fraud in the normal
course of the person's duties.
PP–GRMC&E–December 2022 22
• Certain control activities may depend on the existence of appropriate higher
level policies established by management or those charged with governance.
For example, authorization controls may be delegated under established
guidelines, such as investment criteria set by those charged with governance;
alternatively, non-routine transactions such as major acquisitions or divestments
may require specific high level approval, including in some cases that of
shareholders.
Answer 5A(ii)
A variety of internal control techniques can help in preventing improprieties. The
following points in this regard are worth mentioning:
• There should be clear division of the work.
• Segregation of the work should be in such a manner that the work done by one
person is the beginning of the work for another person.
• There should be the clarity of the responsibility.
• The work flow process be documented or standardized so that the staff may
perform the work as suggested in the work flow chart.
• No single persons should be allowed to have access or control over any important
business operation.
• There should be job rotation of the staff duties periodically.
• Staff should be asked to go on mandatory leave periodically so that other person
may come to know if someone is playing foul with the system.
• Persons having the charge of the important assets should not be allowed to have
access to the books of accounts.
• Periodical inspection of the physical assets be carried out to ensure its physical
existence as well in good working conditions.
• The valuable items like cash and others, by physically inspected and the periodicity
should be at irregular intervals, so that the person under whose charge the
assets are, cannot know in advance, when the inspection will take place and
manage the affairs.
Answer 5A(iii)
Sustainability reporting can help organizations to measure, understand and
communicate their economic, environmental, social and governance performance, and
then set goals, and manage change more effectively. A sustainability report is the key
platform for communicating sustainability performance and impacts - whether positive or
negative.
Internal benefits of sustainability reporting for companies and organizations can
include:
• Increased understanding of risks and opportunities
• Emphasizing the link between financial and non-financial performance
 23 PP–GRMC&E–December 2022
• Influencing long term management strategy and policy, and business plans
• Streamlining processes, reducing costs and improving efficiency
• Benchmarking and assessing sustainability performance with respect to laws,
norms, codes, performance standards, and voluntary initiatives
• Avoiding being implicated in publicized environmental, social and governance
failures Comparing performance internally, and between organizations and sectors
External benefits of sustainability reporting can include:
• Mitigating - or reversing - negative environmental, social and governance impacts.
• Improving reputation and brand loyalty
• Enabling external stakeholders to understand the organization's true value, and
tangible and intangible assets
• Demonstrating how the organization influences, and is influenced by, expectations
about sustainable development.
Answer 5A(iv)
Apart from financial reporting, the non-financial reporting under the annual reports is
also being made by the companies. It contains the information relating to the company's
performance during the previous year, future projections, award achievements and penalty
imposed, if any by any regulators, are apprised to the Stake holders by way of reporting
in the annual report. It is a structured way of presenting information about one's
performance.
Non-financial reporting is the practice of measuring, disclosing and being accountable
to internal and external stakeholders for organisational performance towards the goal of
sustainable and inclusive development. There has been a general perception that right
from the time of Industrial Revolution, economic development has come at the cost of
environment and has brought about large scale destruction of nature and growth process
has not been inclusive.
Due to the negative externalities of economic development, the practice of non-
financial reporting started largely in response to pressure from non-governmental
organisations (NGOs) and civic society, which claimed that many firms lacked social
and environmental responsibility. It epitomises that a company's financial health is
dependent on much more than the assets on its balance sheet and the movements on
its profit and loss account. Non-financial reporting is an opportunity to communicate in
an open and transparent way with stakeholders. In their non-financial reports, firms
volunteer an overview of their environmental and social impact during the previous year.
The information in nonfinancial reports contributes to building up a company's risk-return
profile.
PART IV
Question 6
(a) Discuss the process to declare a person as a Fugutive Economic Offender,
indicating provisions relating to application, attachment, notice, proceedings
PP–GRMC&E–December 2022 24
and declaration, confiscation appeal etc. as mentioned in Fugitive Economic
Offender Act, 2018.
(b) What is Net Zero ? Why is it relevant in the industry ? Why should companies
care about it ? (5 marks each)
Answer 6(a)
Process to Declare a Person as a Fugitive Economic Offender under Fugitive
Economic Offender Act, 2018:
Application (Section 4)
The process of declaring a person as a fugitive economic offender starts with an
application that is to be filled by the director or any other person who is not below the
position of deputy director. The application needs to contain the following:
1. Reason behind believing that such a person is an economic offender.
2. Any information about his whereabouts.
3. List of all the properties which are believed to be proceeds of crime or Benaim
property.
4. List of people having interest in the said property.
Attachment (Section 5)
The Authorities may attach any property which is mentioned in the above application
with the prior approval of the special court. Such an attachment will be valid for 180 days,
which may be extended to the discretion of the court.
Notice (Section 10)

The individual against whom the proceedings have been initiated will be served a
notice by the special court. Such a notice will require the said individual to be present at
the specified date on the specified date, failure to report on that date will result in declaring
that person as a fugitive economic offender. It must be noted that the court will give a
minimum time of six weeks to the alleged offender to be present before the court.

Proceedings and Declaration (Section 11 & 12)

If the alleged offender appears before the court within the prescribed time then the
proceedings will be terminated, and if he is represented by his council then the court will
grant them a period of one week to file a reply after which if the court doesn't find him as
an fugitive economic offender then all his properties will be released If that individual fails
to appear in the stipulated date then he will be declared as a fugitive economic offender.

Confiscation (Section 12)

If the alleged person is found to be a fugitive economic offender then the special
court may confiscate all the properties which are acquired from the proceeds of crime,
Benami property. All the rights of this confiscated property shall solely vest with the
central government. The central government has all the right to dispose of these properties
after 90 days of confiscation.
 25 PP–GRMC&E–December 2022
Appeal (Section 17)
The offender, if unsatisfied with the order, may appeal to the High Court within 30 of
the order.
Answer 6(b)
Net-Zero
Net-zero is a climate outcome where any greenhouse emissions through man-made
sources are countered by removing such gases in equal amount. The net effect is that
the global temperature remains unchanged. There are two ways to achieve this drastically
reduce emissions and simultaneously use methods to neutralize or remove greenhouse
gases.
Why's it relevant in the industry?
Foremost is to avoid an impending climate catastrophe. Consider carbon budget-the
maximum limit of emissions that the Earth can handle before heating up. If we continue
to release emissions. on a net basis, that budget is breached and temperature continues
to rise. For example, a water tank that is filled three-fourths. And a stream is connected
to the tank that constantly keeps filling it. The idea of net zero is that we reduce the flow
of the stream so that the water doesn't start to overflow
Policymakers across the globe have a consensus that setting net zero goals is a
plausible way to contain further damage and hopefully, reverse some of it. Under the
landmark 2016 Paris climate agreement, countries including India Net Carbon - Zero
Goal One step toward Sustainable development
Developed nations such as the UK, France and Denmark, with higher emissions,
have already codified in law their commitment to net-zero by 2050, according to the
Energy and Climate Intelligence Unit. The European Union, South Korea and Canada
have also proposed similar legislation The US, Japan and Germany are considering
making it a law.
India, a developing nation with relatively lower per capita emissions, doesn't have a net
zero target. But authorities are said to be considering pledging to net-zero by 2050.
Why Should Companies Care?
Bulk of the emission comes from industries-particularly in the energy, metals and
transportation sectors. Any climate action will have to start by reducing or offsetting
emissions that come from the industrial and commercial activity.
There is also the need to negate potential business losses. According to the Carbon
Disclosure Project, Indian stand to collectively lose over Rs 7.14 lakh crore if they do
nothing to mitigate climate risks in the next five years. These risks come from physical
phenomena like floods, emerging regulations, emission caps, changing customer
behaviour and preferences, and even potential legal issues. But if done right, opportunities
worth Rs 2.9 lakh crore could emerge.
Indian suppliers of multinational firms also risk losing $274 billion worth of exports
every year if they fail to curb carbon emissions, according to Standard Chartered.
***
GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME

JUNE 2022

MODULE 1

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
Phones : 41504444, 45341000; Fax : 011-24626727
E-mail : info@icsi.edu; Website : www.icsi.edu
These answers have been written by competent persons
and the Institute hope that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.

The Guideline Answers contain the information based on

the Laws/Rules applicable at the time of preparation.
However, students are expected to be updated with the
applicable amendments which are as follows:

CS Examinations Applicability of Amendments to Laws

December Session upto 31 May of that Calender year
June Session upto 30 November of previous Calender Year

C O N T E N T S
Page
MODULE 1

1. Governance, Risk Management, Compliances and Ethics 1

2. Advanced Tax Laws 22

3. Drafting, Pleadings and Appearances 50

 1 PP–GRMC&E–June 2022
PROFESSIONAL PROGRAMME EXAMINATION
JUNE 2022

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES

AND ETHICS
Time allowed : 3 hours Maximum marks : 100
NOTE : Answer ALL Questions.

PART I
Question 1
Arham Logistics Limited, a listed company, has duly constituted an Audit Committee.
One of the matters considered by the Audit Committee, was quarterly internal audit
report. Board was informed by Chairman of the Audit Committee that there was no
adverse remark reported in the internal audit report. An independent Director requested
a copy of internal audit report, which was denied by CFO stating that it is only the
prerogative of Audit Committee to consider internal audit report and hence copy of
the same need not be placed in the Board meeting or circulated.
Based on the above facts, answer the following questions :
(a) Whether this stand taken by CFO will amount to undermining the authority of
the Board of Directors ?
(b) What is the role of Chairman of the Audit Committee ?
(c) What is the role of Chairman of the Board of Directors ?
(d) Not providing the copy will not make other directors liable for any unusual
observation in internal audit report.
(e) Is the principle of transparency flouted ? (4 marks each)
Answer 1(a)
Audit Committee is formed by the Board of Directors and all actions of Audit
Committee are subject to approval/noting by the Board of Directors. Committees are
formed to aid the Board in discharge of its functions and a committee cannot undermine
the authority of the Board. Hence, the Board of Directors is the highest authority in
hierarchy under which Audit Committee functions. It is true that certain matters remain
in domain of Audit Committee, but ultimately, it requires concurrence of Board of Directors.
Internal Audit Report is an important report covering various aspects of the operations of
the Company, important financial matters like ageing of creditors, debtors, inventory,
ledger scrutiny etc. which directly relates to Financial Statements. In view of above,
stand taken by CFO amounts to undermining the authority of the Board.
Answer 1(b)
The Chairman of the Audit Committee has an important role to play. As per the
provisions of the SEBI (LODR) Regulations, 2015, the Chairman of the Audit Committee
1
PP–GRMC&E–June 2022 2

shall be an Independent Director. The Chairman of the Audit Committee is a member of

the Board himself. In the given situation, the Chairman of the Audit Committee should
ensure that he is correctly educating the CFO about the role and responsibilities of the
Audit Committee and the position of the Committee vis-a-vis the Board of Directors and
the members of the Board. He can then immediately apprise the Chairman of the Board
of Directors regarding the situation and so that necessary remedial measures can be
taken before the matter aggravates.
Answer 1(c)
The Chairman is the executive leader of Board of Directors. The Chairman of the
Board of Directors is like the Captain of a Ship who is responsible for steering the Board
towards the correct path and taking decisions on important matters. In the case presented,
on coming to know about the CFO’s mistake, the Chairman should reprimand him and
ensure that the CFO undergoes necessary training and educational programmes to apprise
himself about the role / responsibilities and powers of the Board of Directors, various
board committees and the individual directors. The Chairman should also instruct the
CFO to check with the Company Secretary before taking any steps relating to compliance
and those relating to terms of reference of various committees and the Board. Chairman
should ensure that a copy of the Internal Audit Report is immediately served to the
Director who requested for it along with a letter of apology and that the same is also
placed before the Board for their noting – mere briefing by the Chairman of the Audit
Committee may not suffice.
Answer 1(d)
As per the provisions of Section 149 (12) the Companies Act, 2013 –
Notwithstanding anything contained in this Act,—
(i) an independent director &
(ii) a Non-Executive Director not being promoter or Key Managerial Personnel, shall
be held liable, only in respect of such acts of omission or commission by a
company which had occurred with his knowledge, attributable through Board
processes, and with his consent or connivance or where he had not acted
diligently.
Accordingly, while the non executive and independent directors may be able to take
shelter under the above provisions, where the audit report is not placed before the Board,
the executive and promoters directors cannot do so.
Directors other than members and Chairman of audit committee will be right in
taking a stand by relying on the briefing by Chairman of Audit Committee that there was
no adverse thing reported in the internal audit report. Directors may rightfully assert that
if in future, anything turns out to be different or adverse, only audit committee and its
members including its Chairman will be held responsibly and not the other Directors.
Answer 1(e)
Any document or report to be reviewed, noted or approved by the Board should be
placed before it. Mere briefing by a person will not be sufficient. Each director has their
own view point and may be able to perceive a reporting in a different manner. Further,
 3 PP–GRMC&E–June 2022
any action on the part of the Committee is subject to supervision and direction of the
Board. Board cannot escape its responsibility by delegating to Committee. Hence the
Company should ensure that the document as such is placed before the Board. The
principle of transparency will be definitely flouted if the requisite documents are not
placed before the Board or if any board member is denied access to it.
Attempt all parts of either Q. No. 2 or Q. No.2A
Question 2
(a) Surabhi Pharmaceutical Ltd. is a listed company. The Board of the Company
comprises of following :
Mr. AG, Chairman (Executive)
Mr. RS, Managing Director
Mr. AR, Whole-Time Director
Mr. DS, a Cost Accountant by profession, Nominee Director of XYZ Bank
and Member of the Audit Committee
Mr. UB, Practising Advocate (Independent Director)
Mr. SP, retired Chairman of a Bank and Member of Audit Committee
(Independent Director)
Ms. KV, a practising Chartered Accountant and Chairman of Audit Committee
(Independent Director)
Due to certain personal issues, Ms. KV resigned from the directorship with
effect from 01.04.2021. What immediate steps the Company should take to
comply with the provisions of SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 with respect to composition of the Board and
Audit Committee ? (5 marks)
(b) XYZ & Co, is an auditor of VPN Limited which is a listed company and the
balance sheet of VPN Limited is being signed by X who is also a partner in other
Audit firm PQR & Co. The original tenure of XYZ & Co. has expired on 31st
March, 2021. Can PQR & Co. be appointed as an auditor of the company for
Financial Year 2021-22 ? Explain with relevant provisions of the Companies
Act, 2013. (5 marks)
(c) Corporate Secretaries International Association Limited (CSIA), a body for
Corporate Secretaries & Governance Professionals was established in the year
2017 as a company limited by guarantee in Hong Kong with certain objectives.
Discuss the main objectives of CSIA. (5 marks)
OR (Alternate question to Q. No. 2)
Question 2A
(i) Describe the principles in respect of :
(1) Audit, Risk and Internal Control
PP–GRMC&E–June 2022 4
(2) Remuneration
Under the UK Corporate Governance Code, 2018. (5 marks)
(ii) ECHO Enterprises Ltd., a listed company has following subsidiaries. The details
of income of ECHO Enterprises Ltd. and its subsidiaries are as under :
Holding Company Rs. in Crore
ECHO Enterprises Ltd. 1,000.00
Subsidiaries Rs. in Crore
ANCHOR Batteries Ltd. 200.00
EAZY Chemicals Ltd 250.00
REAL Power Ltd. 400.00

Examine the above in terms of Regulation 24 of SEBI (Listing Obligations and

Disclosure Requirements) Regulations, 2015 with respect to compliance relating
to subsidiaries and advise the Boards of all companies regarding various
compliances. (10 marks)

Answer 2(a)

As per the SEBI (LODR) Regulations, 2015, if the Chairman of the Board of Directors
is an Executive Director, then one-half of the Board should comprise of Independent
Directors. Therefore, in the present case, 50% of the Board shall comprise of Independent
Directors.

The Board of the Surabhi Pharmaceutical Ltd., consists of 3 Executive Directors, 3

Independent Directors and 1 Nominee Director

Ms. KV, an Independent Director, resigned from the Directorship of the Company.
On her resignation, the Board will have to comply criteria of 50%-50% Independent and
Non-Independent Directors. Therefore, there is requirement for appointment of a new
Independent Director in place of Ms. KV or a Non-Executive Director should Chair the
Board.
On resignation, Ms. KV will cease to be Chairman of the Audit Committee of the
Company also. The Audit Committee of the Company will now have only one Independent
Director and one Nominee Director. Therefore, the Company should take following steps
to comply with SEBI (LODR) Regulations, 2015:
Immediately a new Independent Director, being financially literate and having
accounting or related financial management expertise shall be appointed and the new
director or Mr. SP can be appointed as Chairman of the Audit Committee in place of Ms.
KV.
Answer 2(b)
Section 139(2) of the Companies Act, 2013 provides for mandatory rotation of auditor
or audit firm by listed and certain class or classes of companies. The Section specifies
 5 PP–GRMC&E–June 2022
that no listed company or a company belonging to such class or classes of companies
as specified shall appoint or reappoint.
1. An individual as auditor for a more than one term of five consecutive years; and
2. An audit firm as auditor for more than two terms of five consecutive years.
Therefore, rotation of auditor is applicable to all listed companies and such other
class of companies as may be prescribed. Since M/S VPN limited is a listed company
so provisions w.r.t. rotation of auditor applies to M/s VPN Limited.
Further as per Second Proviso to Section 139(2) of the Companies Act, 2013 if
Audit Firm i.e. incoming audit firm and outgoing audit firm whose tenure has expired in a
company immediately preceding the financial year, are having common partner or partners,
then such incoming audit firm is not eligible to get appointed as auditor of the same
company for a period of 5 years.
Keeping the above proviso in view, M/s PQR & Co. cannot be appointed as the
auditor of the company as X is the common partner in the both firm i.e. M/s XYZ & Co.
which is outgoing auditor and M/s PQR & Co.
Answer 2(c)
Corporate Secretaries International Association Limited (CSIA) was established on
February 10, 2017 as a Company limited by Guarantee in Hong Kong. It is international
federation of governance professional bodies for Corporate Secretaries & Governance
Professional and represents those who work as frontline practitioners of governance
throughout the world.
The main objectives of CSIA are as under:
(i) To promote the professional status of suitably qualified Chartered Secretaries,
Corporate Secretaries, Company Secretaries, board secretaries and other
governance professionals.
(ii) To establish and maintain good relations and exchanges between organisations
dedicated to the promotion and practice of Secretaryship and/or the promotion
of good governance.
(iii) To develop and improve their services and professionalism of their members.
(iv) To assist in the creation of such organisations in countries or regions in which
they do not currently exist.
(v) To promote the growth, development, study and practice of Secretaryship and
assist their members develop and improve their services and professional
standards.
(vi) To advocate for good governance through carrying out research, developing
standards and raising awareness.
(vii) To promote the recognition and influence in respect of Secretaryship and its
professional practitioners to national governments and their supplementary/
sponsored organisations, international organisations and the global business
community.
PP–GRMC&E–June 2022 6
Answer 2A(i)
(1) Audit, Risk, and Internal Control Principles
1. The board should establish formal and transparent policies and procedures
to ensure the independence and effectiveness of internal and external audit
functions and satisfy itself on the integrity of financial and narrative
statements.
2. The board should present a fair, balanced, and understandable assessment
of the company's position and prospects.
3. The board should establish procedures to manage risk, oversee the internal
control framework and determine the nature and extent of the principal risks
the company is willing to take in order to achieve its long-term strategic
objectives.
(2) Remuneration Principles
1. Remuneration policies and practices should be designed to support strategy
and promote long term sustainable success.
2. Executive remuneration should be aligned to company purpose and values
and be clearly linked to the successful delivery of the company's long term
strategy.
3. A formal and transparent procedure for developing policy on executive
remuneration and determining director and senior management remuneration
should be established. No director should be involved in deciding their own
remuneration outcome.
4. Directors should exercise independent judgement and discretion when
authorizing remuneration outcomes, taking account of company and
individual performance, and wider circumstances.
Answer 2A(ii)
The provisions of Regulation 24 of SEBI (LODR) Regulations states as under:
1. At least one independent director on the Board of Directors of the listed entity
shall be a director on the Board of Directors of an unlisted material subsidiary,
whether incorporated in India or not.
Explanation - For the purposes of this provision, notwithstanding anything to the
contrary contained in Regulation 16, the term “material subsidiary” shall mean a
subsidiary, whose income or net worth exceeds twenty percent of the
consolidated income or net worth respectively, of the listed entity and its
subsidiaries in the immediately preceding accounting year.
2. The Audit Committee of the listed entity shall also review the financial statements,
in particular, the investments made by the unlisted subsidiary.
3. The minutes of the meetings of the board of directors of the unlisted subsidiary
shall be placed at the meeting of the board of directors of the listed entity.
 7 PP–GRMC&E–June 2022
4. The management of the unlisted subsidiary shall periodically bring to the notice
of the board of directors of the listed entity, a statement of all significant
transactions and arrangements entered into by the unlisted subsidiary.
Explanation - For the purpose of this Regulation, the term "significant transaction
or arrangement shall mean any individual transaction or arrangement that
exceeds or is likely to exceed ten percent of the total revenues or total expenses
or total assets or total liabilities, as the case may be, of the unlisted subsidiary
for the immediately preceding accounting year.
5. A listed entity shall not dispose of shares in its material subsidiary resulting in
reduction of its shareholding (either on its own or together with other
subsidiaries) to less than or equal to fifty percent or cease the exercise of
control over the subsidiary without passing a special resolution in its General
Meeting except in cases where such divestment is made under a scheme of
arrangement duly approved by a Court/Tribunals, or under a resolution plan
duly approved under section 31 of the Insolvency Code and such an event is
disclosed to the recognized stock exchanges within one day of the resolution
plan being approved.
6. Selling, disposing and leasing of assets amounting to more than twenty percent
of the assets of the material subsidiary on an aggregate basis during a financial
year shall require prior approval of shareholders by way of special resolution,
unless the sale/disposal/lease is made under a scheme of arrangement duly
approved by a Court/Tribunals, or under a resolution plan duly approved under
section 31 of the Insolvency Code and such an event is disclosed to the
recognized stock exchanges within one day of the resolution plan being
approved.
7. Where a listed entity has a listed subsidiary, which is itself a holding company,
the provisions of this regulation shall apply to the listed subsidiary in so far as
its subsidiaries are concerned.
ANCHOR Batteries Ltd. has income of Rs. 200.00 Crores which does not exceed
20% of consolidated income of ECHO Enterprises Ltd., the holding Company and all its
subsidiaries. Therefore, ANCHOR Batteries Ltd. is not required to comply with the
provisions which are specifically applicable with respect to material subsidiaries, other
provisions which are applicable in general to all subsidiaries need to be complied.
EAZY Chemicals Ltd. has income of Rs. 250.00 Crores which does not exceeds
20% of consolidated income of ECHO Enterprises Ltd., and all its subsidiaries. Therefore,
EAZY Chemicals Ltd. is not required to comply with the provisions which are specifically
applicable with respect to material subsidiaries, other provisions which are applicable in
general to all subsidiaries need to be complied.
REAL Power Ltd. has income of Rs. 400.00 Crores which exceeds 20% of
consolidated income of ECHO Enterprises Ltd., and all its subsidiaries. Therefore, REAL
Power Ltd. has to comply with all the requirements stipulated above.
ECHO Enterprises Ltd, holding Company, will also need to ensure compliance with
all the provisions mentioned above with respect to its subsidiaries.
PP–GRMC&E–June 2022 8
Question 3
(a) As per Ind AS 24, what are the parameters of considering a person or an entity
as related party ?
(b) ‘‘National Financial Reporting Authority (NFRA) has the powers to oversee the
quality of service of Auditor as well as to suggest measures for improvement.’’
Discuss.
(c) Explain the content of ‘‘Management Discussion and Analysis’’ section of the
Annual Report.
(d) Why do institutional investors rely on proxy advisors ?
(e) Stakeholder engagement is the process by which an organisation involves people
who may be affected by the decision it makes or can influence the implementation
of its decisions. In reference to stakeholder’s engagement, explain the three
key principles of stakeholder’s engagement. (3 marks each)
Answer 3(a)
Ind AS 24 deals with Related Party Disclosure. As per Ind AS 24: A related party is
a person or entity that is related to the entity that is preparing its financial statements
(i.e. the 'reporting entity')
(a) A person or a close member of that person's family is related to a reporting
entity if that person:
• has control or joint control over the reporting entity;
• has significant influence over the reporting entity; or
• is a member of the key management personnel of the reporting entity or of
a parent of the reporting entity
(b) An entity is related to a reporting entity if any of the following conditions applies:
• The entity and the reporting entity are members of the same group (which
means that each parent, subsidiary and fellow subsidiary is related to the
others).
• One entity is an associate or joint venture of the other entity (or an associate
or joint venture of a member of a group of which the other entity is a member).
• Both entities are joint ventures of the same third party.
• One entity is a joint venture of a third entity and the other entity is an
associate of the third entity.
• The entity is a post-employment benefit plan for the benefit of employees of
either the reporting entity or an entity related to the reporting entity. If the
reporting entity is itself such a plan, the sponsoring employers are also
related to the reporting entity.
The entity is controlled or jointly controlled by a person identified in (a).
• A personhas control or joint control over the reporting entity has significant
influence over the entity or is a member of the key management personnel
of the entity (or of a parent of the entity)
• The entity, or any member of a group of which it is a part, provides key
 9 PP–GRMC&E–June 2022
management personnel services to the reporting entity or to the parent of
the reporting entity.
• A related party transaction is a transfer of resources, services or obligations
between a reporting entity and a related party, regardless of whether a price
is charged.
Answer 3(b)
Rule 9 of the National Financial Reporting Authority Rules, 2018 provides that:-
1. On the basis of its review, the Authority may direct an auditor to take measures
for improvement of audit quality including changes in their audit processes,
quality control, and audit reports and specify a detailed plan with time-limits.
2. It shall be the duty of the auditor to make the required improvements and send
a report to the Authority explaining how it has complied with the directions made
by the Authority.
3. The Authority shall monitor the improvements made by the auditor and take
such action as it deems fit depending on the progress made by the auditor.
4. The Authority may refer cases with regard to overseeing the quality of service
of auditors of companies or bodies corporate referred to in rule 3 to the Quality
Review Board constituted under the Chartered Accountants Act, 1949 or call for
any report or information in respect of such auditors or companies or bodies
corporate from such Board as it may deem appropriate.
5. The Authority may take the assistance of experts for its oversight and monitoring
activities.
Accordingly, the given statement looks right.
Answer 3(c)
As per SEBI (LODR) Regulations, 2015, Management Discussion and Analysis
shall include discussion on the following matters within the limits set by the listed entity’s
competitive position:
(a) Industry structure and developments.
(b) Opportunities and Threats.
(c) Segment-wise or product-wise performance.
(d) Outlook.
(e) Risks and concerns.
(f) Internal control systems and their adequacy.
(g) Discussion on financial performance with respect to operational performance.
(h) Material developments in Human Resources / Industrial Relations front, including
number of people employed.
(i) Details of significant changes (i.e. change of 25% or more as compared to the
immediately previous financial year) in key financial ratios, along with detailed
explanations therefor, including:
(i) Debtors Turnover
PP–GRMC&E–June 2022 10
(ii) Inventory Turnover
(iii) Interest Coverage Ratio
(iv) Current Ratio
(v) Debt Equity Ratio
(vi) Operating Profit Margin (%)
(vii) Net Profit Margin (%) or sector-specific equivalent ratios, as applicable.
(j) Details of any change in Return on Net Worth as compared to the immediately
previous financial year along with a detailed explanation thereof.
Disclosure of Accounting Treatment : Where in the preparation of financial statements,
a treatment different from that prescribed in an Accounting Standard has been followed,
the fact shall be disclosed in the financial statements, together with the management’s
explanation as to why it believes such alternative treatment is more representative of
the true and fair view of the underlying business transaction.
Answer 3(d)
Following are few reasons why institutional investors engage proxy advisors:
(i) Proxy advisors generally offer variety of services consisting of both, analysing
the proposals at general meetings and recommending voting decisions.
(ii) 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 manner.
(iii) The proxy advisors assist the institutional investors with informed knowledge of
corporate governance, breaking the language barrier and providing a voting
platform in a general meeting, wherever required, while investing across the
globe.
(iv) 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.
(v) Proxy advisers also influence boards’ decision making. They do a good job of
policing the boards and governancerecords of the firms they track, and nudging
institutional investors to take a stand on governance issues.
Answer 3(e)
Following are the key principles of stakeholder engagement:
Communicate : Interactions from the various stakeholders should be promoted.
Example : for customers there should be dedicated customer care center. The
communication may be made through the print media elaborating about the progress
of the company, which is also a part of the principle of transparency and disclosure.
Ensure intended message is understood and the desired response achieved.
 11 PP–GRMC&E–June 2022
Consult, early and often: Always ask the right questions to get the useful information
and ideas. To engage their support ask them for advice and listen how they feel.
Remember, they are human: Operate with an awareness of human feelings.
Plan it : Time investment and careful planning against it, has a significant payoff.
Relationship : Try to engender trust with the stakeholders. Seek out networking
opportunity.
Simple but not easy : Show your care. Be empathetic. Listen to the stakeholders.
Managing risk : Stakeholders can be treated as risk and opportunities that have
probabilities and impact.
Compromise : Compromise across a set of stakeholders' diverging priorities.
Understand what success is : Explore the value of the project to the stakeholder.
Take responsibility : Project governance is the key of project success. It's always
the responsibility of everyone to maintain an ongoing dialogue with stakeholders.
PART II
Question 4
(a) As per COSO Framework of Enterprise Risk Management (ERM), there are
certain components of Enterprises Risk Management. Explain different
components of Enterprise Risk Management in brief.
(b) Explain the term ‘‘Risk Register’’ and give a template of Risk Register in an
organization.
(c) Explain the Fraud Risk and the methodology to manage the Fraud Risk in an
organisation.
(d) Risk oversight is the responsibility of the entire Board and the same can be
achieved through a structured review mechanism. In view of this statement,
explain the review mechanism which may be followed by the Board for Risk
Oversight. (5 marks each)
Answer 4(a)
Enterprise Risk Management consists of eight interrelated components. These are
derived from the way management runs an enterprise and are integrated with the
management process. These components are:
(a) Internal Environment - The internal environment encompasses the tone of an
organization, and sets the basis for how risk is viewed and addressed by an
entity's people, including risk management philosophy and risk appetite, integrity
and ethical values, and the environment in which they operate.
(b) Objective Setting - Objectives must exist before management can identify
potential events affecting their achievement. Enterprise risk management
ensures that management has in place a process to set objectives and that the
chosen objectives support and align with the entity's mission and are consistent
with its risk appetite.
PP–GRMC&E–June 2022 12
(c) Event Identification - Internal and external events affecting achievement of an
entity's objectives must be identified, distinguishing between risks and
Opportunities are channelled back to management's strategy or objective-setting
processes.
(d) Risk Assessment - Risks are analyzed, considering likelihood and impact, as a
basis for determining how they should be managed. Risks are assessed on an
inherent and a residual basis.
(e) Risk Response - Management selects risk responses - avoiding, accepting,
reducing, or sharing risk – developing a set of actions to align risks with the
entity's risk tolerances and risk appetite.
(f) Control Activities - Policies and procedures are established and implemented to
help ensure the risk responses are effectively carried out.
(g) Information and Communication - Relevant information is identified, captured,
and communicated in a form and timeframe that enable people to carry out their
responsibilities. Effective communication also occurs in a broader sense, flowing
down, across, and up the entity.
(h) Monitoring - The entirety of enterprise risk management is monitored and
modifications made as necessary. Monitoring is accomplished through ongoing
management activities, separate evaluations, or both.
Enterprise risk management is not strictly a serial process, where one component
affects only the next. It is a multidirectional, iterative process in which almost any
component can and does influence another.
Answer 4(b)
Risk Register is a document which is maintained by an organisation to keep the
details of different risks as faced by an organisation and the methodology as used by
the organisation to mitigate the risk. Risk register must contain the name of risk, its
nature, its root cause, its severity, the possibility of its occurrence, methodology of risk
mitigation. An example of Risk register is as given below:

Sr. No. Risk Area Key risks Root cause Mitigation measures

1. Business Risk Decreasing Lack of innovation, Keeping a vigil on latest

market share market survey etc. developments and
continuous monitoring
2. Financial risk Leveraging Inability to assess Adopting a Resource
capital structure the appropriate planning policy
and the cash funding
flows requirements

3. Regulatory and Non-compliance Not keeping Knowledge updation &

Compliance of applicable abreast of the maintenance of a robust
Risk laws latest changes in compliance check list
the Regulatory
environment
 13 PP–GRMC&E–June 2022
Answer 4(c)
Fraud Risk is the risk of unexpected financial, material or reputational loss as the
result of fraudulent action of persons internal or external to the organization. Fraud is
perpetrated through the abuse of systems, controls, procedures and working practices.
It may be perpetrated by an outsider or insider. Fraud may not be usually detected
immediately and thus the detection should be planned for on a proactive basis rather
than on a reactive basis.
Methodology to deal with the Fraud Risk in an organisation:
1. Defining fraud : This shall cover activities which the company would consider
as fraudulent.
2. Defining Role & responsibilities : The policy may define t responsibilities of the
officers who shall be involved in effective prevention, detection, monitoring &
investigation of fraud. The company may also consider constituting a committee
or operational structure that shall ensure an effective implementation of anti-
fraud strategy of the company. This shall ensure effective investigation in fraud
cases and prompt as well as accurate reporting of fraud cases to appropriate
regulatory and law enforcement authorities.
3. Communication channel : Encourage employees to report suspicious cases of
fraud/misconduct. Any person with knowledge of suspected or confirmed incident
of fraud/misconduct must report the case immediately through effective and
efficient communication channel or mechanism.
4. Disciplinary action : After due investigations disciplinary action against the
fraudster may be considered as per the company's policy.
Answer 4 (d)
Risk oversight is the responsibility of the entire Board and the same can be achieved
through a review mechanism which inter alia include:
1. Developing policies and procedures around risk that are consistent with the
organization's strategy and risk appetite.
2. Taking steps to foster risk awareness.
3. Encourage an organizational culture of risk adjusting awareness
4. Maintenance of a Risk Register
5. A compliance certificate on the identification of risks and establishment of
mitigation measures.
PART III
Attempt all parts of either Q. No. 5 or Q. No.5A
Question 5
(a) The Companies Act, 2013 brought revolutionary changes and mandated the
Corporate Social Responsibility (CSR) provisions for the companies. As per the
PP–GRMC&E–June 2022 14
provisions related to CSR, eligible companies need to file a CSR Report on
annual basis. What are the contents of CSR report ? (5 marks)
(b) Integrated reporting is founded on integrated thinking, which helps to demonstrate
interconnectivity of strategy, strategic objectives, performance, risk and
incentives and helps to identify sources of value creation. In reference to
integrated reporting, explain the International Integrated Reporting Council (IIRC).
(5 marks)
(c) Explain the regulatory framework with respect to sustainability reporting in India.
(5 marks)
(d) As per SEBI Circular No. CIR/CFD/CMD/10/2015 dated 4th November, 2015, a
format for ‘‘Business Responsibility Report (BRR)’’ has been prescribed. This
circular prescribes the BRR framework into five sections. Explain the contents
of these five sections, in brief. (5 marks)
OR (Alternate question to Q. No. 5)
Question 5A
(i) ‘‘A trusted employee who has easy access to a business’s finances may abuse
his authority by stealing company funds.’’ Considering the statement, narrate
any 10 points to be worth noted for a variety of internal control techniques in
your organisation. (5 marks)
(ii) As a Company Secretary of the Company, you are asked by the management
to provide inputs on Internal Control to be observed by the Audit Committee
mandatorily in terms of Regulation 18 of SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015. State any five information which are to be
mandatorily reviewed by the Audit Committee in this regard. (5 marks)
(iii) ‘‘Global Reporting Initiative (GRI) Sustainability Reporting Standards (GRI
Standards) helps businesses, governments and other organizations understand
and communicate the impact of business on critical sustainability issues.’’
Considering the statement, discuss any five distinctive elements of the GRI
Standards. (5 marks)
(iv) State any five points/sub-points which are incorporated in the compliance
certificate which shall be furnished by CEO and CFO of a company in terms of
Regulation 17 of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015. (5 marks)
Answer 5(a)
The Board of the Company is mandated to prepare a CSR Report under Section
134(3)(o) of the Companies Act, 2013. The Companies (CSR Policy) Rules, 2014 provides
for the format for reporting CSR activities annually. The format for the annual report on
CSR activities to be included in the Board's report is as follows:
1. Brief outline on CSR Policy of the Company.
2. The Composition of the CSR Committee.
3. Web-link where Composition of CSR committee, CSR Policy and CSR projects
approved by the board are disclosed on the website of the company.
 15 PP–GRMC&E–June 2022
4. Details of Impact assessment of CSR projects carried out in pursuance of sub-
rule (3) of rule 8 of the Companies (Corporate Social responsibility Policy) Rules,
2014.
5. Details of the amount available for set off in pursuance of sub-rule (3) of rule 7
of the Companies (Corporate Social responsibility Policy) Rules, 2014 and amount
required for set off for the financial year, if any.
6. Average net profit of the Company as per Section 135(5).
7. (a) Two percent of average net profit of the company as per section 135(5):
(b) Surplus arising out of the CSR projects or programmes or activities of the
previous financial years
(c) Amount required to be set off for the financial year, if any
(d) Total CSR obligation for the financial year (7a+7b-7c).
8. (a) CSR amount spent or unspent for the financial year in the table provided
(b) Details of CSR Amount spent against Ongoing Projects for the financial
year in the table provided:
(c) Details of CSR Amount spent against other than Ongoing Projects for the
financial year in the table provided:
(d) Amount Spent in Administrative Overheads
(e) Amount Spent on Impact Assessment
(f) Total Amount Spent for the Financial Year (8b+8c+8d+8e)
(g) Excess Amount for Set Off, if any
9. (a) Details of Unspent CSR amount for the preceding three financial years
(b) Details of CSR amount spent in the financial year for Ongoing Projects of
the preceding financial years
10. Details relating to the asset so created or acquired through CSR spent in the
financial year;
(a) Date of Creation of Acquisition of the Capital Asset(s)
(b) Amount of CSR spent for creation or acquisition of capital asset
(c) Details of the entity or public authority or beneficiary under whose name
such capital asset is registered, their address etc.
(d) Details of the capital asset(s) created or acquired (including complete
address and location of the capital asset).
Answer 5(b)
The International Integrated Reporting Council (IIRC) is a powerful, international
cross section of leaders from the corporate, investment, accounting, securities, regulatory,
academic and standard-setting sectors as well as civil society.
PP–GRMC&E–June 2022 16
The IIRC was established in 2010 in recognition of the need to move to-wards an
International Integrated Reporting Framework that is fit-for-purpose for the 21st century.
The IIRC seeks to build upon, enhance and support the work that has been done to date,
and is ongoing, to achieve a reporting framework that:
• communicates the organization's strategy, business model, performance and
plans against the background of the context in which it operates;
• provides a coherent framework within which market and regulatory driven reporting
requirements can be integrated;
• is internationally agreed, so as to encourage convergence of approach and
hence more ready understanding of information presented;
• reflects the use of and effect on all of the resources and relationships or “capitals”
(human, natural and social as well as financial, manufactured and intellectual)
on which the organization and society depend for prosperity; and
• reflects and communicates the interdependencies between the success of the
organization and the value it creates for investors, employees, customers and,
more broadly, society.
The IIRC is developing an International Integrated Reporting Framework that will
facilitate the development of reporting over the coming decades. The core objective of
the Framework is to guide organizations on communicating the broad set of information
needed by investors and other stakeholders to assess the organization's long-term
prospects in a clear, concise, connected and comparable format. This will enable those
organizations, their investors and others to make better short-and long-term decisions.
Answer 5(c)
Considering the importance of sustainability in businesses, Ministry of Corporate
Affairs (MCA) launched Corporate Social Responsibility Voluntary Guidelines in 2009.
These Voluntary Guidelines addressed six core elements - Care for all Stakeholders,
Ethical functioning, Respect for Workers' Rights and Welfare, Respect for Human Rights,
Respect for Environment and Activities for Social and Inclusive Development. To take
this further, in 2011, MCA issued ‘National Voluntary Guidelines on Social, Environmental
and Economical Responsibilities of Business' which encouraged reporting on environment,
social and governance issues.
In line with the National Voluntary Guidelines on Social, Environmental and Economic
Responsibilities of Business and considering the larger interest of public disclosure
regarding steps taken by listed entities from an Environmental, Social and Governance
("ESG") perspective, SEBI decided to mandate inclusion of Business Responsibility
Reports (“BRR reports") as part of the Annual Reports for listed entities.
SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015
has mandated the requirement of submission of BRR for top 1000 listed entities describing
initiative taken by them from an environmental, social and governance perspective in
the prescribed format.
Regulation 34(2)(f) of SEBI(LODR) Regulations 2015 provides that the annual report
shall contain for the top one thousand listed entities based on market capitalization, a
 17 PP–GRMC&E–June 2022
business responsibility report describing the initiatives taken by the listed entity from an
environmental, social and governance perspective, in the format as specified by the
Board from time to time.
It also contains that the requirement of submitting a business responsibility report
shall be discontinued after the financial year 2021–22 and thereafter, with effect from
the financial year 2022–23, the top one thousand listed entities based on market
capitalization shall submit a business responsibility and sustainability report in the format
as specified by the Board from time to time. Even during the financial year 2021–22, the
top one thousand listed entities may voluntarily submit a business responsibility and
sustainability report in place of the mandatory business responsibility report.
Answer 5(d)
The Business Responsibility Reports framework is divided into five sectors:
Section - A : General Information about the Organization - Industry sector, products
& Services, Markets, other General Information.
Section - B : Financial Details of the Organisation - Paid Up capital, Turnover,
Profits, CSR (Corporate Social Responsibility) spend.
Section - C : Other Details - BR initiatives at Subsidiaries and Supply Chain Partners.
Section - D : BR information - structure, Governance & Policies for Business
Responsibility.
Section - E : Principle wise performance - Indicators to assess performance on the
business responsibility principles as envisaged by the National Voluntary Guidelines
(NVGs).
Answer 5A(i)
Fraud can have a large negative impact on one's business's bottom line. In some
cases, a trusted employee who has easy access to a business's finances may abuse
his authority by stealing company funds. A variety of internal control techniques can
help prevent improprieties. The following points in this regard are worth mentioned:
• There should be clear division of the work.
• Segregation of the work should be in such a manner that the work done by one
person is the beginning of the work for another person.
• There should be the clarity of the responsibility.
• The work flow process be documented or standardized so that the staff may
perform the work as suggested in the work flow chart.
• No single persons should be allowed to have access or control over any important
business operation.
• There should be job rotation of the staff duties periodically.
• Staff should be asked to go on mandatory leave periodically so that other person
may come to know if someone is playing foul with the system.
PP–GRMC&E–June 2022 18
• Persons having the charge of the important assets should not be allowed to
have access to the books of accounts.
• Periodical inspection of the physical assets be carried out to ensure its physical
existence as well in good working conditions.
• The valuable items like cash and others, by physically inspected and the
periodicity should be at irregular intervals, so that the person under whose charge
the assets are, cannot know in advance, when the inspection will took place
and manage the affairs.
Answer 5A(ii)
The audit committee shall mandatorily review the following information:
1. Management discussion and analysis of financial condition and results of
operations;
2. Statement of significant related party transactions (as defined by the audit
committee), submitted by management;
3. Management letters / letters of internal control weaknesses issued by the statutory
auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the chief internal auditor
shall be subject to review by the audit committee.
6. Statement of deviations:
(a) Quarterly statement of deviation(s) including report of monitoring agency, if
applicable, submitted to stock exchange(s).
(b) Annual statement of funds utilized for purposes other than those stated in
the offer document/ prospectus/notice.
Answer 5A(iii)
Global Reporting Initiative Standards help businesses, governments and other
organizations understand and communicate the impact of business on critical sustainability
issues. Some of the distinctive elements of the GRI Standards – and the activity that
creates them – include:
Multi-stakeholder input : The approach is based on multi stakeholder engagement,
representing the best combination of technical expertise and diversity of experience to
address the needs of all report makers and users. This approach enables to produce
universally applicable reporting guidance. All elements ofthe Reporting Framework are
created and improved using a consensus seeking approach, and considering the widest
possible range of stakeholder interests which includes business, civil society, labour,
accounting, investors, academics, governments and sustainability reporting practitioners.
A record of use and endorsement : Of the world's largest 250 corporations, 92%
report on their sustainability performance and 74% of these use GRI's Standards to do
so. With over 23,000 GRI Reports recorded in the database, sustainability reporting
 19 PP–GRMC&E–June 2022
using the GRI Standards continues to grow. New audiences for sustainability information,
like investors and regulators, are now calling for more and better performance data.
Annual growth in the number of reporters is expected to continue, as we work towards a
key area of our strategy: more reporters and better reporting.
Governmental references and activities : Enabling policy is a key aspect of overall
strategy and GRI work with governments, international organizations and capital markets
to further this agenda. As a result, 35 countries use GRI in their sustainability policies
and look for guidance as the world's most widely used sustainability reporting standards.
In addition GRI have long-standing collaborations with over 20 international organizations
such as the UNGC, OECD and the UN Working Group on Business & Human Rights.
Independence : The creation of the Global Sustainability Standards Board in 2014,
and related governance structure changes, have strengthened the independence of the
standards aspect funding approach also ensures independence. GRI is a stichting – in
Dutch, a non-profit foundation - with a business model that aims for a degree of self-
sufficiency. Funding is secured from diverse sources; governments, companies,
foundations, partner organizations and supporters.
Shared development costs : The expense of developing GRI's reporting guidance is
shared among many users and contributors. For companies and organizations, this
negates the cost of developing in-house or sector based reporting frameworks.
Answer 5A(iv)
Regulation 17 (8) of the SEBI (LODR), 2015 provides that the Chief Executive
Officer(CEO) and the Chief Financial Officer(CFO) shall provide the compliance certificate
to the board of directors as specified in Part B of Schedule II as provided below:
A. They have reviewed financial statements and the cash flow statement for the
year and that to the best of their knowledge and belief:
1. These statements do not contain any materially untrue statement or omit
any material fact or contain statements that might be misleading;
2. These statements together present a true and fair view of the listed entity's
affairs and are in compliance with existing accounting standards, applicable
laws and regulations.
B. There are, to the best of their knowledge and belief, no transactions entered into
by the listed entities during the year which are fraudulent, illegal or violative of
the company's code of conduct.
C. They accept responsibility for establishing and maintaining internal controls for
financial reporting and that they have evaluated the effectiveness of internal
control systems of the listed entity's pertaining to financial reporting and they
have disclosed to the auditors and the Audit Committee, deficiencies in the
design or operation of such internal controls, if any, of which they are aware and
the steps they have taken or propose to take to rectify these deficiencies.
D. They have indicated to the auditors and the Audit committee:
1. significant changes in internal control over financial reporting during the
year;
PP–GRMC&E–June 2022 20
2. significant changes in accounting policies during the year and that the same
have been disclosed in the notes to the financial statements; and
3. instances of significant fraud of which they have become aware and the
involvement therein, if any, of the management or an employee having a
significant role in the listed entity's internal control system over financial
reporting.
PART IV
Question 6
(a) Explain the term ‘‘Ethical Dilemma’’ and the mode to come out of Ethical
Dilemma. (5 marks)
(b) Karl-Henrik Robert along with a group of 50 scientists developed four basic,
non-negotiable system conditions for global sustainability. What are these
conditions ? (5 marks)
Answer 6(a)
Dilemma is a situation that requires a choice between options that are or seem
equally unfavourable or mutually exclusive. By definition, an ethical dilemma involves
the need to choose from among two or more morally acceptable courses of action, when
one choice prevents selecting the other; or, the need to choose between equally
unacceptable alternatives.
A dilemma could be a right vs. wrong situation in which the right would be more
difficult to pursue and wrong would be more convenient. A right versus wrong dilemma is
not so easy to resolve. It often involves an apparent conflict between moral imperatives,
in which to obey one would result in transgressing the other. This is also called an
ethical paradox.
An ethical dilemma involves a situation that makes a person question what is the
‘right’ or ‘wrong’ thing to do. They make individuals think about their obligations, duties
or responsibilities. These dilemmas can be highly complex and difficult to resolve. Easier
dilemmas involve a ‘right’ versus ‘wrong’ answer; whereas, complex ethical dilemmas
involve a decision between a right and another right choice. However, any dilemma
needs to be resolved.
Modes to come out of Ethical Dilemmas
The ethical dilemma consideration takes us into the grey zone of business and
professional life, where things are no longer black or white and where ethics has its vital
role today. A dilemma is a situation that requires a choice between equally balanced
arguments or a predicament that seemingly defies a satisfactory solution.
An ethical dilemma is a moral situation in which a choice has to be made between
two equally undesirable alternatives. Dilemmas may arise out of various sources of
behaviour or attitude, as for instance, it may arise out of failure of personal character,
conflict of personal values and organizational goals, organizational goals versus social
values, etc. A business dilemma exists when an organizational decision maker faces a
choice between two or more options that will have various impacts on (i) the organization’s
 21 PP–GRMC&E–June 2022
profitability and competitiveness; and (ii) its stakeholders. ‘In situations of this kind, one
must act out of prudence to take a better decision.
Answer 6(b)
In an attempt to address criticism of the vagueness in the definition of sustainable
development, Karl-Henrik Robert, founder of the environment organization, The Natural
Step, along with a group of 50 scientists sought to obtain a consensus on sustainability
and developed four ‘basic, non-negotiable system conditions for global sustainability’.
These include:
1. No systematic increase of substances from the earth’s crust in the ecosphere.
This condition implies a drastic reduction in the use of minerals, fossils fuels
and non-renewable resources.
2. No systematic increase of substances produced by society in the ecosphere.
This condition means that substances cannot be produced faster that they are
broken down and degraded biologically. Therefore, the uses of non-biodegradable
materials must be minimized.
3. No systematic diminishing of the physical basis for productivity and diversity of
nature. This condition requires preservation of biodiversity, non-environmentally
damaging land use practices and use of renewable resources.
4. Fair and efficient use of resources and social justice. This implies equitable
access to a just distribution of resources.

***
GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME
(New Syllabus)

DECEMBER 2021

MODULE 1

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
Phones : 41504444, 45341000; Fax : 011-24626727
E-mail : info@icsi.edu; Website : www.icsi.edu
These answers have been written by competent persons
and the Institute hope that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.

The Guideline Answers contain the information based on

the Laws/Rules applicable at the time of preparation.
However, students are expected to be updated with the
applicable amendments which are as follows:

CS Examinations Applicability of Amendments to Laws

December Session upto 31 May of that Calender year
June Session upto 30 November of previous Calender Year

C O N T E N T S
Page
MODULE 1

1. Governance, Risk Management, Compliances and Ethics 1

2. Advanced Tax Laws 24

3. Drafting, Pleadings and Appearances 49

 1 PP–GRMC&E–December 2021
PROFESSIONAL PROGRAMME EXAMINATION
DECEMBER 2021

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES

AND ETHICS
Time allowed : 3 hours Maximum marks : 100
NOTE : Answer ALL Questions.

PART I
Question 1
(a) Z Finance Pvt. Ltd. (Z) is a deposit taking Non-Banking Financial Company
(NBFC-D) registered with the Reserve Bank of India (RBI) and incorporated on
7th January, 2020. Z is engaged in the business of lending and accepting deposits.
The newly appointed statutory auditor of the company advised the board that
the company should have board committees in place as part of corporate
governance compliances, but the board of directors disagreed as the company
was newly incorporated private company. Do you agree with the advice of the
statutory auditor? Explain in brief. Would your answer have been different if Z
had been a non-deposit accepting NBFC ? (5 marks)
(b) M/s. LMN & Co. Chartered Accountants have been appointed as the statutory
auditors of AB Ltd. for the financial year 2019-20. During the course of their
audit, certain transactions were observed to be irregular and on further scrutiny,
the auditors uncovered a series of fraudulent transactions involving the Sales
Manager and the Finance Manager. The amount involved was `50 lakhs. Under
the circumstances, explain the reporting responsibilities of M/s. LMN & Co.
(5 marks)
(c) P Ltd. is a listed company having 10 directors but only 9 were present in a
particular board meeting. What would be the quorum required for the board
meeting? The number of interested directors in respect of an agenda item is 7.
What would be the quorum in such a case ? Discuss with reference to Secretarial
Standard–1 (SS-1). (5 marks)
(d) SBL Limited is an unlisted public company having paid-up share capital of `10
crores and turnover of ` 300 crores. The Board of directors comprise of one
nominee director, five non-executive directors, two non-resident directors and
one managing director. Is the composition of the Board of directors valid ?
Answer with reasons. (5 marks)
Answer 1(a)
The Reserve Bank of India in the public interest and to regulate the credit system to
the advantage of the country, issued directions known as the Non-Banking Financial
Companies- Corporate Governance (Reserve Bank) Directions, 2015, relating to Corporate
Governance vide Notification dated April 10, 2015 and vide master circular dated July 1,
2015.
1
PP–GRMC&E–December 2021 2
These Directions require every non-deposit accepting Non-Banking Financial
Company with asset size of `500 crore and above (NBFCs-ND-SI), as per its last audited
balance sheet, and all deposit accepting Non-Banking Financial Companies (NBFCs-D),
henceforth called as Applicable NBFCs to constitute the following committees of the
board:
i. Audit Committee, consisting of not less than three members of its Board of
Directors. And in accordance with the provisions of Section 177 of the Companies
Act, 2013. The Audit Committee must ensure that an Information System Audit
of the internal systems and processes is conducted at least once in two years
to assess operational risks faced by the NBFCs.
ii. Nomination committee, to ensure 'fit and proper' status of proposed/ existing
directors with the same powers, functions and duties as laid down in Section
178 of the Companies Act, 2013.
iii. Risk Management committee, to manage the integrated risk, all Applicable
NBFCs shall form a Risk Management Committee, besides the Asset Liability
Management Committee.
In the instant case, Z is a deposit accepting company and therefore, the statutory
auditor is correct in advising that the company has to establish board committees as
part of corporate governance compliance.
If Z had been a non-deposit accepting NBFC, then it would have to comply with the
RBI corporate governance criteria only when its assets size is `500 crore and above.
Answer 1(b)
As per section 143 (12) of the Companies Act, 2013 read with Companies (Audit and
Auditors) Rules, 2015, if an auditor of a company, in the course of the performance of
his duties as statutory auditor, has reason to believe that an offence of fraud, which
involves or is expected to involve individually an amount of `1 crore or above, is being
or has been committed against the company by its officers or employees, the auditor
shall report the matter to the Central Government within such time and in such manner
as prescribed.
Where the fraud is of an amount lesser than `1 crore, the auditor shall report the
matter to Audit Committee constituted under section 177 of the Companies Act, 2013 or
to the Board immediately, but not later than two days of the knowledge of the fraud,
specifying the following:
• Nature of fraud with description;
• Approximate amount involved; and
• Parties involved.
The following details of each of the fraud reported to the Audit Committee or the
Board during the year shall be disclosed in the Board's Report:
• Nature of fraud with description;
• Approximate amount involved;
 3 PP–GRMC&E–December 2021
• Parties involved, if remedial action not taken; and
• Remedial actions taken.
In the instant case, as the amount of fraud is less than `1 crore, M/s. LMN & Co.
shall report the matter to the Audit Committee or the Board as stated above along with
the disclosure in the Board’s Report in the manner as may be prescribed.
Answer 1(c)
As per Secretarial Standard - 1 (SS-1) on Meetings of the board of directors, the
quorum for board meeting shall be one-third of the total strength of the board or two
directors, whichever is higher. Any fraction contained in the above one-third shall be
rounded off to the next one.
Directors participating through electronic mode in a meeting shall be counted for the
purpose of quorum, unless they are to be excluded for any items of business under the
provisions of the Companies Act, 2013 or any other law.
In the instant case, P Ltd. has 10 directors. Therefore, the quorum for its board
meeting would be 4 (1/3rd of 10 = 3.33, rounded off to 4). As 9 directors are present, the
requisite quorum is fulfilled.
If the number of interested directors exceeds or is equal to two-thirds of the total
strength, the remaining directors present at the meeting, being not less than two, shall
be the quorum during such item. In a board meeting, where 7 out of 9 directors present
are interested in an agenda item, two-thirds of the total strength will be 7 (2/3rd of 10 =
6.67, rounded off to 7). Hence, number of interested directors is equal to 2/3rd of total
strength and the required quorum will be the number of directors who are not interested
and present at the meeting, i.e. 9 - 7 = 2 directors.
Answer 1(d)

Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014

prescribes that the following class of companies shall appoint at least one women director:

(1) Every listed company; and

(2) Every public company having paid-up share capital of one hundred crore rupees
or more;
or
(3) Every public company having turnover of three hundred crore rupees or more.

Further, Rule 4 of Companies (Appointment and Qualification of Directors) Rules,

2014 prescribes the following class of companies shall have at least two independent
directors:

(1) Public Companies having paid-up share capital of 10 crore rupees or more; or

(2) Public Companies having turnover of 100 crore rupees or more; or

(3) Public Companies which have, in aggregate, outstanding loans, debentures and
deposits, exceeding 50 crore rupees.
PP–GRMC&E–December 2021 4
Section 149(6) of the Companies Act, 2013 specifically excluded nominee director
from being considered as Independent. Hence, nominee director cannot be treated as an
Independent Director.

In view of above legal provisions, the present composition of Board of Directors is

not in compliance with the provisions of the Companies Act, 2013 as the Company
satisfying the threshold criteria given above should have atleast:

• Two Independent directors, and

• One Women director.

Hence, it should appoint atleast two independent directors and one women director.
Attempt all parts of either Q. No. 2 or Q. No. 2A
Question 2
(a) Discuss, in brief, the actions the institutional investors in a listed company may
take under the UK Stewardship Code if they are dissatisfied with the board’s
response to their concerns on the performance of the company during the previous
financial year. (5 marks)
(b) During the course of the statutory audit of Y Ltd., a listed company, it was
observed for the first time that there are shares in the demat suspense account.
State the disclosure requirements in this regard in Y Ltd.’s annual report.
(5 marks)
(c) ‘‘Shareholders and stakeholders are both associated with a corporation, but
their interests in the organization differ.’’ Explain with reference to stakeholder
theory. (5 marks)
OR (Alternate question to Q. No. 2)
Question 2A
(i) You are the company secretary of Q Ltd., a listed company. The Chairman of
the Board of directors of Q Ltd. is concerned that the CEO of the company will
be reaching his retirement age in a couple of years. He is vaguely aware that the
company has a succession planning policy in place, but seeks your advice on
the nature and best practices for succession planning.
(ii) Prepare a detailed note on Institute of Directors for promoting good corporate
governance for UK business.
(iii) ‘‘Company law’s central dilemma has been the separation of ownership and
control in companies.’’ Comment. (5 marks each)
Answer 2(a)
The UK Stewardship Code sets out the principles of effective stewardship by
investors. Stewardship responsibilities of institutional investors may include monitoring
and engaging with companies on matters such as strategy, performance, risk, capital
structure and corporate governance, including culture and remuneration.
 5 PP–GRMC&E–December 2021
The Stewardship Code also states that institutional shareholders should:
• Publicly disclose their policy on how they will discharge their stewardship
responsibilities.
• Have a robust policy on managing conflicts of interest in relation to stewardship
which should be publicly disclosed.
• Monitor their investee companies.
• Establish clear guidelines on when and how they will escalate their stewardship
activities.
• Be willing to act collectively with other investors where appropriate.
• Have a clear policy on voting and disclosure of voting activity.
• Report periodically on their stewardship and voting activities.
Institutional investors should have clear guidelines about the circumstances when
they will intervene actively. Compliance with the code does not constitute an invitation
to manage the affairs of a company. If the company's board does not respond
constructively, the institutional investor should have guidelines for deciding whether and
how to escalate their action. For example, an institutional investor may ask for a meeting
with the company chairman, or find out whether other institutional shareholders share
the same concerns so that joint action can be considered. Institutional investors should
endeavour to identify at an early stage issues that may result in a significant loss in
investment value. If they have concerns, they should seek to ensure that the appropriate
members of the investee company’s board or management are made aware.
Answer 2(b)
Para F of Schedule V of SEBI (LODR) Regulations, 2015 provides that the listed
entity shall disclose the following details in its annual report, as long as there are shares
in the demat suspense account or unclaimed suspense account, as applicable:
(1) aggregate number of shareholders and the outstanding shares in the suspense
account lying at the beginning of the year;
(2) number of shareholders who approached listed entity for transfer of shares from
suspense account during the year;
(3) number of shareholders to whom shares were transferred from suspense account
during the year;
(4) aggregate number of shareholders and the outstanding shares in the suspense
account lying at the end of the year;
(5) that the voting rights on these shares shall remain frozen till the rightful owner of
such shares claims the shares.
Hence, Y Ltd, having shares in suspense account, has to disclose the above
information in its annual report.
Answer 2(c)
A shareholder is a person or entity that owns shares in the company. A shareholder
is entitled to vote in general meetings, receive dividends from the company, transfer the
shares etc. and include equity shareholders and preference shareholders of the company.
PP–GRMC&E–December 2021 6
Stakeholders represent a substantially broad group, because they include anyone
having an interest in the success or failure of a business. A company’s stakeholders are
"those groups without whose support the organization would cease to exist." This group
include shareholders, but goes well beyond shareholders to also include creditors,
customers, employees, investors, suppliers, the local community, government agencies
and many others who have a 'stake' or claim in some aspect of the company's products,
operations, markets, industry and outcomes. . Thus, shareholders are a subset of the
larger group of stakeholders.
Traditionally, shareholders have been considered more important than all other
stakeholders in a business, since they own the entity and have rights to receive its cash
flows under certain circumstances. However, the stakeholder theory suggests that the
purpose of a business is to create as much value as possible for stakeholders. It creates
an ecosystem of related groups, all of whom need to be considered and satisfied to
keep the company healthy and successful in the long term. In order to succeed and be
sustainable over time, executives must keep the interests of customers, suppliers,
employees, communities and shareholders aligned and going in the same direction.
Answer 2A(i)
Board succession planning is an ongoing process linked closely to a company’s
strategy. It is essential for good governance, as it sets the stage for board engagement,
performance and effective leadership. Succession plans address the inevitable changes
that occur when directors resign, retire or die. It helps ensure the inclusion of directors
with a balanced level of institutional knowledge and fresh perspectives.
It is of utmost importance that the board of directors are prepared for resignation
and / or retirement of its members. Succession planning for the board includes planning
for all board positions and for the composition of the board as a whole.
The nomination and remuneration committee should review the skills required, identify
the gaps, develop transparent appointment criteria and inform succession planning. The
committee may also carry out regular reviews of the composition of the board, and
report to the board on recommendations for changes in the future. Executive directors
may be recruited from external sources, but companies should also develop internal
talent and capability. Initiatives might include middle management development
programmes, facilitating engagement from time to time with non executive directors and
partnering and mentoring schemes.
In view of the approaching retirement of the CEO, the nomination committee should
start the process of identification of the successor, which may be an internal or external
appointment.
Some leading practices for board succession planning are:
• Using a skills metric to proactively shape board composition that incorporates
strategic direction and opportunities, regulatory and industry developments,
challenges, and transformation.
• Conducting robust annual performance evaluations, including facilitation by an
independent third party.
• Establishing and enhancing written director’s qualification standards that align
 7 PP–GRMC&E–December 2021
with the company’s business and corporate strategy, and including these
standards in corporate governance policies and bylaws as appropriate.
• Reviewing evolving committee and board leadership needs, including the time
commitments required.
• Considering director election results and engagement by investors regarding
board composition, independence, leadership and diversity.
• Prioritizing an independent mindset on boards, including through board diversity,
to foster debate, challenge norms and invigorate board oversight processes and
strategy development.
• Making sure mentoring and development opportunities are available for incoming
directors.
Answer 2A(ii)
The Institute of Directors (IOD) is a non-party-political business organisation
established in United Kingdom in 1903. The IOD is charged with promoting good corporate
governance for UK business. The board of IOD is responsible for the overall leadership
of the Institute of Directors (IOD) and setting its values, standards, aims and objectives
and delivering them in line with the objects of the Royal Charter. The board is composed
of the chair, a majority of non-executive directors, and the director general and executive
directors. It acts as a unitary board and has the following powers and responsibilities:
• to manage the affairs and long-term success of the Institute
• to approve the strategy of the Institute, business and financial planning, to hold
the executive to account and ensure financial and risk stewardship
• to approve the annual report and accounts
• to appoint, reappoint and remove (acting by the non-executive directors only)
the director general and other executive directors, as the board permits
• to ensure open and transparent engagement with all stakeholders when carrying
out its duties
• to establish and dissolve committees and groups of the board
The council is the guardian of the IOD constitution, ensuring that the objects of the
IOD’s Royal Charter are delivered. It comprises 11 members of geographical areas, 13
elected members and the IOD chairman. The council carries out the following
responsibilities:
• to appoint, reappoint and remove the non-executive directors and to determine
their independence, having considered any recommendations of the nomination
committee
• to hold the board to account for the delivery of the charter objects and adherence
to the laws of the institute
• to provide critique and opinion to the board on the overall progress of the institute
l to monitor the board’s engagement with membership and stakeholders
• to appoint and remove a senior independent council member who will act as
PP–GRMC&E–December 2021 8
deputy chair of the council The IOD seeks to provide an environment conducive
to business success.
Answer 2A(iii)
Company law’s central dilemma has been the separation of ownership and control in
companies. Shareholders, being owners of the company, should ideally play a crucial
role in governing the company. However, it is not practically possible for each shareholder
to participate in the decision making process on a day to day basis. Further, the
shareholders generally lack the knowledge and professional skills that are required to
manage a company. Hence, they elect a board of directors to govern the company and
take strategic decisions.
The shareholders vest control of the business in the board of directors, who in turn,
appoint management specialists to run the business and return the profits of the business
back to the owner shareholders. The directors have a fiduciary responsibility to the
shareholders (principal) of their organisation.
Companies allow for the separation in the roles of ownership and management. It is
not necessary that owners need to be managers and vice versa. Owners and managers
may have differing views on various issues in the company. For instance, managers
may pursue growth rather than maximize share value, whereas shareholders may prefer
high leverage because it increases share values.
Question 3
(a) M Ltd. is a listed entity having a paid up equity share capital of ` 100 crores.
The company has 1500 small shareholders. It received a notice from 1200
small shareholders proposing Mr. X, a small shareholder as a candidate for the
post of small shareholder director. The board of directors of M Ltd. are not
interested in the appointment of Mr. X as small shareholder director, as they
feel that there are sufficient numbers of independent directors on the board who
are taking adequate steps to protect the interests of all shareholders including
small shareholders. Can such nomination be rejected. Discuss. (3 marks)
(b) Whether the receipt of sitting fee for attending the board meeting by an
Independent Director from a company would be considered as having pecuniary
interest while considering his appointment in the holding company, subsidiary
company or associate company of such company ? (3 marks)
(c) HP Ltd., a Non-Government unlisted company, have paid up share capital of
`20 crores as on 31st March, 2019, it was increased to `25 crores during the
financial year 2019-20. The company secretary advised that the company should
have formal annual evaluation of performance of the Board, its committees and
all the individual directors. Answer the following questions with reasons :
(i) Discuss the legal provisions in this regard.
(ii) Whether the annual performance evaluation is mandatory based on the
provided facts ?
(iii) In the above case, if the company had been a Government Company, what
would be your answer ? (3 marks)
 9 PP–GRMC&E–December 2021
(d) Explain the areas briefly in which Asian Corporate Governance Association
(ACGA) works. (3 marks)
(e) Write a short note on the content of Management Discussion and Analysis.
(3 marks)
Answer 3(a)
Section 151 of the Companies Act, 2013 read with the Rules made thereunder
provides that a listed company, may upon notice of not less than one thousand small
shareholders or one-tenth of the total number of such shareholders, whichever is lower,
have a small shareholders' director elected by the small shareholders.
However, the use of "may" in both the Section and the Rules gives an impression
that it is the prerogative of the Company with no obligation on the company to process
the notice received from the small shareholders for appointment of a director representing
small shareholders.
In the instant case, M Ltd. has sufficient number of independent directors who are
taking adequate care of the interests of all shareholders including small shareholders.
Under the circumstances, the board of M Ltd. may reject the appointment of Mr. X as
small shareholder director by explaining the circumstances to the shareholders and the
rationale for taking such decision.
Answer 3(b)
The term "Pecuniary relationship" as provided in section 149(6)(c) of the Companies
Act, 2013 does not include receipt of remuneration, from one or more companies, by
way of fee provided under sub-section (5) of section 197, reimbursement of expenses
for participation in the Board and other meetings and profit related commission approved
by the members, in accordance with the provisions of the Act.
Hence, receipt of sitting fees would not be considered as pecuniary interest while
considering his appointment in the holding company, subsidiary company or associate
company of such company.
Answer 3(c)
(i) Section 134(3) (p) of the Companies Act, 2013 read with Rule 8(4) of the
Companies (Accounts) Rules, 2014 provides that the Board Report of every
listed company and every other public company having paid up share capital of
Rs. 25 crores or more calculated at the end of the preceding financial year
except Government Companies has to do formal annual evaluation of the Board,
its committees and all individual directors. The Board's report of such companies
must include a statement indicating the manner and criteria of formal Board
Evaluation.
Further, Section 178 of the Companies Act, 2013 contains 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
PP–GRMC&E–December 2021 10

the Nomination and Remuneration Committee or by an independent external

agency and review its implementation and compliance.
(ii) As per the provided facts, HP Ltd. is a Non- Government, public, unlisted
company having paid up share capital of Rs. 25 crores in the preceding financial
year (2019-20), thus the annual performance evaluation is mandatory in the
Financial year 2020-21 in this case.
(iii) The Exemption has been granted to Government Company from compliance of
the provisions of section 134(3) (p) of the Companies Act, 2013.
Answer 3(d)
The Asian Corporate Governance Association (ACGA) is an independent, non-profit
membership organisation dedicated to working with investors, companies and regulators
in the implementation of effective corporate governance practices throughout Asia.
ACGA’s scope of work covers three areas:
1. Research : Tracking corporate governance developments across 12 markets in
Asia Pacific and producing independent analysis of new laws and regulations,
investor activism and corporate practices.
2. Advocacy : Engaging in a constructive dialogue with financial regulators, stock
exchanges, institutional investors and companies on practical issues affecting
the regulatory environment and the implementation of better corporate governance
practices in Asia.
3. Education : Organising conferences and seminars that foster a deeper
understanding of the competitive benefits of sound corporate governance and
ways to implement it effectively.
Answer 3(e)
As per SEBI (LODR) Regulations, 2015, Management Discussion and Analysis
Report should form part of the Annual Report of the Company to the shareholders. It
should include discussion on the following matters within the limits set by the company’s
competitive position:
a) Industry structure and developments
b) Strength and weakness
c) Opportunities and Threats
d) Segment–wise or product-wise performance
e) Outlook
f) Risks and concerns
g) Internal control systems and their adequacy
h) Discussion on financial performance with respect to operational performance
i) Material developments in Human Resources, Industrial Relations front, including
number of people employed.
 11 PP–GRMC&E–December 2021
j) Environmental Protection and Conservation, Technological conservation,
Renewable energy developments, Foreign Exchange conservation
k) Corporate social responsibility
Where in the preparation of financial statements, a treatment different from that
prescribed in an Accounting Standard has been followed, the fact shall be disclosed in
the financial statements, together with the management's explanation as to why it believes
such alternative treatment is more representative of the true and fair view of the underlying
business transaction.
PART II
Attempt all parts of either Q. No. 5 or Q. No. 5A
Question 4
(a) ‘‘A Company Secretary plays an important role in controlling the risk
management.’’ Discuss.
(b) What are the steps involved in risk identification ?
(c) Discuss briefly the Enterprise Risk Management (ERM). Explain the components
derived from the way management runs an enterprise and are integrated with
the management process.
(d) Discuss the roles and responsibilities of the personnel of an entity in enterprise-
wide risk oversight. (5 marks each)
Answer 4(a)
In terms of Section 203(1)(ii) of the Companies Act, 2013, a Company Secretary is
a Key Managerial Personnel. Hence being a top level officer and board confidante, a
Company Secretary can pay a role in ensuring that a sound Enterprise wide Risk
Management (ERM) which is effective throughout the company is in place. The company
secretaries are governance professionals whose role is to enforce a compliance framework
to safeguard the integrity of the organization and to promote high standards of ethical
behavior.
The functions of a Governance Professional include:
1. Advising on best practice in governance, risk management and compliance.
2. Championing the compliance framework to safeguard organizational integrity.
3. Promoting and acting as a 'sound board' on standards of ethical and corporate
behaviour.
4. Balancing the interests of the Board or governing body, management and other
stakeholders.
Answer 4(b)
The process for risk identification starts by taking inventory of the potential project
risks that can affect the project delivery. This step is crucial for efficient risk management
throughout the project. The outputs of the risk identification are used as an input for risk
PP–GRMC&E–December 2021 12
analysis, and they reduce a project manager’s uncertainty. It is an iterative process that
needs to be continuously repeated throughout the duration of a project. The process
needs to be rigorous to make sure that all possible risks are identified. An effective risk
identification process should include the following steps:
1. Creating a systematic process - The risk identification process should begin
with project objectives and success factors.
2. Gathering information from various sources - Reliable and high quality information
is essential for effective risk management.
3. Applying risk identification tools and techniques - The choice of the best suitable
techniques will depend on the types of risks and activities, as well as
organizational maturity.
4. Documenting the risks - Identified risks should be documented in a risk register
and a risk breakdown structure, along with its causes and consequences.
5. Documenting the risk identification process - To improve and ease the risk
identification process for future projects, the approach, participants, and scope
of the process should be recorded.
6. Assessing the process’ effectiveness - To improve it for future use, the
effectiveness of the chosen process should be critically assessed after the
project is completed.
Answer 4(c)
The Enterprise Risk Management is an integrated Framework which is one of the
most widely recognized and applied enterprise risk management frameworks in the world.
It provides a principles-based approach to help organizations design and implement
enterprise-wide approaches to risk management.
Enterprise risk management deals with risks and opportunities affecting value
creation or preservation, defined as follows:
Enterprise risk management is a process, effected by an entity’s board of directors,
management and other personnel, applied in strategy setting and across the enterprise,
designed to identify potential events that may affect the entity, and manage risk to be
within its risk appetite, to provide reasonable assurance regarding the achievement of
entity objectives.
This definition is purposefully broad. It captures key concepts fundamental to how
companies and other organizations manage risk, providing a basis for application across
organizations, industries, and sectors. It focuses directly on achievement of objectives
established by a particular entity and provides a basis for defining enterprise risk
management effectiveness.
Components of Enterprise Risk Management
Enterprise risk management consists of eight interrelated components. These are
derived from the way management runs an enterprise and are integrated with the
management process. These components are:
1. Internal Environment – The internal environment encompasses the tone of an
 13 PP–GRMC&E–December 2021
organization, and sets the basis for how risk is viewed and addressed by an
entity’s people, including risk management philosophy and risk appetite, integrity
and ethical values, and the environment in which they operate.
2. Objective Setting – Objectives must exist before management can identify
potential events affecting their achievement. Enterprise risk management
ensures that management has in place a process to set objectives and that the
chosen objectives support and align with the entity’s mission and are consistent
with its risk appetite.
3. Event Identification – Internal and external events affecting achievement of an
entity’s objectives must be identified, distinguished between risks and
opportunities.
4. Risk Assessment – Risks are analysed, considering likelihood and impact, as a
basis for determining how they should be managed. Risks are assessed on an
inherent and a residual basis.
5. Risk Response – Management selects risk responses – avoiding, accepting,
reducing, or sharing risk – developing a set of actions to align risks with the
entity’s risk tolerances and risk appetite.
6. Control Activities – Policies and procedures are established and implemented
to help ensure the risk responses are effectively carried out.
7. Information and Communication – Relevant information is identified, captured,
and communicated in a form and time frame that enable people to carry out their
responsibilities. Effective communication also occurs in a broader sense, flowing
down, across, and up the entity.
8. Monitoring – The entirety of enterprise risk management is monitored and
modifications made as necessary. Monitoring is accomplished through ongoing
management activities, separate evaluations, or both.
Enterprise risk management is not strictly a serial process, where one component
affects only the next. It is a multi-directional, iterative process in which almost any
component can and does influence another.
Answer 4(d)
The ultimate responsibility for enterprise-wide risk management starts at the top.
However, everyone in the entity will have some role and responsibility for Enterprise risk
management (ERM) as discussed below:
1. Board of directors & CEO - have ultimate accountability for all risks. Risk
management practices must be discussed periodically and risk management
related policies must be reviewed and approved. The extent to which the board
is willing to accept any consequences of taking risk must be clearly defined.
2. Senior management - design, implement and maintain an effective risk
framework. This involves developing policies and procedures, promoting a risk
aware culture, establishing and monitoring the risk appetite and reporting regularly
to the board of directors.
PP–GRMC&E–December 2021 14
3. Business units - identify, assess, measure, monitor, control, and report risks to
senior management. This involves managing relevant risks within the framework
established by senior management and ensuring compliance with policies and
procedures.
4. Support functions (i.e. Legal, HR, IT etc.) - provide support to business units in
developing and enforcing policies and procedures.
5. Internal audit & Compliance - monitor and provide independent assurance of the
effectiveness of the risk framework.
6. Risk officer/management - co-ordinate the establishment of the risk framework
and provide risk management expertise.
PART III
Attempt all parts of either Q. No. 5 or Q. No. 5A
Question 5
(a) Define compliance. What is the difference between compliance and conformance?
(b) Write a short note on reporting principles and standard disclosures under Global
Reporting Initiative.
(c) Discuss the guiding principles for preparation and presentation of an integrated
report.
(d) Define internal audit. What are the main aspects of internal auditing ?
(5 marks each)
OR (Alternate question to Q. No. 5)
Question 5A
(i) ‘‘Internal control is a part of the internal check system.’’ Discuss.
(ii) Define financial reporting. What are its main components ?
(iii) State in brief, the components of internal control under the framework of the
Committee of Sponsoring Organizations (COSO).
(iv) Specify, in brief, the information to be disclosed in board’s report.
(5 marks each)
Answer 5(a)
OECD defines compliance as the act of adhering to, and the ability to demonstrate
adherence to mandated requirements defined by laws and regulations, as well as voluntary
requirements resulting from contractual obligations and internal policies.
The International Compliance Association has defined the term compliance as the
ability to act according to an order, set of rules or request. Compliance mainly operates
at two levels:
• Level 1 - compliance with the external rules that are imposed upon an organisation
as a whole.
 15 PP–GRMC&E–December 2021
• Level 2 - compliance with internal systems of control that are imposed to achieve
compliance with the externally imposed rules.
The difference between compliance and conformance is as below:

Compliance Conformance

Forced adherence to a law, regulation, Voluntary adherence to a standard, rule,

rule, process or practice. specification, requirement, design,
process or practice.
Applies to laws and regulations that Applies to strategies and plans that are
one has no option but to follow or adopted to be more productive or to
face penalties. Such regulations may improve quality.
potentially be productive for society
but don't necessarily contribute to an
organization's goals.

Answer 5(b)
Part 1 of Global Reporting Initiative (GRI) - Reporting Principles and Standard
Disclosures - contains reporting principles, standard disclosures, and the criteria to be
applied by an organization to prepare its sustainability report 'in accordance with the
guidelines.
The Reporting Principles are fundamental to achieving transparency in sustainability
reporting and therefore should be applied by all organizations when preparing a
sustainability report. The Principles are divided into two groups:
(a) Principles for defining report content : The Principles for Defining Report Content
describe the process to be applied to identify what content the report should
cover by considering the organization’s activities, impacts, and the substantive
expectations and interests of its stakeholders.
(b) Principles for defining Report Quality : The Principles for Defining Report Quality
guide on ensuring the quality of information in the sustainability report, including
its proper presentation. The quality of the information is important to enable
stakeholders to make sound and reasonable assessments of performance, and
take appropriate actions.
There are two different types of Standard Disclosures:
1. General Standard Disclosures:
• Strategy and Analysis
• Organizational Profile
• Identified Material Aspects and Boundaries
• Stakeholder Engagement
• Report Profile
• Governance
• Ethics and Integrity
PP–GRMC&E–December 2021 16
2. Specific Standard Disclosures:
• Disclosures on Management Approach
• Indicators
Answer 5(c)
Guiding Principles underpin the preparation of an integrated report, informing the
content of the report and how information is presented. The following guidelines are
applied individually and collectively for the purpose of preparing and presenting an
integrated report:
1. Strategic focus and future orientation : An integrated report should provide insight
into the organization’s strategy, and how it relates to the organization’s ability to
create value in the short, medium and long term, and to its use of and effects on
the capitals
2. Connectivity of information : An integrated report should show a holistic picture
of the combination, interrelatedness and dependencies between the factors that
affect the organization’s ability to create value over time
3. Stakeholder relationships : An integrated report should provide insight into the
nature and quality of the organization’s relationships with its key stakeholders,
including how and to what extent the organization understands, takes into account
and responds to their legitimate needs and interests
4. Materiality : An integrated report should disclose information about matters that
substantively affect the organization’s ability to create value over the short,
medium and long term
5. Conciseness : An integrated report should be concise
6. Reliability and completeness : An integrated report should include all material
matters, both positive and negative, in a balanced way and without material
error
7. Consistency and comparability : The information in an integrated report should
be presented: (a) on a basis that is consistent over time; and (b) in a way that
enables comparison with other organizations to the extent it is material to the
organization’s own ability to create value over time.
Answer 5(d)
Internal audit is an independent, objective assurance and consulting activity designed
to add value and improve an organization’s operations. It helps an organization
accomplish its objectives by bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management, control, and governance processes.
The main aspects of internal auditing are:
1. Review, appraisal and evaluation of the soundness, adequacy and application
of financial, accounting and other operating controls.
2. Ascertaining the adequacy and reliability of management information and control
systems.
 17 PP–GRMC&E–December 2021
3. Ascertaining the achievement of management objectives and compliance with
established plans, policies and procedures.
4. Ensuring proper safeguards for assets - their utilization and accounting thereof.
5. Detection and prevention of fraud and error.
6. Ascertaining the integrity of management data in an organisation.
7. Identifying the areas of cost reduction, coupled with increased production,
improved productivity and improved systems.
8. Ascertaining the quality of performance and undertaking ‘value for money’
exercises.
9. Compliance with statutory laws and rules including adherence to the Companies
(Auditors’ Report) Order to avoid adverse comments from the statutory auditors.
10. Undertaking special reviews and assignments directed by management to ensure
economical and efficient use of resources.
11. To provide for a channel of communicating new ideas to the top management.
Answer 5A(i)
According to Standard on Auditing (SA) 315, internal control is the process designed,
implemented and maintained by those charged with governance, management and other
personnel to provide reasonable assurance about the achievement of an entity’s objectives
with regard to reliability of financial reporting, effectiveness and efficiency of operations,
and compliance with applicable laws and regulations.
Internal check refers to allocation of duties in such a manner that the work of one
person is checked by another while that other is performing his own duties in a normal
way. In other words, it may be referred to as a system of instituting checks on the day
to-day transactions which operate continuously as a part of routine system whereby the
work of one person is complementary to the work of another, the object being the
prevention or early detection of errors or fraud. The objective of such allocation of duties
is that no single individual has an exclusive control over any one transaction or group of
transactions.
Thus, internal check is a part of the overall internal control system and a method of
division of work with the objective of prevention or early detection of errors or fraud.
Hence, it is not correct to say that internal control is part of the internal check system.
Answer 5A(ii)
Financial Reporting involves the disclosure of financial information to the various
stakeholders about the financial performance and financial position of the organisation
over a specified period of time. These stakeholders include – investors, creditors, public,
debt providers, governments & government agencies. In case of listed companies the
frequency of financial reporting is quarterly & annual.
Financial reporting serves two primary purposes. First, it helps management to
engage in effective decision making concerning the company’s objectives and overall
PP–GRMC&E–December 2021 18
strategies. The data disclosed in the reports can help management discern the strengths
and weaknesses of the company, as well as its overall financial health. Second, financial
reporting provides vital information about the financial health and activities of the company
to its stakeholders including its shareholders, potential investors, consumers, and
government regulators. It is a way of ensuring that the company is being run appropriately.
The main components of financial reporting are:
1. The financial statements – Balance Sheet, Statement of Profit & Loss, Cash
flow statement & Statement of changes in stock holder’s equity
2. The notes to financial statements
3. Quarterly & Annual reports (in case of listed companies)
4. Prospectus (In case of companies going for IPOs)
5. Management Discussion & Analysis (In case of public companies)
The Government and the Institute of Chartered Accounts of India (ICAI) has issued
various accounting standards and guidance notes which are applied for the purpose of
financial reporting. This ensures uniformity across various diversified industries when
they prepare and present their financial statements.
Answer 5A(iii)
A system of internal control has five components under the Committee of Sponsoring
Organizations (COSO) framework which are as follows:
1. Control environment:
• Exercise integrity and ethical values.
• Make a commitment to competence.
• Use the board of directors and audit committee.
• Facilitate management's philosophy and operating style.
• Create organizational structure.
• Issue assignment of authority and responsibility.
• Utilize human resources policies and procedures.
2. Risk assessment:
• Create company wide objectives.
• Incorporate process-level objectives.
• Perform risk identification and analysis.
• Manage change.
3. Control activities:
• Follow policies and procedures.
 19 PP–GRMC&E–December 2021
• Improve security (application and network).
• Conduct application change management.
• Plan business continuity/backups.
• Perform outsourcing.
4. Information and communication:
• Measure quality of information.
• Measure effectiveness of communication.
5. Monitoring:
• Perform ongoing monitoring.
• Conduct separate evaluations.
• Report deficiencies.
Answer 5A(iv)
The Companies Act, 2013 mandates certain disclosures to be made in the board's
report. In addition, a listed company has to comply with certain additional requirements
under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Where
a company is listed in an overseas stock exchange, then it has to also comply with the
disclosure requirements of that exchange. A company regulated by any other law has to
comply with the disclosure requirements of those laws.
The board's report should be based on the company's standalone financial statement
and should relate to the financial year for which such statement has been prepared. If
any information is specified elsewhere in the financial statement, then the board's report
may give a reference thereof instead of repeating the same.
A board’s report should typically include information under following heads:
• Company Specific Information
• General Information
• Capital and Debt Structure
• Credit Rating of Securities
• Investor Education and Protection Fund (IEPF)
• Management
• Disclosures Relating to Subsidiaries, Associates and Joint Ventures
• Details of Deposits
• Particulars of Loans, Guarantees And Investments
• Particulars of Contracts or Arrangements with Related Parties
• Corporate Social Responsibility (CSR)
• Conservation of Energy, Technology Absorption
• Foreign Exchange Earnings and Outgo
PP–GRMC&E–December 2021 20
• Risk Management including management perception of Risk factors
• Details of Establishment of Vigil Mechanism
• Changes in directors and KMP
• Material Orders of Judicial Bodies /Regulators
• Auditors Reports including Secretarial Audit Report
• Explanations in Response to Auditors’ Qualifications
• Compliance With Secretarial Standards
• Compliance of applicable regulations
• Corporate Insolvency Resolution Process Initiated under the Insolvency and
Bankruptcy Code, 2016 (IBC)
• Failure to Implement any Corporate Action
• Annual Return link on website
• Sweat Equity, ESOPs etc.
• Attendance of Directors at meetings of Board
• Details of Committee meetings
• Additional Disclosures Under Listing Regulations
• Disclosures pertaining to the Sexual Harassment of Women at the Workplace
(Prevention, Prohibition and Redressal) Act, 2013 etc.
PART IV
Question 6
(a) ‘‘The Prevention of Corruption Act, 1988 enacted to combat corruption in public
sector and not in the private sector businesses of India.’’ Do you agree with the
statement ? Justify your answer with the help of provided provision in the
Prevention of Corruption Act, 1988.
(b) Explain the Economic Value Added (EVA) and how it is helpful in calculating
the true economic profit of an enterprise ? (5 marks each)
Answer 6(a)
The Prevention of Corruption Act, 1988 (PCA) criminalises the acceptance of
gratification (pecuniary or otherwise) other than the acceptance of legal remuneration by
public servants which is paid by their employers in connection with the performance of
their duties. Aiding and abetting the commission of bribery is also an offence, such that
any person, who bribes or attempts to bribe a public servant or acts as a middleman for
such bribing may also be held liable. Further, the PCA creates an adverse presumption
if a public servant’s assets are disproportionate in value to his or her income and cannot
be satisfactorily accounted for.
The provisions of the PCA apply regardless of the location or jurisdiction of the
commission of an offence, as long as the same is committed by a ‘public servant’ as
defined under it. Judicial decisions have also interpreted the term ‘public servant’ in the
PCA to include a wide variety of persons, such as bank employees in both private and
government owned banks.
 21 PP–GRMC&E–December 2021
The PCA deals only with bribery of public servants. It does not extend to bribery or
corruption in the private sector, i.e. where a public servant is not involved. That said, a
private person/entity will be liable for inducing a public servant to commit an act that is
prohibited by the PCA, by corrupt or illegal means or by exercising personal influence.
Who is Public Servant [Section 2(c)]:
“Public servant” means –
(i) any person in the service or pay of the Government or remunerated by the
Government by fees or commission for the performance of any public duty;
Public Duty has been defined by Section 2(b) of the Act, which means a duty in
the discharge of which the State, the public or the community at large has an
interest.
(ii) any person in the service or pay of a local authority;
(iii) any person in the service or pay of a corporation established by or under a
Central, Provincial or State Act, or an authority or a body owned or controlled or
aided by the Government or a Government company as defined in section 617
of the Companies Act, 1956 (1 of 1956);
(iv) any Judge, including any person empowered by law to discharge, whether by
himself or as a member of any body of persons, any adjudicatory functions;
(v) any person authorised by a court of justice to perform any duty, in connection
with the administration of justice, including a liquidator, receiver or commissioner
appointed by such court;
(vi) any arbitrator or other person to whom any cause or matter has been referred for
decision or report by a court of justice or by a competent public authority;
(vii) any person who holds an office by virtue of which he is empowered to prepare,
publish, maintain or revise an electoral roll or to conduct an election or part of an
election;
(viii) any person who holds an office by virtue of which he is authorised or required to
perform any public duty;
(ix) any person who is the president, secretary or other office-bearer of a registered
co-operative society engaged in agriculture, industry, trade or banking, receiving
or having received any financial aid from the Central Government or a State
Government or from any corporation established by or under a Central, Provincial
or State Act, or any authority or body owned or controlled or aided by the
Government or a Government company as defined in section 617 of the
Companies Act, 1956 (1 of 1956);
(x) any person who is a chairman, member or employee of any Service Commission
or Board, by whatever name called, or a member of any selection committee
appointed by such Commission or Board for the conduct of any examination or
making any selection on behalf of such Commission or Board;
(xi) any person who is a Vice-Chancellor or member of any governing body, professor,
reader, lecturer or any other teacher or employee, by whatever designation called,
PP–GRMC&E–December 2021 22
of any University and any person whose services have been availed of by a
University or any other public authority in connection with holding or conducting
examinations;
(xii) any person who is an office-bearer or an employee of an educational, scientific,
social, cultural or other institution, in whatever manner established, receiving or
having received any financial assistance from the Central Government or any
State Government, or local or other public authority.
Answer 6(b)
Economic Value Added (EVA) is promoted by a consulting firm Stern Steward &
Co., which was established in 1982 and pioneered the EVA concept in 1989. EVA is a
performance measure that captures the true economic profit of an enterprise. EVA is
used by over 300 successful companies. EVA is a value based financial performance
measure. It is an investment decision tool and it is also a performance measure reflecting
the absolute amount of shareholder value created.
It is computed as the product of the “excess return” made on an investment or
investments and the capital invested in that investment or investments. “Economic
Value Added (EVA) is the net operating profit minus an appropriate charge for the
opportunity cost of all capital invested in an enterprise or project. It is an estimate of true
economic profit, or amount by which earnings exceed or fall short of the required minimum
rate of return investors could get by investing in other securities of comparable risk
(Stewart, 1990).”
EVA is net operating profit after tax less capital charge.
Or, EVA = NOPAT- (Invested Capital × WACC)
Where
NOPAT is Net Operating profit after taxes
WACC is Weighted average cost of capital
Components of EVA
The equation for EVA shows that there are three key components to a company’s
EVA: i.e. NOPAT, Capital invested, and the WACC:
• NOPAT can be calculated manually but is normally listed in a public company’s
financials.
• Invested Capital is the amount of money used to fund a specific project.
• WACC is the average rate of return a company expects to pay its investors; the
weights are derived as a fraction of each financial source in a company’s capital
structure. WACC can also be calculated but is normally provided as public
record.
An equation for invested capital often used to calculate EVA is = Total Assets -
Current Liabilities, two figures easily found on a firm’s balance sheet. In this case, the
formula for EVA is: NOPAT - (Total Assets - Current Liabilities) * WACC.
 23 PP–GRMC&E–December 2021
The cost of capital is a weighted average that reflects the cost of both debt and
equity capital. Thus, EVA measures the excess of a firm’s operating income over the
cost of the capital employed in generating those earnings. It relates operating income to
capital employed in an additive operation. This is in contrast to return on assets (ROA =
operating income / capital), which compares operating income to capital employed in a
multiplicative operation.
EVA assesses the performance of a company and its management through the idea
that a business is only profitable when it creates wealth and returns for shareholders,
thus requiring performance above a company’s cost of capital. EVA as a performance
indicator is very useful. The calculation shows how and where a company created wealth,
through the inclusion of balance sheet items. This forces managers to be aware of
assets and expenses when making managerial decisions. However, the EVA calculation
relies heavily on the amount of invested capital, and is best used for asset-rich companies
that are stable or mature. Companies with intangible assets, such as technology
businesses, may not be good for an EVA evaluation.

***
GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME
(New Syllabus)

JUNE 2021 Session

MODULE 1

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
Phones : 41504444, 45341000; Fax : 011-24626727
E-mail : info@icsi.edu; Website : www.icsi.edu
These answers have been written by competent persons
and the Institute hope that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.

The Guideline Answers contain the information based on the

Laws/Rules applicable at the time of preparation. However,
students are expected to be well versed with the amendments
in the Laws/Rules made upto six months prior to the date of
examination.

C O N T E N T S
Page
MODULE 1

1. Governance, Risk Management, Compliances and Ethics 1

2. Advanced Tax Laws 24

3. Drafting, Pleadings and Appearances 50

 1 PP–GRMC&E–June 2021
PROFESSIONAL PROGRAMME EXAMINATION
JUNE 2021

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES

AND ETHICS
Time allowed : 3 hours Maximum marks : 100
NOTE : Answer ALL Questions.

PART - I
Question 1
ABC Ltd., is a Joint Venture between an Indian Company and a Multi-National
Company. In present Covid pandemic situation, a Board Meeting through video
conference was held on 29th October, 2020 at a shorter notice of 3 days. One of the
agenda items was approval of the financial statements for the quarter ended 30th
September, 2020.
One of the Directors joined late in the Board Meeting and was not present while
discussing one agenda item. None of the Independent Directors were present.
The Company needs funds and is proposing to issue rights shares. Board
recommended increase in authorised share capital as well as approved convening
of an EGM through Video Conference on 31st December, 2020.
The Board discussed on a business proposal at length in the Board Meeting. When
minutes were circulated by the Company Secretary, both the joint venture nominee
Directors on the Board of the Company had different views on the discussions made
and suggested modifications to the minutes which were not in harmony with the
minutes circulated by the Company Secretary.
Chairman of the Board of Directors is nominee of Indian Company. He is firm that
Chairman’s decision is final in finalising the minutes of the meeting
Based on the above facts, answer the following questions :
(a) Discuss whether the financial statements can be approved in Board Meeting
through Video Conferencing ?
(b) What is the procedure to be followed by the Company Secretary when conducting
Board Meeting through Video Conferencing as per SS-1 ?
(c) How is proceeding of the Meeting is recorded by the Company Secretary in the
Board Meeting ? Discuss on recording and finalisation of minutes in light of the
provisions of applicable SS–1.
(d) Can EGM be held through Video Conferencing? (5 marks each)
Answer 1(a)
Approval of financial statements for the quarter ended 30th September 2020 should
have been approved at a physically held Board Meeting as per Section 173 and Section
1
PP–GRMC&E–June 2021 2
179 of the Companies Act, 2013 read with Rule 4 of the Companies (Meetings of Board
and its Powers) Rules, 2014.
However, on account of current scenario due to COVID-19 pandemic, Ministry of
Corporate Affairs had relaxed these provisions vide Companies (Meetings of Board and
its Powers) Amendment Rules, 2020 dated 19th March 2020 by providing that for the
period beginning from the commencement of the Companies (Meetings of Board and its
Powers) Amendment Rules, 2020 and ending on the 30th June 2020 (later extended
upto 30th June, 2021), the meetings on all matters referred to in sub-rule (1) of Rule 4
may be held through video conferencing or other audio visual means in accordance with
rule 3. Therefore, the resolution passed is proper.
(Note: Rule 4 has been omitted vide the Companies (Meetings of Board and its Powers)
Amendment Rules, 2021 dated 15.06.2021 implying that all business matters can now
be dealt in meetings held through video conferencing or other audio visual means in
accordance with Rule 3)
Answer 1(b)
The complete process for conducting of board meetings through video conferencing
is prescribed under Section 173 read with Rule 3 of the Companies (Meetings of Board
and its Powers) Rules), 2014 and Secretarial Standard 1.
Process to be followed by Company Secretary when conducting the Board Meeting
through Video Conference is as below:
The notice of the meeting shall inform the directors regarding the option available to
them to participate through video conferencing mode. The notice shall also contain all
the necessary information to enable the directors to participate through video conferencing
mode, like contact number or email address of the chairman or any other person authorised
by the board, to whom the director shall confirm in this regard.
The notice shall also seek advance confirmation from the directors as to whether
they will participate through electronic mode in the meeting. Director who intends to
participate through video conferencing shall give prior intimation to chairman of the
company well in advance so that the company can make necessary arrangements in
this behalf.
At the commencement of the meeting, a roll call shall be taken by the chairperson
when every director participating through video conferencing or other audio visual means
shall state, for the record, the following namely:
a) Name
b) The location from where he is participating,
c) That he has received the agenda and all the relevant material for the meeting
like draft resolution, notes to agenda etc, and
d) That no one other than the concerned director is attending or having access to
the proceedings of the meeting at the location.
After the roll call, the chairperson shall confirm that the required quorum is complete.
Every participant shall identify himself for the record before speaking on any item of
business on the agenda. If statement of a director in the meeting through video
 3 PP–GRMC&E–June 2021
conferencing or other audio-visual means is interrupted or garbled, the chairperson shall
request for a repeat or reiteration by the director.
The minutes of the meeting shall disclose the particulars of the directors who attended
the meeting through video conferencing or other audio-visual means and the location
from where and the agenda items in which he participated.
Answer 1(c)
As per Clause 7 of SS- 1, the Company Secretary shall record the proceedings of
the Meetings. Where there is no Company Secretary, any other person duly authorised
by the Board or by the Chairman in this behalf shall record the proceedings.
The Chairman shall ensure that the proceedings of the Meeting are correctly recorded.
The Chairman has absolute discretion to exclude from the Minutes, matters which in his
opinion are or could reasonably be regarded as defamatory of any person, irrelevant or
immaterial to the proceedings or which are detrimental to the interests of the company.
Minutes need not be an exact transcript of the proceedings at the Meeting. In case
any Director requires his views or opinion on a particular item to be recorded verbatim in
the Minutes, the decision of the Chairman whether or not to do so shall be final.
In case of meetings held through electronic mode, all the recordings of the
proceedings of the Meeting, shall be deemed to be made at the venue of the meeting as
mentioned in the Notice. The proceedings of Meetings held through video conferencing
or other audio visual means shall be recorded through any electronic recording mechanism
and the details of the venue, date and time shall be mentioned.
Finalisation of Minutes : Within 15 days from the date of the conclusion of the
Meeting, the draft Minutes thereof shall be circulated to all the members of the Board,
as on the date of the Meeting, for their comments. The Directors, whether present at the
Meeting or not, shall communicate their comments, if any, in writing on the draft Minutes
within 7 days from the date of circulation thereof, so that the Minutes are finalised and
entered in the Minutes Book within the specified time limit of 30 days. Minutes shall be
entered in the Minutes Book within 30 days from the date of conclusion of the Meeting.
Answer 1(d)
The Companies Act, 2013 does not contain any specific provisions allowing or
disallowing conduct of members' meetings through Video Conferencing or other audio-
visual means. In other words, it is silent on the matter.
However, in view of the current extra-ordinary circumstances due to COVID-19
Pandemic MCA has vide their circular No. 14 dated 8th April 2020, circular No. 17 dated
13th, April 2020, circular No. 22 dated 15th June 2020, circular No. 33 dated 28th
September 2020 and circular no. 39 dated 31st December 2020 allowed companies to
hold EGMs through Video Conference or other audio visual means or postal ballot subject
to some guidelines prescribed under the above circulars.
(Note: As per the recent circular issued on 23rd June 2021, companies can hold
Extra-ordinary general meeting through Video Conference or other audio-visual means
or transact items through postal ballot subject to compliance with the guidelines
prescribed in the above circulars upto 31st December 2021)
PP–GRMC&E–June 2021 4
Attempt all parts of either Q. No. 2 or Q. No. 2A
Question 2
(a) The ‘Fit and Proper’ criteria for nomination of directors applies only to private
sector banks. Do you agree with the statement ? Describe the phrase ‘Fit and
Proper’. (5 marks)
(b) During the Meeting of Audit Committee of PQR Ltd. (BSE Listed Company), the
member of the Audit Committee so desired to detailed information on material
management control at depot. He also required the financial control system on
material movement. The Project Head opined that Audit Committee has no
such power. In light of the provisions of the Companies Act, 2013 and SEBI
(LODR), Regulations 2015, explain whether such information can be called by
Audit Committee. What penal provisions are applicable in case of Audit
Committee is not constituted as per section 177 of the Act ? (5 marks)
(c) What are the Materiality Guidelines ? Prepare a note on Disclosures of events
upon application of the Materiality Guidelines. (5 marks)
OR (Alternate question to Q. No. 2)
Question 2A
(i) Which Authority issued code on Stewardship for Insurer in India ? What are the
Principles of such Guidelines ? (5 marks)
(ii) The Finnish Corporate Governance Code 2020 (2020 CG Code) came into force
and applicable to listed companies on Nasdaq Helsinki Ltd. (Helsinki Stock
Exchange). What is the key recommendation with respect to Related Party
Transaction in this Code ? (5 marks)
(iii) Define the role of Stakeholders in Corporate Governance under SEBI (LODR)
Regulations, 2015. (5 marks)
Answer 2(a)
Yes, some of the recommendations made by the Ganguly Committee are applicable
only to private sector banks. Among some of the recommendations, one of the eligibility
criteria for nomination of directors is 'fit and proper'. The recommendations in this regard
are as under:
(a) The Board of Directors of the banks while nominating/ co-opting directors should
be guided by certain broad ‘fit and proper' norms for directors, viz. formal
qualification, experience, track record, integrity etc. For assessing integrity and
suitability features like criminal records, financial position, civil actions initiated
to pursue personal debts, refusal of admission to or expulsion from professional
bodies, sanctions applied by regulators or similar bodies, previous questionable
business practices etc. should be considered. The Board of Directors may,
therefore, evolve appropriate systems for ensuring 'fit and proper' norms for
directors, which may include calling for information by way of self-declaration,
verification reports from market, etc.
(b) The following criteria, which is in vogue in respect of nomination to the boards of
 5 PP–GRMC&E–June 2021
public sector banks, may also be followed for nominating independent/ non-
executive directors on private sector banks:
i. The candidate should normally be a graduate (which can be relaxed while
selecting directors for the categories of farmers, depositors, artisans, etc.)
ii. He/she should be between 35 and 65 years of age.
iii. He/ she should not be a Member of Parliament/ Member of Legislative
Assembly/ Member of Legislative Council.
Answer 2(b)
Powers of the Audit Committee

Section 177 (5),(6) and (7) of the Regulation 18(2)(c) of the SEBI
Companies Act, 2013 Listing Regulations, 2015

1. The Audit Committee has the power The Audit committee shall have powers
to call for the comments of the auditors to investigate any activity within its terms
about internal control systems, the of reference, seek information from any
scope of audit, including the obser- employee, obtain outside legal or other
vations of the auditors and review of professional advice and secure attendance
financial statement before their sub- of outsiders with relevant expertise, if it
mission to the Board and may also considers necessary.
discuss any related issues with the
internal and statutor y auditors and
the management of the company.
[Section 177(5)]
2. Audit Committee shall have authority
to investigate into any matter in
relation to the items specified in terms
of reference or referred to it by the
Board and for this purpose the
Committee has power to obtain
professional advice from external
sources. The Committee for this
purpose shall have full access to
information contained in the records
of the company. [Section 177(6)]
3. The auditors of a company and the
key managerial personnel shall have
a right to be heard in the meetings of
the Audit Committee when it considers
the auditor's report but shall not have
the right to vote. [Section 177(7)]

As per section 178(8) of the Companies Act, 2013, in case of any contravention of
the provisions of section 177 of the Companies Act, 2013, the Company shall be liable
to a penalty of Rs. 5 Lakhs and every officer of the Company who is in default shall be
liable to a penalty of Rs. 1 Lakh.
PP–GRMC&E–June 2021 6
Answer 2(c)
As per Regulation 30 of the Listing Regulations, every listed entity shall make
disclosure of any event or information which, in the opinion of the board of directors of
the listed company, is material.
Materiality Guidelines
As per Regulation 30(4), the listed entity shall frame a policy for determination of
materiality of events/ information, approved by the board of directors and which shall be
disclosed on its website.
The criteria for determination of materiality of events/informations is:
a) the omission of an event or information, which is likely to result in discontinuity
or alteration of event or information already available publicly; or
b) the omission of an event or information is likely to result in significant market
reaction if the said omission came to light at a later date; or
c) In case where the criteria specified in sub-clauses (a) and (b) are not applicable,
an event/information may be treated as being material if in the opinion of the
board of directors of listed entity, the event / information is considered material.
Disclosures of events upon application of the Materiality Guidelines
Regulation 30(3) of the SEBI (LODR) Regulations, 2015 specifies that the listed
entity shall make disclosure of events specified in Para B of Part ‘A’ of Schedule III,
based on application of the guidelines for materiality. These are as follows:
1. Commencement or any postponement in the date of commencement of
commercial production or commercial operations of any unit/division.
2. 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).
3. Capacity addition or product launch.
4. Awarding, bagging/ receiving, amendment or termination of awarded/bagged
orders/contracts not in the normal course of business.
5. 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) thereof.
6. 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 etc.
7. Effect(s) arising out of change in the regulatory framework applicable to the
listed entity
8. Litigation(s) / dispute(s) / regulatory action(s) with impact.
 7 PP–GRMC&E–June 2021
9. Fraud/defaults etc. by directors (other than key managerial personnel) or
employees of listed entity.
10. Options to purchase securities including any ESOP/ESPS Scheme.
11. Giving of guarantees or indemnity or becoming a surety for any third party.
12. Granting, withdrawal, surrender, cancellation or suspension of key licenses
or regulatory approvals.
Answer 2A(i)
IRDAI had issued a code for stewardship for the insurance companies vide its
circular ref: IRDA/F&A/GDL/CMP/059/03/2017 on 20th March, 2017. The code was in
the form of a set of principles which the insurance companies needed to adopt and
made applicable from FY 2017-18. Guidelines for each principle under the code had also
been prescribed by IRDAI. As per the code, insurer should have a board approved
stewardship policy which should identify and define the stewardship responsibilities that
the insurer wishes to undertake and how the policy intends to fulfill the responsibilities to
enhance the wealth of its policyholders who are ultimate beneficiaries.
Further, the IRDAI decided to review the existing guidelines on stewardship code
based on the experience in implementation, compliance by the insurers and the recent
developments in this regard. Accordingly, a revised guidance on stewardship code has
been prepared and known as Revised Guidelines on Stewardship Code for Insurers in
India. The Principles under this code are:

S. No. Principles

1 Insurers should formulate a policy on the discharge of their stewardship

responsibilities and publicly disclose it.
2 Insurers should have a clear policy on how they manage conflicts of interest in
fulfilling their stewardship responsibilities and publicly disclose it.
3 Insurers should monitor their investee companies.
4 Insurers should have a clear policy on intervention in their investee companies.
5 Insurers should have a clear policy for collaboration with other institutional
investors, where required, to preserve the interests of the policyholders (ultimate
investors), which should be disclosed.
6 Insurers should have a clear policy on voting and disclosure of voting activity.
7 Insurers should report periodically on their stewardship activities.

Answer 2A(ii)
The Finnish Corporate Governance Code, 2020 is a collection of recommendations
on good corporate governance for listed companies. The recommendations of the
Corporate Governance Code supplement the obligations set forth in legislation.
On the matter of related party transactions, the code contains that the company
PP–GRMC&E–June 2021 8
procedure concerning related party transactions is also a part of good corporate
governance. Whenever the company conducts business transactions with related parties,
the company must ensure that the transactions are appropriate from the perspective of
the company and the shareholders. The company must take into account the legislation
that sets specific requirements for the monitoring, assessment, deciding, and disclosure
of related-party.

Recommendation 27 requires that Companies define and report their principles for
monitoring and evaluation of related party transactions. The purpose of the principles is
to ensure proper decision making in related party transactions in accordance with new
requirement of the Limited Liability Companies Act.

The Board of Directors should consider in particular how the company identifies
related party transactions who shall be the receiving party for related party transaction
reports and how the procedure will be supervised.

The relevant 'related party transaction' is defined as a transaction that is carried out
outside the ordinary course of the Company's business or that is not carried out on
normal business terms. To identify these transactions, the company must be liable to
identify its related parties and the transactions carried out by the Company with the
related parties.

The main features of the related party transactions principle will be disclosed in the
Company's CG report. As a result of that, Company listed on the Helsinki Stock Exchange
should without delay review and if needed, update their related party transactions principles
to enable them to fulfil the CG reporting requirement.
Answer 2A(iii)
Role of Stakeholders in Corporate Governance
As per Regulation 4(2)(d) of SEBI (LODR) Regulations, 2015 the listed entity should
recognise the rights of stakeholders and encourage co-operation between listed entity
and the stakeholders in the following manner:-

(i) The listed entity should respect the rights of stakeholders that are established
by law or through mutual agreements.

(ii) Stakeholders should have the opportunity to obtain effective redress for violation
of their rights.

(iii) Stakeholders should have access to relevant, sufficient and reliable information
on a timely and regular basis to enable them to participate in Corporate
Governance process.

(iv) The listed entity should devise an effective whistle blower mechanism enabling
stakeholders, including individual employees and their representative bodies, to
freely communicate their concerns about illegal or unethical practices.
(Note: According to SEBI (LODR) 2nd Amendment Regulations, 2021 dt. 5th May, 2021,
in regulation 4(2)(d)(iv) the words ‘vigil mechanism/ whistle blower policy’ shall be used
instead of the words ‘whistle blower mechanism’)
 9 PP–GRMC&E–June 2021
Question 3
(a) Write the short notes on CSR Audit.
(b) ICSI Recommendations to strengthen Corporate Governance framework suggests
for constitution of Corporate Compliance Committee on mandatory basis. If
such recommendations are accepted by competent authority, what will be the
applicability ? Highlight any 3 major functions, that may be included in charter of
the Committee.
(c) Prepare a brief note on Corporate Secretaries International Association Limited.
(d) ‘‘Governance, Risk and Compliance (GRC) is the integrated collection of
capabilities that enable an organization to reliably achieve objectives, address
uncertainty and act with integrity.’’ Explain.
(e) When will a transaction with a related party be material ? (3 marks each)
Answer 3(a)
To ensure that the Companies comply with the provisions of Section 135 of the
Companies Act, 2013 and rule made thereunder and genuinely spend the CSR amount
on the eligible welfare projects, it is imperative to improve governance and transparency
in CSR sphere.

Akin to other areas of corporate activity requiring compliance, need for a dedicated
independent professional has been felt in the area of social responsibility as well. In this
regard, an independent CSR Audit/ Review and issue of CSR Audit / Review Report by
the Company Secretaries in Practice shall not only give the existing CSR Mechanism
much needed support and give necessary comfort to the Stakeholders, regulators and
the society at large that the companies are complying with the legal requirements but
will also give authentic information about utilization of CSR Fund by the Companies in
specified CSR activities.
The Companies Act, 2013 does not contain any provision relating to CSR Audit.
However, monitoring of CSR activities and its reporting is mandatory as per the Companies
(Company Social Responsibility Policy) Rules 2014. Also, it is the responsibility of the
Company through the CSR Committee to monitor the funds of the Company which are to
be utilized as per the CSR Policy of the Company. So, Companies may voluntarily get
an Audit conducted of its CSR initiatives and compliances.
Answer 3(b)
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:
1. 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 documents;
PP–GRMC&E–June 2021 10
2. 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 business;
3. To review complaints received from internal and external sources, regarding
matters other than the financial matters which are within the purview of the
Audit Committee;
4. To periodically present to the Board for adoption appropriate changes to the
policies, and oversee implementation of and compliance with these policies;
5. To review regularly the company’s compliance risk assessment plan;
6. To investigate or cause to be investigated any significant instances of non-
compliance, or potential compliance violations that are reported to the committee;
7. To coordinate with other committees regarding matters brought to the committees
attention that relate to issues of compliance with applicable laws and regulations;
8. Regularly report to the Board on the Committee’s activities, recommendations
and conclusions;
9. To discuss any significant compliance issues with the Chief Executive officer;
10. To periodically report to the Board and CEO on the adequacy and effectiveness
of the company’s compliance programme;
11. To retain at the company’s expense, independent advisors to assist the
committee with carrying out its responsibilities from time to time;
12. To perform such other duties and responsibilities as may be assigned to the
committee by the board.
Answer 3(c)
Corporate Secretaries International Association Limited (CSIA) was established on
February 10, 2017 as a Company limited by Guarantee in Hong Kong. It is an international
federation of governance professional bodies for corporate secretaries & governance
professional and represents those who work as frontline practitioners of governance
throughout the world.
CSIA is governed by a council consisting of the honorary members (President,
Vice-President, Secretary and Treasurer as elected from the member bodies), past
presidents, co-opted members and representatives of each national member organisation.
CSIA is an international association of 14 national professional bodies, representing
more than 100,000 corporate secretaries and governance professionals in more than 70
countries throughout the world. CSIA has 10 full members which include Institute of
Chartered Secretaries from South Africa, Hong Kong, Kenya, Nigeria, Zimbabwe, UK,
Bangladesh, India, Malaysia and Singapore.
Objectives of CSIA are:
1. To promote the professional status of suitably qualified chartered secretaries,
Corporate Secretaries, Company Secretaries, board secretaries and other
governance professionals.
 11 PP–GRMC&E–June 2021
2. To establish and maintain good relations and exchanges between organisations
dedicated to the promotion and practice of secretaryship and/or the promotion
of good governance.

3. To develop and improve their services and professionalism of their members.

4. To assist in the creation of such organisations in countries or regions in which

they do not currently exist.

5. To promote the growth, development, study and practice of secretaryship and

assist their members develop and improve their services and professional
standards.

6. To advocate for good governance through carrying out research, developing

standards and raising awareness.

7. To promote the recognition and influence in respect of secretaryship and its

professional practitioners to national governments and their supplementary/
sponsored organisations, international organisations and the global business
community.

Answer 3(d)

Governance, Risk and Compliance (GRC) is the integrated collection of capabilities

that enable an organization to reliably achieve objectives, address uncertainty and act
with integrity. GRC refers to a strategy for managing an organization’s overall governance,
enterprise risk management and compliance with regulations. GRC is a set of processes
and practices that runs across departments and functions. GRC might be enabled by a
dedicated platform and other tools, although this is not mandatory. While organizations
generally don’t need to maintain a separate GRC department, most organizations have
a team in place to manage the GRC platform and tools. The scope of GRC doesn’t end
with just governance, risk, and compliance management, but also includes assurance
and performance management, information security management, quality management,
ethics and values management, and business continuity management.

Effective GRC implementation helps the organization to reduce risk and improve
control effectiveness, security and compliance through an integrated and unified approach
that reduces the ill effects of organizational silos and redundancies.

Answer 3(e)

According to Regulation 23(1) and (1A) of SEBI (LODR) Regulations- A transaction

with a related parry shall be considered material if the transaction(s) to be entered into
individually or taken together with previous transactions during a financial year, exceeds
10% of the annual consolidated turnover of the listed entity as per the last audited
financial statements of the listed entity. With effect from July 01, 2019, a transaction
involving payments made to a related party with respect to brand usage or royalty shall
be considered material if the transaction(s) to be entered into individually or taken together
with previous transactions during a financial year, exceed 5% of the annual consolidated
turnover of the listed entity as per the last audited financial statements of the listed
entity.
PP–GRMC&E–June 2021 12
PART II
Question 4
(a) What type of risk is the Covid Pandemic ?
(b) Is Risk Management Policy mandatory for private companies ? What are the
advantages of Risk management ?
(c) Write short notes on ISO 31000.
(d) What is Reputation Risk ? How is it managed ? (5 marks each)
Answer 4(a)
Covid Pandemic is a Systemic Risk due to the following reasons:
- It is not fully controllable by any organisation.
- It is not entirely predictable.
- It is of a macro nature.
- It usually affects a large number of organisations operating under a similar
stream.
- It cannot be fully assessed and anticipated in advance in terms of timing and
gravity.
Answer 4(b)
The Companies Act, 2013 does not seem to mandate framing of a Risk Management
Policy for Private Companies. However, Section 134(3) of the Companies Act, 2013
which provides disclosures to be made in the Board's Report of company, interalia
provides that the Board's Report must include a statement indicating development and
implementation of a risk management policy for the company including identification
therein of elements of risk, if any, which in the opinion of the Board may threaten the
existence of the company.
As per the above statement, it may be inferred that Companies, including Private
Companies are required to develop and implement a Risk management Policy.
Advantages of Risk Management:
1. Risk management in the long run always results in significant cost savings and
prevents wastage of time and effort in firefighting. It develops robust contingency
planning.
2. It can help plan and prepare for the opportunities that unravel during the course
of a project or business.
3. Risk management improves strategic and business planning. It reduces cost
by limiting legal action or preventing breakages.
4. It establishes improved reliability among the stakeholders leading to an enhanced
reputation.
5. Sound risk management practices reassure key stakeholders throughout the
organisation.
 13 PP–GRMC&E–June 2021
Answer 4(c)

ISO 31000 is the international standard for risk management. This standard was
published in the year 2009. It helps organisations with their risk analysis and risk
assessments. ISO 31000 applies to most business activities including planning,
management operations and communication processes. While all organisations manage
risk to some extent, this international standard's best practice recommendations were
developed to improve management techniques and ensure safety and security in the
workplace at all times.

By implementing the principles and guidelines of ISO 31000 in organisation, the

organisation is able to improve operational efficiency, governance and stakeholder
confidence, while minimising losses. This international standard also helps to boost
health and safety performance, establish a strong foundation for decision making and
encourage proactive management in all areas.

Answer 4(d)

Reputation risk is a type of non-financial risk arising from negative perception on the
part of customers, counterparties, shareholders, investors, debt holders, market analysts,
other relevant parties or regulators that can adversely affect an entity’s ability to maintain
existing, or establish new, business relationships and continued access to sources of
funding.

This type of risk is multi-dimensional and reflects the perception of other market
participants. Exposure to reputational risk is essentially a function of the adequacy of
the entity’s internal risk management processes, as well as the manner and efficiency
with which the management responds to external influences on entity’s related
transactions.

Reputational risk can be managed based on the following principles:

1. Integration of risk while formulating business strategy.

2. Effective board oversight.

3. Image building through effective communication.

4. Promoting compliance culture to have good governance.

5. Persistently following up the corporate values.

6. Due care, interaction and feedback from the stakeholders.

7. Strong internal checks and controls.

8. Peer review and evaluating the company's performance.

9. Quality report/ newsletter publications.

10. Cultural alignments.

PP–GRMC&E–June 2021 14
PART III
Attempt all parts of either Q. No. 5 or Q. No. 5A
Question 5
(a) You are newly appointed as the Company Secretary of ABC Pvt Ltd. Rama,
who is the CEO of the Company, is not clear on concept and applicability of
internal audit to your company. She approaches you to understand the same.
Prepare a short note to brief Rama on concept and applicability of internal audit
as per the provisions of Companies Act, 2013 to your company.
(b) Why Non-Financial Reporting is important for companies ?
(c) Administrative Controls have an indirect relationship with financial records. Do
you agree with this statement ?
(d) Sustainability Reporting being relatively a new concept, what challenges do you
foresee in mainstreaming sustainability reporting ? (5 marks each)
OR (Alternate question to Q. No. 5)
Question 5A
(i) Elucidate the purposes and limitations of Financial Reporting.
(ii) Explain the meaning of internal control and internal audit and also mention how
these two are different from each other.
(iii) What are the Guiding Principles for preparation of an integrated report ?
(iv) Discuss the relation between integrated reporting and sustainability reporting.
(5 marks each)
Answer 5(a)
According to Institute of Internal Auditors “Internal auditing is an independent,
objective assurance and consulting activity designed to add value and improve an
organization’s operations. It helps an organization accomplish its objectives by bringing
a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes.”
Applicability of Internal Audit:
As per Section 138 of the Companies Act, 2013 and Companies (Accounts) Rules,
2016, the following class of companies shall be required to appoint an internal auditor:-
(a) every listed company
(b) every unlisted public company having :-
(i) paid up share capital of fifty crore rupees or more during the preceding
financial year; or
(ii) turnover of two hundred crore rupees or more during the preceding financial
year; or
 15 PP–GRMC&E–June 2021
(iii) 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
(iv) outstanding deposits of twenty-five crore rupees or more at any point of
time during the preceding financial year; and
(c) every private company having :-
(i) turnover of two hundred crore rupees or more during the preceding financial
year; or
(ii) 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.
An Internal Auditor may be either an individual or a partnership firm or a body
corporate. An internal auditor can be a chartered accountant or a cost accountant, or
such other professional as may be decided by the Board to conduct internal audit of the
functions and activities of the company. The internal auditor may or may not be an
employee of the company. The Audit Committee of the company or the Board shall, in
consultation with the Internal Auditor, formulate the scope, functioning, periodicity and
methodology for conducting the internal audit.
Answer 5(b)
Non-Financial reporting is a structured way of presenting information about one’s
performance. It is the practice of measuring, disclosing and being accountable to internal
and external stakeholders for organisational performance towards the goal of sustainable
and inclusive development. It epitomises that a company's financial health is dependent
on much more than the assets on its balance sheet and the movements on its profit and
loss account.

Non-financial reporting is an opportunity to communicate in an open and transparent

way with stakeholders. In their non-financial reports, companies report an overview of
their environmental and social impact during the previous year. The information in non-
financial reports contributes to building up a company's risk-return profile. Non-financial
reporting includes -

1. Board's Report

2. Corporate Social Responsibility Report

3. Corporate Sustainability Report

During the initial phases, corporate performance was mainly judged by market
capitalization, share price and certain financial ratios such as Earnings Per Share (EPS),
Return on Equity (ROE), etc. Now in the 21st century, corporate performance is being
judged by corporate social responsibility reporting and Sustainability reporting whose
disclosure will fall under non-financial reporting.
One of the critical parameters to be evaluated in this context would be the value
created by the firm for society and whether such value creation is going to be enduring
PP–GRMC&E–June 2021 16
in nature. As a result, non-financial reporting will be extremely important for companies
and its relevance is only going to increase in times to come. Just as financial reporting
is not only concerned with returns but the risk return trade-off, similarly, non-financial
reporting is also about the risks that one creates in the society and measures adopted to
mitigate the same.
Answer 5(c)
Administrative Controls have an indirect relationship with financial records. Operational
controls are those which help in improving the efficiency and productivity of an
organisation and not necessarily enter the accounting systems.
A number of controls falling under operational controls can also be administrative
controls. Examples of such controls are quality control, work standards, periodic reporting,
policy appraisal etc. The administrative controls are very wide in their scope and they
include all other managerial controls concerned with decision making process. They are
concerned with the authorization of transactions and include anything from plan of
organization to procedures, record keeping, distribution of authority and the process of
decision making. They include controls such as time and motion studies, quality control
through inspection, performance budgeting, responsibility accounting and performance
evaluation. Accounting controls pertain purely to the accounting system which enter
finally in the preparation of financial statements and information which are subject to the
expression of opinion by the auditors.
Whereas operational controls which can also be termed as administrative controls
have an indirect relationship with financial records and the auditor may evaluate only
those administrative controls which have a bearing on the financial records.
Answer 5(d)
Since the Sustainability Reporting is relatively a new concept, many organizations
find it difficult to prepare sustainability reports. Following may be considered as the
challenges in mainstreaming sustainability reporting:
1. Awareness : lack of awareness about the emerging concept of sustainability
reporting is also a major challenge which the government and corporate
governance bodies need to address by arranging the sustainability awareness
programme for the Professionals, Board of Directors and Management in the
corporate sector, as these are the persons who will drive sustainability reporting
initiative for an organisation. The government/regulators should organize such
awareness programme jointly with the experts in the field of Sustainability
Reporting.
2. Expertise Knowledge : Sustainability Reporting is relatively a new concept in
many jurisdictions and organization found it very difficult to prepare a
sustainability report in the absence of expert guidance on the subject. The
Sustainability Reporting concept is emerging as a good tool to showcase the
corporate governance practices of an orgainsation and this area demand
professionals having expert knowledge of sustainability reporting. The
professional bodies in various jurisdictions should impart the expert knowledge
of sustainability reporting to their members to develop a good cadre of experts
in this emerging area of sustainability reporting.
 17 PP–GRMC&E–June 2021
3. Investor Behaviour : It is a recognized principle that investors should consider
the Environmental, Social and Governance (ESG) issues while making investment
decisions. There are specific regulators guidelines for the institutional investor
to be vigilant on voting aspects and be concerned about the governance practices
of the companies in which they invest. However, the investor behaviour may
vary from company to company and sometimes they invest in companies without
considering the ESG issues either due to lack of awareness on ESG issues or
some other business reasons. It should be made a practice that the investor
fund flow to those organization following the good governance including reporting
on sustainability aspects.
4. Cost Factor : Many elements of the reporting process can contribute to its cost,
including:
o Time for senior management and other staff to discuss report contents.
o Developing and implementing data gathering systems
o Time for gathering and inputting data
o Implementing new processes, including staff training on data collection
o Time for checking information
o Preparing the report itself, involving internal resources (time, capacity building,
etc.), and potentially external resources (consultancy, writing/ editing, layout,
printing, etc.)
o External verification or auditing, if applicable.
Answer 5A(i)
Financial reporting is the process of producing statements that disclose an
organisation’s financial status to management, investors and the government. Financial
Reporting involves the disclosure of financial information to the various stakeholders
about the financial performance and financial position of the organisation over a specified
period of time. These stakeholders include – investors, creditors, public, debt providers,
governments & government agencies. In case of listed companies the frequency of
financial reporting is quarterly & annual.
Financial reporting serves two primary purposes. First, it helps management to
engage in effective decision- making concerning the company’s objectives and overall
strategies. The data disclosed in the reports can help management discern the strengths
and weaknesses of the company, as well as its overall financial health. Second, financial
reporting provides vital information about the financial health and activities of the company
to its stakeholders including its shareholders, potential investors, consumers, and
government regulators. It’s a means of ensuring that the company is being run
appropriately.
The importance of financial reporting cannot be over emphasised. But still financial
reporting has some limitations. The current financial reporting model was developed in
the 1930’s for an industrial world. In general, the model provides a backwards-looking
review of performance and does not provide enough relevant information for decision-
PP–GRMC&E–June 2021 18
making today. The financial reporting model is like “looking in the rear-view mirror,” when
in fact the road ahead is very turbulent and there are huge impacts on the company,
both societal and environmental.
It is not necessarily the volume of information, but the lack of a comprehensive
story, which is where improvements in financial reporting are needed. Investors expect
information about:
• Business model and strategy,

• Intangible factors and sustainability (i.e. economic, environmental, social)

commitments,

• Impacts and performance that affect a company’s value today and its ability to
create value in the future,

• Key aspects of corporate governance,

• Internal controls,

• Human rights / diversity practices and policies,

• Key financial ratios.

Answer 5A(ii)
The term internal control is defined as a system or plan of accounting and financial
organization within a business comprising all the methods and measures necessary for
safeguarding its assets, checking the accuracy of its accounting data or otherwise
substantiating its financial statements, and policing previously adopted rules, procedures
and policies as to compliance and effectiveness. Internal control is not necessarily a
control over finance only. Its scope is wider as it covers the control of the whole
management system.
Internal auditing is an independent, objective assurance and consulting activity
designed to add value and improve an organization's operations. It helps an organization
accomplish its objectives by bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management, control and governance processes.
The scope of internal auditing is broad. It may involve topics such as an organisation's
governance, risk management and management controls over efficiency of operations,
reliability of financial and management reporting and compliance with laws and regulations.
Differences between Internal Control and Internal Audit:

Basis Internal Control Internal Audit

Meaning Internal Control means the process
designed, implemented and main-
tained by those charged with gover-
nance, management and other
personnel to provide reasonable
assurance about the achievement
Internal auditing means an audit on
behalf of management to ensure the
adequacy and effectiveness of internal
controls, accuracy and timeliness of
financial and other records and reports
and adherence to the laid down policies
 19 PP–GRMC&E–June 2021
of an entity’s objectives with regard and procedures by each unit of the
to reliability of financial reporting, organization.
effectiveness and efficiency of
operations, and compliance with
applicable laws and regulations.
Verification It is a self-balancing mechanism The entire work process / system is
implemented by the management, checked and reviewed by the internal
so as to ensure that the entire work auditor.
process is divisible in parts, so that
not a single person may have the
access to complete the entire
process.
Reporting It is a mechanism introduced by the Internal auditor submit its report to the
management. management.
What it is? It is a system introduced by the It is an activity done by the internal
management. auditor.
When it is Internal Control is a policy decision Its periodicity may be yearly or half
done? by the management and is a yearly or quarterly, as decided by the
continuous process. management.
Purpose Formulation and circulation of Detecting and reporting errors and
management principles and policies frauds and irregularities regarding
and effective and speedy execution assets committed, if any detection and
thereof with the help of internal prevention activity.
checking and internal audit activities.
Scope Wider in scope than internal audit. Limited to a continuous internal
system of checking financial and non-
financial operations and reporting to
internal top management.

Answer 5A(iii)

The following Guiding Principles underpin the preparation of an integrated report,

informing the content of the report and how information is presented:

1. Strategic focus and future orientation : An integrated report should provide

insight into the organization’s strategy, and how it relates to the organization’s
ability to create value in the short, medium and long term, and to its use of and
effects on the capitals.

2. Connectivity of information : An integrated report should show a holistic picture

of the combination, interrelatedness and dependencies between the factors that
affect the organization’s ability to create value over time.

3. Stakeholder relationships : An integrated report should provide insight into the

nature and quality of the organization’s relationships with its key stakeholders,
PP–GRMC&E–June 2021 20
including how and to what extent the organization understands, takes into account
and responds to their legitimate needs and interests.
4. Materiality : An integrated report should disclose information about matters that
substantively affect the organization’s ability to create value over the short,
medium and long term.
5. Conciseness : An integrated report should be concise.
6. Reliability and completeness : An integrated report should include all material
matters, both positive and negative, in a balanced way and without material
error
7. Consistency and comparability : The information in an integrated report should
be presented: (a) on a basis that is consistent over time; and (b) in a way that
enables comparison with other organizations to the extent it is material to the
organization’s own ability to create value over time.

Answer 5A(iv)

Sustainability reporting is a process that assists organizations in setting goals,

measuring performance and managing change towards a sustainable global economy –
one that combines long term profitability with social responsibility and environmental
care. Sustainability reporting – mainly through but not limited to a sustainability report –
is the key platform for communicating the organization’s economic, environmental, social
and governance performance, reflecting positive and negative impacts. The aspects
that the organization deems to be material, in response to its stakeholders’ expectations
and interests, drive sustainability reporting. Stakeholders can include those who are
invested in the organization as well as those who have other relationships with the
organization.

Integrated reporting is an emerging and evolving trend in corporate reporting, which

in general aims primarily to offer an organization’s providers of financial capital with an
integrated representation of the key factors that are material to its present and future
value creation. Integrated reporters build on sustainability reporting foundations and
disclosures in preparing their integrated report. Through the integrated report, an
organization provides a concise communication about how its strategy, governance,
performance and prospects lead to the creation of value over time. Therefore, the
integrated report is not intended to be an extract of the traditional annual report nor a
combination of the annual financial statements and the sustainability report. However,
the integrated report interacts with other reports and communications by making reference
to additional detailed information that is provided separately.
Although the objectives of sustainability reporting and integrated reporting may be
different, sustainability reporting is an intrinsic element of integrated reporting.
Sustainability reporting considers the relevance of sustainability to an organization and
also addresses sustainability priorities and key topics, focusing on the impact of
sustainability trends, risks and opportunities on the long term prospects and financial
performance of the organization. Sustainability reporting is fundamental to an
organization’s integrated thinking and reporting process in providing input into the
organization’s identification of its material issues, its strategic objectives, and the
assessment of its ability to achieve those objectives and create value over time.
 21 PP–GRMC&E–June 2021
PART IV
Question 6
(a) Explain specific additional provisions for Board Members and Management
Committee Members in a Model Code of Business Conduct and Ethics. (5 marks)
(b) Define the following terms:
(i) Standard and Poor’s ESG India Index
(ii) Sustainable Value Added (SVA)
(iii) ‘‘Undue Advantage’’ as per Prevention of Corruption Act, 1988
(iv) ‘‘Bribery’’ under ICSI Anti Bribery Code
(v) Central Vigilance Commission. (5 marks)
Answer 6(a)
The Model Code of conduct is applicable to the Board Members and all employees
in and above Officers level. Everyone must read and understand the Model Code and
ensure to abide by it in their day-to-day activities. Apart from general moral imperatives
and Specific Professional Responsibilities, there are some specific additional provisions
for Board Members and Management Committee Members.
The following specific additional provisions would be incorporated in the Model Code
of Business Conduct and Ethics:
As Board members
1. They undertake to inform the Chairman of the Board of any changes in our other
board positions, relationship with other business and other events/ circumstances/
conditions that may interfere with our ability to perform Board/Board Committee
duties or may impact the judgment of the Board as to whether we meet the
independence requirements of Listing Agreement with Stock Exchanges.
2. Board members must also undertake that without prior approval of the disinterested
members of the Board, we will avoid apparent conflict of interest. Conflict of
interest may exist when we have personal interest that may have a potential
conflict with the interest of the company at large. Some illustrative cases can
be:
– Related Party Transactions : Entering into any transactions or relationship
with the Company or its subsidiaries in which they have a financial or other
personal interest (either directly or indirectly such as through a family member
or other person or other organisation with which they are associated).
– Outside Directorship : Accepting Directorship on the Board of any other
Company that compete with the business of Company.
– Consultancy/Business/Employment : Engaging in any activity (be it in the
nature of providing consultancy service, carrying on business, accepting
employment) which is likely to interfere or conflict with their duties/
PP–GRMC&E–June 2021 22
responsibilities towards the Company. They should not invest or associate
themselves in any other manner with any supplier, service provider or
customer of the Company.
– Use of Official position for personal gains: They should not use their official
position for their personal gains.
As Board Members and Management Committee members, they must undertake
to actively participate in meetings of Board, or the Committees thereof and the meetings
of management committee on which they serve.
Answer 6(b)
(i) Standards and Poor’s ESG India Index
Standard & Poor’s ESG India index provides investors with exposure to a liquid
and tradable index of 50 of the best performing stocks in the Indian market as
measured by environmental, social, and governance parameters. The 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 their peers in the Indian market. Its quantitative scoring
system offers investors complete transparency.
The creation of the index involves a two-step process, the first of which uses a
multi-layered approach to determine an ‘ESG’ score for each company. The
second step determines the weighting of the index by score. Index constituents
are derived from the top 500 Indian companies by total market capitalizations
that are listed on National Stock Exchange of India Ltd. (NSE). These stocks
are then subjected to a screening process which yields a score based on a
company’s ESG disclosure practices in the public domain.
(ii) Sustainable Value Added (SVA)
Sustainable development is a normative concept laid out as the combination of
economic prosperity, environmental integrity and social equity. Value is created
whenever benefits exceed costs. There are two approaches to measure corporate
contribution to sustainability i.e. Absolute Measures and Relative Measures.
Sustainable Value Added takes into account both, the efficiency and the absolute
level (effectiveness) of resource use. It has never been more important for
businesses to use their economic, environmental and social resources efficiently.
Conceptually, SVA stresses the complementary disposition of economic,
environmental and social resources. Sustainable Value Added is the extra value
created when the overall level of environmental and social impacts is kept
constant.
(iii) “Undue Advantage” as per Prevention of Corruption Act, 1988
In terms of Section 2(d), “Undue advantage” means any gratification whatever,
other than legal remuneration.
Explanation : For the purposes of this clause, –
(a) the word “gratification” is not limited to pecuniary gratifications or to
gratifications estimable in money;
 23 PP–GRMC&E–June 2021
(b) the expression “legal remuneration” is not restricted to remuneration paid to
a public servant, but includes all remuneration which he is permitted by the
Government or the organisation, which he serves, to receive.
(iv) “Bribery” under ICSI Anti Bribery Code
‘Bribery’ includes giving or receiving bribe and third party gratification. The act
of giving bribe is when committed intentionally in the course of economic, financial
or commercial activities and when it is established that there is a promise,
offering or giving, directly or indirectly, of an undue advantage to any person
who directs or works, in any capacity, for a commercial entity, for the person
himself or for another person, in order that he in breach of his duties, act or
refrain from acting.
(v) Central Vigilance Commission
The Central Vigilance Commission (CVC) is the body constituted by the
Government in the year 1964 on the proposal of the Santharam Committee on
the Prevention of Corruption. The body was established with an intention to
check corruption in the Government departments. The Commission is an
independent statutory body exempted from the authority of the executive. The
CVC attained statutory recognition by an ordinance of 1998 and in September
12, 2003 the ordinance was replaced by The Central Vigilance Commission Act
enacted by the Legislative Department under the Ministry of Law and Justice.
The main purpose of the Act was to establish the Central Vigilance Commission
to investigate the offences punishable under the Prevention of Corruption Act,
1988 by the public servants working under the Central Government, Corporations
constituted under the Act of Parliament, Government companies, and local
bodies owned and managed by the Centre.

***
GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME
(New Syllabus)

DECEMBER 2020

MODULE 1

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
Phones : 41504444, 45341000; Fax : 011-24626727
E-mail : info@icsi.edu; Website : www.icsi.edu
These answers have been written by competent persons
and the Institute hope that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.

The Guideline Answers contain the information based on the

Laws/Rules applicable at the time of preparation. However,
students are expected to be well versed with the amendments
in the Laws/Rules made upto six months prior to the date of
examination.

C O N T E N T S
Page
MODULE 1

1. Governance, Risk Management, Compliances and Ethics 1

2. Advanced Tax Laws 24

3. Drafting, Pleadings and Appearances 48

 1 PP–GRMC&E–December 2020
PROFESSIONAL PROGRAMME EXAMINATION
DECEMBER 2020

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES

AND ETHICS
Time allowed : 3 hours Maximum marks : 100
NOTE : Answer ALL Questions.

PART I
Question 1
Rakesh is the Managing Director of ABC Co. Ltd., a listed company having its
registered office in Bangalore. In December, 2018 an allegation of the Managing
Director’s immediate family members and Alfa Co. Ltd. which got a `1,000 crore
contract from ABC Co. Ltd. entering into a quid pro quo deal surfaced in the public
domain. The matter was personally enquired by the Chairman of the Board of Directors
and nothing improper was found. In March, 2019 another complaint from an
anonymous “Whistle Blower” was received alleging non-adherence to code to conduct,
conflict of interest and quid pro quo by the Managing Director while dealing “with
certain customers.”

The allegations were refuted by the Board of Directors of ABC Co. Ltd. as “being
malicious and baseless” but when the controversy started getting blown out of
proportion the company stated in a regulatory filing that its Board had decided to
institute an independent enquiry in the matter and pending such enquiry, the Managing
Director had been asked to go on leave. The enquiry revealed that Rakesh did not
make proper disclosure about his family links with the corporate customer to the
Board. It also transpired that Rakesh gave scant respect to “conflict of interest and
due disclosure or recusal requirements” while awarding contracts to Alfa Co. Ltd.
with which his close family members had business interests. Upon the findings of
the enquiry being made public, Rakesh resigned and the company stated that it will
treat his resignation as “termination for cause” and will also stop payments of unpaid
benefits due to him.

In the background of the aforesaid case, answer the following questions :

(a) How, if so, has Rakesh failed to discharge his duties as a director of ABC Co.
Ltd. ? Which regulations of the SEBI LODR have been breached by him ?

(b) State the characteristics of an effective Board of Directors.

(c) Analyze the performance of the Board of Directors in handling the complaints
against Rakesh, the Managing Director of ABC Co. Ltd.

(d) Discuss the principles for Corporate Governance in order to improve the practices
followed by ABC Co. Ltd. to prevent such situations from recurring.
(5 marks each)
1
PP–GRMC&E–December 2020 2
Answer 1(a)
The directors of a company are required to act in the best interest of the company
since they occupy a position of trust and owe a fiduciary duty to the shareholders of the
company.
Under section 166 of the Companies Act, 2013 the duties of the directors include:
(a) duty to exercise his duties with due and reasonable care, skill and diligence and
to exercise independent judgment.
(b) not to involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict, with the interest of the company.
(c) not to achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives, partners, or associates and if such director is found
guilty of making any undue gain, he shall be liable to pay an amount equal to
that gain to the company.
In the instant case Rakesh has failed to disclose the business interest of his
immediate family member have with Alfa Co. Ltd. which has business relations with
ABC Co. Ltd. And had been given contract worth Rs. 1000 crores. Thus Rakesh has
violated the provisions of section 166 of the Companies Act, 2013 in discharge of his
duties. Further Rakesh should have made disclosure of his interest as per section 184
of the Companies Act, 2013.
Regulation 4(2)(f) of the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 contains the responsibilities of the board of directors of a listed entity.
As regards, disclosure of information, it states the following:
(i) Disclosure of information:
(1) Members of board of directors and key managerial personnel shall disclose
to the board of directors whether they, directly, indirectly, or on behalf of
third parties, have a material interest in any transaction or matter directly
affecting the listed entity.
(2) The board of directors and senior management shall conduct themselves
so as to meet the expectations of operational transparency to stakeholders
while at the same time maintaining confidentiality of information in order to
foster a culture of good decision-making.
Thus in view of the above Rakesh has breached the provisions of Regulation 4 of
the SEBI (LODR) Regulations, 2015.
Answer 1(b)
The role of the board of directors in a company is to provide entrepreneurial leadership
to the company. An effective board defines the purpose and then sets a strategy to
achieve it shapes its culture and the way it conducts its business.
Following are the main characteristic of an effective board of directors:
(i) It should have a judicious mix of internal and independent directors with a variety
 3 PP–GRMC&E–December 2020
of experience and core competence. The majority of the board of directors
should be independent from the organization.
(ii) It should have a set of required competencies articulated for the board and
committees, and current board members should as a whole display the entire
set of required competencies.
(iii) It should have a board manual that articulates terms of reference for the board,
board committees, individual directors, and the code of conduct? It should have
a forward list of topics for the year.
(iv) At least one member of the board should have extensive experience in the
industry of the organization.
(v) Each director should get a comprehensive orientation on the business of the
organization and meet key senior staff before the first board meeting.
(vi) Directors should be offered continuing education in governance or a program of
director certification.
(vii) Each director should display a keen interest or passion in the undertaking of the
organization.
(viii) Directors should regularly attend both board and committee meetings.
(ix) Directors should been couraged and supported when asking difficult or awkward
questions of management.
(x) The Chairman should solicit views from each director specifically.
(xi) The Chairman should ask board members to refrain from expressing their personal
views at the outset of a discussion.
(xii) The Chair should manage the timing of the board meetings to ensure there is
sufficient time for discussion after each topic addressed by management.
(xiii) The board should regularly have outside experts to advice on specific topics.
(xiv) The board should have an in-camera meeting both before and after each board
meeting.
(xv) The board should retain an independent consultant to help evaluate director and
board performance.
(xvi) At the beginning of a board meeting, the committee chairman should have an
opportunity to summarize (verbally or in writing) the issues addressed and
decisions taken at prior committee meetings.
(xvii) The board should have an effective system to provide board members with
timely, relevant and reliable financial and strategic information about the
organization.
(xviii) The board should review the risk identification and management system of the
organization.
(xix) The board should approve the business plan and major expenditures.
(xx) The board should work with the CEO and senior staff to develop and review the
strategic plan.
PP–GRMC&E–December 2020 4
Answer 1(c)
It has been stated that initially the Chairman had enquired into the matter personally
and had found nothing improper. However, this seems more of an opinion rather than
based on any detailed enquiry. Thereafter when another complaint was received, the
Board simply refuted the matter citing it as “malicious and baseless”.
The approach of the board in rejecting the allegations as “malicious and baseless”
without conducting any enquiry into the matter raises serious questions on its functioning.
Instead of addressing the concerns raised the board tried to sweep the matter under the
carpet. The board should have tried to reassure the stakeholders immediately by taking
steps to conduct an investigation into the matter to set the matter right. A voluntary
investigation carried on behalf of the board would have increased the reputation of the
board. The board could then have taken steps to protect the interest of the company.
Only when the matter went out of hand, the Board decided to institute an independent
enquiry. Later it was found that Rakesh had not followed the dictum of law.
Thus, overall the performance of the Board in handling the compliant against Rakesh
doesn’t seem satisfactory. The Board should have acted proactively in the interest of
the stakeholders.
Answer 1(d)
To improve its functioning and efficiency, ABC Co. Ltd. should align its corporate
governance practices with the board principles for corporate governance by listed entities
as given below:
(i) The company should ensure timely and accurate disclosure of all material matters
including the financial position, performance, ownership and governance of the
company.
(ii) The responsibilities of the board of directors should be clearly defined.
(iii) The board of directors shall lay down a code of conduct for all members of board
of directors and senior management of the listed entity.
(iv) All members of the board of directors and senior management personnel shall
affirm compliance with the code of conduct of board of directors and senior
management on an annual basis.
(v) The Board should monitor and manage potential conflicts of interest of
management, members of the board of directors and shareholders, including
misuse of corporate assets and abuse in related party transactions
(vi) The board of directors shall exercise objective independent judgement on
corporate affairs.
(vii) The board of directors shall consider assigning a sufficient number of non-
executive members of the board of directors capable of exercising independent
judgement to tasks where there is a potential for conflict of interest.
(viii) Members of the board of directors shall act on a fully informed basis, in good
faith, with due diligence and care, and in the best interest of the listed entity and
the shareholders.
 5 PP–GRMC&E–December 2020
(ix) The board of directors shall set a corporate culture and the values by which
executives throughout a group shall behave.
(x) The board of directors shall maintain high ethical standards and shall take into
account the interests of stakeholders.
Attempt all parts of either Q. No. 2 or Q. No. 2A
Question 2
(a) Write a short note on Dividend distribution policy. (5 marks)
(b) “A responsible business activity contributes to good public policy and to human
rights in the communities in which it operates.” Explain the responsibilities of
business provided in the Caux Round Table’s (CRT) Stakeholder Management
Guidelines. (5 marks)
(c) The Audit Committee of Polar Ltd., a company listed with BSE, consists of
three directors, Ashish, Nitin and Rekha. Ashish is the chairman of the Audit
Committee and is also the CEO of Polar Ltd., Nitin and Rekha are independent
directors and all three directors are financially literate. Rekha is a Chartered
Accountant with more than 15 years’ experience in finance and accounting.
Discuss the above constitution of the Audit Committee in the light of the legal
requirements in this regard. (5 marks)
OR (Alternate question to Q. No. 2)
Question 2A
(i) KLIP Travels Ltd. (KLIP) is a BSE listed company in the travel industry. Arun
Kumar is the Chairperson of KLIP. There has been a major re-shuffle in the
composition of the Board of Directors of KLIP with several old directors retiring
and many new individuals inducted as directors. The Chairperson of the company,
Arun, is keen to give an Induction kit to the newly inducted members on the
Board but is unsure of its contents. As the Company Secretary of KLIP, prepare
the induction kit. (5 marks)
(ii) You are the Company Secretary of XYZ Insurance Co. Ltd. The Board of Directors
of your company requires you to draw up a policy based on the principles spelt
out in the stewardship code for insurers in India. (5 marks)
(iii) Discuss the need for Internal Audit as a tool for Corporate Governance in the
present day organizations. (5 marks)
Answer 2(a)
The provisions pertaining to Dividend Distribution Policy are contained in Regulation
43A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Regulation 43A of the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 provides that:
(1) The top five hundred listed entities based on market capitalization (calculated
as on March 31 of every financial year) shall formulate a dividend distribution
policy which shall be disclosed in their annual reports and on their websites.
PP–GRMC&E–December 2020 6
(2) The dividend distribution policy shall include the following parameters:
(a) the circumstances under which the shareholders of the listed entities may
or may not expect dividend.
(b) the financial parameters that shall be considered while declaring dividend.
(c) internal and external factors that shall be considered for declaration of
dividend.
(d) policy as to how the retained earnings shall be utilized.
(e) parameters that shall be adopted with regard to various classes of shares.
Provided that if the listed entity proposes to declare dividend on the basis of
parameters in addition to clauses (a) to (e) or proposes to change such additional
parameters or the dividend distribution policy contained in any of the parameters,
it shall disclose such changes along with the rationale for the same in its annual
report and on its website.
(3) The listed entities other than top five hundred listed entities based on market
capitalization may disclose their dividend distribution policies on a voluntary
basis in their annual reports and on their websites.
Answer 2(b)
According to the Caux Round Tables (CRT) Principles for Responsible Businesses
as a global corporate citizen a responsible business activity contributes to good public
policy and to human rights in the communities in which it operates:
In this context it is envisaged that a responsible business has a responsibility to:
a. Respect human rights and democratic institutions, and promote them wherever
practicable.
b. Recognize government’s legitimate obligation to society at large and support
public policies and practices that promote social capital.
c. Promote harmonious relations between business and other segments of society.
d. Collaborate with community initiatives seeking to raise standards of health,
education, workplace safety and economic well-being.
e. Promote sustainable development in order to preserve and enhance the physical
environment while conserving the earth’s resources.
f. Support peace, security and the rule of law.
g. Respect social diversity including local cultures and minority communities.
h. Be a good corporate citizen through ongoing community investment and support
for employee participation in community and civic affairs.
Answer 2(c)
The legal requirement for the composition of the Audit Committee are mentioned
under sub section (1) and (2) of section 177 of the Companies Act, 2013 which states
 7 PP–GRMC&E–December 2020
that the Board of Directors of every listed public company shall constitute an Audit
Committee.
The Audit Committee shall consist of a minimum of three directors with independent
directors forming a majority.
Provided that majority of members of Audit Committee including its Chairperson
shall be persons with ability to read and understand, the financial statement.
Further regulations 18(1) of the SEBI (LODR) Regulations, 2015 requires that every
listed entity shall constitute a qualified and independent audit committee in accordance
with the terms of reference, subject to the following:
(a) The audit committee shall have minimum three directors as members.
(b) Two-thirds of the members of audit committee shall be independent directors
(c) All members of audit committee shall be financially literate and at least one
member shall have accounting or related financial management expertise.
Explanation (1).- For the purpose of this regulation, “financially literate” shall
mean the ability to read and understand basic financial statements i.e. balance
sheet, profit and loss account, and statement of cash flows.
Explanation (2).- For the purpose of this regulation , a member shall be considered
to have accounting or related financial management expertise if he or she
possesses experience in finance or accounting, or requisite professional
certification in accounting, or any other comparable experience or background
which results in the individual’s financial sophistication, including being or having
been a chief executive officer, chief financial officer or other senior officer with
financial oversight responsibilities.
(d) The chairperson of the audit committee shall be an independent director and he
shall be present at Annual general meeting to answer shareholder queries.
In the given case
(i) There are three directors in the audit committee.
(ii) All the directors are financial literate.
(iii) Majority (2/3) of the members of the audit committee are independent directors.
(iv) One director, namely Rekha is chartered accountant and have accounting and
related financial management expertise.
But the chairman of the audit committee is Ashish who is also CEO of Polar Ltd.
and not an independent director. Thus the conditions of regulation 18(1) of the SEBI
(LODR) Regulations, 2015 is not fully complied with. Therefore in order to validate the
composition of audit committee either Nitin or Rekha should be appointed as the Chairman
of the audit committee.
Answer 2A(i)
An induction kit is generally given to the newly inducted directors and it may contain
the following information about the company to enable the newly inducted director to
familiarise himself about the company and the environment in which it operated:
(i) Memorandum and Articles of Association with a summary of most important
provisions.
PP–GRMC&E–December 2020 8
(ii) Brief history of the company.
(iii) Current business plan, market analysis and budgets.
(iv) All relevant policies and procedures, such as a policy for obtaining independent
professional advice for directors.
(v) Protocol, procedures and dress code for Board meetings, general meetings,
staff social events, site visits etc including the involvement of partners.
(vi) Press releases in the last one year.
(vii) Copies of recent press cuttings and articles concerning the company.
(viii) Annual report for last three years.
(ix) Notes on agenda and Minutes of last six Board meetings.
(x) Board’s meeting schedule and Board committee meeting schedule.
(xi) Description of Board procedures.
(xii) Organization Chart.
Answer 2A(ii)
Policy of XYZ Insurance Co. Ltd. based on the Principles of Stewardship Code for
Insurers
IRDAI has issued the guidelines on Stewardship Code for Insurers in India in the
form of a set of principles to be adopted by them. It requires the insurers to draft a policy
as regards their conduct at general meetings of their investee companies to improve
their governance. The Policy shall be duly approved by the Board of Directors. As an
insurance company, XYZ Insurance Co. Ltd. shall approve a policy in this regard. The
Policy of XYZ Insurance Co. Ltd. shall incorporate the following
(i) The company discharges its stewardship responsibilities and publicly disclose
it. The company’s stewardship responsibilities are monitoring and engaging with
companies on matters such as strategy, performance, risk, capital structure,
and corporate governance, including culture and remuneration.
(ii) The company manages conflicts of interest in fulfilling its stewardship
responsibilities and publicly disclose it. The company identifies and manages
conflicts of interest with the aim of taking all reasonable steps to put the interests
of their client or beneficiary first.
(iii) The Company monitors its investee companies. The company regularly monitors
its investee companies in respect of its performance, leadership effectiveness,
succession planning, corporate governance, reporting and other parameters.
The company nominates directors on the board of its investee company for
active involvement.
(iv) The company intervenes in its investee companies. The company intervenes
when ithas concerns about the investee company’s strategy, performance,
governance, remuneration or approach to risks, including those that may arise
 9 PP–GRMC&E–December 2020
from social and environmental matters. In case of non-resolution of company’s
concerns, the company escalates the matter.
(v) The company collaborates with other institutional investors, where required, to
preserve the interests of the policyholders (ultimate investors) and discloses
the collaboration.
(vi) The voting decisions of the company aims to promote the overall growth of the
investee companies and, in turn, enhance the value of their investors. The
voting policy of the company, voting decisions and the rationale is disclosed on
its website.
(vii) The company reports periodically on its stewardship activities. The company
also provides a periodic report to its policyholders of how the company has
discharged its responsibilities, in a easily understandable format. But the
company do not intend to manage the affairs of the investee company. The
company may also at any time decide to sell its holding in the investee company,
if it is in the best interest of clients or beneficiaries.
Answer 2A(iii)
Internal Audit is an independent management function, which involves a continuous
and critical appraisal of the functioning of an entity with a view to suggest improvements
thereto and add value to and strengthen the overall governance mechanism of the entity
including entity’s strategic risk management and internal control system.
An effective internal audit function can play a significant role within the corporate
governance framework of a company. Over the last decade internal audit has developed
and grown in importance. Efficient internal audit functions provide objective assurance/
assessments to the board (and to the audit committee) about the adequacy and
effectiveness of the processes by which risks are identified and prioritised; managed,
controlled, and mitigated.
In most of the countries and business sectors internal audit reports professionally
to an audit committee and managerially to the chief executive or chief financial officer.
Internal audit is an independent and objective appraisal function; it supports senior
management and the (management) board. Internal audit activities are performed in
diverse legal and cultural environments; within organisations that vary in size and
structure. Internal audit functions should comply with the relevant professional standards.
Internal Audit is a tool of control:
(i) To measure and evaluate the effectiveness of the working of an organization
(ii) To ensure that all the laws, rules and regulations governing the operations of the
organization are adhered to
(iii) To identify risks and also suggests remedial measures, thereby acting as a
catalyst for change and action.
Question 3
Write short notes on :
(a) Factors to be kept in mind for planning to mitigate compliance risk.
PP–GRMC&E–December 2020 10
(b) Mission and objectives of International Corporate Governance Network (ICGN).
(c) Regulation 30(3) of SEBI (LODR), 2015 regarding disclosure of events upon
application of materiality guidelines.
(d) Matters that cannot be discussed in a Board meeting conducted through Video-
conferencing.
(e) Matters to be discussed under “Management Discussion and Analysis” to be
disclosed in Annual Report of listed companies. (3 marks each)
Answer 3(a)
To put in place a system or plan for mitigation of compliance risks an organization
needs to keep in mind the following factors:
• What kinds of compliance failures would create significant brand risk or
reputational damage? Could the failures arise internally, in the supply chain, or
with regard to third parties operating on the organization’s behalf?
• What is the likely impact of that damage on the organization’s market value,
sales, profit, customer loyalty, or ability to operate?
• What kinds of compliance missteps could cause the organization to lose the
ability to sell or deliver products/services for a period of time?
• How should the compliance program design, technology, processes, and resource
requirements change in light of growth plans, acquisitions, or product/category/
service expansions?
• Is the organization doing enough to inform customers, investors, third parties,
and other stakeholders about its vision and values? Is it making the most of
ethics, compliance, and risk management investments as potential competitive
differentiators?
• What are the total compliance costs—beyond salaries and benefits at the
centralized level—and how are costs aligned with the most significant compliance
risks that could impact the brand or result in significant fines, penalties, and/ or
litigation?
• How well-positioned is the compliance function? Does it have a seat “at the
table” in assessing and influencing strategic decisions?
• What are the personal and professional exposures of executive management
and the board of directors with respect to compliance?
Answer 3(b)
The International Corporate Governance Network (“ICGN”) is a not-for-profit company
limited by guarantee and not having share capital under the laws of England and Wales
founded in 1995.
ICGN’s mission is to promote effective standards of corporate governance and
investor stewardship to advance efficient markets and sustainable economies world-
wide.
 11 PP–GRMC&E–December 2020
It has four primary objectives:
(i) to provide an investor-led network for the exchange of views and information
about corporate governance issues internationally
(ii) to examine corporate governance principles and practices and
(iii) to develop and encourage adherence to corporate governance standards and
guidelines
(iv) to generally promote good corporate governance.
Answer 3(c)
Regulation 30(3) of the SEBI (Listing Obligations and Disclosure Requirements)
Regulaions, 2015 specifies that the listed entity shall make disclosure of events specified
in Para B of Part A of Schedule III, based on application of the guidelines for materiality,
as specified in regulation 30(4) of SEBI (LODR) Regulations, 2015.
The listed entity shall consider the following criteria for determination of materiality
of events/ information:
(a) the omission of an event or information, which is likely to result in discontinuity
or alteration of event or information already available publicly or
(b) the omission of an event or information is likely to result in significant market
reaction if the said omission came to light at a later date
(c) In case where the criteria specified in sub-clauses (a) and (b) are not applicable,
an event/information may be treated as being material if in the opinion of the
board of directors of listed entity, the event / information is considered material.
The listed entity shall frame a policy for determination of materiality, based on
criteria specified in the regulation 30(4) of SEBI (LODR) Regulations, 2015, duly approved
by its board of directors, which shall be disclosed on its website.
Answer 3(d)
The following types of matters cannot be discussed in a board meeting conducted
through video conference:
1. Approval of the annual financial statements.
2. Approval of the Board’s report.
3. Approval of the prospectus.
4. Audit Committee Meetings for consideration of accounts.
5. Approval of the matter relating to amalgamation, merger, demerger, acquisition
and takeover.
Provided that where there is quorum presence in a meeting through physical presence
of directors, any other director may participate through video conferencing or other audio
visual means.
PP–GRMC&E–December 2020 12
Answer 3(e)
As part of the Directors Report or as an addition thereto, a Management Discussion
and Analysis Report should form part of the Annual Report.
This Management Discussion and Analysis should include discussion on the following
matters within the limits set by the company’s competitive position:
(a) Industry structure and developments
(b) Strength and weakness
(c) Opportunities and Threats
(d) Segment–wise or product-wise performance
(e) Outlook
(f) Risks and concerns
(g) Internal control systems and their adequacy
(h) Discussion on financial performance with respect to operational performance
(i) Material developments in Human Resources, Industrial Relations front, including
number of people employed.
(j) Environmental Protection and Conservation, Technological conservation,
Renewable energy developments, Foreign Exchange conservation
(k) Corporate Social Responsibility
PART II
Question 4
(a) Discuss in brief Enterprise Risk Management, its components and limitations.
(5 marks)
(b) “Risk analysis is an essential tool and one that could save time, money and
reputations.” Explain the statement and bring out the use of risk analysis.
(5 marks)
(c) “Non-financial risks do not have direct and immediate impact on business, but
the consequences are very serious and later do have significant financial impact
as well if not controlled at the initial stage.” List the non-financial risks encountered
during the course of business by a business entity. (5 marks)
(d) What is meant by handling of risk ? Explain risk retention as a method of handling
risk. (5 marks)
Answer 4(a)
Enterprise risk management is a process, put in place by an entity’s board of directors,
management and other personnel, applied in strategy setting and across the enterprise,
designed to identify potential events that may affect the entity, and manage risk to be
within its risk appetite, to provide reasonable assurance regarding the achievement of
entity objectives.
 13 PP–GRMC&E–December 2020
Enterprise risk management encompasses:
i. Aligning risk appetite and strategy.
ii. Enhancing risk response decisions.
iii. Reducing operational surprises and losses.
iv. Identifying and managing multiple and cross-enterprise.
v. Seizing opportunities.
vi. Improving deployment of capital.
Enterprise risk management consists of eight interrelated components. These are
derived from the way management runs an enterprise and are integrated with the
management process. These components are:
1. Internal Environment
2. Objective Setting
3. Event Identification
4. Risk Assessment
5. Risk Response
6. Control Activities
7. Information and Communication
8. Monitoring
Enterprise risk management is not strictly a serial process, where one component
affects only the next. It is a multidirectional, iterative process in which almost any
component can and does influence another.
Limitations
While enterprise risk management provides important benefits, it also has certain
limitations. In addition to factors discussed above, limitations result from the realities
that human judgment in decision making can be faulty, decisions on responding to risk
and establishing controls need to consider the relative costs and benefits, breakdowns
can occur because of human failures such as simple errors or mistakes, controls can be
circumvented by collusion of two or more people, and management has the ability to
override enterprise risk management decisions.
These limitations preclude a board and management from having absolute assurance
as to achievement of the entity’s objectives.
Answer 4(b)
After identification of the risk parameters, the second stage is of analyzing the risk
which helps to identify and manage potential problems that could undermine key business
initiatives or projects.
To carry out a Risk Analysis, first identify the possible threats and then estimate
the likelihood that these threats will materialize. The analysis should be objective and
should be industry specific. Within the industry, the scenario based analysis may be
PP–GRMC&E–December 2020 14
adopted taking into consideration of possible events that may occur and its alternative
ways to achieve the given target.
Risk Analysis can be complex, as it requires to draw on detailed information such
as project plans, financial data, security protocols, marketing forecasts and other relevant
information. However, it’s an essential planning tool, and one that could save time,
money, and reputations.
Risk analysis is useful in many situations like:
• While planning projects, to help in anticipating and neutralizing possible problems.
• While deciding whether or not to move forward with a project.
• While improving safety and managing potential risks in the workplace.
• While preparing for events such as equipment or technology failure, theft, staff
sickness, or natural disasters.
• While planning for changes in environment, such as new competitors coming
into the market, or changes to government policy.
• When all the permutations-combinations of possible events/ threats are listed
while analyzing the risk parameters and the steps taken to manage such risks,
the risk matrix is designed / popped-up before the decision making and
implementing authority.
Answer 4(c)
The various non-financial risk faced in a business may be listed as follows:
1. Business/ Industry & Services Risk- Business risks implies uncertainty in profits
or danger of loss and the events that could pose a risk due to some unforeseen
events in future, which causes business to fail. Business risk refers to the
possibility of inadequate profits or even losses due to uncertainties e.g., changes
in tastes, preferences of consumers, strikes, increased competition, change in
government policy, obsolescence etc. Every business organization contains
various risk elements while doing the business. Such type of risk may also
arise due to business dynamics, competition risks affecting tariff prices, customer
relation risk etc.
2. Strategic Risk - Business plans which have not been developed properly and
comprehensively since inception may lead to strategic risk. For example, strategic
risk might arise from making poor business decisions, from the substandard
execution of decisions, from inadequate resource allocation, or from a failure to
respond well to changes in the business environment.
3. Compliance Risk - This risk arises on account of non-compliance or breaches
of laws/ regulations which the entity is supposed to adhere. It may result in
deterioration of reputation in public eye, penalty and penal provisions.
4. Fraud Risk - Fraud is perpetrated through the abuse of systems, controls,
procedures and working practices. It may be perpetrated by an outsider or insider.
Fraud may not be usually detected immediately and thus the detection should
be planned for on a proactive basis rather than on a reactive basis.
 15 PP–GRMC&E–December 2020
5. Reputation Risk - This type of risk arises from the negative public opinion. Such
type of risk may arise from for example from the failure to assess and control
compliance risk and can result in harm to existing or potential business
relationships.
6. Transaction Risk- Transaction risk arises due to the failure or inadequacy of
internal system, information channels, employees integrity or operating processes.
7. Disaster Risk - On account of natural calamities like floods, fire, earthquake,
man-made risks due to extensive exploitation of land for mines activity, land
escalation, risk of failure of disaster management plans formulated by the
company etc.
8. Regulatory Risk - On account of change in Government policies and perceptions.
Especially this type of risks is associated with Food and beverages and
Pharmaceuticals industries.
9. Technology Risk - Failure of system caused due to tampering of data access to
critical information, non availability of data and lack of controls.
Answer 4(d)
Handling the risk refers to responding to the risk situation when the risk actually
materialize. For handling the risk first the ownership of the risk should be allocated and
the responsibilities of the persons handling the risk need to be identified and assigned.
The persons concerned should document the risk when it arises and report it to the
higher ups in order to have early risk mitigation measures and later to minimise the risk.
Risk retention/absorption: It is the handling the unavoidable risk internally and the
firm bears/ absorbs it due to the fact that either because insurance cannot be purchased
of such type of risk or it may be of too expensive to cover the risk and much more cost-
effective to handle the risk internally. Usually, retained risks occur with greater frequency,
but have a lower severity.
An insurance deductible is a common example of risk retention to save money,
since a deductible is a limited risk that can save money on insurance premiums for
larger set backs. There are two types of retention methods for containing losses as
under:
1. Active Risk Retention : Where the risk is retained as part of deliberate
management strategy after conscious evaluation of possible losses and causes.
2. Passive Risk Retention : Where risk retention occurred through negligence.
Such type of retaining risk is unknown or because the risk taker either does not
know the risk or considers it a lesser risk than it actually is.
PART III
Attempt all parts of either Q. No. 5 or Q. No. 5A
Question 5
(a) Describe the essentials of an effective compliance program.
(b) “Internal control can help an entity in achieving its objectives but it is not a
panacea.” Discuss.
PP–GRMC&E–December 2020 16
(c) What do you mean by Corporate Sustainability Reporting? Discuss the benefits
and key drivers of sustainability reporting.
(d) You are the Company Secretary of Super Chef Ltd. Shirley, the newly appointed
CEO of Super Chef Ltd. is not clear about the concept of internal control and her
role and responsibilities with regard to internal controls of the company. She
approaches you to understand the same. Prepare a short note to brief Shirley
on Internal control and her role and responsibilities in this regard.
(5 marks each)
OR (Alternate question to Q. No. 5)
Question 5A
(i) The Board of Directors of Fresco Pvt. Ltd. is in the process of reviewing the list
of laws applicable to the company. As the Company Secretary of Fresco Pvt.
Ltd., advise the Board on the components of a robust internal compliance
reporting program.
(ii) “Corporate reporting is an essential means by which companies communicate
with investors as a part of their accountability and stewardship obiligation.”
Comment and list out the expected information required by investors.
(iii) “Risk can arise or change due to circumstances.” Comment and point out the
circumstances which result into risks for an entity.
(iv) “Internal check refers to allocation of duties in a scientific way so that no one is
responsible for all phases of the transactions.” Explain the essential features of
Internal check in the light of above statement. (5 marks each)
Answer 5(a)
The elements of an Effective Compliance Program may be listed as under:
1. High level company personnel who exercise effective oversight : The
organization’s governing body should be knowledgeable about the effective
compliance program and should have oversight of it. The governing body should
have the overall responsibility for the compliance program and shall ensure the
effectiveness of it. Specific individuals shall have overall responsibility for the
day to day operations of the compliance program. A Compliance Officer shall
be designated by the organization’s governing body, who shall periodically report
to the higher level management/ governing body. The Compliance Officer should
be given adequate resources with appropriate authority and direct access to the
governing body.
2. Written policies and procedures : The employees of the organization should be
appraised about the legal requirements so that employees understand their
obligations. The employees should be encouraged to report suspected fraud
and other irregularities without fear.
3. Training and education : The employees of the organization should be provided
reasonable training to understand the organization’s compliance programme
and its policies and processes.
 17 PP–GRMC&E–December 2020
4. Lines of communication : Information about the compliance program must be
widely communicated at all levels of an organization. To enhance the
effectiveness of the compliance program, the program must establish lines of
communication whereby, employees and agents may seek guidance and report
concerns, including the opportunity to report anonymously (such as a compliance
hot line); There are assurances that there will be no retaliation for good faith
reporting.
5. Standards enforced through well-publicized disciplinary guidelines : The
organization’s compliance and ethics program should be promoted and enforced
consistently through well-publicized guidelines that provide, incentives to support
the compliance and ethics program, disciplinary measures for disobeying the
law, the organization’s policies, or the requirements of the compliance and ethics
program.
6. Internal compliance monitoring : The organization shall take reasonable steps,
including monitoring and auditing, to, ensure that the organization’s compliance
and ethics program is followed, periodically evaluate the effectiveness of the
organization’s compliance program.
7. Response to detected offenses and corrective action plans : After monitoring
and auditing of the compliance program, the organization shall take reasonable
steps to, respond appropriately to any violations of the law or policies to prevent
future misconduct, modify and improve the organization’s compliance and ethics
program.
Answer 5(b)
In a business entity the internal control should be adequate to cover all the key and
sensitive areas of the organization. No one person should be allowed to complete one
set of transactions. The control mechanism once established should be reviewed
periodically in order to assess the lacunas and to remove the same. The password
sharing should be strictly prohibited and stringent action should be taken against the
erring staff. The efficacy of the internal control mechanism depends when the employees
accepts this philosophy in the true letter and spirit.
A good and efficient Internal control system can assist in the following ways:
1. help an entity achieve its performance and profitability targets, and prevent loss
of resources.
2. help ensure reliable financial reporting.
3. help ensure that the enterprise complies with laws and regulations, avoiding
damage to its reputation and other consequences.
4. In sum, it can help an entity get to where it wants to go, and avoid pitfalls and
surprises along the way.
While internal control as such is inherently useful and help organisation in many
ways yet it is not a panacea as it also has its limitations such as:
1. Internal control cannot change an inherently poor manager into a good one.
PP–GRMC&E–December 2020 18
2. Internal control cannot ensure success, or even survival in case of shifts in
government policy or programs, competitors’ actions or economic conditions,
since these are beyond the management’s control.
3. An internal control system, no matter how well conceived and operated, can
provide only reasonable-- not absolute--assurance to management and the board
regarding achievement of an entity’s objectives.
4. The likelihood of achievement is affected by limitations inherent in all internal
control systems.
5. Controls can be circumvented by the collusion of two or more people, and
management has the ability to override the system.
6. Another limiting factor is that the design of an internal control system must
reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs.
Answer 5(c)
Corporate Sustainability reporting is a process for publicly disclosing an organization’s
economic, environmental, and social performance. Through sustainability reporting,
organizations report on progress against performance goals not only for economic
achievements, but for environmental protection and social well-being. A sustainability
report is an organizational report that gives information about economic, environmental,
social and governance performance. Sustainability reporting aims to communicate an
organization’s sustainability priorities, policies, programs and performance to its investors.
It comprises information on how a company, proactively and beyond regulations, acts
responsibly towards the environment around it and works towards equitable and fair
business practices and brings to life products and services with lower impacts on the
natural environment. Such a report describes how a company has implemented a greener
supply chain, has engaged with local communities, is helping tackle climate-change
issues, or is “innovating for the poor”.
The benefits of Corporate sustainability reporting includes:
i. Increased understanding of risks and opportunities
ii. Emphasizing the link between financial and non-financial performance
iii. Influencing long term management strategy and policy, and business plans
iv. Streamlining processes, reducing costs and improving efficiency
v. Benchmarking and assessing sustainability performance with respect to laws,
norms, codes, performance standards, and voluntary initiatives
vi. Avoiding being implicated in publicized environmental, social and governance
failures
vii. Comparing performance both internally and between organizations as well as
among external sectors External benefits of sustainability reporting can include:
a. Mitigating – or reversing – negative environmental, social and governance
impacts
b. Improving reputation and brand loyalty
 19 PP–GRMC&E–December 2020
c. Enabling external stakeholders to understand the organization’s true value,
and tangible and intangible assets
d. Demonstrating how the organization influences, and is influenced by,
expectations about sustainable development
The key drivers of sustainability reporting are:
1. Regulations
2. Customers
3. Loyalty
4. NGO’s and the media
5. Employees
6. Peer pressure from other companies
7. Companies themselves
8. Investors
Answer 5(d)
The Committee of Sponsoring Organizations of the Treadway Commission (COSO)
defines Internal Control as a process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable assurance regarding
the achievement of objectives relating to operations, reporting, and compliance.
According to COSO an organization needs to focus on separate aspects of internal
control for achievement of the following objectives:
• Effectiveness and efficiency of the entities operations.
• Reliability, limitations and transparency of financial reporting.
• Compliance with applicable laws and regulations.
The chief executive officer is ultimately responsible and should assume “ownership”
of the system. More than any other individual, the chief executive sets the “tone at the
top” that affects integrity and ethics and other factors of a positive control environment.
In a large company, the chief executive fulfils this duty by providing leadership and
direction to senior managers and reviewing the way they’re controlling the business.
Senior managers, in turn, assign responsibility for establishment of more specific internal
control policies and procedures to personnel responsible for the unit’s functions. In a
smaller entity, the influence of the chief executive, often an owner-manager is usually
more direct. In any event, in a cascading responsibility, a manager is effectively a chief
executive of his or her sphere of responsibility. Of particular significance are financial
officers and their staffs, whose control activities cut across, as well as up and down, the
operating and other units of an enterprise.
Answer 5(A)(i)
An internal reporting mechanism need not be extensive however it must go far
PP–GRMC&E–December 2020 20
beyond a written policy. It must be designed to reflect the practices, laws and culture of
the countries in which the company is operating. Any broken link in the reporting chain
can interrupt the flow of information from the reporter to those who need to hear and act
on it. A sound program should include the following elements:
• Communication : make the program known to all levels of employees
• Accessibility : make the program available to all the employees around the
company in various local languages.
• Culture Appropriateness : adopt the program to the constraints imposed by
local culture, history and practice.
• Universality : make the reporting mechanism available to relevant third parties
e.g. suppliers, consultants, customers.
• Confidentiality and Anonymity : guarantee confidentiality and permit discreet or
anonymous report.
• Screening : provide safeguard against frivolous or malicious reports.
• Collect Data : monitor reports, track them over time, identify vulnerabilities and
take corrective action.
• Remedial action and feedback : take action and provide feedback to the reporter
as appropriate.
• Management visibility : report to the audit committee or board of directors.
• Employee Protection : protect reporting employee both during employment and
after departure from the company.
Answer 5(A)(ii)
Corporate reporting is an essential means by which companies communicate with
investors as part of their accountability and stewardship obligations. The current financial
reporting model was developed in the 1930’sfor an industrial world. In general, the model
provides a backwards-looking review of performance and does not provide enough relevant
information for decision- making today.
The financial reporting model is like “looking in the rear-view mirror,” when in fact the
road ahead is very turbulent and there are huge impacts on the company, both societal
and environmental.
It is not necessarily the volume of information, but the lack of a comprehensive
story, which is where improvements in corporate reporting are needed.
Investors expect information about:
• Business model and strategy,
• Intangible factors and sustainability (i.e. economic, environmental, social)
commitments,
• Impacts and performance that affect a company’s value today and its ability to
create value in the future,
 21 PP–GRMC&E–December 2020
• Key aspects of corporate governance,
• Internal controls,
• Human rights / diversity practices and policies,
• Key financial ratios
Answer 5(A)(iii)
Risks relevant to reliable financial reporting include external and internal events,
transactions or circumstances that may occur and adversely affect an entity’s ability to
initiate, record, process, and report financial data consistent with the assertions of
management in the financial statements. Management may initiate plans, programs, or
actions to address specific risks or it may decide to accept a risk because of cost or
other considerations. Risks can arise or change due to circumstances such as the
following:
• Changes in operating environment : Changes in the regulatory or operating
environment can result in changes in competitive pressures and significantly
different risks.
• New personnel : New personnel may have a different focus on or understanding
of internal control. New or revamped information systems: Significant and rapid
changes in information systems can change the risk relating to internal control.
• New or revamped information systems : Significant and rapid changes in
information systems can change the risk relating to internal control.
• Rapid growth : Significant and rapid expansion of operations can strain controls
and increase the risk of a breakdown in controls.
• New technology: Incorporating new technologies into production processes or
information systems may change the risk associated with internal control.
• New business models, products, or activities : Entering into business areas or
transactions with which an entity has little experience may introduce new risks
associated with internal control.
• Corporate restructurings : Restructurings may be accompanied by staff reductions
and changes in supervision and segregation of duties that may change the risk
associated with internal control.
• Expanded foreign operations : The expansion or acquisition of foreign operations
carries new and often unique risks that may affect internal control, for example,
additional or changed risks from foreign currency transactions.
• New accounting pronouncements : Adoption of new accounting principles or
changing accounting principles may affect risks in preparing financial statements.
Answer 5(A)(iv)
The term ‘internal check’ refers to allocation of duties in such a manner that the
work of one person is checked by another while that other is performing his own duties
in a normal way. Internal check is the organisation of duties of staff in a scientific way
so that no one is responsible for all phases of the transaction and the work of one
employee is so distributed that the discrepancies are revealed in the process of
PP–GRMC&E–December 2020 22
performance of duties of that employee. The duties are divided and sub-divided in such
a manner that discrepancies flow out from the system itself.
Essential features of internal check are given hereunder:
(1) There should be proper division of work and responsibilities.
(2) The duties of each person should be properly defined so as to fix definite
responsibilities of each individual.
(3) Possibilities of giving absolute control to anybody should not be left out
unchecked.
(4) Too much confidence on a person should be avoided.
(5) The duties of staff should be rotated and one person should not be allowed to
occupy a particular area of operation for long.
(6) Necessary safeguards should be provided so as to avoid collusion of thoughts
which quite often leads to commission of fraud.
(7) The person handling cash, stock, securities should be given compulsory leave
so as to prevent their having uninterrupted control.
(8) Physical inventory of fixed assets and stocks should be taken periodically.
(9) Assets should be protected from unauthorised use.
(10) To prevent loss or misappropriation of cash, mechanical devices such as the
automatic cash register, should be employed.
(11) The financial and administrative powers should be distributed very judiciously
among different officers and the manner in which these are actually exercised
should be reviewed periodically.
(12) Accounting procedures should be laid down for periodical verification and testing
of different sections of accounting records to ensure that they are accurate
PART IV
Question 6
(a) A ‘Code of Ethics’ and a ‘Code of Conduct’ are often confused or used
interchangeably. Discuss.
(b) Explain the concept and need to apply the Triple Bottom approach for CSR.
(5 marks each)
Answer 6(a)
The terms “Code of Ethics” and “Code of Conduct” are often mistakenly used
interchangeably. They are, in fact, two unique documents. Codes of ethics, which govern
decision-making, and codes of conduct, which govern actions, represent two common
ways that companies self-regulate.
Similarities: Both a Code of Ethics and a Code of Conduct are similar as they are
 23 PP–GRMC&E–December 2020
used in an attempt to encourage specific forms of behaviour by employees. Ethics
guidelines attempt to provide guidance about values and choices to influence decision
making. Conduct regulations assert that some specific actions are appropriate, others
in appropriate. In both cases, the organization’s desire is to obtain a narrow range of
acceptable behaviour from employees.
Differences : With similarities, comes differences. Both are used in an attempt to
regulate behaviour in very different ways. Ethical standards generally are wide-ranging
and non-specific, designed to provide a set of values or decision-making approaches
that enable employees to make independent judgments about the most appropriate
course of action. Conduct standards generally require little judgment; you obey or incur
a penalty, and the code provides a fairly clear set of expectations about which actions
are required, acceptable or prohibited. Violation of code of ethics may not lead to action
against the employee but violation of code of conduct may lead to disciplinary action.
Answer 6(b)
Within the broader concept of corporate social responsibility, the concept of Triple
Bottom Line (TBL) is gaining significance and becoming popular amongst corporates.
Coined in 1997 by John Ellington, noted management consultant, the concept of TBL is
based on the premise that business entities have more to do than make just profits for
the owners of the capital, only bottom line people understand. “People, Planet and Profit”
is used to succinctly describe the triple bottom lines. “People” (Human Capital) pertains
to fair and beneficial business practices toward labour and the community and region in
which a corporation conducts its business. “Planet” (Natural Capital) refers to sustainable
environmental practices. It is the lasting economic impact the organization has on its
economic environment A TBL company endeavors to benefit the natural order as much
as possible or at the least do no harm and curtails environmental impact. “Profit” is the
bottom line shared by all commerce.
The need to apply the concept of TBL is caused due to –
(a) Increased consumer sensitivity to corporate social behaviour
(b) Growing demands for transparency from shareholders/stakeholders
(c) Increased environmental regulation
(d) Legal costs of compliances and defaults
(e) Concerns over global warming
(f) Increased social awareness
(g) Awareness about and willingness for respecting human rights
(h) Media’s attention to social issues
(i) Growing corporate participation in social upliftment
***
GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME
(New Syllabus)

JUNE 2019

MODULE 1

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
Phones : 41504444, 45341000; Fax : 011-24626727
E-mail : info@icsi.edu; Website : www.icsi.edu
These answers have been written by competent persons
and the Institute hope that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.

The Guideline Answers contain the information based on the

Laws/Rules applicable at the time of preparation. However,
students are expected to be well versed with the amendments
in the Laws/Rules made upto six months prior to the date of
examination.

C O N T E N T S
Page
MODULE 1

1. Governance, Risk Management, Compliances and Ethics 1

2. Advanced Tax Laws 25

3. Drafting, Pleadings and Appearances 52

 1 PP–GRMC&E–June 2019
PROFESSIONAL PROGRAMME EXAMINATION
JUNE 2019

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES

AND ETHICS
Time allowed : 3 hours Maximum marks : 100
NOTE : Answer ALL Questions.

PART - I
Question 1
ABC Ltd. is a public limited company listed on NSE and BSE. The company is
enjoying cash credit limit of Rs 10 crores with Trust Bank against the book debts.
The said cash credit limit is renewed from time to time and for this purpose the Trust
Bank requires the financial papers from the company which include the Balance
Sheet and Profit and Loss Account, list of sundry debtors (with age-wise outstanding)
and projected financial data viz: Turnover, Profit, Non-performing debtors etc.
The company was in the process of the finalisafion of its annual accounts as of 31st
March, 2018 and the same was to be put before the Audit Committee of Board
(ACB), meeting of which was schedule to be held on 5th July, 2018, for
recommendation to the Board of Directors. The CC limit with the Trust Bank which
was due for renewal from 31st March, 2018, renewed on ad-hoc basis for three
months only on the basis of provisional data, subject to the submission of final
papers, else the CC limit account of the company will turned in to non-performing
account. Since the Trust Bank also wants the CC Limit account in performing status,
it insisted the company to submit the final data even before the approval of the
ACB/ Board in order to renew the limit and prevent the account from turning into
NPA.
Based on the above facts the Company approaches you, being a Corporate Law
Consultant.
Answer the following queries raised by the ABC Ltd. :
(a) Whether HP Ltd can provide the financial information (which is price sensitive
information) to its banker without getting it perused and approved by the ACB
and Board ? Quote your answer with relevant provisions of law.
(b) If the Manager of the Trust Bank Branch, where the CC Limit account is
maintained, is provided the unapproved financial papers and on the basis of
these financial papers, he comes to know that company has shown profit with a
rise of 20% from the previous year, so he purchased the shares of the company
from the market with lesser price (in expectation of high jump in price after
declaration of the result). When the results were officially declared by the
company, the shares jumped to 30% and the branch manager off loaded the
purchases so made. Whether the Manager will be treated as Insider as per the
SEBI (Prohibition of Insider Trading) Regulations, 2015 ?

1
PP–GRMC&E–June 2019 2
(c) What are the provisions relating to the trading when a person is in possession of
unpublished price sensitive information as per the SEBI (Prohibition of Insider
Trading) Regulations, 2015 ?
(d) What are the penal provisions for insider trading as prescribed in the Companies
Act, 2013 and SEBI Act, 1992. (5 marks each)
Answer 1(a)
In terms of Sub-Regulation (1) of Regulation 3 of SEBI (Prohibition of Insider Trading)
Regulations, 2015, no insider shall communicate, provide, or allow access to any
unpublished price sensitive information, relating to a company or securities listed or
proposed to be listed, to any person including other insiders except where such
communication is in furtherance of legitimate purposes, performance of duties or discharge
of legal obligations.
Sub-Regulation (2) of Regulation 3 states that no person shall procure from or cause
the communication by any insider of unpublished price sensitive information relating to
a company or securities listed or proposed to be listed, except in furtherance of legitimate
purposes, performance of duties or discharge of legal obligations.
Sub-Regulation (2A) of Regulation 3 provides that the board of directors of a
listed company shall make a policy for determination of “legitimate purposes” as
a part of “Codes of Fair Disclosure and Conduct” formulated under regulation 8.
The Explanation to Sub-Regulation (2A) of Regulation 3 further clarifies that for the
purpose of illustration, the term “legitimate purpose” shall include sharing of unpublished
price sensitive information in the ordinary course of business by an insider with partners,
collaborators, lenders, customers, suppliers, merchant bankers, legal advisors, auditors,
insolvency professionals or other advisors or consultants, provided that such sharing
has not been carried out to evade or circumvent the prohibitions of these regulations.
Thus, as a prudent rule the price sensitive information should not be passed on until
it is for legitimate purposes. However, as per Explanation to Sub-Regulation (2A),
unpublished price sensitive information can be shared with banker/lender for legitimate
purposes like renewal of Credit limits provided that such sharing has not been carried
out to evade or circumvent the prohibitions of these regulations.
Answer 1(b)
Sub-Regulation (2B) of Regulation 3 of SEBI (Prohibition of Insider Trading)
Regulations, 2015 provides that any person in receipt of unpublished price sensitive
information pursuant to a “legitimate purpose” shall be considered an “insider” for purposes
of these regulations and due notice shall be given to such persons to maintain
confidentiality of such unpublished price sensitive information in compliance with
these regulations.
According to the above para, the branch manager who is in receipt of unpublished
price sensitive information for the legitimate purpose is an insider under the regulations.
Also as per Regulation 4(1), no insider shall trade in securities that are listed or
proposed to be listed on a stock exchange when in possession of unpublished price
sensitive information. When a person who has traded in securities has been in
 3 PP–GRMC&E–June 2019
possession of unpublished price sensitive information, his trades would be presumed
to have been motivated by the knowledge and awareness of such information in his
possession.
Answer 1(c)
Regulation 4 of SEBI (Prohibition of Insider Trading) Regulations, 2015 deals with
the provisions relating to trading when in possession of unpublished price sensitive
information.
Regulation 4(1) : No insider shall trade in securities that are listed or proposed
to be listed on a stock exchange when in possession of unpublished price sensitive
information:
Explanation – When a person who has traded in securities has been in
possession of unpublished price sensitive information, his trades would be presumed
to have been motivated by the knowledge and awareness of such information in his
possession.
Provided that the insider may prove his innocence by demonstrating the
circumstances including the following:
(i) the transaction is an off-market inter-se transfer between insiders who were
in possession of the same unpublished price sensitive information without
being in breach of regulation 3 and both parties had made a conscious and
informed trade decision. Provided that such unpublished price sensitive
information was not obtained under sub-regulation (3) of regulation 3 of these
regulations. Provided further that such off-market trades shall be reported
by the insiders to the company within two working days. Every company
shall notify the particulars of such trades to the stock exchange on which
the securities are listed within two trading days from receipt of the disclosure
or from becoming aware of such information.
(ii) the transaction was carried out through the block deal window mechanism between
persons who were in possession of the unpublished price sensitive information
without being in breach of regulation 3 and both parties had made a conscious
and informed trade decision; Provided that such unpublished price sensitive
information was not obtained by either person under sub-regulation (3) of
regulation 3 of these regulations.
(iii) the transaction in question was carried out pursuant to a statutory or regulatory
obligation to carry out a bona fide transaction.
(iv) the transaction in question was undertaken pursuant to the exercise of stock
options in respect of which the exercise price was pre-determined in compliance
with applicable regulations.
(v) in the case of non -individual insiders: –
(a) the individuals who were in possession of such unpublished price sensitive
information were different from the individuals taking trading decisions and
such decision-making individuals were not in possession of such unpublished
price sensitive information when they took the decision to trade; and
PP–GRMC&E–June 2019 4
(b) appropriate and adequate arrangements were in place to ensure that these
regulations are not violated and no unpublished price sensitive information
was communicated by the individuals
(c) possessing the information to the individuals taking trading decisions and
there is no evidence of such arrangements having been breached;
(vi) the trades were pursuant to a trading plan set up in accordance with regulation
5.
Regulation 4(2): In the case of connected persons the onus of establishing, that
they were not in possession of unpublished price sensitive information, shall
be on such connected persons and in other cases, the onus would be on the
Board.
Regulation 4(3): The Board may specify such standards and requirements,
from time to time, as it may deem necessary for the purpose of these regulations.
Answer 1(d)
Section 195 of the Companies Act 2013, which was dealing with the matter relating
to insider trading has been omitted by the Companies Amendment Act, 2017 w.e.f 09/
02/2018.
However, penalty for insider trading is provided under Section 15G of the SEBI Act,
1992. It provides that if any insider who,—
(i) either on his own behalf or on behalf of any other person, deals in securities of
a body corporate listed on any stock exchange on the basis of any unpublished
price-sensitive information; or
(ii) communicates any unpublished price-sensitive information to any person, with
or without his request for such information except as required in the ordinary
course of business or under any law; or
(iii) counsels, or procures for any other person to deal in any securities of anybody
corporate on the basis of unpublished price-sensitive information, shall be liable
to a penalty which shall not be less than ten lakh rupees but which may extend
to twenty-five crore rupees or three times the amount of profits made out of
insider trading, whichever is higher.
Attempt all parts of either Q. No. 2 or Q. No. 2A
Question 2
(a) The corporate governance framework should recognise the rights of stakeholders
established by law or through mutual agreements and encourage active co-
operation between corporations and stakeholders in creating wealth, jobs, and
the sustainability of financially sound enterprises. Elucidate the statement.
(b) Dr. Ganguly Committee recommended some Corporate Governance norms which
are applicable only to private sector bank. What were these recommendations ?
(c) Whether the rule of majority, was established in the case of Foss v. Harbottle
[(1843) 67 ER 189], is still relevant ? Narrate your answer with relevant provisions
of the Companies Act, 2013 and in light of the decided case law.
(5 marks each)
 5 PP–GRMC&E–June 2019
OR (Alternate question to Q. No. 2)
Question 2A
(i) What is the Code for Stewardship for the insurers ?
(ii) "The NFRA is an independent regulator established under Section 132 of the
Companies Act, 2013 to oversee the auditing profession". Discuss.
(iii) Write a brief note on "The ICSI National Awards for Excellence in Corporate
Governance". (5 marks each)
Answer 2(a)
OECD has defined corporate governance to mean “A system by which business
corporations are directed and controlled”. Corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the company
such as board, management, shareholders and other stakeholders; and spells out the
rules and procedures for corporate decision making.
The corporate governance framework should recognise the rights of stakeholders
established by law or through mutual agreements and encourage active co-operation
between corporations and stakeholders in creating wealth, jobs, and the sustainability of
financially sound enterprises – this statement is the fourth principle of OECD Principles
of Governance. This principle recognizes the interest of stakeholders and their contribution
to the long term success of the company. The corporate governance framework should
consider interest of all stakeholders and include following -
• The rights of stakeholders that are established by law or through mutual
agreements are to be respected.
• Where stakeholder interests are protected by law, stakeholders should have the
opportunity to obtain effective redress for violation of their rights.
• Mechanisms for employee participation should be permitted to develop.

• Where stakeholders participate in the corporate governance process, they should

have access to relevant, sufficient and reliable information on a timely and
regular basis.

• Stakeholders, including individual employees and their representative bodies,

should be able to freely communicate their concerns about illegal or unethical
practices to the board and to the competent public authorities and their rights
should not be compromised for doing this.

• The corporate governance framework should be complemented by an effective,

efficient insolvency framework and by effective enforcement of creditor rights.
Answer 2(b)
The RBI vide its circular dated 20th June 2002, circulated to all scheduled commercial
banks, a Report of the Consultative Group of Directors of Banks/Financial Institutions
(Dr. Ganguly Group) - Implementation of recommendations. The RBI through this circular
urged the banks that these recommendations be adopted and implemented by banks.
PP–GRMC&E–June 2019 6
Dr. Ganguly Committee’s recommendations on corporate governance applicable
only to private sector bank are as under:
(I) Eligibility criteria and ‘fit and proper’ norms for nomination of directors:
(a) The Board of Directors of the banks while nominating/ co-opting directors
should be guided by certain broad 'fit and proper’ norms for directors, viz.
formal qualification, experience, track record, integrity etc.
(b) The following criteria, which are considered for the boards of public sector
banks, may also be followed for nominating independent/ non-executive
directors on private sector banks:
• The candidate should normally be a graduate (which can be relaxed
while selecting directors for the categories of farmers, depositors,
artisans, etc.)
• He/she should be between 35 and 65 years of age.
• He/she should not be a Member of Parliament/Member of Legislative
Assembly/ Member of Legislative Council.
(II) Commonality of directors of banks and non-banking finance companies (NBFC):
In case, a director on the board of an NBFC is to be considered for appointment
as director on the board of the bank, the following conditions must be followed:
• He/she is not the owner of the NBFC, [i.e., share holdings (single or jointly
with relatives, associates, etc.) should not exceed 50%].
• He/she is not related to the promoter of the NBFC.
• He/she is not a full-time employee in the NBFC.
• The concerned NBFC is not a borrower of the bank.
(III) Composition of the Board:
The composition of the Board should be commensurate with the business needs
of the banks and should be blend of professionals having skills such as,
marketing, technology and systems, risk management, strategic planning,
treasury operations, credit recovery etc.
Answer 2(c)
In the case of Foss v. Harbottle [1843], it was held that the Courts would not
generally interfere with the decisions of the company which it was empowered to take in
so far they had been approved of by the majority and made exceptions to breaches of
charter documents, fiduciary duties and frauds or oppression and inadequate notice to
the shareholders. The principle is still relevant as the court was right in ruling that every
shareholder is bound by the terms and conditions of incorporation of the company,
which operated as a set of mutually binding obligations.
However, in the process of implementing the objectives of the company, one should
not override the legitimate expectations of minority shareholders. The following are the
 7 PP–GRMC&E–June 2019
various sections which deal with the minority shareholders under the Companies Act,
2013.
• Oppression & Mismanagement [Sections 241-246]
• Class Action Suits [Section 245]
• Appointment of director by small shareholders (Section 151)
• Promoting the confidence of minority shareholders (Schedule IV - Code for
Independent Directors)
Case : In a judgment by Supreme Court, upholding the landmark judgement passed
by Madras High Court (HC), ordered S V Global (SVG) Mill, which was carved out of the
200-year-old textiles major Binny, to pay Rs. 100 crore to minority shareholders to buy
them out. The minority shares were owned by S Natarajan, one of the original promoters
of Binny, and his associates. The Apex court, under Article 142 of the Constitution,
directed that a sum of Rs. 100 crore be paid, to the respondents (associates of Natarajan)
for the buyout of all the respondents’ shares in the company.
Answer 2A(i)
The IRDAI has implemented a code for stewardship for the insurers. The code is in
the form of a set of principles, which the insurers would need to adopt. The principles
may be uniformly adopted for institutional investors, like Mutual Funds, Pension Funds,
Foreign Portfolio Investors (FPIs), Alternative Investment Funds (AIFs), etc. The code
broadly requires the insurers to have a policy as regards their conduct at general meetings
of the investee companies and the disclosures relating thereto. The code was made
applicable from FY 2017-18.
Stewardship Principles provided in the Code
• Principle 1: Insurers should formulate a policy on the discharge of their
stewardship responsibilities and publicly disclose it.
• Principle 2: Insurers should have a clear policy on how they manage conflicts of
interest in fulfilling their stewardship responsibilities and publicly disclose it.
• Principle 3: Insurers should monitor their investee companies.
• Principle 4: Insurers should have a clear policy on intervention in their investee
companies.
• Principle 5: Insurers should have a clear policy for collaboration with other
institutional investors, where required, to preserve the interests of the
policyholders (ultimate investors), which should be disclosed.
• Principle 6: Insurers should have a clear policy on voting and disclosure of
voting activity.
Answer 2A(ii)
The NFRA is an independent regulator established under Section 132 of the Companies
Act, 2013 to oversee the auditing profession. The NFRA has been established as an
independent regulators for enforcement of auditing standards and ensuring the quality of
PP–GRMC&E–June 2019 8
audits to strengthen the independence of audit firms and therefore enhance investor and
public confidence in financial disclosures of companies. The powers and functions of
NFRA are majorly pertaining to oversee the auditing profession that may be studied
under the following points-
(A) To investigate either suo-motu or on a reference made by the Central Government
in matters of professional misconduct committed by any member or Chartered
Accountants firm.
(B) To make recommendations to the Central Government on formulation and laying
down of accounting standards and auditing policies for adoption by companies
or their auditors.
(C) To monitor and implement compliance relating to accounting standards and
auditing policies as prescribed.
(D) To oversee the quality of service of professions associated with compliance of
accounting standards and auditing policies and suggest measures for
improvement.
(E) NFRA shall have equivalent powers as a civil court under the Code of Civil
Procedure, 1908. It can exercise the powers related to:-
(i) discovery and production of books or other documents as specified by NFRA;
(ii) summoning and enforcing the attendance of persons and examining them
on oath;
(iii) inspection of books, registers and other documents of any person;
(iv) issuing commissions for examination of witness or other documents.
(F) NFRA may impose penalties:
(i) not less than one lakh rupees which may extend up to five times of the fees
received in case of individuals and
(ii) not less than ten lakh rupees which may extend up to ten times of the fees
received in case of firms.
(G) NFRA may consider an investigation based on monitoring and compliance review
of auditor or audit firm upon recommendations by Member- Accounting and
Member- Auditing.
(H) NFRA shall receive a final report from the Committee on Enforcement on matters
referred to them and issue a notice in writing to the investigated company or the
professional on whom the action is proposed to be taken.
(I) NFRA may conduct quality review of the following class of companies:-
(a) Listed companies,
(b) Unlisted companies having net worth or paid up capital of not less than 500
crores or annual turnover of not less than 1000 crores as on 31st March of
immediately preceding financial year,
 9 PP–GRMC&E–June 2019
(c) Companies having securities listed outside India.
(J) NFRA may debar any member or a firm from engaging himself or itself from
practice as a member of the Institute of Chartered Accountants of India for a
minimum period of six months which may extend upto ten years on account of
proved misconduct.
(K) NFRA shall have the power to accept or overrule clarifications received or
objections raised in writing.
(L) NFRA may investigate against the auditor or audit firms which conducts-
(a) audit of 200 or more companies in a year,
(b) audit of 20 or more listed companies.
Answer 2A(iii)
The ICSI National Awards for Excellence in Corporate Governance : In pursuit of
excellence and to identify, foster and reward the culture of evolving globally acceptable
standards of corporate governance among Indian companies, the “ICSI National Award
for Excellence in Corporate Governance” was instituted by the ICSI in the year 2001.
The Awards are based on the outcome of concerted and comprehensive process of
evaluation which enables the Jury to judge on the basis of parameters, the practices of
corporate governance as followed by Indian corporates and acknowledge the best practices
worthy of being exemplified. The underlying guideline for the Corporate Governance
Award is to identify the corporates, which follow the best corporate governance norms in
letter and spirit. The institution of the Award aims at promoting the cause of Corporate
Governance by:
- Recognizing leadership efforts of corporate boards in practising good corporate
governance principles in their functioning;
- Recognizing implementation of innovative practices, programmes and projects
that promote the cause of corporate governance;
- Enthusing the corporates in focusing on corporate governance practices in
corporate functioning; and
- Implementation of acknowledged corporate governance norms in letter and spirit.
The Institute also annually bestows upon a corporate leader the “ICSI Lifetime
Achievement Award for Translating Excellence in Corporate Governance into Reality”
keeping in view the attributes like:
- Outstanding contribution to social upliftment and institution building;
- Exemplary contribution in enhancement of stakeholders’value;
- A visionary with innovative ideas;
- Long tradition of trusteeship, transparency and accountability;
- Qualities of leadership, team spirit, integrity and accountability;
- Proven track record of adherence of statutory obligations; and
- Social acceptance and approval.
PP–GRMC&E–June 2019 10
Question 3
(a) A successful compliance-risk management program which is an essential for
sound and vibrant operational system contains certain elements. Point out such
elements.
(b) CSB Ltd. a Listed Company is holding a Meeting of Board of Directors. The
Agenda Items inter alia include the item for approval with respect to declaration
of Interim Dividend for current fiscal. However, information of the Meeting as
well as for closing of the trading window has already been intimated to the Stock
Exchange. There are 7 members on the Board of Directors. On the date of
Meeting, 2 Directors were out of Country, whereas the remaining Directors were
present in the Meeting. The Directors in abroad were willing to participate through
video conferencing. One of the Independent Directors objected that the item for
declaration of Interim Dividend can't be discussed through video conferencing
and should be deferred for ensuing physical meeting of Board of Directors.
Examine in the light of the provisions of the Companies Act, 2013 and list out
the matters which shall not be dealt with in any meeting held through video
conferencing or other audio visual means.
(c) Which categories of companies are required to have Audit Committee of Board
(ACB) as per the Companies Act, 2013 and as per the SEBI (LODR) Regulations,
2015.
(d) Highlight the OECD Principles of Corporate Governance with respect to
Disclosures and Transparency.
(e) Write a brief note on Caux Round Table (CRT). (3 marks each)
Answer 3(a)
The compliance framework needs to be comprehensive, dynamic, and customizable,
allowing the organization to identify and assess the categories of compliance risk to
which it may be exposed. A successful compliance-risk management program which is
an essential component for sound and vibrant operational system contains the following
elements:
• Active board and senior management oversight : An effective board and senior
management oversight is the cornerstone of an effective compliance risk
management process.
• Effective policies and procedures : Compliance risk management policies and
procedures should be clearly defined and consistent with the nature and
complexity of an institution’s activities.
• Compliance risk analysis and comprehensive controls : Organizations should
use appropriate tools in compliance risk analysis like self-assessment, risk
maps, process flows, key indicators and audit reports; which enables in
establishing an effective system of internal controls.
• Effective compliance monitoring and reporting : Organizations should ensure
that they have adequate management information systems that provide
 11 PP–GRMC&E–June 2019
management with timely reports on compliances like training, effective complaint
system and certifications.
• Testing : Independent testing should be conducted to verify that compliance-
risk mitigation activities are in place and functioning as intended throughout the
organization.
Answer 3(b)
Sec 173 (2) of the Companies Act, 2013 read with Rule 4 of the Companies (Meetings
of Board and its Powers) Rules, 2014 prescribes restriction on following matters which
shall not be dealt with in any meeting held through video conferencing or other audio
visual means:
(a) the approval of the annual financial statements;
(b) the approval of the Board’s report;
(c) the approval of the prospectus;
(d) the Audit Committee Meetings for consideration of financial statements including
consolidated financial statements to be approved by the Board.
(e) the approval of the matter relating to amalgamation, merger, demerger, acquisition
and takeover.
Provided that where there is quorum in a meeting through physical presence of
directors, any other director may participate through video conferencing or other audio
visual means but he shall not be counted in quorum.
As per the rule discussed above, there is no restriction on discussing declaration of
interim dividend through video conferencing. Also, if the majority of directors are present
in the meeting physically, other directors can participate through video conferencing
even though they shall not be counted in quorum.
Answer 3(c)
Section 177(1) of the Companies Act, 2013 provides that the Board of Directors of
every listed public company and such other class or classes of companies, as may be
prescribed, shall constitute an Audit Committee.
Rule 6 of the Companies (Meetings of Board & its Powers) Rules, 2014 states that
the Board of directors of every listed public company and a company covered under
Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall
constitute an 'Audit Committee' and a 'Nomination and Remuneration Committee of the
Board'. The class of companies covered under Rule 4 of Companies (Appointment and
Qualification of Directors) Rules, 2014 are-
(i) All listed public companies
(ii) All public companies with a paid up capital of 10 crore rupees or more;
(iii) All public companies having turnover of 100 crore rupees or more;
(iv) All public companies, having in aggregate, outstanding loans or borrowings or
debentures or deposits exceeding 50 crore rupees or more.
PP–GRMC&E–June 2019 12
Regulation 18(1) of SEBI Listing Regulations, 2015 provides that every listed entity
shall constitute a qualified and independent audit committee in accordance with the
terms of reference.
Answer 3(d)
OECD has defined corporate governance to mean “A system by which business
corporations are directed and controlled”. Corporate governance structure specifies the
distribution of rights and responsibilities among different participants in the company
such as board, management, shareholders and other stakeholders; and spells out the
rules and procedures for corporate decision making
The OECD principles of Corporate Governance with respect to Disclosures and
transparency are given hereunder-
The corporate governance framework should ensure that timely and accurate disclosure
is made on all material matters regarding the corporation, including the financial situation,
performance, ownership, and governance of the company:
• Disclosure should include, but not be limited to, material information on:
1. The financial and operating results of the company.
2. Company objectives and non-financial information.
3. Major share ownership, including beneficial owners, and voting rights.
4. Remuneration of members of the board and key executives.
5. Information about board members, including their qualifications, the selection
process, other company directorships and whether they are regarded as
independent by the board.
6. Related party transactions.
7. Foreseeable risk factors.
8. Issues regarding employees and other stakeholders.
9. Governance structures and policies, including the content of any corporate
governance code or policy and the process by which it is implemented.
• Information should be prepared and disclosed in accordance with high quality
standards of accounting and financial and non-financial reporting.
• An annual audit should be conducted by an independent, competent and qualified,
auditor in accordance with high-quality auditing standards in order to provide an
external and objective assurance to the board and shareholders that the financial
statements fairly represent the financial position and performance of the company
in all material respects.
• External auditors should be accountable to the shareholders and owe a duty to
the company to exercise due professional care in the conduct of the audit.
• Channels for disseminating information should provide for equal, timely and
cost-efficient access to relevant information by users.
 13 PP–GRMC&E–June 2019
Answer 3(e)
The Caux Round Table (CRT) is an international network of business leaders working
to promote a morally and sustainable way of doing business. The Caux Round Table
was founded in 1986 by Frits Philips Sr, former President of Philips Electronics, and
Olivier Giscard d’Estaing, former Vice-Chairman of INSEAD, as a means of reducing
escalating international trade tensions between Europe, Japan and the USA. At the
urging of Ryuzaburo Kaku, then Chairman of Canon Inc, the CRT began to focus attention
on the importance of global corporate responsibility in reducing social and economic
threats to world peace and stability. This led to the development of the 1994 Caux
Round Table Principles for Business around three ethical foundations, namely:
• responsible stewardship;
• the Japanese concept of Kyosei - living and working for mutual advantage; and
• respecting and protecting human dignity.
These principles recognize that while laws and market forces are necessary, they
are insufficient guides for responsible business conduct. The Caux Round Table believes
that the world business community should play an important role in improving economic
and social conditions. Through an extensive and collaborative process in 1994, business
leaders developed the CRT Principles for Business to embody the aspiration of principled
business leadership. The CRT believes that its Principles for Responsible Business
provide necessary foundations for a fair, free and transparent global society.
PART - II
Question 4
(a) Whether Risk Management and Corporate Governance Principles have any
relations ? Explain.
(b) What are the different dimensions of identifying threats in Risk Analysis process?
In a company there is a probability of increase of 40% cost of raw material from
present level of Rs 10 crores. What shall be risk value of cost of production ?
(c) While conducting the Audit, Secretarial Auditor found that by forged signature,
accountant had transferred huge amount in dummy account. There was a big
financial scam in the organization. Reporting on fraud, Management has desired
that a Risk Management Policy to detect and control the Fraud be prepared.
Being a Company Secretary, point out the major aspects to be included in
Fraud Risk Management Policy.
(d) Point out the situations where the Risk Analysis may be useful.
(5 marks each)
Answer 4(a)
Risk management and corporate governance principles are strongly interrelated. An
organization implements strategies in order to reach their goals. Each strategy has
related risks that must be managed in order to meet these goals. Risk is an important
element of corporate functioning and governance. There should be a clearly established
PP–GRMC&E–June 2019 14
process of identifying, analyzing and treating risks, which could prevent the company
from effectively achieving its objectives. It also involves establishing a link between
risk-return and resourcing priorities. The Board has the ultimate responsibility for identifying
major risks to the organization, setting acceptable levels of risk and ensuring that senior
management takes steps to detect, monitor and control these risks. The Board must
satisfy itself that appropriate risk management systems and procedure are in place to
identify and manage risks.
Corporate governance concerns the relationships among the management, board of
directors, controlling shareholders, minority shareholders, and other stakeholders. Good
corporate governance contributes to sustainable economic development by enhancing
the performance of companies and increasing their access to foreign capital. Incorporating
risk management in corporate governance of an organisation is very important.
Risk governance includes the skills, infrastructure and culture deployed as directors
exercise their oversight. Good risk governance provides clearly defined accountability,
authority, and communication/reporting mechanisms. A process for risk management
cannot be initiated unless there is a perception and knowledge of risk surrounding the
business. The board shall have to identify the extent and type of risks it faces and the
planning necessary to manage and mitigate the same for ensuring growth for the benefit
of all the stakeholders.
The updated G20/OECD Principles of Corporate Governance provides on considering
the establishment of specialized board committees in areas such as remuneration, audit
and risk management. The sixth principle of OECD Principles of Corporate Governance
deals with the responsibilities of the board with respect to Risk Management provides-
• The board should fulfill certain key functions, including - reviewing and guiding
corporate strategy, major plans of action, risk management policies and
procedures, annual budgets and business plans; setting performance objectives;
monitoring implementation and corporate performance; and overseeing major
capital expenditures, acquisitions and divestitures.
• Ensuring the integrity of the corporation’s accounting and financial reporting
systems, including the independent audit, and that appropriate systems of control
are in place, in particular, systems for risk management, financial and operational
control, and compliance with the law and relevant standards.
Answer 4(b)
After identification of the risk parameters, the second stage is of analyzing the risk
which helps to identify and manage potential problems that could undermine key business
initiatives or projects. To carry out a Risk Analysis, first the possible threats are identified
and then the likelihood that these threats will materialize is estimated. The analysis
should be objective and should be industry specific. Within the industry, the scenario
based analysis may be adopted taking into consideration of possible events that may
occur and its alternative ways to achieve the given target. The first step in Risk Analysis
is to identify risks or threats both existing and possible which may pertain to:
• Human – Illness, death, injury, or other loss of a key individual.
• Operational – Disruption to supplies and operations, loss of access to essential
assets, or failures in distribution.
 15 PP–GRMC&E–June 2019
• Reputational – Loss of customer or employee confidence, or damage to market
reputation.
• Procedural – Failures of accountability, internal systems, or controls, or from
fraud.
• Project – Going over budget, taking too long on key tasks, or experiencing
issues with product or service quality.
• Financial – Business failure, stock market fluctuations, interest rate changes,
or non-availability of funding.
• Technical – Advances in technology, or from technical failure.
• Natural – Weather, natural disasters, or disease.
• Political – Changes in tax, public opinion, government policy, or foreign influence.
• Structural – Dangerous chemicals, poor lighting, falling boxes, or any situation
where staff, products, or technology can be harmed.
There is a probability of increase of 40% of price rise in the raw material. If this
happens, it will increase the cost of production in the next year. So, the risk value of the
cost of the production can be derived by the following formula:
Risk value= Probability of event X Cost of event
By, putting the values
Risk value= 0.40 (Probability of event) x Rs. 10 Crores (Cost of event) = Rs. 4 Crores
Answer 4(c)
The management should be pro-active in fraud related matter. A fraud is usually not
detected until and unless it is unearthed. A Fraud Risk Management Policy should be
incorporated, aligned to its internal control and risk management. The Fraud Risk
Management Policy will help to strengthen the existing anti-fraud controls by raising the
awareness across the company and promote an open and transparent communication
culture. It would also promote zero tolerance to fraud/misconduct and encourage
employees to report suspicious cases of fraud/misconduct. The policy would spread
awareness amongst employees and educate them on risks faced by the company.
The major aspects to be included in Fraud Risk Management Policy are –
• Defining fraud : This shall cover activities which the company would consider
as fraudulent.
• Defining Role & responsibilities : The policy may define the responsibilities of
the officers who shall be involved in effective prevention, detection, monitoring
& investigation of fraud. The company may also consider constituting a committee
or operational structure that shall ensure an effective implementation of anti-
fraud strategy of the company. This shall ensure effective investigation in fraud
cases and prompt as well as accurate reporting of fraud cases to appropriate
regulatory and law enforcement authorities.
• Communication channel : Encourage employees to report suspicious cases of
fraud/misconduct. Any person with knowledge of suspected or confirmed incident
PP–GRMC&E–June 2019 16

of fraud/misconduct must report the case immediately through effective and

efficient communication channel or mechanism.
• Disciplinary action : After due investigations disciplinary action against the
fraudster may be considered as per the company’s policy.
• Reviewing the policy : The employees should educate their team members on
the importance of complying with Company’s policies & procedures and
identifying/ reporting of suspicious activity, where a situation arises. Based on
the developments, the policy should be reviewed on periodical basis.
Answer 4(d)
After identification of the risk parameters, the second stage is of analyzing the risk
which helps to identify and manage potential problems that could undermine key business
initiatives or projects. To carry out a Risk Analysis, first the possible threats are identified
and then estimate the likelihood that these threats will materialize. The analysis should
be objective and should be industry specific. Within the industry, the scenario based
analysis may be adopted taking into consideration of possible events that may occur
and its alternative ways to achieve the given target.
Risk Analysis can be complex, as it requires to draw on detailed information such
as project plans, financial data, security protocols, marketing forecasts and other relevant
information. However, it's an essential planning tool, and one that could save time,
money, and reputations. Risk analysis can be useful in many situations like:
• While planning projects, to help in anticipating and neutralizing possible problems.
• While deciding whether or not to move forward with a project.
• While improving safety and managing potential risks in the workplace.
• While preparing for events such as equipment or technology failure, theft, staff
sickness, or natural disasters.
• While planning for changes in environment, such as new competitors coming
into the market, or changes to government policy.
PART - III
Attempt all parts of either Q. No. 5 or Q. No. 5A
Question 5
(a) You have been appointed as Company Secretary of a newly incorporated public
limited company, which is engaged in providing logistic services across India.
The company has come out with a public issue and its shares are listed at BSE
and NSE. How would you implement a Corporate Compliance Management culture
in the company ? (5 marks)
(b) You are a company secretary of a listed company. The company has borrowings
from the Banks/FIs worth Rs. 75 crores, which is in the form of Term Loan and
Working Capital Finance. You noticed that the company is not having Vigil
Mechanism in place. Suggest the suitable strategy to the Board for establishment
 17 PP–GRMC&E–June 2019
of Vigil Mechanism in the company quoting the relevant provisions of the
Companies Act, 2013 and SEBI (LODR) Regulations, 2015. (5 marks)
(c) Apart from Statutory Audit, for some class of companies, Internal Audit is also
mandatory. Which companies are required to have Internal Audit as per the
provisions of the Companies Act, 2013 ? (5 marks)
(d) What are the Financial Information which are required to be disclosed on website
of the Company as per Regulation 46 of SEBI (LODR) Regulations, 2015 ?
(5 marks)
OR (Alternate question to Q. No. 5)
Question 5A
(i) "A corporate compliance program is a formal program specifying an organization's
policies, procedures and actions within a process to help prevent and detect
violations of laws and regulations". In this context discuss the essential of an
effective compliance program. (5 marks)
(ii) Internal check and internal control are two frequently used terms in risk
management and compliance. Explain the meaning of Internal Check and Internal
Control and also mention how these two are different from each other.
(5 marks)
(iii) In addition to the Financial Capital, the Integrated Reporting examines five
additional capitals that should guide an organisation's decision-making and long-
term success. Which are these five additional capitals ? (5 marks)
(iv) Explain the scope of "Administrative Control". (5 marks)
Answer 5(a)
Being a Company Secretary i.e. ‘Compliance Manager/ Officer’ of the company, I
would ensure that the company is in total compliance with all regulatory provisions. I
would ensure that all statutory and non-statutory disclosures are made to shareholders
and other stakeholders in true letter and spirit. I would draft a Corporate Compliance
Management Policy and put up before the board of directors for their approval and
implementation. The policy would contain following aspects-
• Background and business strategy of the company : This will include the brief
background of the company, area of operation, competition prevailing from the
peer companies and SWOT analysis of the company, marketing strategies to
be adopted, use of technology in providing better services to the customers.
• Identification of applicable laws : This will include identifying the applicable
laws, application of control measures to mitigate the risk, generation of reports
for identifying the non-compliances, reminder before the due date for compliances
and having internal control on compliances.
• Individual responsibilities on compliances to be clearly defined : Responsibility
with respect to compliances would be clearly defined in the compliance
management programme, which will enable the compliance officer to co-ordinate
with the respective officials in respect of deviations if any.
PP–GRMC&E–June 2019 18
• Evaluation : Compliance management system would have a proper evaluation
methodology through questionnaires for departmental heads etc. at regular
intervals.
• Bridging the gap between compliance in letter and compliance in letter and
spirit: The compliance management system would be made in such a manner
that the compliance is made in letter and spirit.
• Updation : Updation of compliance management programme is very essential
as and when there is any change in any of the applicable law.
Answer 5(b)
Sec 177 (9) of the Companies Act, 2013 provides that every listed company or such
class or classes of companies, as may be prescribed, shall establish a vigil mechanism
for directors and employees to report genuine concerns in such manner as may be
prescribed. Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014
provides that every listed company and the companies belonging to the following class
or classes shall establish a vigil mechanism for their directors and employees to report
their genuine concerns or grievances:
(a) the Companies which accept deposits from the public;
(b) the Companies which have borrowed money from banks and public financial
institutions in excess of fifty crore rupees.
Regulation 22 of SEBI (LODR) Regulations, 2015 provides that every listed entity
shall establish a vigil mechanism for directors and employees to report concerns about
unethical behaviour, actual or suspected fraud or violation of the listed entity code of
conduct or ethics policy.
Since the company is a listed company, it should establish vigil mechanism as per
both Section 177(9) of the Companies Act, 2013 and SEBI (LODR) Regulations, 2015
with following provisions-
• The audit committee shall oversee the vigil mechanism through the committee
and if any of the members of the committee have a conflict of interest in a given
case, they should recuse themselves and the others on the committee would
deal with the matter on hand.
• The vigil mechanism shall provide for adequate safeguards against victimisation
of employees and directors who avail of the vigil mechanism and also provide
for direct access to the Chairperson of the Audit Committee or the director
nominated to play the role of Audit Committee, as the case may be, in exceptional
cases.
• In case of repeated frivolous complaints being filed by a director or an employee,
the audit committee or the director nominated to play the role of audit committee
may take suitable action against the concerned director or employee including
reprimand.
• The details of establishment of such mechanism shall be disclosed by the
listed entity on its website and in the Board’s report.
 19 PP–GRMC&E–June 2019
Answer 5(c)
Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies (Accounts)
Rules, 2014 provides for the mandatory appointment of an internal auditor who shall
either be a chartered accountant or a cost accountant, or such other professional as
may be decided by the Board to conduct internal audit of the functions and activities for
classes of company given below-
• every listed company,
• every unlisted public company having –
— paid up share capital of 50 crore rupees or more during the preceding financial
year; or
— turnover of 200 crore rupees or more during the preceding financial year; or
— outstanding loans or borrowings from banks or public financial institutions
exceeding 100 crore rupees or more at any point of time during the preceding
financial year; or
— outstanding deposits of 25 crore rupees or more at any point of time during
the preceding financial year; and
• every private company having –
— turnover of 200 crore rupees or more during the preceding financial year; or
— outstanding loans or borrowings from banks or public financial institutions
exceeding 100 crore rupees or more at any point of time during the preceding
financial year.
Answer 5(d)
The financial information which are required to be disclosed on website of the company
as per the Regulation (46) of SEBI (LODR) Regulations, 2015 are –
(i) financial information including:
— notice of meeting of the board of directors where financial results shall be
discussed;
— financial results, on conclusion of the meeting of the board of directors
where the financial results were approved;
— complete copy of the annual report including balance sheet, profit and loss
account, directors report, corporate governance report etc;
(ii) shareholding pattern;
(iii) details of agreements entered into with the media companies and/or their
associates, etc;
(iv) schedule of analyst or institutional investor meet and presentations made by
the listed entity to analysts or institutional investors simultaneously with
submission to stock exchange;
PP–GRMC&E–June 2019 20
(v) new name and the old name of the listed entity for a continuous period of one
year, from the date of the last name change;
(vi) With effect from October 1, 2018, all credit ratings obtained by the entity for all
its outstanding instruments, updated immediately as and when there is any
revision in any of the ratings.
(vii) Separate audited financial statements of each subsidiary of the listed entity in
respect of a relevant financial year, uploaded at least 21 days prior to the date
of the annual general meeting which has been called to inter alia consider accounts
of that financial year.
Answer 5A(i)
A corporate compliance program is generally defined as a formal program specifying
an organization's policies, procedures, and actions within a process to help prevent and
detect violations of laws and regulations.
The essential of a successful compliance program are as under:
(i) Development of written Compliance Policies, Procedures and framing of
Standards : The successful implementation of any compliance program needs
a well drafted written document of the compliance policy. The policy shall contain
the regulatory aspects which are in force as on the date of the framing of the
policy, set a Code of Conduct / Standards, action to be taken in case of deviations
from the set standards and also the initiation of the disciplinary actions against
the erring staff.
(ii) Designation of a compliance officer and compliance committee : The Compliance
Policy shall contain a clause for appointment of a designated compliance officer,
who shall take care of the regulatory compliance related functions and he shall
be responsible to ensure adherence to the compliance policy and put up a note
before the Board of Directors periodically for their perusal and directions wherever
required. The Board approved note, wherever required be submitted to Regulatory
Authorities.
(iii) Developing open lines of communication : The Compliance Policy shall have a
provision to welcome open communication as a product of organizational culture
and internal mechanisms for reporting instances of potential fraud and abuse.
This concept of whistle blower, may prove to be early warning signals and may
be effective in prevention thereof. The name and designation of the reporting
official shall be kept confidential.
(iv) Appropriate training and education : For effective implementation of the
compliance policy, there is need of proper training and education to the field
functionaries and policy implementing officials.
(v) Internal monitoring and auditing : The compliance policy shall contain a clause
for having the effective auditing and monitoring plans.
(vi) Response to detected deficiencies : Wherever the deficiencies in the prescribed
procedure come in the knowledge of the concerned official, there shall be a
reporting system to make a report to the designated official.
 21 PP–GRMC&E–June 2019
(vii) Enforcement of disciplinary standards : There shall be a clause in the compliance
policy to take the disciplinary action against the erring official, who have not
adhered to the prescribed set of rules and regulations.
(viii) Effective use of Information technology : By using available tools of information
technology compliances can be managed effectively. There are various compliance
management software available which facilitate compliance management.
Answer 5A(ii)
Internal check may be referred to as a system of instituting checks on the day- to-
day transactions which operate continuously as a part of routine system whereby the
work of one person is complementary to the work of another, the object being the
prevention or early detection of errors or fraud. The objective of such allocation of duties
is that no single individual has an exclusive control over any one transaction or group of
transactions.
Internal control, as defined in accounting and auditing, is a process for assuring
achievement of an organization’s objectives in operational effectiveness and efficiency,
reliable financial reporting, and compliance with laws, regulations and policies. It is
a means by which an organization's resources are directed, monitored, and measured. It
plays an important role in detecting and preventing fraud and protecting the organization's
resources, both physical (e.g., machinery and property) and intangible (e.g., reputation
or intellectual property such as trademarks).
Differences

Internal check Internal control

Internal check refers to the way of
allocating responsibility, segregation
of work, where work of the sub-
ordinates is checked by the immediate
supervisors to verify that the work is
carried out according to the company
policies and guidelines.
Scope of internal check is narrower
compared to internal control.
Internal checks are implemented at
all organizational levels such as
tactical and operational level.
Internal control is the system implemented
by a company to ensure the integrity of
financial and accounting information and
that the company is progressing towards
fulfilling its profitability and operational
objectives in a successful manner.
Internal control is a broader aspect in which
internal check play a vital role.
Internal controls are designed and
documented at the corporate management
level.

Answer 5A(iii)
Integrated reporting 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. Central to this is the proposition that value is increasingly shaped by factors
additional to financial performance, such as reliance on the environment, social reputation,
human capital skills and others. This value creation concept is the backbone of integrated
reporting.
PP–GRMC&E–June 2019 22
In addition to financial capital, integrated reporting examines five additional capitals
that should guide an organisation’s decision-making and long-term success — its value
creation in the broadest sense. They are –
• Manufactured capital : Manufactured capital is seen as human-created,
production-oriented equipment and tools.
• Intellectual capital : It is a key element in an organization’s future earning
potential, investment in R&D, innovation, human resources and external
relationships, which can determine the organization’s competitive advantage.
• Human capital : It is generally understood to consist of individual’s capabilities
and the knowledge, skills and experience of the company’s employees and
managers as they are relevant to the task at hand as well as the capacity to add
to the reservoir of knowledge, skills and experience.
• Social and relationship capital : Social and relationship capital may include
relationships within an organization, as well as those between an organization
and its external stakeholders, depending on where social boundaries are drawn.
• Natural capital : It may be defined as any stock of natural resources or
environmental assets such as soil, water, and atmosphere, ecosystems which
provide a flow of useful goods or services now and in the future.
Answer 5A(iv)
A number of controls falling under operational controls can also be administrative
controls. Examples of operational controls are: quality control, works standards, periodic
reporting, policy appraisal etc.
Administrative controls are very wide in their scope. They include all other managerial
controls concerned with decision-making process. They are concerned with the
authorisation of transactions and include anything from plan of organisation to procedures,
record keeping, distribution of authority and the process of decision-making. They include
controls such as time and motion studies, quality control through inspection, performance
budgeting, responsibility accounting and performance evaluation etc.
Administrative controls have an indirect relationship with financial records and the
auditor may evaluate only those administrative controls which have a bearing on the
financial records.
Thus, administrative controls are those which help in improving the efficiency,
productivity and not necessarily recorded under the accounting systems. Works
standards, quality control, methods study and motion study are examples of administrative
control.
PART – IV
Question 6
(a) What is Risk-adjusted return on capital (RAROC) and how is it calculated ?
(b) Discuss in brief the composition of Lokpal and its powers.
(5 marks each)
 23 PP–GRMC&E–June 2019
Answer 6(a)
Risk-adjusted return on capital (RAROC) is a profitability metric that can be used to
analyse return in relation to the level of risk taken on. It can be used to compare the
performance of several investments with differing levels of risk exposure. RAROC was
developed by Bankers Trust in the late 1970s and early 1980s in response to regulatory
interest in the capital ratios of financial institutions and the implementation of capital
adequacy regulations. RAROC is often used by banks to determine the amount of capital
required to support the bank’s activities.
In business enterprises, risk is traded off against benefit. RAROC is defined as the
ratio of risk adjusted return to economic capital. The economic capital is the amount of
money which is needed to secure the survival in a worst-case scenario, it is a buffer
against unexpected shocks in market values. Economic capital is a function of market
risk, credit risk, and operational risk, and is often calculated by VaR (Value at Risk).
RAROC system allocates capital for two basic reasons:
• Risk management
• Performance evaluation
For risk management purposes, the main goal of allocating capital to individual
business units is to determine the bank's optimal capital structure that is economic
capital allocation is closely correlated with individual business risk. As a performance
evaluation tool, it allows banks to assign capital to business units based on the economic
value added of each unit.
Risk-adjusted return on capital (RAROC) is a modified return on investment (ROI)
figure that takes elements of risk into account. The formula used to calculate RAROC
is:
RAROC = R - E - EL + (Income from Capital/Capital)
Where:
R = Revenue
E = Expenses
EL = Expected losses
Income from Capital = Capital Charges x Risk free rate
Answer 6(b)
Composition of Lokpal : Lokpal is a statutory, multi-member body which has no
constitutional backing. It consists of one Chairperson and a maximum of 8 members.
• Chairperson : A person becomes eligible for the appointment as Chairperson of
Lokpal if he is a former Chief Justice of India, a former member of Supreme
Court or an eminent person with impeccable integrity and outstanding ability.
Additionally, he should have adequate knowledge and 25 years of experience in
the matters of the anti-corruption policy, finance, vigilance, law and management,
and public administration.
PP–GRMC&E–June 2019 24
• Members : Out of 8 permissible members, 50% are from the judiciary. Rest
50% of members are from OBC/SC/ST/women and minorities. Judicial members
should either be a former Judge of Supreme Court or a former Chief Justice of a
High Court. In the case of non-judicial members, they should be eminent persons
with impeccable integrity and outstanding ability in their chosen professional
areas. They should have at least of 25 years of experience in matters relating to
anti-corruption policy, vigilance, public administration, vigilance, law,
management, and finance.
Powers of Lokpal
Its inquiry wing has the power to search and seize objects both movable and immovable
objects and make reports based on them. These reports would be taken up by the 3-
member Lokpal benches for further scrutiny. The benches would give the opportunities
for the allegedly corrupt officers to say in their defense. After this, the benches would
undertake any of the following alternatives-
• If the officers are found guilty, the benches would grant their sanction to the
prosecution wing or CBI to file charge sheets against them. The benches can
also direct the concerned government departments to start proceedings against
them.
• If the officers are found innocent, the benches would direct the filing of the
closure of case reports before the Special Court.

***
GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME
(New Syllabus)

DECEMBER 2019

MODULE 1

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
Phones : 41504444, 45341000; Fax : 011-24626727
E-mail : info@icsi.edu; Website : www.icsi.edu
These answers have been written by competent persons
and the Institute hope that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.

The Guideline Answers contain the information based on the

Laws/Rules applicable at the time of preparation. However,
students are expected to be well versed with the amendments
in the Laws/Rules made upto six months prior to the date of
examination.

C O N T E N T S
Page
MODULE 1

1. Governance, Risk Management, Compliances and Ethics 1

2. Advanced Tax Laws 26

3. Drafting, Pleadings and Appearances 48

 1 PP–GRMC&E–December 2019
PROFESSIONAL PROGRAMME EXAMINATION
DECEMBER 2019

GOVERNANCE, RISK MANAGEMENT, COMPLIANCES

AND ETHICS
Time allowed : 3 hours Maximum marks : 100
NOTE : Answer ALL Questions.

PART - I
Question 1
(a) P Pvt. Ltd. was incorporated under the Companies Act, 1956 on 3rd October,
2011. The Authorised Share Capital of the Company is `75 crores. 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 :
(i) Whether internal audit is compulsory for the Private Limited ? (1 mark)
(ii) 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)
(iii) Can Company Secretary be appointed as Internal Auditor in an Unlisted
Public Company where he is already appointed as Key Managerial
Personnel? (2 marks)
(b) M Pvt. 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 :
(i) Whether X can be reappointed as Statutory Auditor of the Company ?
(1 mark)
(ii) 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)
1
PP–GRMC&E–December 2019 2
(iii) 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)
(c) RST Ltd. 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.
(5 marks)
(d) 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.
(5 marks)
Answer 1(a)(i)
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-
(a) turnover of two hundred crore rupees or more during the preceding financial
year; or
(b) outstanding loans or borrowings from banks or public financial institutions
 3 PP–GRMC&E–December 2019
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.
Answer 1(a)(ii)
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-
(a) paid up share capital of fifty crore rupees or more during the preceding financial
year; or
(b) turnover of two hundred crore rupees or more during the preceding financial
year; or
(c) 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
(d) 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 auditor.
In the mentioned case, as the paid up capital is more than Rs. fifty crores hence the
company needs to appoint the internal auditor.
Answer 1(a)(iii)
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.
Answer 1(b)(i)
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
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years.
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.
PP–GRMC&E–December 2019 4
Answer 1(b)(ii)
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
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years.
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.
Answer 1(b)(iii)
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:-
(a) all unlisted public companies having paid up share capital of Rs. ten crores or
more or
(b) all private limited companies having paid up share capital of Rs. fifty crores or
more or
(c) all companies having paid up share capital of below threshold limit mentioned in
(a) 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—
(a) an individual as auditor for more than one term of five consecutive years
and
(b) 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.
Answer 1(c)
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 :
(i) Paid up capital of Rs. 10 crore or more or
 5 PP–GRMC&E–December 2019
(ii) Turnover of Rs. 100 Crore or more or
(iii) Aggregate outstanding loan, debenture and deposit exceeding Rs.50 Crore
Shall constitute the Audit Committee and Nomination and Remuneration Committee.
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.
Answer 1(d)
According to Section 2(76) of Companies Act 2013, "related party", with reference
to a company includes any body corporate which is —
(a) a holding, subsidiary or an associate company of such company; or
(b) a subsidiary of a holding company to which it is also a subsidiary; or
(c) an investing company or the venture of the company.
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
PP–GRMC&E–December 2019 6
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) a Government Company where the contracts/arrangements to be entered into
by it with any other Government Company;
(b) 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 Government.
In this case, C Ltd, being a Government company has entered into the following
transactions:
(i) Purchase of power from A Ltd.( Government Company)
(ii) Sale of power to subsidiary companies ( all Government companies, as they
are subsidiaries of a Government company)
(iii) X Ltd, Y Ltd. and Z Ltd (wholly owned subsidiaries, being Government companies)
distribute power through B Ltd.( Government company)
(iv) Purchase of cables from a manufacturer and sale to its Subsidiary companies
(Government companies)
(v) 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
Question 2
(a) In year 2017, the SEBI has 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. List out the
recommendations given by this Committee.
(b) With what mission, International Corporate Governance Network (ICGN) was
incorporated ? Describe the purpose of the ICGN.
(c) 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, 2015. Prepare a note on Code
of Fair Disclosure. (5 marks each)
OR (Alternate question to Q. No. 2)
Question 2A
(i) KLM Ltd. in its 64th Board meeting held on 30th June, 2019 has constituted
 7 PP–GRMC&E–December 2019
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)
(ii) The big investors, FIIs etc. 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)
(iii) Compliance Management is the most important part of any business. Highlight
the risk of non-compliances. (5 marks)
Answer 2(a)
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 i.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 etc.
• Board Committees i.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 Co. 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 etc.
• 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 etc.
PP–GRMC&E–December 2019 8
• 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 etc.

• 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 Enterprises.

• Leniency Mechanism.

• Capacity building in SEBI for enhancing Corporate Governance in Listed Entities.

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.

Answer 2(b)

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 stewardship.

• Connect peers at global events to enhance dialogue between companies and

investors around long term value creation.

• Inform dialogue through education to enhance the professionalism of governance

and stewardship practices.

It has four primary purposes:

(i) To provide an investor-led network for the exchange of views and information
about corporate governance issues internationally;

(ii) To examine corporate governance principles and practices;

(iii) To develop and encourage adherence to corporate governance standards and

guidelines; and
(iv) To generally promote good corporate governance.
 9 PP–GRMC&E–December 2019
Answer 2(c)
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:
(1) 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 manner.
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.
(2) 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 listed.
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
1. 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 available.

2. Uniform and universal dissemination of unpublished price sensitive information

to avoid selective disclosure.

3. Designation of a senior officer as a chief investor relations officer to deal with

dissemination of information and disclosure of unpublished price sensitive
information.

4. Prompt dissemination of unpublished price sensitive information that gets

disclosed selectively, inadvertently or otherwise to make such information
generally available.

5. Appropriate and fair response to queries on news reports and requests for
verification of market rumours by regulatory authorities.
PP–GRMC&E–December 2019 10
6. Ensuring that information shared with analysts and research personnel is not
unpublished price sensitive information.

7. 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 made.

8. Handling of all unpublished price sensitive information on a need-to-know basis.

Answer 2A(i)
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.
Answer 2A(ii)
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:
(i) Proxy advisors generally offer variety of services consisting of both, analyzing
the proposals at general meetings and recommending voting decisions.
(ii) 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 manner.
(iii) Considering that institutional investors invest in multiple companies in different
industry range and across the globe, it may not be feasible for those investors
 11 PP–GRMC&E–December 2019
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.
(iv) 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 voting. 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.
Answer 2A(iii)
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 :
1. Penalties and Fines : Penalties include financial fines, limitations on activities,
additional barriers to approval and even imprisonment.
2. Criminal Charges : Criminal charges are a potential consequence for certain
regulatory non-compliance.
3. Reputational Damage : A business' public image is a key to its success. When
a company is thrust into the public eye for failing to comply with regulations,
there are reputational repercussions, which eventually lead to distrust.
4. Access to Markets and Product Delays : Non-compliance across enterprise and
business network could result in exclusion from the tendering processes and
PP–GRMC&E–December 2019 12
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.
5. Roadblock in Funding : A company cannot get funded, even in the seed
investment level, whose compliances are not up to date.
Question 3
(a) Prepare a brief note on National Foundation for Corporate Governance (NFCG)
and Board of Trustees of NFCG.
(b) “Better Stakeholder engagement ensures Good Governance”. In light of this
sentence, elaborate the role of stakeholders in governance.
(c) Now the days, protection of the Investors’ wealth is big challenge before the
Government. 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.
(d) Prepare a detailed note on ICSI Recommendations to strengthen Corporate
Governance framework.
(e) 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)
Answer 3(a)
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)
 13 PP–GRMC&E–December 2019
— Representative, National Stock Exchange (NSE)
— Director General & CEO, Indian Institute of Corporate Affairs (IICA)
Answer 3(b)
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 board.
• 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 industries.
• 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 practices.
• Co-implementers, such as NGOs, who have partnered with the company to
implement a joint solution or program to address a shared challenge.
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.
Answer 3(c)
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:
(i) Audit Committee (mandatory)
(ii) Investment Committee (mandatory)
(iii) Risk Management Committee (mandatory)
(iv) Policyholder Protection Committee (mandatory)
(v) Nomination and Remuneration Committee (mandatory)
(vi) Corporate Social Responsibility Committee ('CSR Committee') (mandatory)
(vii) 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,
PP–GRMC&E–December 2019 14
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 policyholders.
• The investment income attributable to the participating fund of policyholders.
• The expenses allocated to the policyholders.
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.
Answer 3(d)
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 documents.
• 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 business.
• To review complaints received from internal and external sources, regarding
matters other than the financial matters which are within the purview of the
Audit Committee.
• To periodically present to the Board for adoption appropriate changes to the
policies, and oversee implementation of and compliance with these policies.
• To review regularly the company’s compliance risk assessment plan.
• To investigate or cause to be investigated any significant instances of non-
compliance, or potential compliance violations that are reported to the committee.
• To coordinate with other committees regarding matters brought to the committees
attention that relate to issues of compliance with applicable laws and regulations.
• Regularly report to the Board on the Committee’s activities, recommendations
and conclusions.
• To discuss any significant compliance issues with the Chief Executive officer.
• To periodically report to the Board and CEO on the adequacy and effectiveness
of the company’s compliance programme.
 15 PP–GRMC&E–December 2019
• To retain at the company’s expense, independent advisors to assist the
committee with carrying out its responsibilities from time to time.
• To perform such other duties and responsibilities as may be assigned to the
committee by the board.
Answer 3(e)
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.
1. Commencement or any postponement in the date of commencement of
commercial production or commercial operations of any unit/division.
2. 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).
3. Capacity addition or product launch.
4. Awarding, bagging/ receiving, amendment or termination of awarded/bagged
orders/contracts not in the normal course of business.
5. 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) thereof.
6. 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 etc.
7. Effect(s) arising out of change in the regulatory framework applicable to the
listed entity.
8. Litigation(s) / dispute(s) / regulatory action(s) with impact.
9. Fraud/defaults etc. by directors (other than key managerial personnel) or
employees of listed entity.
10. Options to purchase securities including any ESOP/ESPS Scheme.
11. Giving of guarantees or indemnity or becoming a surety for any third party.
12. Granting, withdrawal, surrender, cancellation or suspension of key licenses or
regulatory approvals.
PART II
Question 4
(a) Liquidity and Solvency are altogether different. Do you agree ? Discuss the
types of liquidity risk. (5 marks)
(b) 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 year.
PP–GRMC&E–December 2019 16
If this happens, it will cost your business an extra `5,00,000 over the next year.
Calculate the risk value. (5 marks)
(c) What is Systematic Risk and Unsystematic Risk ? Give examples. (5 marks)
(d) Write the relevant provisions of the Companies Act, 2013 relating to the reporting
of fraud. (5 marks)
Answer 4(a)
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.
(a) Trading Risk : It may mean the absence of the liquidity or enough products or
securities etc to actually undertake buy and sell activities. e.g. in the context of
securities trading inability to enter into derivative transactions with counter parties
or make sales or purchase of securities.
(b) 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 time.
Answer 4(b)
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)
Answer 4(c)
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.
 17
It is usually of a macro nature.
It usually affects a large number of
organisations operating under a
similar stream.
It cannot be fully assessed and
anticipated in advance in terms of
timing and gravity.
The example of such type of risks is
Interest Rate Risk, Market Risk,
Purchasing Power Risk
PP–GRMC&E–December 2019
It is normally micro in nature.
If not managed it directly affects the
individual organisation first.
It can be usually assessed well in advance
with reasonable efforts and risk mitigation
can be planned with proper understanding
and risk assessment techniques.
The examples of such risk are Compliance
risk, Credit Risk, Operational Risk.

Answer 4(d)
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 days.
• 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 observations.
• 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 report.
• 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
PP–GRMC&E–December 2019 18
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.
PART–III
Attempt all parts of either Q. No. 5 or Q. No. 5A
Question 5
(a) “Integrated reporting would build on the existing financial reporting model to
present additional information about a company’s strategy, governance, and
performance.”
In light of above sentence, prepare a note on purpose of Integrated reporting
and guiding principles for preparation of such report.
(b) 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’.
(c) Elucidate principles on Internal Control enunciated by Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
(d) What are the major sections of Business Responsibility Report (BRR) ?
(5 marks each)
OR (Alternate question to Q. No. 5)
Question 5A
(i) Prepare a brief note on National Guidelines on Responsible Business Conduct
(NGRBC).
(ii) “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 ?
(iii) “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 ?
(iv) Why the Information System is the most essential component of Internal Control?
(5 marks each)
Answer 5(a)
Integrated reporting is founded on integrated thinking, which helps demonstrate
 19 PP–GRMC&E–December 2019
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).
A. 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.
B. 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 time.
C. 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 interests.
D. 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 term.
E. 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 information.
PP–GRMC&E–December 2019 20
F. Reliability and completeness : An integrated report should include all material
matters, both positive and negative, in a balanced way and without material
error.
G. Consistency and comparability : The information in an integrated report should
be presented:
• On a basis that is consistent over time.
• 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 time.
Answer 5(b)
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.
Answer 5(c)
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
1. Demonstrates commitment to integrity and ethical values
2. Exercises oversight responsibility
3. Establishes structure, authority, and responsibility
4. Demonstrates commitment to competence
5. Enforces accountability
Component 2: Risk Assessment
6. Specifies suitable objectives
 21 PP–GRMC&E–December 2019
7. Identifies and analyzes risk
8. Assesses fraud risk
9. Identifies and analyzes significant change
Component 3 : Control Activities
10. Selects and develops control activities
11. Selects and develops general controls over technology
12. Deploys control activities through policies and procedures
Component 4 : Information & Communication
13. Uses relevant information
14. Communicates internally
15. Communicates externally
Component 5 : Monitoring Activities
16. Conducts ongoing and/or separate evaluations
17. Evaluates and communicates deficiencies
Answer 5(d)
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:
(a) Section A : General Information about the Organisation – Industry Sector,
Products & Services, Markets, other general information.
(b) Section B : Financial Details of the Organisation – Paid up capital, Turnover,
Profits, CSR (Corporate Social Responsibility) spend.
(c) Section C : Other Details – Business Responsibility initiatives at Subsidiaries
and Supply-chain Partners.
(d) Section D : Business Responsibility Information – Structure, Governance &
Policies for Business Responsibility.
(e) Section E : Principle-wise Performance – Indicators to assess performance on
the 9 Business. Responsibility principles as envisaged by the National Voluntary
Guidelines (NVGs)
Answer 5A(i)
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
PP–GRMC&E–December 2019 22
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:
(a) Section A – General Disclosures, covering operational, financial and ownership
related information.
(b) Section B – Management and Process Disclosures covering the structures,
policies and processes to integrate the Guidelines and
(c) Section C – Principle-wise Performance Indicators covering how well businesses
are performing in pursuit of these Guidelines.
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.
Answer 5A(ii)
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
Answer 5A(iii)
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.
 23 PP–GRMC&E–December 2019
The following may add to the significance of the corporate compliance management:
• Image building of a responsible corporate citizen.
• Stake holders can trust in the working of the corporate.
• Prevent improper conduct in the organization.
• It keeps things running smoothly and minimizes risks.
• It helps the company in maintaining a good reputation.
• Real time status of legal/statutory compliances.
• Prevent unintended non compliances/ prosecutions.
• Higher Productivity in the Company.
• Building Positive Reputation.
• It enhances credibility/creditworthiness being a law abiding company.
• Proper compliance management avoids the penal provisions.
• Saves cost in litigation by avoiding penalties/fines.
• It lays down the foundation for the control environment.
• Enjoys healthy returns through employee and customer loyalty.
• Benefits of compliance program far outweigh its costs.
Answer 5A(iv)
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 transactions.
• Describe on a timely basis the transactions in sufficient detail to permit proper
classification of transactions for financial reporting.
• Measure the value of transactions in a manner that permits recording their proper
monetary value in the financial statements.
• Determine the time period in which transactions occurred to permit recording of
transactions in the proper accounting period.
• 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.
PP–GRMC&E–December 2019 24
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.
PART– IV
Question 6
(a) Describe the following terms :
(i) “Foreign Public Official” as per ICSI Anti-Bribery Code
(ii) “Disciplinary Mechanism” under ICSI Anti-Bribery Code
(iii) “Ethical Dilemma”
(iv) “Indian Ethos”
(v) “Environment, Social, Governance (ESG) Index”.
(b) Define the term “Sustainable Development”. What are the fundamental principles
of Sustainable Development ? (5 marks each)
Answer 6(a)
(i) 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 country.
(ii) 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
mechanism. 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
(iii) Ethical Dilema : An ethical dilemma is a moral situation in which a choice has to
be made between two equally undesirable alternatives. 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.
(iv) 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 philosophy.
 25 PP–GRMC&E–December 2019
(v) Environment, Social, Governance (ESG) Index : ESG describes the
environmental, social and corporate governance issues. 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 services.
— Social - Employees, Poverty and community impact and Supply chain
management.
— Governance - Codes of conduct and business principles, accountability,
transparency and disclosure and Implementation – quality and consistency.
Answer 6(b)
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 performance.
— Secondly, it provides a common societal goal for corporations, governments,
and civil society to work towards ecological, social, and economic sustainability.
Four fundamental Principle of Sustainable Development agreed by the world
community are as under:
1. Principle of Intergenerational equity : Need to preserve natural resources for the
future generations.
2. Principle of sustainable use : Use of natural resources in a prudent manner
without or with minimum tolerable impact on nature.
3. Principle of equitable use or intra-generational equity : Use of natural resources
by any state / country must take into account its impact on other states.
4. Principle of integration : Environmental aspects and impacts of socio-economic
activities should be integrated so that prudent use of natural resources is ensured.
***