You are on page 1of 27

Meaning of ethics

Ethics is the study ofhuman behavior which is

right or wrong. In general, ethics means doing
right things to others, being honest to others,
being fair and justiceto others. Even ethics in
finance is compartment to general ethics. Ethics
are very important to maintain constancy in
sociallife, where people work togetherwith one
another. In the process ofsocial development
we should not beconscious ofourselves but
also conscious to take care ofothers.


Finance means fund or other financial resources; it deals

with matter related to money and the market. The field
offinance refers to the concept oftime, money and risk and
how they are interrelated. Banks are the main facilitators
offunding. Funding means asset in theform
ofmoneyFinance is the set ofactivities that deals with
themanagement offunds. It helps in makingthe decision
like how to use the collected fund.It is also art and science
ofdetermining ifthe funds ofan organization are being
used in a right manner or not. Through financial analysis,
any company or business can take decision in making
financial investments, acquisition ofcompany, selling
ofcompany, to know the financial standing oftheir business
in present, past and future. It helps to stay competitive with
others in makingstrategic financial decisions. Finance is the
backbone ofbusiness; no business can run without finance.


Ethics in finance is one ofthe main things which

everyone has to follow from the small, medium andbig
level company because almost all the country depend
up on the financial background ofthe country because
without financial component no business can run for a
longtime. Theassumption ofmodern financialeconomic theory runs counter to theideas ofhonesty,
devotion, dependability andloyalty. Ethics infinance
may vary fromdifferent industries to different industries
but everyone is liable to-do theirwork at utmost good
faith. Peoples who involved in finance activityhave to
serve both their company and their customers at utmost
good faith.

Code of Ethics in Finance

1. Act with honesty and integrity, avoiding real
orclear conflicts of interest in personal and
professional relationships.
2. To provide information which is full, fair,
accurate, complete, objective, relevant, timely
and understandable, including in and for
reports and documents that the Company files
with, or submits to, the other public
communications made bythe Company.
3. Act in accordance with all applicable laws,
rules and regulations of governments, and
other appropriate private and public regulatory

4. Act in good faith, responsibly, with due

care, competence and carefulness, without
misrepresenting material factor allowing my
independent judgment to besubordinated.
5. Respect the confidentiality of information
acquired in the course of business except
when authorized or otherwise legally
obligated to disclose the information. It
should notbe used forpersonal advantage.
6. To promote ethical behavior among
7. Adhere to and promote this Code of Ethics

Ethical issues in Finance

Financial statements
Financial Markets
Insider Trading

Fraud in Financial
Fictitious Revenues
Concealed Liabilities and Expenses
Fraudulent Asset Valuations
Improper or Fraudulent Disclosures or

Example : The Satyam Computer

Services scandal was a corporate
scandal that occurred in India in 2009
where ChairmanRamalinga Raju
confessed that the company's accounts
had been falsified. CID told in court that
the actual number of employees is only
40,000 and not 53,000 as reported
earlierand that Mr. Raju had been
withdrawing 20 crore (US$4 million)
every month for paying these13,000
non-existent employees.

Duties ofanAuditor
To give an accurate statement to the
members about the state of affairs of a
To meet the objectives of the
Companies Act1956
andalsotheArticles of Association.
To be reasonably skillful and careful
indentifying the true nature of the

Ethical Issues inFinancial Markets

Deception: act of misrepresenting relevant
Churning: Excessive or inappropriate
trading for clients account by a broker who
has control over the account with intent to
generate commissions rather than to
benefit client.
Unfairness in Markets




Harshad Shantilal Mehta was anIndian stockbroker.
OnApril 23, 1992, journalist SuchetaDalal exposed Mehta's
illegal methods in a column in The Times of India. Mehta was
dipping illegally into the banking system to finance his buying.
In this scam Mehta needed banks whichissued fake BRs (Not
backed by anygovernment securities). Two small andlittle
known banks - the Bank of Karad (BOK) and the Metropolitan
Co-operative Bank (MCB) - came inhandy for this purpose.
These banks were willing to issue BRs as and when required, for
a fee, once these fake BRs were issued, they were passed on to
other banks and the banks in turn gave money to Mehta,
assuming that they were lending against government securities
when this was not reallythe case. This money was used to drive
up the prices of stocks in the stock market. When time came to
return themoney, the shares were sold for a profit and theBR
was retired. The money due to the bank was returned.

This went on as long as the stock prices

kept going up, and no one had aclue
about Mehtas operations. Once the scam
was exposed, though, a lot of banks were
left holding BRs which did not have any
value - the banking system had been
swindled of a whopping 4,000crore
(US$728 million).

Insider trading
Insider trading essentially denotes
dealing in a companys securities on the
basis of confidential information relating
to the company which is
sedtomakeprofit or loss. It isfairly a
breachof fiduciary duties of officers of a
company orconnected "persons as
defined under the SEBI regulations,1992,
towards the shareholders.

Insider terms actually includes both legal and illegal

The legal version iswhen corporate insider officer,
directors , and employees buy and sell stock in their
own companies. when corporate insiders trade in their
own securities , theymust report theirtrades to SEBI.
Illegal insider trading refers generally to buying
orselling a security , in breach offiduciary duty
orother relationship of trust and confidence, while
inpossession of material, non public information
about the security.

Who are insider traders ?????

Who are insider traders ?????

Remember this STONE COLD

Remember this STONE COLD

Who are insider traders?

Corporate officers, directors , and employees who traded the
corporations securities after learning of significant ,confidential
corporate developments.
Friends , business associates, family members , and other types
of such officers ,directors , and employees, who traded the
securities after receiving suchinformation.
Employees of law, banking , brokerage andprinting firms who
were givensuch information to provide services to the
corporation whose securities they traded.
Govt employees who learned of such information because of
theiremployment by the Govt .
Other persons who misappropriated ,and took advantage of,
confidential information from their employers.


Hostile Takeovers
Ahostile takeover isan acquisition in
which the company being purchased
doesnt want to be purchased, or
doesnt want to be purchased by the
particularbuyer that is making a bid.
How can someone buy something thats
not forsale? Hostile takeovers only work
with publicly traded companies. That is,
they have issued stock that can be
bought and sold on public stock

Examples hostile takeover

Anti-takeover defense measures

Poison Pills
Green mail
Buy back
People Pill

Poison Pills
Astrategy used by corporations to
discourage hostile takeovers. With a
poison pill, the target company
attemptsto make its stockless
attractive tothe acquirer. There are two
types of poison pills:
1. A"flip-in" allows existingshareholders
(exceptthe acquirer)to buy more shares
at adiscount.
2. A"flip-over" allows stockholders
tobuy the acquirer'sshare sat a
discounted priceafter the merger.

Like blackmail, greenmail is money that is paid to
an entity to make it stop anaggressive behavior. In
mergers and acquisitions, it is an
antitakeovermeasure where the target company
pays a premium, known as greenmail, to purchase
its own stock shares back (at inflated prices) from a
corporate raider. Once the raider accepts the
greenmail payment, generally it agrees to stop
pursuing the takeover and not to purchase any
more shares for a specified number of years. The
term "greenmail" stems from a combination of
blackmail and greenbacks (dollars).The great
number of corporate mergers that occurred during
the 1980s led to a wave ofgreenmailing.

The St. Regis Paper Company provides an
example of greenmail. When an investor
grouped by Sir James Goldsmith acquired
8.6% stake in St. Regis and expressed
interest in takingoverthe paper concern,
the company agreed to repurchase the
shares at a premium. Goldsmith's group
acquired the shares for an average price
of$35.50 per share, a total of $109 million.
It sold its stake at $52 per share, netting a
profit of $51million.

Buy Back
Abuyback allows companies to invest in
themselves. By reducing the number of shares
outstanding on the market, buybacks increase the
proportion of shares a company owns. Buybacks
can be carried out in two ways:1. Shareholders
may be presented with atender offerwhereby
they have the option to submit (or tender)
apportion or all of their shares within a certain
timeframe and at apremium to the current market
price. This premium compensates investors for
tendering their shares rather than holding on to
them.2. Companies buy back shares on the open
market over an extended period oftime.

People Pill
Adefensive strategy to ward off a hostile
takeover. The target company's
management team threatens that, in the
eventof a takeover, the entire team will
resign. The purpose of a people pill is to
discourage the acquiring company from
completing the takeover, by introducing
thepossibility ofhaving to put together
an entirely new management team. This
strategy is only effective ifthe acquiring
company wants to keep the existing

No business and company can run
without finance. It is lifeblood for all
the organization. So if almost all the
field in finance follows ethics in their
duty almost all other process will
function very well without any