corporate financial models

7/29/2019 Corporate Financial Models

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CORPORATE FINANCIAL MODELS

CORPORATE FINANCIAL MODELS ARE FORMAL REPRESENTATIONS OF A COMPANYS

OPERATIONS AND PROCESSES IN FINANCIAL TERMS. SUCH MODELS, INTER ALIA, HELPMANAGEMENT TO:

Analyse the inter-relationships between investment and financing alternatives

available to the firm.

Project the financial future of the company under various assumptions.

Decide among various alternatives.

Monitor performance vis--vis pre-determined targets.

There are two broad types of corporate financial models: Optimisation models and

simulation models. An optimisation models seeks to maximise a certain objective function

subject to various constraints. A simulation model, on the other hand, essentially seeks to

answer what if questions. While optimisation models are conceptually more elegant,

simulation models are far more popular in practice.


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MODEL DEVELOPMENT

THE EXPERIENCES OF THE COMPANIES WHICH HAVE UNDERTAKEN

FINANCIAL MODELLING HAS LEAD TO A FAIRLY STANDARD APPROACH TOMODEL DEVELOPMENT. THIS INVOLVES THE FOLLOWING STAGES:

1. Feasibility study.

2. Construction of model logic

3. Programming and debugging

4. Documentation

5. Implementation

6. Updating and extension

These stages though given sequentially , in practice tend to overlap and

the process is somewhat iterative.


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IMPROVING FINANCIAL MODELLING

The simulation models used in practice seems to suffer from the following

shortcomings.

BOTTOMUP APPROACH: Typically simulation models follow a bottom-up

approach wherein the inputs of lower and higher level management are treated

together. This easily produces a tree versus forest problem and can lead to an

undue emphasis on lower level inputs and neglect of more important concerns.

INADEQUATE REPRESENTATION OF FINANCIAL POLICIES: In financial simulation

models, management policies are generally represented in a very simplistic and

inadequate manner.

INEFFICIENT SCREENING OF FINANCIAL PLANS: In the absence of a well- defined

objective, a simulation model is not an efficient device for screening various

financial plans.


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CONDITIONS FOR THE SUCCESSFUL USE OF MODELS

While corporate financial models are powerful tools, evidence indicates thatmany such models have been either partial successes or, even worse, downrightfailures. Experiences of companies suggest that the following conditions, iffulfilled, significantly enhance the likelihood of successful use of corporatefinancial models:

The operations of the business models must be understood well.

Relevant data of good quality is available.

The modelling project must be enthusiastically supported by top management.

Well defined budgetary and planning systems. Involvement of potential users in the development process

Expression of inputs and outputs in familiar format

In the initial stages, the modelling project should be kept as simple as possible.

Opportunistic introduction

There must be abundant allowance for judgemental inputs

Primary responsibility with a manager

Clarity of roles and

Proper orientation and education of users.


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SUGGESTIONS TO IMPROVE FINANCIAL MODELLING IN PRACTICE

1. Follow a top down approach in building the model. This will ensure that the

model will concern itself with the key financial decisions of the firm.2. Avoid cluttering the model with excessive detail. If the model is relatively with

a sharp focus on key financial decisions it will have a greater appeal to

management.

3. Use an optimising framework, using a methodology like linear programming.

Such a model will develop, as its output, the key financial decisions.

4. Explore through a series of computer runs the implications of various

managerial policy requirements on the optimal set of financial decisions. It

must be appreciated that the programming framework has the power to

answer the same questions as budget compilers and even more

5. Inject greater financial theory in otherwise accounting-dominated

models. Since the model is primarily a device for financial decision-making, itshould display a greater degree of sophistication in reflecting financial issues.


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INFLATION AND ASSET VALUATION

In an inflationary period, the book value of assts, typically reflecting historical costs

less accumulated depreciation, do not reflect their true values. Hence it may beworthwhile to consider revaluation of assets periodically so that the asset valueshown in the balance sheet reflect economic reality more accurately.

OBJECTIVE OF REVALUATION: Revaluation of assets is undertaken with one or moreof the following objectives in mind:

To attract investors by indicating to them the current value of assets

To make depreciation provision which will enable the firm to meet replacementneeds adequately.

To provide a more reasonable and accurate perspective regarding the true worth ofassets in the event of a possible takeover or merger.

To help management in (i) assessing the true profitability of different divisions, (ii)formulating a more sensible dividend policy, (iii) pricing its products realistically, (iv)

fixing the machine hour rates in a job order situation, and (v) determining thedesirable insurance cover for the assets.

To enhance the borrowing capacity of the firm


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CONCEPT AND MEASURE OF VALUE

For purpose of valuing (revaluing) assets, the following concept is widelyfollowed-

The value of property (or asset) to its owner should be identical to the loss,

direct and indirect, the owner might expect to suffer if he is deprived of the

property (or asset)

Three broad categories of measures have been suggested for valuation of assets,

as represented by loss on deprivation . These are:

Replacement cost

Realisable value and

Economic value


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MEASURE OF VALUE

REPLACEMENT COST: This is the cost that will be incurred to replace the asset. It

may be measured in terms of (i) gross current replacement cost or (ii) net current

replacement cost.

REALISABLE VALUE: This represents the value that can be realised on the disposal

of the asset. It may be measured as (i) the current open market sales value of the

asset, or (ii) the forced sale value of asset, i.e. the amount likely to be obtainedfor the asset if the same is sold under conditions adverse to the seller.

ECONOMIC VALUE: This denotes the value derivable from the economic use of the

asset. It may be calculated as (i) the value related to the earnings potential of the

asset, or (ii) the alternative use value. i.e. the value of the asset for a prospective

purpose other than the purpose for which it is used at present, or (iii) the going

concern value, i.e. the value of the asset to a firm, assuming that the firm will be

a going entity.


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CHOICE OF MEASURE

Before we decide the measure to be adopted we need to look at the six

possible relationships among these measures:

1. Case I : Realisation value > Economic value > Replacement cost

2. Case2 : Realisation value > Replacement cost> Economic value

3. Case3: Economic value > Replacement cost> Realisation value

4. Case4: Economic value > Realisation value > Replacement cost

5. Case5: Replacement cost> Economic value > Realisation value

6. Case6: Replacement cost> Realisation value>Economic value

In cases I and 2, as the realisation value exceeds the economic value, it is

advantageous to dispose the asset rather than use it. However, the maximum

loss suffered by the firm, using the deprivation principle in these cases is

the replacement cost, not the realisation value, because by buying another

asset of the same type , the firm can restore the deprivation suffered by it.


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CHOICE OF MEASURE

In cases 3 and 4, as the economic value is greater than the realisation value, it isadvantageous to use the asset rather than dispose it. However, here too, as in cases 1and 2, the loss suffered by the firm, when deprived of the asset is the replacementcost.

In case 5, the loss suffered by the firm, if it is deprived of the asset, is the economicvalue of the asset. Hence, this represents the value of the asset

In case 6 , the loss suffered by the firm, if it is deprived of the asset, is the realisationvalue of the asset hence this is the measure of asset value in this case.

Out of the above cases 1, 2 and 6 may be discarded for all practical purposesbecause for industrial assets realisable value cannot exceed economic value. Thus forcases 3, 4 and 5, the basis for valuation shall be as follows:

Case 3 : Replacement cost ; Case 4: Replacement cost

Case 5: Economic value

The specific measures to be employed may be as follows:

Replacement cost : Net current Replacement CostEconomic Value: Present value of earnings expected from the use of the asset.


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DIVERGENCE OF INTEREST

As long as the firm is owned and managed by the same person, there is no room

for conflict. As the stake of managers in the ownership of the firm diminishes thescope for agency problem increases. In a typical joint stock company, where

managers have very little stake in ownership they are likely to act in ways that

incompatible with the interest of shareholders.

The forces leading to divergence between the goals of managers and shareholders

have been referred to as the institutional imperative. The consequences of this

divergence is that it leads to adoption of different yardsticks and possible conflicts.

The key differences, are as shown in the next exhibit.


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DIVERGENCE OF INTEREST

Types of

decisions

Managements

yardstick

Shareholders

yardstick

Areas of possible

conflict

Performance

Measurement

Cash Flow Shareholder rate

of return

Ranking of

investment

alternatives

Investment

proposals

Historical rate of

return

Opportunity cost

of capital

Hurdle rates

Financing

sources

Pecking order:

(a) Retained

earnings

(b) Debt, and

(c) Equity

Pecking order:

(a) Debt

(b) retainedearnings and

(c) equity

Extent of

financing

Risk

Management

Firm risk Portfolio risk Degree of

diversification


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DEVICES FOR CONTAINING AGENCY COSTS

To mitigate agency costs, a variety of devices have evolved. Some are internal andsome are external.

Internal Devices:

The key internal devices for containing agency costs are:- internal monitoring andincentive compensation contracts.

Internal Monitoring: Most organizations have fairly well developed internal systems ofperformance monitoring and responsibility accounting. Workers are supervised bylower level managers. Lower level managers are monitored by middle level managerswho in turn, are supervised by top level management. Finally, the top levelmanagement is accountable to the board of directors. The hierarchical monitoringstructure tends to reduce the agency costs within the firm.

Incentive Compensation Contracts: Agency problems arise because of lack ofalignment of the interests of shareholders and management. To make these interestsmore congruent, managerial compensation may be linked to shareholder returns. A

number of firms seek to provide incentive to management in the form of stockoptions, performance bonuses, and so on, to reduce agency costs.


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There are two important external devices for containing agency costs the market for

corporate control and the managerial labour market.

Market for Corporate Control: When internal control devices do not work, the market

for corporate control may act as a deterrent on managerial behaviour that dissipates

shareholder value. Also referred to as the takeover market, it is a market in which the

right to control represented by a chunk of equity holding that is sufficient to wield

control is traded. Proponents of takeover argue that an active market for control is a

good external disciplining device. Defending raiders, who seek to wrest control byacquiring a sufficient equity stake, it can be said that they help in rescuing hapless

shareholders from the clutches of inept management.

contd..


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Managerial Labour Market: Along with the market for corporate control, the market

for managers tend to check agency problems. In their search for better prospects,

managers participate in the managerial labour market now and then. Hence they havean interest in establishing a reputation and track record for performance. Spendthrifts

and wastrels, who destroy shareholder wealth, obviously have a weak demand for

their services in the managerial labour market. This market can make a manager pay a

price for self serving behaviour. However, many argue that this market may not be a

very effective disciplining device because of the difficulty of isolating the effect of

managerial action from other influences which shape a firms performance.


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It is a popular measure currently being used by several firms to determinewhether an existing/proposed investment positively contributes to the

owners/shareholders wealth. The EVA is equal to after-tax operating profitsof a firm less the cost of funds used to finance investments. A positive EVAwould increase owners value/wealth. Therefore, only investments withpositive EVA would be desirable from the viewpoint of maximisingshareholders wealth.

Shareholders must earn sufficient returns for the risk they have taken ininvesting their money in companys capital. The return generated by thecompany for shareholders has to be more than the cost of capital to justifyrisk taken by the shareholders.

If a companys EVA is negative, the firm is destroying shareholders wealth

even though it may be reporting positive and growing EPS or Return onCapital employed.

CONCEPT OF ECONOMIC VALUE ADDED(EVA)


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EVA is just a way of measuring an operations real profitability. EVA holdsa company accountable for the cost of capital it uses to expand and

operate its business and attempts to show whether a company iscreating real value for its shareholders.

EVA is a better system than ROI, to encourage growth in new products,new equipment and new manufacturing facilities. EVA measurementalso requires a company to be more careful about resource mobilisation,

resource allocation and investment decisions. It effectively measures theproductivity of all factors of production.

The computation of the after-tax operating profits attributable to theinvestment under consideration as well as the cost of funds used tofinance it would, however, involve numerous accounting and financialissues.

The merits of EVA are: (a) its relative simplicity and (b) its strong linkwith the wealth maximisation of the owners.


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EVA can be calculated as follows:

EVA = NOPAT (TCE x WACC) where,

NOPAT = Net operating profit after tax

TCE = Total capital employed

WACC = Weighted average cost of capital

While calculation of NOPAT, the non-operating items like

dividend/interest on securities invested outside the business, non-

operating expenses etc will not be considered.

The total capital employed is the sum of shareholders funds as well as

loan funds. But this does not Include investments outside the business.

In determining WACC, cost of debt is taken as after tax cost and cost of

equity is measured on the basis of Capital Asset Pricing Model. Under

CAPM cost of equity (Ke) = Rf+ Bi(Rm Rf) where Rf = risk free return

Rm =expected market rate of return and Bi = risk coefficient of particular

Investment. EVA is expressed in terms of rupee figure and not as a

Percentage. In EVA calculation total capital employed in the business is taken, whether

provided by shareholder or creditors. The EVA figure measures the value added after

the claims or expectations of each of the group of capital providers have been met.



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EVA VS. RESIDUAL INCOME

EVA is just a refinement of residual income Residual income is definedas the difference between profit and the cost of capital. It differs from

EVA in the fact that profits and capital employed are book figures i.e thesame appearing in the financial statements. No adjustment to profit andcapital employed figures as reported in the profit and loss account andbalance sheet are made unlike EVA.

IMPROVING EVA: EVA can be improved in any of the following ways: Increasing NOPAT with the same amount of capital

Reducing the capital employed without affecting the earnings ie bydiscarding the unproductive assets.

Investing in those projects that earn a return greater the coc

By reducing coc , which means employing more debt which is cheaperthan equity or preference capital


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EVA AND MANAGERIAL PERFORMANCE

FIRMS COMPETE WITH EACH OTHER FOR GETTING THE SCARCE

CAPITAL FROM THE SHAREHOLDERS. TO BE ABLE TO GET THE CAPITAL, FIRMMUST PERFORM BETTER THAN THOSE OF THE COMPETITOR. IT MUST EARN

MORE THAN THAT EARNED BY SIMILAR RISK SEEKERS. IF IT CAN ACHIEVE THIS

OBJECTIVE IT HAS CREATED VALUE FOR THE SHAREHOLDERS AND ITS STOCK

PRICE WILL COMMAND A HIGHER PREMIUM IN THE MARKET. IN USING THE EVA

SYSTEM EMPLOYEES FOCUS ON HOW THE C APITAL IS BEING USED ON THE

CASHFLOWS GENERATED TO IT.

EVA MAKES MANAGERS CARE ABOUT MANAGING ASSETS AS WELL AS INCOME,

AND HELPS THEM PROPERLY ASSESS THE TRADEOFF BETWEEN THE TWO. EVA

FORCES MANAGERS TO FOCUS ON ALUE CREATING ACTIVITIES RATHER THAN

WASTING TIME AND ENERGY ON PLAYING WITH THE ACCOUNTING PRINCIPLES.


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SUPERIORITY OF EVA

EVA is a superior measure of corporate performance and reflects all thedimensions by which management can increase value. It helps in creation of

wealth on the following grounds:

EVA is most directly linked to the creation of shareholders wealth over time.

The mechanism of EVA forces management to expressly recognise its cost ofequity in all its decisions from the board room to the shop floor

An EVA financial management system removes all the inconsistencies resultingfrom the use of different financial measures for different corporate functionsunder the typical traditional financial management system as its ties all thefunctions for instance valuing an acquisition, assessing performance,communicating, considering strategic plan alternatives or rewardingmanagement to one single measure the effect on shareholder value and thusprovides a meaningful target to pursue for both internally and externallyoriented decisions.

EVA compensation system ties managements interest with those of shareholdersand the value creation motion will permeate to the whole organisation.


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SUPERIORITY OF EVA

EVA captures the performance status of corporate system over a broader canvasi.e. to arrive at true profits, cost of borrowed capital as well as cost of equity

capital should be deducted from net operating profits. Further to maximiseearnings is not sufficient, at the same time consumption of capital should beminimum/optimum under an EVA based system.

EVA framework provides a clearer perception of the underlying economics of abusiness and enables any manager to make better decisions.

A regular monitoring of EVA throws light on the problem areas of a company andthus helps the management to select the one that will best serve shareholders.

It is used to assess the likely impact of competing strategies on shareholderwealth and thus helps managers to select the one that will best serveshareholders.

It also fits well with the concepts of corporate governance and thus considered tobe the best corporate governance system. EVA bonus systems do this by givingemployees an ownership stake in improvements in the EVA of their divisions oroperations. This causes employees to behave like owners and reduces or

eliminates the need for outside interference in decision making.


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STEPS IN IMPLEMENTATIONOF EVA

MEASURE EVA - Create systems facilitating proper resource and

asset allocation and transfer pricing

- Create EVA Stretch-Goals and benchmark them

- Define EVA of business units, strategic groups,

project teams.PROVIDE MANAGEMENT

TOOLS USING EVA - Refine capabilities & investing techniques to

ensure only value adding projects are taken up

- Identify EVA drives and operating measures

- Report EVA of the business division, team orproject on a regular basis


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STEPS IN IMPLEMENTATIONOF EVA

MOTIVATE PEOPLE

ON THE BASIS OF EVA - Adopt an EVA based incentive

compensation and appraisal system.

- Create a long term At-Risk Bonus Planto

replace the Annual Bonus Incentive Plan.

MINDSET - Train people in the organisation in EVA and value

building concepts.

- Teach them to focus on one objective

maximising EVA.


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STEPS IN IMPLEMENTATION OF EVA

MEASUREMENT : Any company that wishes to implement EVA

should institutionalise the process of measuring the metric, regularly. This

measurement , should be carried out after carrying out the prescribed accounting

adjustments.

MANAGEMENT SYSTEM : Further, the company should be willing to align its

management system to the EVA process. The EVA based management system is the

basis on which the company should take decisions related to the choice of strategy,

capital allocation, M & A, divesting business and goal setting.

MOTIVATION : Companies should decide to implement EVA only if they are preparedto implement the incentive plan that goes with it. An EVA based incentive system,

how4ever, encourages managers to operate in such a way as to maximise the EVA,

not just of the operations they oversee but of the company as a whole.

MINDSET: The effective implementation of EVA necessitates a change in the culture

and mindset of the company. All constituents of the organisation need to be taught

to focus on one objective maximising EVA. This singular focus leaves no room forambiguity and also it is not difficult for employees to know just what actions of their

will create EVA, and what will destroy it.


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DRAWBACKS OF EVA

One important drawback of EVA is that it ignores inflation. So it is biased against

new assets. Whenever a new investment is made capital charge is on the full cost

initially, so EVA figure is low. But as the depreciation is written off the capital

charge decreases and hence EVA goes up.

Second problem is that since EVA is measured in rupee terms it is biased in

favour of large, low return businesses. Large businesses that have returns only

slightly above the cost of capital can have higher EVA than smaller businesses

that earn returns much higher than the costs. This makes EVA a poor metric forcomparing businesses.

Thirdly, in the short term EVA can be improved by reducing assets faster than the

earnings and if this pursued for long it can lead to problems in the longer run

when new improvements to the asset base are made. This new investment can

have a high negative effect on EVA because the asset base would have been

reduced to a large extent and improvements will involve huge investments.


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MARKET VALUE ADDED

A term closely related to EVA is MVA. MVA is the market value of the

capital employed in the firm less the book value of capital employed. MVA

is calculated by summing up the paid-up value of equity and preference

share capital, retained earnings, long term and short term debt and

subtracting this sum from the market value of equity and debt.

MVA is a cumulative measure of corporate performance. It measures how

much a companys stock has added to or taken out of investors pocket

books over its life and compares it with the capital those same investors

put into the firm. EVA drives the MVA. Continuous improvements in EVA

year after year will lead to increase in MVA.


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CORPORATE GOVERNANCE

CORPORATE GOVERNANCE- MEANING

Corporate governance is a process or a set of systems and processes

to ensure that a company is managed to suit the best interests of all.

The systems which can ensure this may include structural and organisational matters. Thestakeholders may be internal stakeholders (promoters, members, workmen and executives) andexternal stakeholders( shareholders, customers, lenders, dealers, vendors, bankers, community,government and regulators).

Corporate governance is concerned with the establishment of a system whereby the directorsare entrusted with responsibilities and

duties in relation to the direction of corporate affairs. It is concerned with accountability ofpersons who are managing it towards the stakeholders. It is concerned with the morals, ethics,values, parameters, conduct and behaviour of the company.

and its management. It is a voluntary ethical code of business of companies


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Several tests have to be adopted to assess whether there has been effective

corporate governance. Broadly, the test of corporate governance should coverthe following aspects:

Whether the funds of the company have been deployed for pursuing themain objects of the company as enshrined in the memorandum?

Whether the funds raised from FIs and the capital market have been utilisedfor the purposes for which they were intended?

Whether the company has the core competence to effectively manage itsdiversifications?

Whether there has been diversion of funds by way of loans and advances orinvestments to subsidiary or investment companies?

Whether the personal properties of the directors have been let out at afabulous rent to the company?

Whether the funds of the company have been diverted to the promotersthrough shell companies to permit the promoters to shore up their stake inthe company?


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Whether the provision of the various statutes have been complied in letter

and spirit.

Whether the practices adopted by the company and its management

towards its shareholders, customers, suppliers, employees and the public at

large are ethical and fair?

Whether the directors are provided with information on the working of the

company and whether the institutional and non-executive directors play an

active role in the functioning of the companies?

Whether the internal controls in place are effective?

Whether there is transparent financial reporting and audit practices and the

accounting practices adopted by the company are in accordance with

accounting standards of ICAI?


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CORPORATE GOVERNANCE IN INDIA

The concept of Corporate Governance receives statutory recognition, with the insertion ofSection 292A in the Companies Act, 1956 with an amendment made to it through theCompanies Amendment) Act,2000. The Institute of Chartered Accountants of India issuedcertain mandatory accounting standards. SEBI based on Kumar Mangalam Birla Report askedall the Stock Exchanges to amend the listing agreements between them and the entitieswhose securities are listed with them

AUDIT COMMITTEE AND THE COMPANIES ACT

The new section 292A incorporated in the Companies Act,1956 made it obligatory upon apublic company having paid up capital of Rs.5 crores or more to have an Audit Committeecomprising at least three directors as members. Two thirds of the total number shall be nonexecutive directors.

As per this section, the Audit Committee has to act in accordance with the written terms of reference thatthe board specifies. The designated functions of the Audit Committee are:

To have periodical dialogue with the statutory auditors on internal control systems, scope ofaudit including auditors observation.

To carry out the review of half yearly and annual financial statements before submission to theBoard.

To ensure compliance of internal control systems


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LEGAL PROVISIONS UNDER THE COMPANIES ACT

THE KEY LEGAL PROVISIONS WITH RESPECT TO CORPORATE BOARDS ARE AS

FOLLOWS: Strength A public limited company must have at least three directors.

Meetings The Board of directors must meet at least once in aquarter.

Composition There is no fixed number of non-executive directors. No personcan be a director of more than 20 companies.

Powers The board of directors has the powers to (a) borrow, lend and investfunds, (b) recommend dividends, and (c) appoint the managing director

Remuneration The total remuneration of the directors is subject to a ceiling of11 percent of net profits. In addition, board members can be paid a sitting feesupto Rs.20,000 per meeting.

Duties The board has the duty to present the annual report to the members.

Liabilities The board is punishable for breach of trust, dihonesty and fraud


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CLAUSE 49 IN LISTING AGREEMENT ON CORPORATE GOVERNANCE

SEBI HAD CONSTITUTED A COMMITTEE ON CORPORATE GOVERNANCE UNDER

THE CHAIRMANSHIP OF SRI KUMARAMANGALAM BIRLA TO PROMOTE AND

RAISE THE STANDARD OF CORPORATE GOVERNANCE IN THE CORPORATE SECTOR.

THE COMMITTEE SUBMITTED ITS REPORT TO SEBI. ACCEPTING THE

RECOMMENDATIONS OF THE COMMITTEE SEBI HAS ADVISED ALL STOCK

EXCHANGES TO AMEND THEIR LISTING AGREEMENTS BY INSERTING NEW CLAUSE

49 WHICH DEALS WITH GOOD CORPORATE GOVERNANCE PRACTICES TO BE

ADOPTED BY ALL LISTED PRIVATE AND PUBLIC SECTOR COMPANIES. HOWEVER,FOR LISTED ENTITIES, WHICH ARE NOT COMPANIES, BUT BODY CORPORATES(

EG. PRIVATE AND PUBLIC SECTOR BANKS, FINANCIAL INSTITUTIONS, INSURANCE

COMPANIES ETC) INCORPORATED UNDER OTHER STATUTES, THIS CLAUSE WILL

APPLY TO THE EXTENT THAT IT DOES NOT VIOLATE THEIR RESPECTIVE STATUTES,

AND GUIDELINES OR DIRECTIVES ISSUED BY THE RELEVANT REGULATORY

AUTHORITIES. CL.49 IS INSERTED VIDE SEBI CIRCULAR DATED 21.9.2000


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CORPORATE GOVERNANCE- THE SEBI CODE

THE KEY ELEMENTS OF THE SEBI CODE, WHICH IS BASED ON THE

RECOMMENDATIONS OF THE KUMARAMANGALAM COMMITTEE REPORT ARE AS

FOLLOWS: least one-half of the board shall comprise of non-executive directors and at

least one-third of the board shall comprise of independent directors.

An audit committee of at least three non-executive directors shall be set up,

the majority of them being independent. It shall meet at least thrice a year.

The remuneration paid to all directors shall be disclosed in the annual report. A Management Discussion and Analysis Report should form part of the annual

report.

Details of new appointees At as directors shall be provided to the shareholders.

The annual report shall have a section on corporate governance.

The auditors of the company should give a certificate regarding compliance oncorporate governance


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The designated functions of the Audit Committee are:

To have periodical dialogue with the statutory auditors on internal control

systems, scope of audit including auditors observation. To carry out the review of half yearly and annual financial statements before

submission to the Board.

To ensure compliance of internal control systems

The Audit committee is also given the authority to investigate

into any matter specified in the section or referred to it by the

Board. For this purpose, the Audit Committee shall have fullAccess to information in the companys records and external

Professional advise, if necessary.

The ACs recommendations on Financial management

Including the audit report are binding on the board. If the

board does not accept them it has to record the relatedreasons in writing and communicate to the shareholders.

CORPORATE GOVERNANCE IN INDIA


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APPLICABILITY OF SECTION 292A

Section 292A is mandatory in nature. Every Public Company, as per

Section 2(37) and section 3 of the Act is affected by it. Pursuant to section

3 aforesaid, the provisions of Section 292A would also be applicable to a

private company, which is a, subsidiary of a company which is not a

private company.

A private company is not covered by section 292A

Section 292A also applies to unlimited and/or a guarantee companyhaving required amount of paid up capital

A government company under section 617 or a section 25

company under the Act have not been exempted specifically and therefore

would also be affected by the provisions of section 292A.

The listing status of a company is irrelevant for the purpose of applicability

of section 292A.

corporate financial models

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