Free of Cost ISBN : ICWA Final Gr. III (Solution upto June-2011 & Question of December )

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1 Free of Cost ISBN : Appendix ICWA Final Gr. III (Solution upto June-2011 & Question of December ) Paper - 11 : Capital Market Analysis and Corporate Laws Chapter-1 : Capital Market & Capital Market Instruments June [2] (a) Financial Market : It is a place or a system where financial instruments (like share, debentures and the like) are used by market players. Some people are smart in saving money while the other are smart in using the money. The financial market provides opportunity for both the kinds of people. Financial market can be defined as the market in which financial assets are created and transferred. A financial market can be defined as the market in which financial assets are created or transferred. Financial market has four segments : Investors, Issuers of financial securities, Intermediate agents between investors and issuers and Regulatory bodies. Financial assets are also called financial claims or financial securities or paper assets. Government securities are also called Gilt-edged securities. Components of Financial Market : It has four elements as given below ; Money Market : It is a mechanism which provides the borrowers and lenders to come together. It is a market for providing debts or loans for a short-term period which may range from one day to one year. The chief players of this market are Government, Scheduled Banks and other financial institutions. The instruments for this market are : call money, CD i.e. Certificate of Deposit, Fixed Deposit, Commercial paper, mutual funds etc. Capital Market : It is a place where people buy and sell financial instruments like shares and debentures. It is same as money market except the time element which is more than a year. Generally the transactions taking place in the capital market will be for period over a

2 Appendix ICWA Final Gr. III Paper 11 2 year. It has two segments : primary market and secondary market. Examples of Capital market are Bombay Stock Exchange and National Stock Exchange. Forex Market : This is Foreign Exchange Market wherein different currencies of different countries are exchanged. This market is for whole word. All nations are part of forex market. In this market transfer of funds of one currency into another currency takes place. Credit Market : It is a place or system where Banks, FIs (Financial institutions) and NBFCs (Non banking financing companies) provide short, medium or long term loans to companies, firms and individuals June [4] (c), (d) (c) ROYAL FABRICS LTD. Total loan to be raised : ` 100 Lakh Amount to be raised through rights issue : ` 100 Lakh Total amount required for expansion project : ` 200 Lakh Right Price (Including Premium) : ` 25 Lakh Number of rights shares to be offered : 100 Lakh 25 = 4 Lakh Therefore, one rights share to be offered for every one existing share. Existing EPS : ` 32 lakh 4 Lakh shares = ` 8 Price - earning ration : 7, Market price per share (7 8) : ` 56 P0 S Value of right (R) = N+ 1 Where, P 0 = Cum rights market share price S = Subscription price of rights share N = Number of existing shares required for a rights issue Value of right (R) = ` NP0 + S Market Value after right issue = = N = = ` Number of shares outstanding after rights issue : 8,00,000 Shares MARKET CAPITALISATION : Ex-rights price x No of shares outstanding = ` x 8,00,000 = ` 3,24,00,000

3 Appendix ICWA Final Gr. III Paper 11 3 CALCULATION OF NET ASSET VALUE PER SHARE AFTER RIGHTS ISSUE: Paid up Capital : 8,00,000 Reserves and Surplus : ` Existing 1,80,00,000 Premium on Rights issue 60,00,000 2,40,00,000 Network of Royal Febrics ` 3,20,00,000 Net asset Value per share : 3,20,00,000 8,00,000 = ` 40 per share (d) We know that premium is comprised of two parts viz intrinsic value and Time Value. Intrinsic value will be greater than zero only if by exercising we get gains. In this case since the option is not exercised, these premiums reflect the "time value" of the contract. The fact that there is still time left to expiration for the price to move in a favourable direction means that the buyers are willing to pay a premium for the contract. We would expect that the premium for the August contract would be higher than the premium for July contract and the premium for the July contract would be higher than the premium for the June contract. Obviously the fact that the August contract expires one month after the July contract and that the August contract expires two months after the June contact means that a purchaser would be willing to pay correspondingly higher prices for later expirations as there is more time available for the buyer to exercise the contract. The premium for the June contract might be say 3, the premium for the July Contract might be 4.5, and the premium for the August contract might be Dec [2] (a) What is "money market"? Explain the terms "Treasury bills" and "Certificate of Deposits" in this context. ( = 6 marks) Chapter-2 : Capital & Financial Market Regulations June [3] (c) The IT Act 2000 empowers the Government departments to accept filing, creating and retention of official documents in the digital format. The Act also put forward the proposal for setting up the legal framework essential for the authentication and origin of electronics record/ Communication through digital signature. The Act legalizes the and gives it the status of being valid form of carrying out communication in India. Digital signatures and digital records have also been awarded the status of being legal and valid means. The Act now allows government to issue notification on the web thus heraldinge - Governance.

4 Appendix ICWA Final Gr. III Paper 11 4 The Act also provides statutory remedy to the corporates in case the crime against the accused for breaking into their computer systems or network and damaging and copying the data is proven. The remedy provided by the Act is in the form of monetary damages, not exceeding 1 Crore ($ 2,00,000). The law sets up the Territorial Jurisdiction of the Adjudicating officers for Cyber Crimes and Cyber Regulation Appellate Tribunal. The law has aid guidelines for providing Internet Services on a license on a non exclusive basis June [4] (a) Venture Capital Funds (VCF) are created to support growing and promising persons (firms, companies etc) during their initial stages before they are ready to make a public issue of shares to raise funds or capital. Venture capital is the fund employed in new company which has promising future. VC represents investment is highly risky projects in the hope of earning a higher rate of return. It is new phenomenon in conservative India. VC financing is generally the first capital to be invested by sources outside the firm and the last to exist. The distinguishing feature of venture capital investment is that the gains on capital are not of revenue nature but of capital nature. The investors of venture capital have profits in the form of capital gains. Features of Venture Capital : 1. The investor of venture capital expects high degree of return. He knows very well that risk of this type of investment is high. He is aware of all the risks he is taking. 2. The investor of VC provides the funds and takes active part in day to day use of the funds so invested. 3. In the initial 3-5 years, no return is required by the investing agency. 4. The investor takes out its investment after the assisted firm has established itself in the market. 5. Investment is usually made in small and medium scale enterprises. 6. VC is not just putting money in the enterprise but also it is also participating in setting up the firm, designing its financial structure, formulating marketing strategy etc. Venture Capital Instruments : Venture capital may be provided in many ways. Some are as follows : 1. Equity Capital : The investor takes the shares of new firm at face value to the extent as required by the promoters. 2. Conditional Loan : Condition may be royalty on sales, share of profit on a percentage basis etc.

5 Appendix ICWA Final Gr. III Paper Hybrid of conditional loan and conventional loan : A loan with usual rate of interest plus a royalty on sales. 4. Conventional Loan : Conventional loan with a higher rate of interest may be given. Schedule of interest payment and principal payment may be agreemented well in advance Dec [3] (a) Briefly state the objective behind issuance of SEBI (Disclosure and Investor Protection) Guidelines, (i) To whom are the said guidelines applicable? (ii) Two whom are the said guidelines not applicable? ( = 4 marks) (b) For an important business offer made by your client BEAUTIFUL LTD, the offeree is ready to send a digitally signed , accepting the offer. Your client wants to know if the same is legally binding. Advise the client suitably. (5 marks) Chapter-3 : Capital Market Analysis June [2] (b) (i) Expected return on stock and variance of spark ltd. E (`) = = 33.3% F 2 s (Variance) : 0.18 ( ) ( ) ( ) ( ) 2 = = % Expected return on stock and Variance of Global Ltd : E (RG) = = 22.56% F 2 G (Variance) : 0.18 ( ) ( ) ( ) ( ) 2 = = 90.69% Expected return and variance on Market : E (RM) = = 16.58% F 2 m (Variance) : 0.18 ( ) ( ) ( ) ( ) 2 = 47.20% COVSM = 0.18 ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) = 78.63% CovGM = 0.18 ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) = 64.61% Betas : ß S = COVSM / F 2 M = / = 1.67 ß G = COVSM / F 2 M = / (ii) Normal return = Rf + ß (Rm - Rf) Spark Ltd. : ( ) = 23.33% Alpha / Excess return = = 9.97%

6 Appendix ICWA Final Gr. III Paper 11 6 (iii) Global Ltd. : ( ) = 20.31% Excess return / Alpha = = 2.25% The alpha i.e. excess return of both the companies is positive. Hence the stock of Spark Ltd and Global Ltd is under priced. Systematic Risk = ß 2 F 2 M Unsystematic Risk = Total Risk - Systematic Risk Spark Ltd : Systematic Risk = (1.67) = % Unsystematic Risk = = 2.53% Proportion of Systematic Risk = (131.64/134.17) 100 = 98.11% Proportion of Unsystematic Risk = (2.53/134.17) = 1.89% Global Ltd : Systematic Risk = (1.37) = 88.59% Unsystematic Risk = = 2.10% Proportion of Systematic Risk = 88.59/90.69 = 97.68% Proportion of Unsystematic Risk = 2.10/90.69 = 2.32% (iv) Spark Ltd : Excess return / stander deviation : = 9.97/ = 9.97/11.58 = 0.86 Global Ltd : Excess return / stander deviation : = 2.25/ = 2.25/9.52 = 0.24 As the excess return / Alpha to Standard deviation is higher for the stock of Spark Ltd, the analyst should suggest to invest on the stock of Spark Ltd June [3] (a),(b) (a) ETF stands for exchange traded funds. As the name indicates, these are the funds which are traded in stock exchanges like trading of shares. These funds are not shares but a group of shares of selected companies. ETFs are thus baskets of securities which are traded like individual stock on stock exchange. These are something like mutual funds with the difference that while the MFs can not be traded like shares, ETFs can be bought and sold throughout the trading days like any other share. The concept of ETF has its origin in the US of A and it first came into existence in the year Initially the concept as is usual with any new concept, was not received properly by the public and the welcome was not warm. In later years it gained popularity and now the ETFs are essential components of all the stock exchanges of the world. ETFs charge annual expenses at a rate lower than that charged by MFs. As the ETFs are traded like shares, every transaction requires some brokerage to be paid which is a

7 Appendix ICWA Final Gr. III Paper 11 7 significant drawback for the traders. The net asset value or NAV is also computed like MFs on the basis of shares in the portfolio. Application of ETFs are as follows : 1. Management of cash flows : The ETFs are temporary investment and are very helpful in management of cash flows. They are highly liquid and can be invested and disinvested for short period of time. 2. Diversification of risk : If an investor is not aware about the market mechanism and does not know what to buy from the market or what to sell in the market, he may take the shelter of ETFs for investment. 3. Efficient trading : ETFs provide a convenient way to gain market exposure. Additional knowledge : Stock Index Futures : An Index Future is a derivative whose value is dependent on some index like BSE index or NIFTY index etc. While trading on index future, an investor is basically buying and selling the basket of securities with their relative weights. A futures contract on a stock market index gives its owner the right and obligation to buy or sell the portfolio on stocks represented by that index. The Stock Index Futures (SIF) contracts involve the payment of cash on the delivery date of an amount as indicated below : Cash Payment = (I P) x M Where I represents the value of index at the close of the last delivery day of the contract. P represents the purchase price of the Futures contracts and M is the multiplier. Value of M in NSE is 200 while in BSE its value is 50. Thus a Nifty futures contract at ` 1,700 is worth ` 3,40,000 i.e x 200. If on the expiry of the contract, the Nifty index is at say at 1,750, an amount of ( ) x 200 = ` 10,000 would be needed for cash settlement. In the instant case, as the index was above the futures price, those who have gone short (sellers), pay those who have long positions (buyers). Conversely, in the event of the index being below the futures price, the long (buyers) pay the short (sellers). In actual practice, the transactions are settled through a clearing house and no actual or physical delivery of the stocks is made. At close of the trading session each day, every customer's position is marked to the market i.e. each account is debited or credited as may be needed on account of fluctuations in price of respective contracts of the customer.

8 Appendix ICWA Final Gr. III Paper 11 8 (b)(i) Since d1 and d2 are required inputs for Black-Scholes option pricing model. d 1 = In (VS/E) + (r F 2 ) t/ F [where t = 3/12 = 0.25, r = 0.05 F = 0.22, VS = , E = 600] = In (597.12/600) + [ (0.22) 2 ] 0.25 / 0.22 = In (0.9952) = ( )/ 0.11 = 0.125, d 2 = d 1 - F N (d 1 ) = N (0.125) = , N(d 2 ) = (0.015) = We can use those to solve the equation in Black-Scholes option pricing model. Value of CALL Option (Vco) : Vs N (d 1 ) - Ee -rt N (d 2 ) [where, e rt = e = e = (given)] Vco = = = ` Hence value of 3 month CALL OPTION on the stock of Apshare Ltd is ` (ii) Value of PUT OPTION (Vpo) : C + PV of E - So = [where, So = Current price = of stock = C = value of call = ` E = Exercise Price] Hence, Value of Put option (Vpo) is ` STRATEGY : (iii) & (iv) Option Actual Option Price ` Fair Option Price ` Valuation Decision (iii) CALL Under Bye Call Option (iv) PUT Over Sell Put Option June [4] (b) CALCULATION OF EFFECTIVE YEILD ON PER ANNUM BASIS IN RESPECT OF THEIR MUTUAL FUND SCHEMES TO MS TANIA UPTO MF - A MF - B MF - D

9 Appendix ICWA Final Gr. III Paper Investment ` 2. No of Units (W 1 Particulars ` 3. Unit NAV on ` 4. Total NAV on (2 3) ` 5. Increase/Decrease of NAV (1-4) ` 6. Dividend Received ` 7. Total yield (5 + 6) ` 8. Number of Months 9. Effective Yield P.A. (W2) (%) Working Notes : (W 1 ) Investment NAV on entry date (W 2 ) [Yield = (Total yield Investment) 12/ No. of month) 7, (714.26) % 1,50,000 15, % 75,000 7, ( ) Nil (24%) 75, ,50, , Alternative Solution to Questions No. 4 (b) : CALCULATION OF EFFECTIVE YEILD ON PER ANNUM BASIS IN RESPECT OF THEIR MUTUAL FUND SCHEMES TO MS TANIA UPTO Particulars MF - A MF - B MF - D 1. Investment ` 2. No of Units (W 1 ) (1 3) 3. NAV on entry date ` 4. Unit NAV on ` 5. Total NAV on ` 6. Increase/Decrease of NAV (1-5) ` 7. Dividend Recieved ` 8. Total yield (6 + 7) ` 9. Date of Investment 10. Number of Days 11. Effective yield P.A. (%) [8 1) 365/No. of days] 7, (714.26) % 1,50,000 15, % 75,000 7, ( ) Nil ( ) (23.55%) Dec [2] (b) MR. VASANT SHAH an analyst of REVAMP SECURITIES LTD has made risk and return projections for the securities of SPARX LTD and DEPROTIV LTD which are as follows: Scenario Probability Returns % associated with SPARX LTD DEPROTIV LTD Market Index Recession & High interest Rate Recession & Low Interest rate Boom & High Interest rate Boom & Low Interest rate It is felt that the interest rate of 7 percent on the 91-day T-Bill is a good approximation of the risk-free rate. Assume that CAPM holds good in the market. You are required to

10 Appendix ICWA Final Gr. III Paper (i) Calculate the ex-ante Betas for Sparx Ltd and Deprotiv Ltd. (ii) Comment on the proportions of systematic and unsystematic Risk in the two stocks. (iii) Recommend for fresh investment in any of these two stocks. Show all the necessary calculations. ( (2+2) = 14 marks) Dec [3] (c) The Stock of GREENENVIRON LTD. (G.L.) is currently trading at ` and Put Option exercisable in three months time has an exercise rate of ` 800. The annual standard deviation of its continuously compounded rate of return is 20 percent. The annualised Treasury Bill rate corresponding to this option life is 6 percent. Requirement : Calculate the value of a three month PUT OPTION on the stock of GREENENVIRON LTD. (Using Black and Scholes Model) Note : Extracted from the Tables : 1. In ( ) = , In (1.0048) = Value of e -x : e = , e = Cumulative standardized normal probability distribution : NCX When X $0 : N(0.152) = , N(0.052) = When X #0 : N( ) = , N(-0.052) = ( = 7 marks) (d) The following table gives an analyst's expected return on two stocks for particular market returns : Market Return Bulls Ltd. Bears Ltd. 8% 4% 7% Required : (i) Compute the Beta of the two stocks. (ii) If the risk-free rate is 6% and the market return is equally likely to be 8% or 18%, what are the required Rate of Returns of the two Stocks? ( = 4 marks) Dec [4] (a) Explain in brief the differences between futures and option. (2 + 2 = 4 marks) (b) SUN MUTUAL FUND LTD promoted an open-ended equity oriented scheme in 2004 with two plans-dividend Re-investment Plan (Plan-D) and a Bonus Plan (Plan-B). The face value of the units was ` 10 each. MS. ADITA invested ` 2,00,000 each on in Plan-D and Plan-B respectively, when the NAV was ` for Plan-D and ` for Plan- B. MS. ADITA redeemed her units in Plan-D and Plan-B respectively on Particulars of dividend and bonus declared over the period were as follows :

11 Appendix ICWA Final Gr. III Paper Date Dividend (%) Bonus Ratio Net Asset Value (`) Plan-D Plan-B : : : Required: Calculate the Annual rate of return in respect of Plan-D and Plan-B for Ms. Adita. Note: Ignore: (i) Income tax of Capital gains. (ii) Security Transaction Tax (STT) (4 + 4 = 8 marks) (c) The settlement price of a NIFTY FUTURES contract, on a particular day in a particular month of the year 2011 on NSE was The multiple associated with the contract is 50. The initial margin for the contract is ` 30,000 and the maintenance margin is set at ` 20,000. The settlement prices on subsequent 8 (eight) days were as follows: Day Settlement Price (`) Required: Calculate the Mark to Market (MTM) cash flows, the daily Closing Balances and Net-Profit (or loss) in the Account of MR. S. BAKSHI an investor who has gone: (i) Long at (ii) Short at (4 + 4 = 8 marks)

12 Appendix ICWA Final Gr. III Paper Chapter-7 : Articles of Association Dec [6] (a) MS. SUCHANDA has entered into a transaction with GLAMOUR LTD for a contract value of ` 40 lacs. The Articles of Association enjoin that contracts above ` 10 lacs should be approved in Board Meeting. Mr. Dhuruv, an officer of the company, produces forged documents to her, which show a resolution having been passed in a Board Meeting approving the contract. Later, the forgery comes to light. MS. Suchanda pleads that she is protected by the Doctrine of Indoor Management-Discuss. (3 + 2 = 5 marks) Chapter-9 : Share Capital & Shares June [6] (a) Sweat Equity Shares (section 79A) Meaning : Worded simply, Sweat equity shares are the shares which are issued as rewards to employees of the company either free of cost or for a price which is much below the current market price. As per section 79A of the Company's Act 1956, equity shares may be issued to directors or employees for providing (i) technical knowledge (ii) intellectual property rights (iii) any value addition. These may be issued at a discount or for consideration other than cash. Rewards are meant to encourage them to continue their better performance in the best interest of the company. These shares are also used as a tool for retaining the employee at senior level. The concept of sweat equity shares is gaining popularity these days. Conditions : Section 79A of the Company's Act 1956 gives the following conditions for the issue of Sweat Equity shares : 1. The issue should be authorised by Special resolution. 2. The resolution should specify (i) the number of shares (ii) the market price (iii) consideration, if any (iv) class of directors and employees to whom these shares are to be issued. 3. The issue should be at least one year after the date of commencement of business. 4. The issue should comply with guidelines of SEBI. 5. All provisions in respect of equity shares will be applicable to sweat equity shares also. Chapter-12 : Directors June [8] (a) Disqualifications for directorship (section 274): The Company's Act 1956 provides that a person shall not be capable of being appointed as director of company if : 1. A court has declared him of unsound mind, and such declaration is still in force.

13 Appendix ICWA Final Gr. III Paper He has applied to be declared insolvent and his application is still pending. 3. He has been declared as insolvent by a competent authority. 4. He has been sentenced to imprisonment for 6 months or more and a period of five years has not been finished from the last day of such imprisonment. 5. An order has been passed by a court that he can not appointed as director. 6. Who is already director of company which has not filed its annual returns and accounts for past three years or which has failed to repay its deposit or interest on due dates or failed to pay dividend on due date. Such person will not be eligible to be appointed as a director of any other public company for a period of five year from the date of such failure. Chapter-13 : Company Meetings June [6] (c) Holding two AGMs on the same day There is no provision in the Companies Act prohibiting the holding of two AGMs on the same day. If the Articles do not contain any provision to the contrary, AGM for the current year as also for the previous year can be held on the same day. There should, however, be separate notices for each meeting and they should be held at different timings. This has been complied with. Hence the shareholder's contention is incorrect, assuming that the Articles do not have any restriction for holding two AGMs on the same day. Chapter-15 : Oppression & Mismanagement Dec [8] (c) A group of shareholders of DECEPTIVE TECHNO LTD. filed an application before the Company Laws Board (CLB) alleging various acts of frauds and mismanagement by MR. NAVIN, the Managing Director & his associates. During the course of hearing before the CLB, the authorized representatives of the said company contended that the alleged transactions had taken place several years ago and the company has already removed the Managing director, who was responsible for such transactions and hence there is no case before the CLB to interfere in the working of the company. Against the submissions on behalf of the company, the applicants submitted that although the fraudulent transactions were done in the past and the Managing Director has been removed, but the company is still controlled by the person, who are in leage with the erstwhile Managing Director and are working as his Henchman.

14 Appendix ICWA Final Gr. III Paper State the merits of the applicants arguments and power of the CLB. (4 marks) Chapter-16 : Compromises, Arrangements & Reconstruction and Inter- Corporate Loans & Investments Dec [8] (a) VAIBHAV POLYMERS LTD has an authorized capital of ` 250 lacs. Its paid up capital is ` 200 lacs. The free reserves are to the tune of ` 120 lacs. The company has advanced to other companies to the tune of ` 180 lacs, as on 30 th November, On this date, the Board of directors of the company wants to advance ` 35 lacs to Vasudha Textiles Ltd., without the prior permission of the shareholders in a general meeting. Discuss the correctness of the proposal. (6 marks) Chapter-18 : Right to Information June [7] (a) Request for information under RTI Act through Section 6(1) of the RTI Act enjoins that a person desirous of obtaining information shall make a request in writing or through electronic means in English or in the official language of the area in which the application is being submitted, to the Public Information Officer. The section makes two thing clear : (a) The request can be through electronic media. is an accepted (b) form of electronic communication; The request can be in English or in the official language of the area in which the application is being submitted. In Delhi, Hindi is the official language of the area. Therefore the refusal on the grounds that the request was not in English and that the same was cent through is not justified Dec [6] (b) Can any fine or penalty be imposed on the Public Information Officer of a Government Department, where he has deliberately delayed the furnishing of information sought for properly, under the RTI Act, 2004? Is such Levy automatic? How can the fine or penalty imposed, be recovered from him? ( = 5 marks) Chapter-19 : The Competition Act, June [6] (b) The Chairperson and other Members shall not, for a period of one year from the date on which they cease to hold office, accept any employment in or connected with the management or administration of,

15 Appendix ICWA Final Gr. III Paper any enterprise which has been a party to a proceeding before the commission under this Act (Section 12 of the Competition Act 2002). Provided that nothing contained in this Section shall apply to any employment under the Central Government or a State Government, or local authority or in any statutory authority or any Corporation established by or under any Central, State or Provincial Act or Government Company as defined in section of the Companies Act, 1956 (1 of 1956). Based on the above provisions of the Competition Act 2002, Mr. Anup Kumar will not be able to accept the offer of ASHLEEN LTD for one year from the date of the cessation as a member of the Competition Commission since the said company was a party to the proceedings before the Commission. However, since Life Insurance Corporation of India is a Corporation established under the Central Act, the above restriction does not apply and Mr. Anup Kumar can accept the offer to join as the Executive Director of the said Corporation with effect from 1 st June, Dec [7] (c) An understanding has been reached among the manufacturers of cotton to control the price of cotton, but the understanding is not in writing and it is also not intended to be enforced by legal proceedings. Examine whether the above understanding can be considered as an agreement within the meaning of section 2(b) of the Competition Act, (3 marks) Chapter-21 : Corporate Governance June [8] (b) Corporate governance may be defined as the system which the companies are directed, managed, administered and controlled. It may be in related to the internal management of the company to ensure and show how beautifully a company is run. It is about promoting fairness, transparency and accountability in conduct of business and use of resources. Section 292A of the Company's Act 1956, provides that every company having a paid up capital of not less than ` 5 crores will constitute an Audit Committee which shall consist of not less than 3 directors. The board may determine additional number of directors on its own. The provisions of section 292A are as follows : 1. Minimum number of directors will be three. 2. Two third directors will be other than MD and WTDs. It means one third of the strength of the audit committee can be given to executives of the management of the company. 3. The committee will elect its chairperson.

16 Appendix ICWA Final Gr. III Paper The committee will act according to the directions given by the board. 5. The composition of audit committee shall be disclosed in the annual report of the company. 6. The statutory auditor, internal auditor and the Head of finance department are required to attend the meeting of the audit committee but they will not have a right to vote in the meeting. 7. The committee will review the internal control and management of the company, its half yearly and yearly report, the points raised by the auditors. The committee will also review other documents before their presentation to the board. 8. The recommendations of the audit committee are binding on the board. If the board is not implementing such recommendations, it should give reasons for the same to the shareholders. 9. One of the members of the committee will be elected as chairperson of the committee. 10. The chairperson of the committee shall attend the annual general meeting to provide clarification if any relating to the performance of audit committee. From the above it is evident that the basic objectives of corporate governance like transparency, accountability and fairness are also chief considerations in the formation and performance of audit committee. In addition to section 292A of the Company's Act 1956, The additional requirements in respect of audit committee, in the listing agreement are as follows : 1. The audit committee should invite appropriate number of executives of the company to its meetings. 2. On some occasions the audit committee can meet without the presence of any executive. 3. The company secretary of the company shall act as secretary of the committee. 4. The committee should meet thrice in a year. One must be before the finalization of the annual accounts. 5. The quorum of the audit committee should be two members or one-third of the members whichever is higher and minimum of two independent directors. Principles of Corporate Governance : A good corporance should include the following principles : 1. Review of operation : It requires review of operations of the company at a regular or irregular intervals. It may include comparison of monthly / quarterly parameters of production or sales or any other prominent factor.

17 Appendix ICWA Final Gr. III Paper Compliance with Statutory and Regulatory Requirements : The BOD should ensure compliance with various requirements of law of the land. All statutory, legal and regulatory requirements must be fulfilled timely and adequately. This may include clearance of statutory dues, compliances with requirements of applicable Acts, following suitable accounting policies and standards and so on so forth. 3. Appointment of various committees : There should be appointment of various committee to look after various matters. Good corporate governance requires formulation and functioning of several committees. There can be following committees: (i) Audit committee u/s 292A (ii) Grievance committee (iii) Remuneration committee (iv) Investment committee and many more. 4. Contribution of employees union : It can and should be considered whether the Board should have some representative of employees union. Employees or workers union should also contribute significantly to good corporate governance creating conducive atmosphere for working. 5. Contribution to community development : A good corporate governance should help community development programs by active participation. It should contribute in pollution control, environment protection and other several social aspects and services. Good corporate governance calls for accountability for all concerned. The directors, stakeholders, shareholders auditors, executives etc. etc. who are associated with the working and operations of the corporate should combine their efforts and effects to improve the system and ensure good management practices Dec [6] (c) Corporate governance is merely the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Critically examine this statement. (5 marks) Chapter-22 : Board of Directors & Different Committees. and key financial Decisions & Disclosures June [7] (b), (c) (b) Checklist on assignment of risk ownership : C Have owners been allocated to all the various parts of the complete risk process and the full scope of the risks being created for? For example, suppliers may be tasked with

18 Appendix ICWA Final Gr. III Paper (c) ownership of assessing and evaluating risk as part of their contracts. C Are the various roles and responsibilities associated with ownership well defined? C Do the individuals who have been allocated ownership actually have the authority in practice to fulfill their responsibilities? C Have the various roles and responsibilities been communicated and understood? C Are the nominated owners appropriate? C In the event of a change, can ownership be quickly and effectively reallocated? C Are the difference between benefit and delivery risk clearly understood and, if required, do they have different owners? Management Audit incorporates in itself an efficiently audit. Efficiently audit ensures"application of the basic economic principle so that resources flow into the most remunerative channels". The main object of efficiency audit is to ensure that 1. Every rupee invested in capital or in other fields give the optimum returns and 2. The planning of investment between the different functions and aspects is designed to give optimum result. The parameters for measuring efficiency with its concomitant details are 1. Overall rate of return on capital employed 2. Better capacity utilization 3. Better utilization of raw material, power, labour, equipments and finance 4. Effective incentive system 5. Better export performance and import substitution 6. Cost control It is necessary to make study activity wise so as to identity areas of deficiency in particular activity. To conclude we can infer saying that investor in order to protect his investment in any company expects proper exhibition of corporate governance which is taken care by Management Audit as Management Audit would encompass compliance audit, efficiency audit, propriety audit and systems audits as well as management audit is concerned with the overall objectives of an organization.

19 Appendix ICWA Final Gr. III Paper June [8] (c) Additional Requirements Stipulated as per Section 292A : The following additional requirements are stipulated as per section 292A of the Companies Act, 1956 which are silent in Clause 49 of the Listing Agreement : (i) The audit Committee Constituted shall act in accordance with terms of reference to be specified in writing by the board. (ii) The recommendation of the audit Committee on any matter relating to financial management, including the audit report, shall be binding on the board. (iii) If the board does not accept the recommendations of the audit committee, it shall record the reasons therefore and Communicate such reasons to the share holders Dec [7] (a) Discuss the role, membership and operations of a Nomination Committee. (6 marks) (b) In the context of management audit, what is meant by control risk vis-a-vis detection of material misstatements in the financial statements? In this regard, what is Control Risk at the maximum and Control Risk at less than the maximum? (6 marks) Dec [8] (b) MR. JYOTIRMA YEE has supplied goods worth ` 3,000 to TWINKLE LTD. The company proposes to appoint him as an independent director in the Board. The total annual purchases of the company amount to ` 4 crores. Discuss about the appropriateness and correctness of this proposal, in the light of provisions of the Companies Act, Chapter-23 : Objective Questions June [1] {C} (a),(b),(c) (a)(i) A : ` 2,500 Crore (5 marks) New Base Year Average = Old Base Year Average (New market value) (Old market value) [Where, old market value/aggregate market value be x.] ˆ 1010 = x = Or, x= = ` 2,500 (ii) C: 660% 10% increase in Market return resulted in 16% increase in Arihant Ltd stock. Thus the Beta (á) for the Arihant ltd stock is 1.60 (i.e. 16% 10%)

20 Appendix ICWA Final Gr. III Paper Now Systematic Risk is ß 2 F m 2 = (1.60) 2 (257.81) = 660% (iii) B: 529% The Beta of portfolio consisting of two securities given that money is allotted equally between two assets : = 1.15 The Systematic Risk of a portfolio = ß 2 F m 2 (1.15) = 529% (iv) C: 22.55% R2 = [1/1 - Initial Expenses (%) R1] + Recurring Expenses (%) Where R2 = Mutual Fund Earnings R1 = Personal earning of SAURAV GANGULY ˆ R2 = [(1/1-0.05) 20%] + 1.5% = = 22.55% (v) C: ` Expected rate of return : (By applying CAPM) Re = Rf + $ (Rm - Rf) = 12% (15% - 12%) = 12% + 4.8% = Price of Stock : (With the use of dividend growth model formula) Re = D 1 P or, = 2.50 P 0 or, P 0 = ` (b)(i) B (ii) C (iii) C (iv) C (v) C (c) (i) T + 2 (ii) Insurance Regulatory and Development Authority (iii) Exchange rate (iv) Securities Appellate Tribunal (v) Index June [5] {C} (a),(b) (a) Matching Part A (i) (ii) (iii) (iv) (v) Part B (v) (ii) (i) (iii) (iv)

21 Appendix ICWA Final Gr. III Paper (b)(i) (ii) 6 Two (iii) 6 Supreme Court (iv) 6 Political Risks (v) 6 One - half of the board Dec [1] {C} (a) In each of the cases given below, one out of four is correct. Indicate the correct answer and give workings/ reasons briefly in support of your answer : (i) The Market Price of Stock of ATCO Ltd. is ` 102 and its Alpha is -1.3%. The realized return on the Stock is 16% p.a. and the Risk-free rate of return is 7.02% p.a. Market Risk premium is 7% p.a. What would be the Required rate of return on the Stock of ATCO Ltd., if its co-variance with the market portfolio declines by 50%? (a) % (b) % (c) % (d) None of the above (ii) The buy and sell value of two securities in stock exchange are as under : Security Buy value Sell value (`) (`) L 5,00,000 2,00,000 M 3,00,000 7,00,000 The Gross Exposure Margin is (a) ` 17,00,000 (b) ` 7,00,000 (c) ` 12,00,000 (d) Insufficient information (iii) The Stock of VENTEX LTD (FV ` 10) quotes ` 920 on NSE and the 3 months futures price quotes at ` 950 and borrowing rate is given as 8% p.a. If the expected annual dividend yield is 15% p.a. payable before expiry, then the theoretical price of 3 month Ventex Ltd. Futures would be (a) ` (b) ` (c) ` (d) `

22 Appendix ICWA Final Gr. III Paper (iv) The following two types of securities are available in the market for investment : Security Return (%) Standard Deviation (%) Gilt-edged Security 7 0 Equity Using the above two securities, if you are planning to invest ` 1,00,000 to construct a portfolio with a standard deviation of 24%, the return of such portfolio is (a) ` 10,900 (b) ` 15,600 (c) ` 21,400 (d) None of the above (v) MS. VASUDA is considering an investment in a Mutual Fund with a 2% load. As another alternative, she can also invest in a Bank deposit paying 10% interest. Her investment planning period is 3 years. What should be the annual rate of return on Mutual Fund so that she prefers the investment in the fund to the investment in Bank Deposit? (a) % (b) % (c) % (d) None of the above (2 5 = 10 marks) (b) Choose the most appropriate one from the stated options and write it down (only indicate A, B, C or D as you think correct) : (i) Green shoe option denotes an option (a) of allocating shares in excess of the shares included in the public issue (b) of allocating of shares lower than the shares included in the public issue (c) to buy shares at a specified price in the stock exchange (d) none of the above (ii) An appeal against the order of the Banking ombudsman can be made to (a) No appeal is possible (b) The Finance Ministry (c) The Deputy Governor s Office of the RBI (d) The Central Government (iii) The conversion of existing assets into marketable securities is known as (a) Future flows securitisation (b) Asset-backed securitisation

23 Appendix ICWA Final Gr. III Paper (c) Venture funds (d) None of the above (iv) Which of the following statements is true? (a) If market price = face value, then coupon rate > YTM> current yield (b) If market price = face value, then coupon rate < current yield < YTM (c) If market price > face value, then coupon rate > current yield > YTM (d) If market price < face value, then coupon rate = current yield = YTM (v) A portfolio holding 90 percent of its assets in CNX Nifty Stocks in proportion to their market capitalization and 10 percent in Treasury bills is more sensitive to (a) Index Risk (b) Systematic Risk (c) Unsystematic Risk (d) Both (A) and (B) of above (1 5 = 5 marks) (c) Fill in the blanks in the following sentences by using appropriate words/phrases/numbers: (i) Inter-bank market for deposits of maturity beyond is covered in money market instruments. (ii) (iii) (iv) (v) SEBI was constituted in the year. A prospectus is said to be a prospectus which contains all information as per prospectus contents but does not have information on price of securities offered and number of securities (quantum) offered through document. The RBI performs the financial supervision function under the guidance of. Buying and selling call or put option with same strike price but different expiration dates is called spread. (1 5 = 5 marks) Dec [5] {C} (a) Choose the most appropriate one from the stated options and write it down (only indicate A, B, C or D as you think correct): (i) In a Public Limited Company there are 10 directors including Managing Director and a nominee of ICICI. How many directors are liable to retire by rotation? (a) (b) (c) (d) Four Five Six Seven

24 Appendix ICWA Final Gr. III Paper (ii) MR. RAJESH, a director of GROW WELL LTD died in a train accident. The Board of directors would like to appoint MR. ARUN KUMAR in place of MR. RAJESH. Which of the following statements is true? (a) The company has to call for extra-ordinary general meeting. (b) The company has to continue with the existing number of Directors till the next Annual General Meeting. (c) The Board can fill up the vacancy at the Board Meeting. (d) None of the above. (iii) Buy-back of equity shares in a financial year shall not exceed (a) 25% of total authorized equity capital of the company (b) 25% of total paid-up equity capital of the company (c) 25% of total called up equity capital of the company (d) None of the above (iv) In the context of classification of Risks war risks will fall under (a) Political Risks (b) Credit Risks (c) Disaster Risks (d) Systems Risks (1 4 = 4 marks) (b) Fill in the Blanks in the following sentences by using appropriate words/phrases: (i) As per clause-49 of the listing agreement where chairman is a Non-executive director, at least of Board (ii) should consist of independent directors. After the commencement of the Companies (Amendment) Act, 2011, no person, shall, save as otherwise provided in section 276, hold office at the same time as director in more than companies. (iii) Section to of the Companies Act, 1956 contain elaborate provisions for regulating payment of compensation to directors for loss of office. (iv) (v) (vi) In the case of a public limited company, the director must obtain qualification shares within from the date of appointment. To examine how a result will change if the predicted financial outcomes are not achieved or if an underlying assumption changes, managers can use analysis. Related party disclosure requirements are spelt out in IAS (1 6 = 6 marks)