Due Diligence-I – Secretarial Audit Compliance Management and Due Diligence Important Questions

Question 1.
Write short note on: “Escrow Account”.
Answer:
1. Escrow Account: Escrow Account is an account opened by an obligator in a bank in which money payable under the obligation is credited but the operation of the account is left with a third party.

2. As per Regulation 17 of SEBI (SAST) Regulations, 2011 – The escrow amount shall be calculated in the following manner as specified: For consideration payable under the public offer :

  • On the first 500 crores – 25 per cent of the consideration.
  • On the balance consideration – An additional amount equal to 10% of balance consideration.

3. An open offer is made conditional upon minimum level of acceptance, hundred per cent of the consideration payable in respect of minimum level of acceptance or fifty per cent of the consideration payable under the open offer, whichever is higher, shall be deposited in cash in the escrow account.

4. The escrow account referred to in Regulation 17(1); may be in the form of:

  • cash deposited with any scheduled commercial bank.
  • bank guarantee issued in favour of the manager to the open offer by any scheduled commercial bank or
    deposit of frequently traded and freely transferable equity shares or other freely transferable securities
  • with appropriate margin. However, securities sought to be provided towards escrow account under clause (c) shall be required to conform to the requirements set out in Regulation 9(2).

Question 2.
Write note on: “Remedial actions to overcome hurdles in carrying out a due diligence”.
Answer:
Remedial actions to break hurdles in due diligence as follows:

  1. Focus on follow up questions.
  2. Polite persistence may help to overcome this attitude.
  3. Ask several people the same questions and utilise appropriate professional acumen.
  4. Independent check with regulatory authorities. Better to add the required disclaimer clauses in due diligence report.

Question 3.
Write note on: “Documents to be checked in due diligence process”.
Answer:
Following documents to be checked in due diligence process:

  1. Basic Information.
  2. Important Business Agreements/Memorandum of Understanding.
  3. Financial data.
  4. Marketing Information.
  5. Litigation Aspects.
  6. IPR Details
  7. Taxation Aspects.
  8. Human Resources Aspects.
  9. Insurance Details.
  10. Cultural Aspects.
  11. Environmental Impact.
  12. Internal Control System.

Question 4.
Write short note on: “Technical due diligence”.
Answer:
Technical due diligence can be classified into:
Intellectual Property due diligence : The main objective of intellectual property due diligence is to ascertain the nature and scope of target company’s right over the intellectual property, to evaluate the validity of the same and to ensure whether there is no infringement claims.

Technology due diligence : Technology due diligence considers aspects such as current level of technology, company’s existing technology, further investments required etc. Technology is a key component of merger and acquisition activities; it’s imperative to look at IT considerations.

Question 5.
Distinguish between the following: “Audit” and Due diligence”.
Answer:
Difference between “Audit” and “Due diligence”” are as follows:

Basis of Distinction “Audit” “Due diligence”
Scope Limited to financial analysis Includes not only analysis of financial statements but also business plan, sustainability of business, future aspects, corporate and managements structure, legal issues etc.
Data Based on historical data. Covers future growth prospects in addition to historical data.
Mandatory Mandatory Mandatory based on the transaction.
Type of Assur-ance Provide Positive Assurance ie. true and fairness of the financial statements Provide Negative Assurance ie. identification of risks, if any.
Type of Process This is post-mortem analysis. This help in future decision making.
Uniformity Always Uniform Varies according to the nature of transactions.
Repetitiveness Recurring Event Occasional Event

Question 6.
Distinguish between the following: “Operational due diligence” and “Strategic due diligence”.
Answer:
Distinction between “Operational due diligence” and “Strategic due diligence” are discussed as under:
1. Operational due diligence: Operational due diligence aims at the assessment of the functional operations of the target company, connectivity between operations, technological up gradation in operational process, financial impact on operational efficiency etc. It also uncovers aspects on operational weakness, inadequacy of control mechanisms etc.

2. Strategic due diligence: Strategic due diligence tests the strategic rationale behind a proposed transaction and analyses whether the deal is commercially viable, whether the targeted value would be realized. It considers factors such as value creation opportunities, competitive position, and critical capabilities.

Question 7.
Distinguish between the following: ‘Technical Due diligence’ and ‘Financial Due Diligence’.
Answer:
Distinguish between ‘Technical Due diligence’ and ‘Financial Due Diligence’ are as follows:
Technical Due diligence: It can be classified into:
1. Intellectual Property due diligence: The main objective of intellectual property due diligence is to ascertain the nature and scope of target company’s right over the intellectual property, to evaluate the validity of the same and to ensure whether there is no infringement claims.

2. Technology due diligence: Technology due diligence considers aspects such as current level of technology, company’s existing technology, further investments required etc. Technology is a key component of merger and acquisition activities; it’s imperative to look at IT considerations.

3. Financial Due Diligence:
a. Financial due diligence provides peace of mind to both corporate and financial buyers, by analysing and validating all the financial, commercial, operational and strategic assumptions being made.

b. The Financial Due diligence also review the company’s projection and basis of such projections, capital expenditure plan, schedule of inventory, debtors and creditors, etc. Also, the process involves analysis of major top customer accounts, fixed and variable cost analysis, analysis on gross margins, customers with high profit margins and their contract period, internal control procedures, etc.

Question 8.
Distinguish between: “Financial due diligence” and “Tax due diligence”.
Answer:
Distinguish between ‘Financial Due Diligence’ and ‘Tax due diligence’ are as follows:
Financial Due Diligence:
1. Financial due diligence provides peace of mind to both corporate and financial buyers, by analysing and validating all the financial, commercial, operational and strategic assumptions being made.

2. The Financial Due diligence also review the company’s projection and basis of such projections, capital expenditure plan, schedule of inventory, debtors and creditors, etc. Also, the process involves analysis of major top customer accounts, fixed and variable cost analysis, analysis on gross margins, customers with high profit margins and their contract period, internal control procedures, etc.

Tax due diligence: The Financial Due Diligence can further extended to tax due diligence which covers the Diligence on various taxes the company is required to pay and which ensure that the proper calculation with no intention of under-reporting of taxes. Status of any tax related case running with the tax authorities. The tax due diligence comprises an analysis of:

  • Tax compliance.
  • Tax contingencies and aggressive positions.
  • Transfer pricing.
  • Identification of risk areas.
  • Tax planning and opportunities.

Question 9.
Critically examine and Comment on the following: The objective of due diligence is to allow the investigator to consider the various options, considering the facts found in the course of due diligence.
Answer:
1. The goal of due diligence is to provide the party proposing the trans¬action with sufficient information to make a reasoned decision as to whether or not to complete the transaction as proposed. It should provide a basis for determining or validating the appropriate terms and price for the transactions incorporating consideration of the risks inherent in the proposed transactions.

2. If the due diligence uncovers information that disclosed the investments, loan and participation then it is undesirable and when cannot be adequately resolve then the investigator may withdraw from the deal.

3. It can be possible for a problem uncovered by the due diligence to be solved before the goals go ahead.

4. The investigator may revise the valuation of the company or reassess the price at which it will provide services. When information is ad¬verse then valuation will go down and price will go up and vice-versa respectively.

Question 10.
Critically examine and comment on the following: “A key step in any due diligence exercise is to develop an understanding of the purpose for the transaction”.
Answer:
1. The given statement is correct: “A key step in any due diligence exercise is to develop an understanding of the purpose for the transaction”.

2. The goal of due diligence is to provide the party proposing the transaction with sufficient information to make a reasoned decision as to whether or not to complete the transaction as proposed. It should provide a basis for determining or validating the appropriate terms and price for the transactions incorporating consideration of the risks inherent in the proposed transactions.

3. The nature and extent of due diligence depends the risk perceived by parties to a transaction. The Scope of due diligence is transaction based and is depending on the needs of the people who are involved in the potential investments, in addressing key uncovered issues, areas of concern/threat and in identifying additional opportunities.

Question 11.
“Audit is a financial post-mortem analysis whereas due diligence is a future decision and a process to achieve the desired comfort level about the potential investment.” Comment.
The scope of due diligence process is wider than a financial audit process. Elucidate
Answer:
An audit is concerned with historical financial statements only and provides an opinion as to whether the financial statements represent a “true and fair” view of the company’s operations. Whereas the Due diligence, on the other hand, review not only look the historical financial performance of a business but also consider the forecast financial performance for the company under the current business plan. The difference between Due Diligence and Financial Audit Process are as follows:

Basis of Distinction Financial Audit Due diligence
Scope Limited to financial analysis Includes not only analysis of financial statements but also business plan, sustainability of business, future aspects, corporate and managements structure, legal issues etc.
Data Based on historical data. Covers future growth prospects in addition to historical data.
Mandatory Mandatory Mandatory based on the transaction.
Assurance Positive Assurance i.e. true and fairness of the financial statements Negative Assurance ie. identification of risks, if any.
Type This is post-mortem analysis. This help in future decision making.
Nature Always Uniform Varies according to the nature of transactions.
Repetitiveness Recurring Event Occasional Event

Question 12.
Examine and comment on the following: “The SWOT Analysis of target business is carried out as part of due diligence”.
Answer:
1. The SWOT analysis of the target business carried out as a part of due diligence has to reveal the strengths and weaknesses of not only the financials but also intangibles.

2. The SWOT analysis of any business carried out as a part of due diligence to reveal the strengths and weaknesses of not only the financials but also intangibles. To perform effectively, the potential buyer needs to be clear about the goals and motives for acquiring the target company, as well as the value the buyer is attempting to create with the purchase.

Example : If there is a legal risk, such as an outstanding lawsuit, that will not only jeopardize the financial stability of the company but also the loyalty of existing customers. This will erode the target company’s market of customers by a new and stronger competitor. The target company ’s talent is the asset desired, and much of this depends on employee relations and accordingly cultural issues have to be addressed in time.

Question 13.
Critically examine and comment on the following: “During the diligence process care should be taken to adhere to certain hpspitality issues”.
Answer:
During the diligence process care should be taken to adhere to certain hospitality issues like:

  • Be warm and respective to the professionals who are conducting diligence.
  • Enquire on due diligence team.
  • Join them for lunch.
  • Ensure good supply of refreshments.
  • In case correction arises: admit and rectify.

The process of diligence as a professional care should be taken to scrutinize every document that is made available and ask for details and clarifications though generally the time provided to conduct the diligence may not be too long and things have to be wrapped up at the earliest. The company may provided with an opportunity to clear the various issues that may arise out of the diligence.

Question 14.
What do you mean by ‘person acting in concert’? Who will be deemed to be persons acting in concert as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011?
Answer:
1. As per Regulation 2(1 )(q) under SEBI (SAST) Regulations, 2011, per¬sons acting in concert means persons who while having a common objective or purpose to acquisition shares or voting rights or control over a company, according to an agreement or understanding, directly or indirectly co-operate for the acquiring of voting rights or shares in, or exercise of control over the target company.

2. Without prejudice to the generality of the foregoing the persons falling within the following categories shall be deemed to be persons acting in concert with other persons within same category unless the contrary is established.

  • A company, its holding company, subsidiary company and any company under the same management and control;
  • A company, its directors and any person entrusted with the management of the Company;
  • Directors of companies referred above two clauses and associates of such directors;
  • Promoters and members of the promoter group;
  • Immediate relatives;
  • A mutual fund; its sponsor, trustees, trustee company and asset management company;
  • A collective investment scheme and its collective investment management company, trustee and trustee company;
  • A venture capital fund and its sponsor, trustees, trustee company and asset management company;
  • An alternative investment fund and its sponsor, trustees, trustee company and manager;
  • A merchant banker and its client, who is an acquirer;
  • A portfolio manager and its client, who is an acquirer;

3. Banks financial advisors and stock brokers of the acquirer, or of any company which is holding company or subsidiary of the acquirer and where the acquirer is an individual of the immediate relative of such individual. However, this shall not apply to a bank whose sole role is that of providing normal commercial banking services or activities in relation to an open offer under these regulations.

4. An investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unit holder having less than 1096 of the paid-up capital of the investment company or unit capital of the fund, and any other investment company or fund in which such person or his associate holds not less than 10% of the paid-up capital of that investment company or unit capital of that fund. However, nothing contained in this sub-clause shall apply to holding of units of mutual funds registered with the Board.

Question 15.
Examine and comment on the following: “Due diligence covers compliances, litigations, uncovered risks and future prospects.”
Answer:
1. The Scope of due diligence is transaction based and is depending on the needs of the people who are involved in the potential investments, in addressing key uncovered issues, areas of concern/threat and in identifying additional opportunities.

2. Due diligence would include thorough understanding of all the obligations of the target company: debts, rights and obligations, pending and potential lawsuits, leases, warranties, all high and impact laden contracts – both inter-corporate and intra-corporate.

3. Due diligence is unstated by legal, financial and business communities / potential investors to mean the disclosure and assimilation of public and proprietary information related to the assets and liabilities of the business being acquired. This information includes financial, human resources, tax, environmental, legal matters, intellectual property matters etc.

Question 16.
Examine and comment on the following: “Due diligence is essentially required to make an informed decision about a potential investment.
Answer:
1. Due diligence is an investigation process for providing the desired comfort level about the potential investment and to minimize the risks such as hidden uncovered liabilities, poor growth prospects, price claimed for proposed investment being on higher side etc. Due diligence is necessary to ensure that there are no onerous contracts or other agreements that could affect the acquirer’s return on investment.

2. The Scope of due diligence is transaction based and is depending on the needs of the people who are involved in the potential investments, in addressing key uncovered issues, areas of concern/threat and in identifying additional opportunities.

3. Due diligence would include thorough understanding of all the obligations of the target company: debts, rights and obligations, pending and potential lawsuits, leases, warranties, all high and impact laden contracts – both inter-corporate and intra-corporate.

Question 17.
“Cultural clashes are likely to be more prominent in cross-national than domestic acquisitions.” Discuss and also briefly enumerate the cultural due diligence process.
Answer:
The cultural due diligence process includes:
1. Leadership, strategies and governing principles : It cover vision, mission, values, business strategy development, leadership effectiveness, ethics, board room practices, role of independent directors, etc.

2. Relationship and behaviours : It covers trust, inter/intra group relationships, community and customers.

3. Communication : Feedback, information sharing, employee trust in information.

4. Infrastructure : Formal procedures, processes, systems, policies, structure and teams.

5. Involvement and Decision Making : Encourage the involvement in decision making process.

6. Change Management : Encouragement of creativity, innovation, recognition, continuous learning and diversity.

7. Communication platforms.

8. Finance : Perception of financial health and the role of the employee and the level of financial comprehension and impact on the business.

Question 18.
Define the Cultural Due Diligence. How would you address the I cultural difference during the merger?
Answer:
1. Cultural Due Diligence (CDD) is the process of identifying, assessing : investigating, evaluating and defining the cultures of two or more distinct corporates through a cultural analysis so that the similarities and differences that impact the merged organization are identified and remedial actions are taken well in advance. It should be carried along with M&A due diligence stage itself. The findings of cultural due diligence would be the base for post integration strategies.

2. During merger the cultural differences are addressed as mentioned below:

  • Formation of strategies for cultural integration.
  • Analyzing the existing cultures.
  • Identifying common aspects and differences.
  • Decide if you want to go on with one of the existing culture or if you prefer an integration culture.
  • Establish ‘bridges’ between both companies,
  • Establish a basis and mechanisms for the new culture.
  • Extensive interaction with people.

The following mechanism may help in resolving cultural differences:

  • Newsletters and hotlines.
  • Workshops.
  • Surveys, questionnaires and feedback analysis.
  • Synergy teams.
  • Continuous interactions.

Question 19.
Prepare a checklist of the questions to be analysed in cultural due diligence.
Answer:
The following questions are being analysed for determining the different corporate culture:

  1. What are the primary issues driving the business strategy?
  2. What are the levels of relationship with the board and the senior management?
  3. What is the nature of relationship between groups and units in the organization?
  4. What formal and informal systems are in place and what part do they play in the daily life of doing the work?
  5. How do people dress and address each other?
  6. How do the office ambiences differ?
  7. What are the working hours?
  8. How actual work performed?
  9. How authority and responsibility allocated?
  10. How the performance evaluation done and reward granted?
  11. What are the reporting relationships in the organization?
  12. What are the supervisory practices in the organization?

Question 20.
Under financial due diligence for a manufacturing industry, describe briefly the focus areas for the following aspects:
i. Cost
ii. Revenue
Answer:
Focus areas under financial due diligence for the following aspects are:
i. Cost:

  • Rationalize the costs incurred by the company.
  • Ensure that provisions for liability has been made correctly on the basis of monthly/annual costs incurred by the company.
  • Is there an increase in the level of costs incurred by .the Company.
  • Detailing the costs of the Company along with percentage breakup of the total cost.
  • Understanding of purchase policies and procedures.
  • Input/output analysis on a monthly basis.
  • Trend analysis of movement in costs over the review period for each cost item.
  • Summary of costs per functional classification (marketing finance, etc.), different cost heads (material salary, etc.).

ii. Revenue:

  • Review customer wise revenue share and ascertain any excessive dependence on few customers.
  • Percentage of the sales to major customers (top ten) with respect to sales over their review period.
  • Discussing any revenue sharing arrangements.
  • Identify the trend in customer’s purchases and inquire about the reasons of any significant increase or decrease in customer orders.
  • Reviewing whether repeat sales happen regularly or rarely.
  • Discussion with the management on any long-term revenue commitments with the customers.
  • Analyse the recovery period for credit sales etc.
  • Providing the break-up of sales into domestic sales and exports.
  • Geographical break-up of revenue along with any significant changes to evaluate particular region/locations where the revenue has increased/decreased significantly.

Question 21.
In the case of a tender floated by a public sector undertaking, there were allegations that some of the parties have indulged in anti-competitive bidding in the tender. As a practising company secretary, how would you check that the company you represent has not indulged in any anti-competitive bidding?
Answer:
1. As a Practicing Company Secretary the following should be checked for ascertaining that the Company has not indulged in any anti – competitive bidding.

2. Following points required to be checked:

  • The company has not agreed to submit identical bids.
  • The company has not agreed as to who shall submit the lowest bid, agreements for the submission of cover bids.
  • The company has not agreed not to bid against each other.
  • The company has not agreed on common norms to calculate prices or terms of bids.
  • The company has not agreed to squeeze out outside bidders.
  • The company has not agreed on designating bid winners in advance on a rotational basis, or on a geographical or customer allocation basis.
  • The company has not agreed as to the bids which any of the parties may offer at an auction for the sale of goods or any agreement through which any party agrees to abstain from bidding for any auction for the sale of goods or any agreement through which any party agrees to abstain from bidding for any auction for the sale of goods, which eliminates or distorts competition.

Question 22.
Star Ltd. and its group company Earth Ltd. acquired shares of Mars Ltd. (the target company) over a period of time. On 17th December, 2014, Star Ltd. and Earth Ltd. were holding 13.86% and 4.74% shares respectively of the target company. Both these companies want to further acquire shares in the target company. You are asked to advise the companies whether these companies can freely acquire further shares in the target company as per the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Answer:
Provisions: As per regulation 3(1) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 which provides that no acquirer shall acquire shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, entitle them to exercise twenty-five per cent or more of the voting rights in such target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company in accordance with these regulations.

In the given case the holdings of Star Ltd. and Earth Ltd. in the target company (Mars Ltd.) is 13.86% and 4.74% which is collectively 18.60%. Both these companies want to further acquire shares in the target company. So as per the provisions of Regulation 3(1) of SEBI (SAST) Regulations, 2011 only if this further acquiring would result in entitling them to exercise 25% or more of the voting rights in such target company then they have to make open offer before acquiring such additional shares.

Question 23.
As a practicing company secretary, during the course of carrying out due diligence process of a merger and amalgamation, enumerate the obligations of target company and acquirer.
Answer:
Obligation of target company:
Once a Public Announcement is made, the board of directors of the Target Company is expected to ensure that the business of the target company is conducted in the ordinary course. Alienation of material assets, material borrowings, issue of any authorized securities, announcement of a buyback offer etc. is not permitted, unless authorized by shareholders by way of a special resolution by postal ballot.

The target company shall furnish to the acquirer within two working days from the identified date, a list of shareholders and a list of persons whose applications, if any, for registration of transfer of shares, in case of physical shares, are pending with the target company.

After closure of the open offer, the target company is required to provide assistance to the acquirer in verification of the shares tendered for acceptance under the open offer, in case of physical shares.

Upon receipt of the detailed public statement, the board of directors of the target company shall constitute a committee of independent directors to provide reasoned recommendations on such open offer, and the target company shall publish such recommendations and such committee shall be entitled to seek external professional advice at the expense of the target company.

The recommendations of the Independent Directors are published in the same newspaper where the Detailed Public-Statement is published by the acquirer and are published at least two working days before opening of the offer. The recommendation will also be sent to SEBI, Stock Exchanges and the Manager to the offer.

Obligations of the acquirer:
1. Prior to making the public announcement of an open offer for acquiring shares under these regulations the acquirer shall ensure that firm financial arrangements have been made for fulfilling the payment obligations under the open offer and that the acquirer is able to implement the open offer, subject to any statutory approvals for the open offer that may be necessary.

2. In the event the acquirer has not declared an intention in the detailed public statement and the letter of offer to alienate any material assets of the target company or of any of its subsidiaries whether by way of sale, lease, encumbrance or otherwise outside the ordinary course of business, the acquirer, where he has acquired control over the target company, shall be debarred from causing such alienation for a period of two years after the offer period.

However, in the event the target company or any of its subsidiaries is required to so alienate assets despite the intention to alienate not having been expressed by the acquirer, such alienation shall require a special resolution passed by shareholders of the target company, by way of a postal ballot and the notice for such postal ballot shall inter alia contain reasons as to why such alienation is necessary.

3. The acquirer shall ensure that the contents of the public announcement, the detailed public statement, the letter of offer and the post-offer advertisement are true, fair and adequate in all material aspects and not misleading in any material particular, and are based on reliable sources, and state the source wherever necessary.

4. The acquirer and persons acting in concert with him shall not sell shares of the target company held by them during the offer period.

5. The acquirer and persons acting in concert with him shall be jointly and severally responsible for fulfillment of applicable obligations under these regulations.

Question 24.
Compliance under SEBI (Substantial Acquisition of Shares and takeovers) Regulations, 2011 includes event based/continual disclosures and opening of an Escrow Account is one of the important event. Explain the Compliance required to be done for this purpose.
Answer:
As per Regulation 29 and Regulation 30 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 included event bases / continual disclosures. However, Regulation 17 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 provides for opening of an Escrow Account. The major provisions under this regulation are as under:

An escrow account has to be opened and the following sum has to be deposited.
The escrow amount shall be calculated in the following manner, as specified in Regulation 17:

For consideration payable under the public offer:

On the first 500 crores 25 per cent of the consideration
On the balance consideration An additional amount equal to 10% of balance consideration.

An open offer is made conditional upon minimum level of acceptance, hundred per cent of the consideration payable in respect of minimum level of acceptance or fifty per cent of the consideration payable under the open offer, whichever is higher shall be deposited in cash in the escrow account.

The consideration payable under the open offer shall be computed and in the event of an upward revision of the offer price or of the offer size, the value of the escrow amount shall be computed on the revised consideration calculated at such revised offer price, and the additional amount shall be brought into the escrow account prior to effecting such revision.

The escrow account referred to in sub-regulation (1) may be in the form of:

  • cash deposited with any scheduled commercial bank;
  • bank guarantee issued in favour of the manager to the open offer by any scheduled commercial bank; or
  • deposit of frequently traded and freely transferable equity shares or other freely transferable securities with appropriate margin.

However, securities sought to be provided towards escrow account under clause (c) shall be required to conform to the requirements set out in Regulation 9(2) of SEBI (SAST) Regulations, 2011.

Question 25.
Critically examine and comment on the following: “Due diligence investigations are generally for corporate mergers and acquisitions.”
Answer:
Due diligence investigations are generally for corporate acquisitions and mergers i.e. investigation of the Company being acquired or merged. The buyer or transferee company wants to make sure to know what is buying. Some other transactions where due diligence is appropriate could be:

  • Strategic Alliances and joint-ventures.
  • Strategic Partnership.
  • Partnership Agreements.
  • Outsourcing Arrangements.
  • Technology and Product Licensing.
  • Technology sharing and cross licensing agreements.
  • Distribution Relationship, etc.

Question 26.
Your Company intends to acquire another company. As a Company Secretary, describe the aspects you will check in the area of legal and regulatory framework for this acquisition.
Answer:
Following aspects will be checked in the area of legal and regulatory framework for this acquisition as discussed below:
Legal Framework for acquiring Company:

  • For Listed companies: SEBI (Substantial Acquisition of Shares and takeover) Regulations, 2011.
  • Section 186 and section 235 of Companies Act, 2013.
  • Income tax Act, 1961.
  • In case of cross border acquisition: FEMA provisions applicable.

Regulatory Aspects – The following Compliances are required to be checked under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011:
1. Whether any acquisition/transfer has triggered open offer?

2. Ensure that a merchant banker (Category I) has been appointed who is not an associate of or group of acquirer or the target company.

3. Ensure that an escrow account has been opened with the required deposit.

4. A letter duly authorizing target company to realize the value of escrow account as specified in these regulations.

5. An undertaking from the target company that none of the Acquirer/Persons Acting in Concert have been prohibited by SEBI from dealing in securities, in terms of direction issued under section 1 IB of SEBI Act.

6. An undertaking from the sellers, promoters, directors of the tar-get company that they have not been prohibited by SEBI from dealing in securities, in terms if direction issued under section 1 IB of SEBI Act.

7. An undertaking from the target company that it has complied with the provisions of Listing Agreement, and that any non-compliance or delayed compliance has been brought to the notice of Target Company.

8. An undertaking from the target company that it has complied with the provisions of these regulation and that any non-compliance or delayed compliance has been brought to the notice of Target Company.

9. Public announcement of an open offer to the shareholder of the target company has been given and detailed public statement has been published as per the prescribed timeline in case of “Acquirer” acquires the shares or voting rights of the target company in excess of the limits prescribed under Regulations 3 & 4.

10. The public announcement has been sent to all the stock exchanges on which the shares of the target company are listed, to SEBI and to the target company at its registered office within one working day of the date of the public announcement. The time within which the public announcement is required to be made to the Stock Exchanges under different circumstances is tabulated below. It is to be checked that following compliances have been made by the company.

11. A detailed public statement has been published by the acquirer through the Manager to the Open Offer within maximum 5 working days from the date of public announcement as provided in Regulation 13(4).

12. In case of indirect acquisition where none of condition specified in Regulation 5(2) are satisfied, the detailed public statement has been published not later than five working days of the completion of the primary acquisition of shares or voting rights in or control over the company or entity holding shares or voting rights in, or control over the target company.

13. The compliances relating to publication of public announcement and detailed public statement by the acquirer has been complied under Regulation 14 and the public announcement contains the information as provided in Regulation 15.

14. The acquirer through the manager to the offer has filed a draft letter of offer along with the fee as prescribed in Regulation 16 with SEBI for its observations within 5 working days of publication of Detailed Public Statement.

Question 27.
Your client is intending to enter into a major commercial agreement for collaboration. You as a Company Secretary have been asked to conduct due diligence for the prospective company. Which factors you will keep in mind while conducting due diligence?
Answer:
1. The goal of due diligence is to provide the party proposing the trans-action with sufficient information to make a reasoned decision as to whether or not to complete the transaction as proposed.

2. The following factors may be kept in mind in this regard:

  • Be clear about your expectations in terms of revenues, profits and the probability of the collaboration to provide you the same.
  • Consider whether you have resources to make the business succeed and whether you are willing to put in all the hard work, which is required for any new or collaborated venture.
  • Consider whether the prospective business gives you the opportunity to put your skills and experience to good use.
  • Learn as much as you can about the industry you are interested in from media reports, journals and people in the industry.
  • Once it is decided for a particular business make sure of the following things: Steps to be followed in due diligence process, areas to be checked, aspects to be checked in each area and information and other material to be requested from the seller.
  • In case the other party in the collaboration wants the process to get over as soon as possible and try to hurry the proceedings.
  • When the other party gives a short review period, negotiations can be made for adequate time to have a complete review on crucial financial and legal aspects.
  • All the information like financials, tax returns, patents, copyrights and customer base should be double checked to ensure that the company does not face a lawsuit or criminal investigation.
  • The financials are very important and one needs to be certain that the other company did not engage in creative accounting. The asset position and profitability of the company are vital.

Question 28.
Super Product Agro Ltd. is proposed to be merged in Geelanjali Ayurved India Ltd. What are the check points to be observed in due diligence with respect to payment of consideration for merger and amalgamation.
Answer:
Under the Regulation 21 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, following points should be observed:
1. For the amount of consideration payable in cash, the acquirer shall open a special escrow account with a banker to an issue registered with the Board and deposit therein, such sum as would, together with cash transferred under clause (b) of sub-regulation (10) of regulation 17, make up the entire sum due and payable to the shareholders as consideration payable under the open offer, and empower the manager to the offer to operate the special escrow account on behalf of the acquirer for the purposes under these regulations.

2. Subject to provisos to sub-regulation (11) of regulation 18, the acquirer shall complete payment of consideration whether in the form of cash, or as the case may be, by issue, exchange or trans-fer of securities, to all shareholders who have tendered shares in acceptance of the open offer, within ten working days of the expiry of the tendering period.

3. Unclaimed balances, if any, lying to the credit of the special es-crow account referred to in sub-regulation (1) at the end of seven years from the date of deposit thereof, shall be transferred to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009.

As per Section 236 read with Rule 27 of the Companies (Arrangement and Amalgamations) Rules, 2016. In case of purchase of equity shares of the minority shareholders of the company, following point shall also be considered by registered valuer:

1. In case of a listed company:

  • The offer price shall be determined in the manner as may be specified by the Securities and Exchange Board of India under the relevant regulations framed by it, as may be applicable; and
  • The registered valuer shall also provide a valuation report on the basis of valuation addressed to the board of directors of the company giving justification for such valuation.

2. In the case of an unlisted company and a private company:
(i) the offer price shall be determined after taking into account the following factors :
(a) the highest price paid by the acquirer, person or group of persons for acquisition during last twelve months.

(b) the fair price of shares of the company to be deter-mined by the registered valuer after taking into account valuation parameters including return on net worth, book value of shares, earning per share, price earning multiple vis-a-vis the industry average, and such other parameters as are customary for valuation of shares of such companies.

(ii) the registered valuer shall also provide a valuation report on the basis of valuation addressed to the board of directors of the company giving justification for such valuation.

Question 29.
The Report of the Official Liquidator in a scheme of amalgamation is a route map in any amalgamation process, which requires ample information from the parties involved in a Corporate Amalgamation. Provide the list of information to be furnished by them respectively to Auditor appointment by the Official Liquidator.
Answer:
Following Information is required to be furnished to the Auditors appointed by the Official Liquidator.

From the transferor company:

  • Certified true copy of the scheme of amalgamation along with the petition.
  • Certified true copy of the Memorandum and Articles of Association of the company.
  • List of shareholders of the company with their shareholding. Any changes during the last five years to be indicated.
  • Accounts of the company made up to the appointed day of amalgamation.
  • Address of the registered office of the company.
  • Present authorised and paid-up share capital of the company.
  • Changes in the Board of directors during the last five years along with list of present Board of directors.
  • Auditors reports for the last 5 years.
  • List of associated concern in which directors are interested.
  • List of various appeals pending under Income-tax, Sale Tax, Excise Duty, Custom Duty, FEMA, etc.
  • Details of loans and advances given to the associated concern/ companies under the same management during the last five years.
  • Details of revaluation of assets.
  • Details of any allegations and/or complaints against the company.
  • Details of amount paid to the managing director, directors or any relative of the directors during the last five years.
  • Comparative statement of profit and loss.account and balance sheet for the last five years.
  • Details of bad debts written off during the last five years.
  • Statutory Register and List of all charges registered with the Registrar of Companies and the amount secured against the same.
  • Copy of the latest annual return filed with the Registrar of Companies along with Annexure.

Details of all the subsidiary companies:

  • Authorised and paid- up share capital of the company;
  • List of present shareholders along with details of changes in the shareholding patterns during the last five years;
  • Shareholding details.

The auditors may also require the following records of the transferor company for examination:

  • Books of Account and relevant records for the last five years.
  • Minutes book of Board and General Meetings.
  • Statutory Registers.

From transferee company:

  • Names of the existing directors of the company.
  • List of common shareholders of the companies involved in the amalgamation with individual shareholding.
  • Authorised and paid up capital of the company.
  • Copy of latest audited balance sheet.

Question 30.
Merger and Amalgamation aims at stability, development and expansion of business prospects, the decision being based on a prudent due diligence process. Draft a due diligence process in a tabular form involving buyer and seller.
Answer:
Due Diligence Process in the M&A Strategy:

Stages For Buyer For Seller
Preparation Stage 1. Merger and Acquisition Strategy formulation.
2. Preparation of list of potential targets.
3. Appoint external advisor for evaluation of targets.
4. Shortlist targets.
5. Create due diligence.		 1. Structure a business plan
2. Preparation of list of potential buyers
3. Appoint external advisor
4. Shortlist buyers.
Pre diligence 1. Approach targets
2. Negotiation of initial terms.
3. Execute non disclosure agreement compilation of list of data required.		 1. Approach buyers.
2. Negotiate initial terms.
3. Execution of non Disclosure Agreement.
4. Creation of data room.
Due diligence 1. Inspection of data room.
2. Analysis of private documents.
3. Evaluation of risk and return
4. Structure of terms and conditions.		 1. Assistance of data room.
2. Setting deadlines for offer.
Negotiations 1. Make final offer.
2. Negotiate and agree on terms.		 1. Compile final offers.
2. Select best offers.
3. Negotiations.
Post diligence Post merger integration and cultural adjustments. Termination of data room and ownership exchange.

Question 31.
Sun Chemicals Ltd., a chemical speciality company proposes to get itself merged with Star Industries Ltd., a pioneer in chemicals, fertilizers and plastic moulds having a market share of more than 40%. List out the basic information that the Company may require under the scheme of amalgamation.
Answer:
The Scheme of amalgamation to be prepared by the Company containing the following information:

  1. Brief history of the companies seeking approval.
  2. Rationale of the proposed Scheme of Amalgamation.
  3. Nature of business of transferor and transferee Company.
  4. Listing status of transferor and transferee companies.
  5. Detailed valuation report with related calculations on the basis of which the swap ratio is determined.
  6. Financial details (Annual Reports) of the transferor and transferee company for last 3 years.
  7. Provisional Net Worth (excluding revaluation reserve) certificate of the transferee company pre and post amalgamation.
  8. Details of directors and promoters of the transferor and transferee company pre and post amalgamation and clarification regarding change in management control if any.
  9. Details about the cross holdings between the companies, if any.
  10. Definitions of the transferor and transferee as well as the definition of the undertaking of the transferor company.
  11. Authorized, issued and subscribed capital of transferor and transferee companies.
  12. Basis of scheme should be explained briefly on the recommendation of the valuation report, covering the assets/liabilities. Specific date, reduction or consolidation of capital, application to financial institutions as lead institution for permission etc.
  13. Change of name, objective and accounting year.
  14. Protection of employment
  15. Dividend position and prospects.
  16. Management structure, indicating the number of directors of the transferee company and the transferor company.
  17. Applications under the provisions of the Companies Act to obtain approval from the High Court.
    Expenses of Amalgamation.
  18. Conditions of the scheme to become effective and operative and the effective date of amalgamation.

Question 32.
You are engaged by a bank for conducting the due diligence on behalf of the bank and submission of Diligence Report. What are the check points to be observed which may be concluded as suggested alerts?
Answer:
The following check points should be observed which can be concluded as Suggested alerts:

  1. Disproportionately large cash payments in relation to normal requirements in a company of its size.
  2. Frequent circular transactions between various bank accounts.
  3. Inordinate delay in submission of stock statements/book debts/quarterly filings to the Bank(s).
  4. Delay/default in meeting statutory payments.
  5. Frequent delays and non compliances with both legal and financial.
  6. Any apparent unrelated payment(s) that come to notice.
  7. Disproportionate holding of Work-in-progress (WIP).
  8. Regular on account payments to creditors.
  9. Regular on account payments from debtors.
  10. Any differential pricing system to associates.
  11. Any attachment of bank accounts from statutory authorities (input from bank).
  12. Borrowings from unconventional sources.
  13. Dishonour of cheques.
  14. Unduly large sales returns/return of bills.
  15. Lack of tie ups in project finance resulting in diversion of short term funds.
  16. Winding-up cases if any filed against the company.
  17. Insolvency proceedings against any of the promoter(s)/ director(s).

Question 33.
“The RBI vide its circular No. RBI/2008-2009-313/DBOD No. B.P. BC 94/08.12.001 /2008-2009 dated 8th December, 2008 advised the banks to strengthen their information back-up about the borrowers enjoying credit facilities from multiple banks.” What are those advices?
Answer:
As per RBI vide its circular No. RBI/2008-2009-313/DBOD No. B.R BC 94/08.12.001/2008-2009 dated 8th December, 2008 advised the banks which are given below:
1. The format for declaration of information by the borrower at the time of applying for a credit facility to a bank and the format for exchange of information among the banks in respect of borrowers enjoying credit facilities from more than one bank enclosed to the aforesaid circular have been revised to reflect information relating to the derivatives transactions entered into by banks with the borrowers and the unhedged foreign currency exposures of the borrowers.

2. Banks are advised to use the revised formats with immediate effect.

Question 34.
M/s S.Core Advisory Services Pvt. Ltd. has submitted its bid invited through International Bidding Process by RE Textiles & Yarns Ltd. being a lowest bid, the letter of award was issued in favour of M/s S.Core Advisory Services Pvt. Ltd. for providing consultancy services to set up a Knitting Fabric Plant at Maharashtra. M/s S.Core Advisory Services Pvt. Ltd. is already providing consultancy services to various organizations in India and outside India.

RE Textiles & Yarns Ltd. asks M/s S.Core Advisory Services Pvt. Ltd. to enter into a Non Disclosure Agreement. The Agreement is proposed to be signed at Mumbai. The Management of RE Textiles & Yarns Ltd. wants to include the following clauses in the Agreement:
(1) No Title to Use
(2) No Obligation to Disclose, No Representations
Prepare a brief note on above two clauses required to be included in the Non-Disclosure Agreement.
Answer:
The Model contents of the clauses to be included in the Non-Disclosure Agreement are as under:
(1) No title of Use:
Nothing contained in this Agreement shall be construed as conferring upon the Receiving Party any right of use in or title to Confidential Information received by it from the Disclosing Party, other than as expressly provided herein.

(2) No Obligation to Disclose No Representations: Nothing in this Agreement shall be construed as –

  • creating an obligation on any of. the Parties to disclose particular information; or
  • creating an obligation on the parties to negotiate; or
  • as a representation as to the accuracy, completeness, quality or reliability of the information.

Question 35.
How does Enhanced Due Diligence (EDD) in KYC differ from Customer Due Diligence (CDD) in KYC?
Answer:
Customer Due Diligence (CDD) refer to identifying and verifying the customer and the beneficial owner, CDD refers to the monitoring of clients and their activities to see if the client does not change its status over time. For example changes in the signatory of the account, changes in the partners, changes in the object, changes in the source of income, revenue etc. hence without CDD the services provider would not know that there is changes in the ownership.

On the other hand, Enhanced Due Diligence (EDD) refers to a rigorous and robust process of investigation over and above (KYC) procedures, that seeks with reasonable assurance to verify and validate the customers identity; understand and test the customers profile, business and account activity; identify relevant adverse information and risk assess the potential for money laundering and/or terrorist financing to support actionable decisions to mitigate against financial, regulatory and reputational risk and ensure regulatory compliance.

Question 36.
ABC Ltd. has got the licence for setting up of a Rubber enterprise in State of Tamil Nadu. While providing the environmental clearance, Ministry of Environment, Forest and Climate Change imposes the condition for audit to check the compliances of norms issued with respect to environment. The company engages C & Co. Practicing Company Secretary (PCS) for this specific purpose. Prepare a note on Environmental Due Diligence as the PCS.
Answer:
To,
XYZ Ltd.
Re: Environment Due Diligence for setting up of a Rubber enterprises in the State of Tamil Nadu.
Dear Sir,
We need your kind attention that audit of the compliance of environment norms and the environmental due diligence is scheduled on _________. In this regard, we request you to please avail the following documents and records for audit on the schedule dates :

  • List of environmental permits and licenses and validities of the same.
  • All correspondence and notices with Environment Protection Agencies, state, or local regulatory agencies.
  • Whether the company’s disposal methods of various by products are in sync with the regulatory guidelines.
  • Whether there are any contingent environmental liabilities or continuing indemnification obligations.
  • We further inform you that as a part of the Environmental due diligence process, we will also review and prepare the detailed assessment report based on the historic, current and potential future environmental risks associated with the proposed locations at Tamil Nadu and for its operations. The process involve the risk identification and assessment with respect to :
  • Environmental setting and history of the site.
  • Assessment of the site conditions.
  • Operations and management of sites.
  • Confirmation of legal compliance and pollution checks from regulatory authorities etc.

Accordingly, We request you to please provide the records and avail-able for the Audit on the scheduled dates.
Regards,
CS _________
C & Co.
Company Secretary in Practice

Question 37.
There are various heads under which due diligence of Competition Law can be carried out. Explain.
Answer:

  1. Due diligence of competition law may be made under the following heads:
  2. Due diligence of various agreements (both existing and proposed).
  3. Due diligence on dominance and its likely abuse, if any (existing).
  4. Due diligence on combinations (i.e., effect of proposed mergers & acquisition).

Due Diligence of various agreements includes :

  1. Agreements relating to production, supply and distribution of goods or services.
  2. Agreement if any with competitor relating to production, marketing or bidding, price etc.
  3. Agreements with customers and distributors.
  4. Purchase agreements.
  5. Non-compete covenants.
  6. Technology transfer/technical know-how agreements.
  7. Concession agreements.

Due diligence on abuse of dominance if any includes :

  1. Examination as to the existence of dominance.
  2. Examination of relevant market, whether product or geographical Areas.
  3. Cases of abuse if any.

Due diligence on regulation of combinations : The following aspects are to be analysed during due diligence process :

  1. Nature of combination.
  2. Acquisition of share, voting rights, assets or control or merger/ amalgamation etc.
  3. Examination of total value of Assets or Turnover and the valuation methodology.
  4. Status of merger notification to be filed with Competition Commission of India.
  5. Status of dominance after merger.

Question 38.
Explain the due diligence for issue of securities by a Company.
Answer:
Due diligence for Issue of Securities by a Company :
The key regulation governing the issue of securities and preparation of financial information are :

  1. The SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009/2018.
  2. The SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015.
  3. The SEBI ICDR Regulations provide the guidelines relating to conditions for various kind of issue including public and right issue; the ICDR Regulations provide detailed provisions :
  4. Relating to public issue such as conditions an Initial Public Offering (IPO) and Further Public Offer (FPO) Conditions.
  5. Relating to pricing in public offering, conditions governing promoters contribution, restriction on transferability of promoters contribution, minimum offer to public, reservations, manner of disclosures in offer documents etc.

The SEBI (LODR) Regulations, 2015 lay down the broad principles for periodic disclosure to be given by the listed entities operating in different segments of capital markets.

While the specific requirements in connection with issue of securities are different under the Companies Act, 2013 and SEBI Laws & Regulations made thereunder, any non-compliance in these regulations are generally impose liability if the offering memorandum or prospectus contains a materially incorrect or misleading statement or omits a material fact.

Question 39.
What is the need off Due Diligence?
Answer:
The necessities of the due diligence are as follows:

  1. To investigate into the affairs of business as a prudent business person.
  2. To confirm all material facts related to the business.
  3. Financial statements.
  4. Assets, intellectual property, brand value etc.
  5. Unpaid tax liens and/or judgments.
  6. Past business failures and consequential debt.
  7. Exaggerated credentials/Fraudulent claims.

Question 41.
What items needs to be checked while conducting Intellectual Property Right Due Diligence?
Answer:
Following items needed to be checked while conducting Intellectual Property Right due diligence:

  1. Pending patents clearance documents.
  2. Any pending claims case by or against the company in violation of intellectual property.
  3. Schedule of patents and its application.
  4. Schedule of copyrights, trademarks and brand names.

Question 42.
What are the areas that should be examined and reviewed during payroll and labour due diligence?
Answer:
For payroll and labour due diligence the auditor should examine and i review the following areas:

  1. Labour law regulations and agreements.
  2. Employment contracts, amendments to employment contracts.
  3. Information, job descriptions.
  4. Legal declarations/agreements regarding termination of employment.
  5. Maintenance of records.
  6. Verification of compliance by contractor engaged by the company.
  7. Observing liability as principal employer.

Question 43.
Explain the primary components of the Competition Law Due Diligence?
Answer:
Primary components of Competition Law due diligences are:

  1. An examination of selected company documents.
  2. Interviews with selected company personnel.
  3. Identify specific business activities that potentially could create anti-trust exposure for the company.
  4. The results of the due diligence may suggest an enterprise to have an effective competition law compliance programme.
  5. The results of the due diligence may result in variation of deal value, withdrawal of deal and also make suggestions to structure a compliance program.
  6. How to go about the process of due diligence of competition law.

Question 44.
How the scheme of amalgamation to be prepared by the Company?
Answer:
The scheme of amalgamation to be prepared by the company should contain inter alia the following information:

  1. Definitions of transferor and transferee as well as the definition of the undertaking of the transferor company.
  2. Authorised, issued and subscribed capital of transferor and transferee companies.
  3. Basis of scheme should be explained briefly on the recommendation of valuation report, covering transfer of assets/liabilities, specified date, reduction or consolidation of capital, application to financial institutions as lead institution for permission, etc.
  4. Change of name, object and accounting year.
  5. Protection of employment.
  6. Dividend position and prospects.
  7. Management structure, indicating the number of directors of the transferee company and the transferor company.
  8. Applications under sections 230 and 232 of the Companies Act, 2013 to obtain approval from the Tribunal.
  9. Expenses of amalgamation.
  10. Conditions of the scheme to become effective and operative and the effective date of amalgamation.

Question 45.
What are Information/Documents that can be required by the Regional Director, Ministry of Corporate Affairs in connection with Amalgamation?
Answer:
Following information is required by the Regional Director, Ministry of Corporate Affairs in connection with Amalgamation:

  1. Balance sheets for last five years of the transferee company.
  2. Balance sheets for last five years of the transferor company.
  3. Two copies of the valuation report of the valuer.
  4. List of top shareholders of the transferee company.
  5. List of top shareholders of the transferor company.
  6. List of directors of the transferor company and their other directorships.
  7. List of directors of the transferee company and their other directorships.
  8. Number and percentage of NRI and foreign holding in the transferee and transferor companies.
  9. Rights/Bonus/Debentures Issues made by.the transferee and the transferor companies in the last five years.

Question 46.
What are the objectives of Due Diligence?
Answer:
The objective of due diligence is to verify the strategic identification or attractiveness of the target company, valuation, risk associated etc. The objective of due diligence may be to:

  1. Collection of material of information.
  2. Identification of strength and threats and weaknesses.
  3. To improving the bargaining position.
  4. Identification of areas where representations and warranties are required.

Question 47.
What terms are used to define the outcome of due diligence report?
Answer:
There are certain terms used to define the outcome of these reports:
1. Deal Breakers: In this report the findings can be very glaring and may expose various non-compliance that may arise any criminal proceedings or known liabilities.

2. Deal Diluters: The findings arising out a diligence may contain violations which may have an impact in the form of quantifiable penalties and in turn may result in diminishing the value of company.

3. Deal Cautioners: It covers those findings in a diligence which may not impact the financials, but there exist certain non-compliances which though rectifiable, require the investor to tread a cautious path.

4. Deal Makers: Which are very hard to come by and may not be a reality in the strict sense, are those reports wherein the diligence team have not been able to come across any violations leading them to submit what is called a ‘clean report’.

Question 48.
“All parties in the Due diligence team to be confident that the established team is for good positive business and industry-wide growth”. Such processes are built on the four cornerstones. Discuss those four cornerstones?
Answer:
All parties in the Due diligence team to be confident that the established team is for good positive business and industry-wide growth. Such processes are built on the following four cornerstones:

1. Know your client: All businesses have risks, and these c,an vary significantly dependent on the nature of the company and the services being operated. It is important to know your client so you’ can properly identify the risks involved and assess how to manage them.

2. Properly identify the risks: This goes beyond listing risks, or simply identifying larger more obvious risks that may affect any commercial dealings. It involves proper consideration of the range and types of risks associated with particular clients and the services they provide, taking into account all the circumstances.

3. Actions taken to control any risks: Once risks are identified, industry members must make a proper assessment of the issues that would arise if incidents occur and take proportionate steps to minimise the likelihood of such issues resulting in consumer harm.

4. Responding to incidents: A business makes significant effort to comply with regulations and legal requirements, they may not be immune to problems arising. Providers have to be prepared to respond calmly and proactively to incidents working closely with the regulator and other parties in the value chain to identify, mitigate and correct any consequences providing support to consumers.

Question 49.
What points are covered under FEMA due diligence.
Answer:
Following points are covered under FEMA due diligence:

  1. Capital Accounts transactions.
  2. Current account transactions.
  3. Currency Transactions.
  4. Regulations, Master Directions and Circulars issued by RBI.
  5. FDI Policy approvals.
  6. Setting up of Business through Liaison office, Branch office, project office, wholly owned subsidiaries,
  7. joint ventures, foreign institutional investors, and foreign venture capital investor, Non-Resident of India/ person of Indian origin.

Question 50.
Write short note on: “Reporting requirement under FCRA”.
Answer:
The reporting requirement under the FCRA includes the submission of annual returns. All NGOs are required to submit their annual returns to the federal government within nine months from the closure of the previous financial year. This return has to include all the details of the contributions received, namely:

  • Source and manner in which it is received.
  • Purpose for which it was received.
  • Manner of usage of the contributions.

Secretarial Audit Compliance Management and Due Diligence ICSI Study Material