CORPORATE FINANCIAL MODELS

CORPORATE FINANCIAL MODELS ARE FORMAL REPRESENTATIONS OF A COMPANYS OPERATIONS AND PROCESSES IN FINANCIAL TERMS. SUCH MODELS, INTER ALIA, HELP MANAGEMENT TO:

Analyse the inter-relationships between investment and financing alternatives available to the firm. Project the financial future of the company under various assumptions. Decide among various alternatives. Monitor performance vis--vis pre-determined targets.
There are two broad types of corporate financial models: Optimisation models and simulation models. An optimisation models seeks to maximise a certain objective function subject to various constraints. A simulation model, on the other hand, essentially seeks to answer what if questions. While optimisation models are conceptually more elegant, simulation models are far more popular in practice.

MODEL DEVELOPMENT THE EXPERIENCES OF THE COMPANIES WHICH HAVE UNDERTAKEN FINANCIAL MODELLING HAS LEAD TO A FAIRLY STANDARD APPROACH TO MODEL DEVELOPMENT. THIS INVOLVES THE FOLLOWING STAGES:
1. 2. 3. 4. 5. 6. Feasibility study. Construction of model logic Programming and debugging Documentation Implementation Updating and extension

These stages though given sequentially , in practice tend to overlap and the process is somewhat iterative.

IMPROVING FINANCIAL MODELLING

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

BOTTOM UP APPROACH: Typically simulation models follow a bottom-up approach wherein the inputs of lower and higher level management are treated together. This easily produces a tree versus forest problem and can lead to an undue emphasis on lower level inputs and neglect of more important concerns. INADEQUATE REPRESENTATION OF FINANCIAL POLICIES: In financial simulation models, management policies are generally represented in a very simplistic and inadequate manner.
INEFFICIENT SCREENING OF FINANCIAL PLANS: In the absence of a well- defined objective, a simulation model is not an efficient device for screening various financial plans.

CONDITIONS FOR THE SUCCESSFUL USE OF MODELS

While corporate financial models are powerful tools, evidence indicates that many such models have been either partial successes or, even worse, downright failures. Experiences of companies suggest that the following conditions, if fulfilled, significantly enhance the likelihood of successful use of corporate financial models: The operations of the business models must be understood well. Relevant data of good quality is available. The modelling project must be enthusiastically supported by top management. Well defined budgetary and planning systems. Involvement of potential users in the development process Expression of inputs and outputs in familiar format In the initial stages, the modelling project should be kept as simple as possible. Opportunistic introduction There must be abundant allowance for judgemental inputs Primary responsibility with a manager Clarity of roles and Proper orientation and education of users.

SUGGESTIONS TO IMPROVE FINANCIAL MODELLING IN PRACTICE

1. 2. Follow a top down approach in building the model. This will ensure that the model will concern itself with the key financial decisions of the firm. Avoid cluttering the model with excessive detail. If the model is relatively with a sharp focus on key financial decisions it will have a greater appeal to management. Use an optimising framework, using a methodology like linear programming. Such a model will develop, as its output, the key financial decisions. Explore through a series of computer runs the implications of various managerial policy requirements on the optimal set of financial decisions. It must be appreciated that the programming framework has the power to answer the same questions as budget compilers and even more Inject greater financial theory in otherwise accounting-dominated models. Since the model is primarily a device for financial decision-making, it should display a greater degree of sophistication in reflecting financial issues.

3. 4.

5.

INFLATION AND ASSET VALUATION

In an inflationary period, the book value of assts, typically reflecting historical costs less accumulated depreciation, do not reflect their true values. Hence it may be worthwhile to consider revaluation of assets periodically so that the asset value shown in the balance sheet reflect economic reality more accurately. OBJECTIVE OF REVALUATION: Revaluation of assets is undertaken with one or more of the following objectives in mind: To attract investors by indicating to them the current value of assets To make depreciation provision which will enable the firm to meet replacement needs adequately. To provide a more reasonable and accurate perspective regarding the true worth of assets in the event of a possible takeover or merger. To help management in (i) assessing the true profitability of different divisions, (ii) formulating a more sensible dividend policy, (iii) pricing its products realistically, (iv) fixing the machine hour rates in a job order situation, and (v) determining the desirable insurance cover for the assets. To enhance the borrowing capacity of the firm

CONCEPT AND MEASURE OF VALUE

For purpose of valuing (revaluing) assets, the following concept is widely followed The value of property (or asset) to its owner should be identical to the loss, direct and indirect, the owner might expect to suffer if he is deprived of the property (or asset) Three broad categories of measures have been suggested for valuation of assets, as represented by loss on deprivation . These are: Replacement cost Realisable value and Economic value

MEASURE OF VALUE
REPLACEMENT COST: This is the cost that will be incurred to replace the asset. It may be measured in terms of (i) gross current replacement cost or (ii) net current replacement cost. REALISABLE VALUE: This represents the value that can be realised on the disposal of the asset. It may be measured as (i) the current open market sales value of the asset, or (ii) the forced sale value of asset, i.e. the amount likely to be obtained for the asset if the same is sold under conditions adverse to the seller. ECONOMIC VALUE: This denotes the value derivable from the economic use of the asset. It may be calculated as (i) the value related to the earnings potential of the asset, or (ii) the alternative use value. i.e. the value of the asset for a prospective purpose other than the purpose for which it is used at present, or (iii) the going concern value, i.e. the value of the asset to a firm, assuming that the firm will be a going entity.

CHOICE OF MEASURE

1. 2. 3. 4. 5. 6.

Before we decide the measure to be adopted we need to look at the six possible relationships among these measures: Case I : Realisation value > Economic value > Replacement cost Case2 : Realisation value > Replacement cost> Economic value Case3: Economic value > Replacement cost> Realisation value Case4: Economic value > Realisation value > Replacement cost Case5: Replacement cost> Economic value > Realisation value Case6: Replacement cost> Realisation value>Economic value In cases I and 2, as the realisation value exceeds the economic value, it is advantageous to dispose the asset rather than use it. However, the maximum loss suffered by the firm, using the deprivation principle in these cases is the replacement cost, not the realisation value, because by buying another asset of the same type , the firm can restore the deprivation suffered by it.

CHOICE OF MEASURE In cases 3 and 4, as the economic value is greater than the realisation value, it is advantageous to use the asset rather than dispose it. However, here too, as in cases 1 and 2, the loss suffered by the firm, when deprived of the asset is the replacement cost. In case 5, the loss suffered by the firm, if it is deprived of the asset, is the economic value of the asset. Hence, this represents the value of the asset In case 6 , the loss suffered by the firm, if it is deprived of the asset, is the realisation value of the asset hence this is the measure of asset value in this case. Out of the above cases 1, 2 and 6 may be discarded for all practical purposes because for industrial assets realisable value cannot exceed economic value. Thus for cases 3, 4 and 5, the basis for valuation shall be as follows: Case 3 : Replacement cost ; Case 4: Replacement cost Case 5: Economic value The specific measures to be employed may be as follows: Replacement cost : Net current Replacement Cost Economic Value: Present value of earnings expected from the use of the asset.

DIVERGENCE OF INTEREST
As long as the firm is owned and managed by the same person, there is no room for conflict. As the stake of managers in the ownership of the firm diminishes the scope for agency problem increases. In a typical joint stock company, where managers have very little stake in ownership they are likely to act in ways that incompatible with the interest of shareholders. The forces leading to divergence between the goals of managers and shareholders have been referred to as the institutional imperative. The consequences of this divergence is that it leads to adoption of different yardsticks and possible conflicts. The key differences, are as shown in the next exhibit.

DIVERGENCE OF INTEREST
Types of decisions Performance Measurement Investment proposals Managements yardstick Cash Flow Shareholders yardstick Shareholder rate of return Opportunity cost of capital Areas of possible conflict Ranking of investment alternatives Hurdle rates

Historical rate of return

Financing sources

Pecking order: (a) Retained earnings (b) Debt, and (c) Equity
Firm risk

Pecking order: (a) Debt (b) retained earnings and (c) equity
Portfolio risk

Extent of financing

Risk Management

Degree of diversification

DEVICES FOR CONTAINING AGENCY COSTS

To mitigate agency costs, a variety of devices have evolved. Some are internal and some are external. Internal Devices: The key internal devices for containing agency costs are:- internal monitoring and incentive compensation contracts. Internal Monitoring: Most organizations have fairly well developed internal systems of performance monitoring and responsibility accounting. Workers are supervised by lower level managers. Lower level managers are monitored by middle level managers who in turn, are supervised by top level management. Finally, the top level management is accountable to the board of directors. The hierarchical monitoring structure tends to reduce the agency costs within the firm. Incentive Compensation Contracts: Agency problems arise because of lack of alignment of the interests of shareholders and management. To make these interests more congruent, managerial compensation may be linked to shareholder returns. A number of firms seek to provide incentive to management in the form of stock options, performance bonuses, and so on, to reduce agency costs.

DEVICES FOR CONTAINING AGENCY COSTS

There are two important external devices for containing agency costs the market for corporate control and the managerial labour market. Market for Corporate Control: When internal control devices do not work, the market for corporate control may act as a deterrent on managerial behaviour that dissipates shareholder value. Also referred to as the takeover market, it is a market in which the right to control represented by a chunk of equity holding that is sufficient to wield control is traded. Proponents of takeover argue that an active market for control is a good external disciplining device. Defending raiders, who seek to wrest control by acquiring a sufficient equity stake, it can be said that they help in rescuing hapless shareholders from the clutches of inept management. contd..

DEVICES FOR CONTAINING AGENCY COSTS

Managerial Labour Market: Along with the market for corporate control, the market for managers tend to check agency problems. In their search for better prospects, managers participate in the managerial labour market now and then. Hence they have an interest in establishing a reputation and track record for performance. Spendthrifts and wastrels, who destroy shareholder wealth, obviously have a weak demand for their services in the managerial labour market. This market can make a manager pay a price for self serving behaviour. However, many argue that this market may not be a very effective disciplining device because of the difficulty of isolating the effect of managerial action from other influences which shape a firms performance.

CONCEPT OF ECONOMIC VALUE ADDED(EVA)

It is a popular measure currently being used by several firms to determine whether an existing/proposed investment positively contributes to the owners/shareholders wealth. The EVA is equal to after-tax operating profits of a firm less the cost of funds used to finance investments. A positive EVA would increase owners value/wealth. Therefore, only investments with positive EVA would be desirable from the viewpoint of maximising shareholders wealth. Shareholders must earn sufficient returns for the risk they have taken in investing their money in companys capital. The return generated by the company for shareholders has to be more than the cost of capital to justify risk taken by the shareholders. If a companys EVA is negative, the firm is destroying shareholders wealth even though it may be reporting positive and growing EPS or Return on Capital employed.

CONCEPT OF ECONOMIC VALUE ADDED(EVA) EVA is just a way of measuring an operations real profitability. EVA holds a company accountable for the cost of capital it uses to expand and operate its business and attempts to show whether a company is creating real value for its shareholders. EVA is a better system than ROI, to encourage growth in new products, new equipment and new manufacturing facilities. EVA measurement also requires a company to be more careful about resource mobilisation, resource allocation and investment decisions. It effectively measures the productivity of all factors of production. The computation of the after-tax operating profits attributable to the investment under consideration as well as the cost of funds used to finance it would, however, involve numerous accounting and financial issues.

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

CONCEPT OF ECONOMIC VALUE ADDED(EVA)

EVA can be calculated as follows: EVA = NOPAT (TCE x WACC) where, NOPAT = Net operating profit after tax TCE = Total capital employed WACC = Weighted average cost of capital While calculation of NOPAT, the non-operating items like dividend/interest on securities invested outside the business, nonoperating expenses etc will not be considered. The total capital employed is the sum of shareholders funds as well as loan funds. But this does not Include investments outside the business. In determining WACC, cost of debt is taken as after tax cost and cost of equity is measured on the basis of Capital Asset Pricing Model. Under CAPM cost of equity (Ke) = Rf + Bi(Rm Rf) where Rf = risk free return Rm =expected market rate of return and Bi = risk coefficient of particular Investment. EVA is expressed in terms of rupee figure and not as a Percentage. In EVA calculation total capital employed in the business is taken, whether provided by shareholder or creditors. The EVA figure measures the value added after the claims or expectations of each of the group of capital providers have been met.

EVA VS. RESIDUAL INCOME EVA is just a refinement of residual income Residual income is defined as the difference between profit and the cost of capital. It differs from EVA in the fact that profits and capital employed are book figures i.e the same appearing in the financial statements. No adjustment to profit and capital employed figures as reported in the profit and loss account and balance sheet are made unlike EVA. IMPROVING EVA: EVA can be improved in any of the following ways: Increasing NOPAT with the same amount of capital Reducing the capital employed without affecting the earnings ie by discarding the unproductive assets. Investing in those projects that earn a return greater the coc By reducing coc , which means employing more debt which is cheaper than equity or preference capital

EVA AND MANAGERIAL PERFORMANCE

FIRMS COMPETE WITH EACH OTHER FOR GETTING THE SCARCE CAPITAL FROM THE SHAREHOLDERS. TO BE ABLE TO GET THE CAPITAL, FIRM MUST PERFORM BETTER THAN THOSE OF THE COMPETITOR. IT MUST EARN MORE THAN THAT EARNED BY SIMILAR RISK SEEKERS. IF IT CAN ACHIEVE THIS OBJECTIVE IT HAS CREATED VALUE FOR THE SHAREHOLDERS AND ITS STOCK PRICE WILL COMMAND A HIGHER PREMIUM IN THE MARKET. IN USING THE EVA SYSTEM EMPLOYEES FOCUS ON HOW THE C APITAL IS BEING USED ON THE CASHFLOWS GENERATED TO IT. EVA MAKES MANAGERS CARE ABOUT MANAGING ASSETS AS WELL AS INCOME, AND HELPS THEM PROPERLY ASSESS THE TRADEOFF BETWEEN THE TWO. EVA FORCES MANAGERS TO FOCUS ON ALUE CREATING ACTIVITIES RATHER THAN WASTING TIME AND ENERGY ON PLAYING WITH THE ACCOUNTING PRINCIPLES.

SUPERIORITY OF EVA
EVA is a superior measure of corporate performance and reflects all the dimensions by which management can increase value. It helps in creation of wealth on the following grounds: EVA is most directly linked to the creation of shareholders wealth over time. The mechanism of EVA forces management to expressly recognise its cost of equity in all its decisions from the board room to the shop floor An EVA financial management system removes all the inconsistencies resulting from the use of different financial measures for different corporate functions under the typical traditional financial management system as its ties all the functions for instance valuing an acquisition, assessing performance, communicating, considering strategic plan alternatives or rewarding management to one single measure the effect on shareholder value and thus provides a meaningful target to pursue for both internally and externally oriented decisions. EVA compensation system ties managements interest with those of shareholders and the value creation motion will permeate to the whole organisation.

SUPERIORITY OF EVA
EVA captures the performance status of corporate system over a broader canvas i.e. to arrive at true profits, cost of borrowed capital as well as cost of equity capital should be deducted from net operating profits. Further to maximise earnings is not sufficient, at the same time consumption of capital should be minimum/optimum under an EVA based system. EVA framework provides a clearer perception of the underlying economics of a business and enables any manager to make better decisions. A regular monitoring of EVA throws light on the problem areas of a company and thus helps the management to select the one that will best serve shareholders. It is used to assess the likely impact of competing strategies on shareholder wealth and thus helps managers to select the one that will best serve shareholders. It also fits well with the concepts of corporate governance and thus considered to be the best corporate governance system. EVA bonus systems do this by giving employees an ownership stake in improvements in the EVA of their divisions or operations. This causes employees to behave like owners and reduces or eliminates the need for outside interference in decision making.

STEPS IN IMPLEMENTATION OF EVA

- Create systems facilitating proper resource and asset allocation and transfer pricing - Create EVA Stretch-Goals and benchmark them - Define EVA of business units, strategic groups, project teams. PROVIDE MANAGEMENT TOOLS USING EVA - Refine capabilities & investing techniques to ensure only value adding projects are taken up - Identify EVA drives and operating measures - Report EVA of the business division, team or project on a regular basis

MEASURE EVA

STEPS IN IMPLEMENTATION OF EVA

MOTIVATE PEOPLE ON THE BASIS OF EVA - Adopt an EVA based incentive compensation and appraisal system. - Create a long term At-Risk Bonus Plan to replace the Annual Bonus Incentive Plan. MINDSET building concepts. - Train people in the organisation in EVA and value

- Teach them to focus on one objective maximising EVA.

STEPS IN IMPLEMENTATION OF EVA

MEASUREMENT : Any company that wishes to implement EVA should institutionalise the process of measuring the metric, regularly. This measurement , should be carried out after carrying out the prescribed accounting adjustments. MANAGEMENT SYSTEM : Further, the company should be willing to align its management system to the EVA process. The EVA based management system is the basis on which the company should take decisions related to the choice of strategy, capital allocation, M & A, divesting business and goal setting. MOTIVATION : Companies should decide to implement EVA only if they are prepared to implement the incentive plan that goes with it. An EVA based incentive system, how4ever, encourages managers to operate in such a way as to maximise the EVA, not just of the operations they oversee but of the company as a whole. MINDSET: The effective implementation of EVA necessitates a change in the culture and mindset of the company. All constituents of the organisation need to be taught to focus on one objective maximising EVA. This singular focus leaves no room for ambiguity and also it is not difficult for employees to know just what actions of their will create EVA, and what will destroy it.

DRAWBACKS OF EVA One important drawback of EVA is that it ignores inflation. So it is biased against new assets. Whenever a new investment is made capital charge is on the full cost initially, so EVA figure is low. But as the depreciation is written off the capital charge decreases and hence EVA goes up. Second problem is that since EVA is measured in rupee terms it is biased in favour of large, low return businesses. Large businesses that have returns only slightly above the cost of capital can have higher EVA than smaller businesses that earn returns much higher than the costs. This makes EVA a poor metric for comparing businesses. Thirdly, in the short term EVA can be improved by reducing assets faster than the earnings and if this pursued for long it can lead to problems in the longer run when new improvements to the asset base are made. This new investment can have a high negative effect on EVA because the asset base would have been reduced to a large extent and improvements will involve huge investments.

MARKET VALUE ADDED

A term closely related to EVA is MVA. MVA is the market value of the capital employed in the firm less the book value of capital employed. MVA is calculated by summing up the paid-up value of equity and preference share capital, retained earnings, long term and short term debt and subtracting this sum from the market value of equity and debt.

MVA is a cumulative measure of corporate performance. It measures how much a companys stock has added to or taken out of investors pocket books over its life and compares it with the capital those same investors put into the firm. EVA drives the MVA. Continuous improvements in EVA year after year will lead to increase in MVA.

CORPORATE GOVERNANCE

CORPORATE GOVERNANCE- MEANING Corporate governance is a process or a set of systems and processes to ensure that a company is managed to suit the best interests of all. The systems which can ensure this may include structural and organisational matters. The stakeholders may be internal stakeholders (promoters, members, workmen and executives) and external stakeholders( shareholders, customers, lenders, dealers, vendors, bankers, community, government and regulators).

Corporate governance is concerned with the establishment of a system whereby the directors are entrusted with responsibilities and duties in relation to the direction of corporate affairs. It is concerned with accountability of persons who are managing it towards the stakeholders. It is concerned with the morals, ethics, values, parameters, conduct and behaviour of the company. and its management. It is a voluntary ethical code of business of companies

CORPORATE GOVERNANCE

Several tests have to be adopted to assess whether there has been effective corporate governance. Broadly, the test of corporate governance should cover the following aspects: Whether the funds of the company have been deployed for pursuing the main objects of the company as enshrined in the memorandum? Whether the funds raised from FIs and the capital market have been utilised for the purposes for which they were intended? Whether the company has the core competence to effectively manage its diversifications? Whether there has been diversion of funds by way of loans and advances or investments to subsidiary or investment companies? Whether the personal properties of the directors have been let out at a fabulous rent to the company? Whether the funds of the company have been diverted to the promoters through shell companies to permit the promoters to shore up their stake in the company?

CORPORATE GOVERNANCE

Whether the provision of the various statutes have been complied in letter and spirit. Whether the practices adopted by the company and its management towards its shareholders, customers, suppliers, employees and the public at large are ethical and fair? Whether the directors are provided with information on the working of the company and whether the institutional and non-executive directors play an active role in the functioning of the companies? Whether the internal controls in place are effective? Whether there is transparent financial reporting and audit practices and the accounting practices adopted by the company are in accordance with accounting standards of ICAI?

CORPORATE GOVERNANCE IN INDIA The concept of Corporate Governance receives statutory recognition, with the insertion of Section 292A in the Companies Act, 1956 with an amendment made to it through the Companies Amendment) Act,2000. The Institute of Chartered Accountants of India issued certain mandatory accounting standards. SEBI based on Kumar Mangalam Birla Report asked all the Stock Exchanges to amend the listing agreements between them and the entities whose securities are listed with them AUDIT COMMITTEE AND THE COMPANIES ACT The new section 292A incorporated in the Companies Act,1956 made it obligatory upon a public company having paid up capital of Rs.5 crores or more to have an Audit Committee comprising at least three directors as members. Two thirds of the total number shall be non executive directors.
As per this section, the Audit Committee has to act in accordance with the written terms of reference that the board specifies. The designated functions of the Audit Committee are: To have periodical dialogue with the statutory auditors on internal control systems, scope of audit including auditors observation. To carry out the review of half yearly and annual financial statements before submission to the Board. To ensure compliance of internal control systems

LEGAL PROVISIONS UNDER THE COMPANIES ACT

THE KEY LEGAL PROVISIONS WITH RESPECT TO CORPORATE BOARDS ARE AS FOLLOWS: Strength A public limited company must have at least three directors. Meetings The Board of directors must meet at least once in a quarter. Composition There is no fixed number of non-executive directors. No person can be a director of more than 20 companies. Powers The board of directors has the powers to (a) borrow, lend and invest funds, (b) recommend dividends, and (c) appoint the managing director Remuneration The total remuneration of the directors is subject to a ceiling of 11 percent of net profits. In addition, board members can be paid a sitting fees upto Rs.20,000 per meeting. Duties The board has the duty to present the annual report to the members. Liabilities The board is punishable for breach of trust, dihonesty and fraud

CLAUSE 49 IN LISTING AGREEMENT ON CORPORATE GOVERNANCE

SEBI HAD CONSTITUTED A COMMITTEE ON CORPORATE GOVERNANCE UNDER THE CHAIRMANSHIP OF SRI KUMARAMANGALAM BIRLA TO PROMOTE AND RAISE THE STANDARD OF CORPORATE GOVERNANCE IN THE CORPORATE SECTOR. THE COMMITTEE SUBMITTED ITS REPORT TO SEBI. ACCEPTING THE RECOMMENDATIONS OF THE COMMITTEE SEBI HAS ADVISED ALL STOCK EXCHANGES TO AMEND THEIR LISTING AGREEMENTS BY INSERTING NEW CLAUSE 49 WHICH DEALS WITH GOOD CORPORATE GOVERNANCE PRACTICES TO BE ADOPTED BY ALL LISTED PRIVATE AND PUBLIC SECTOR COMPANIES. HOWEVER, FOR LISTED ENTITIES, WHICH ARE NOT COMPANIES, BUT BODY CORPORATES( EG. PRIVATE AND PUBLIC SECTOR BANKS, FINANCIAL INSTITUTIONS, INSURANCE COMPANIES ETC) INCORPORATED UNDER OTHER STATUTES, THIS CLAUSE WILL APPLY TO THE EXTENT THAT IT DOES NOT VIOLATE THEIR RESPECTIVE STATUTES, AND GUIDELINES OR DIRECTIVES ISSUED BY THE RELEVANT REGULATORY AUTHORITIES. CL.49 IS INSERTED VIDE SEBI CIRCULAR DATED 21.9.2000

CORPORATE GOVERNANCE- THE SEBI CODE

THE KEY ELEMENTS OF THE SEBI CODE, WHICH IS BASED ON THE RECOMMENDATIONS OF THE KUMARAMANGALAM COMMITTEE REPORT ARE AS FOLLOWS: least one-half of the board shall comprise of non-executive directors and at least one-third of the board shall comprise of independent directors. An audit committee of at least three non-executive directors shall be set up, the majority of them being independent. It shall meet at least thrice a year. The remuneration paid to all directors shall be disclosed in the annual report. A Management Discussion and Analysis Report should form part of the annual report. Details of new appointees At as directors shall be provided to the shareholders. The annual report shall have a section on corporate governance. The auditors of the company should give a certificate regarding compliance on corporate governance

CORPORATE GOVERNANCE IN INDIA

The designated functions of the Audit Committee are: To have periodical dialogue with the statutory auditors on internal control systems, scope of audit including auditors observation. To carry out the review of half yearly and annual financial statements before submission to the Board. To ensure compliance of internal control systems The Audit committee is also given the authority to investigate into any matter specified in the section or referred to it by the Board. For this purpose, the Audit Committee shall have full Access to information in the companys records and external Professional advise, if necessary. The ACs recommendations on Financial management Including the audit report are binding on the board. If the board does not accept them it has to record the related reasons in writing and communicate to the shareholders.

APPLICABILITY OF SECTION 292A

Section 292A is mandatory in nature. Every Public Company, as per Section 2(37) and section 3 of the Act is affected by it. Pursuant to section 3 aforesaid, the provisions of Section 292A would also be applicable to a private company, which is a, subsidiary of a company which is not a private company. A private company is not covered by section 292A Section 292A also applies to unlimited and/or a guarantee company having required amount of paid up capital A government company under section 617 or a section 25 company under the Act have not been exempted specifically and therefore would also be affected by the provisions of section 292A.

The listing status of a company is irrelevant for the purpose of applicability of section 292A.