Project Report

On
Corporate
Compliance
Management
&
Due Diligence

Prepared & Submitted by:

Anuradha Kaushik
Reg. No. 220929851/08/2010

PREFACE
Compliance is not the beginning in a well governed company, but is a statement by the
management on the attitude of one and all in an organization plasticised in letter and spirit. A
due diligence exercise proves the level of compliance in a corporate and acts as a health
check to ensure that the standards are maintained. A due diligence, therefore, can go as far
as the law itself. One may call it a post-mortem exercise, but it is still forward looking,
futuristic and brings out the essence of a professional, in the true sense. Though compliance
and due diligence are inter-changeable and are normally understood as synonyms in
common parlance, yet the purpose of both is not the same. Due diligence relates to a
particular assignment like mergers and acquisitions, credit appraisals, etc., but compliance
action

relates

to

overall

and

total

quality

management.

Corporate

Acquisitions/mergers/takeovers have become part of the business strategy to grow rapidly

and widely. Due Diligence is used to investigate and evaluate business opportunity.

ii

INDEX
Detailed Contents
Corporate Compliance Management
Introduction
Need for Corporate Compliance Management
Significance
Three Step Process
Case Study
Advantages
Role of Government
Role of Company Secretaries
Role of Information Technology
Secretarial Audit
Magic of 3-C
Structured Approach
Due Diligence
Objectives
Types of Due Diligence
Steps/Process of Due Diligence
Transactions Requirements
Point of Concerns while conducting Due Diligence
Due Diligence Vs. Audit
Case Studies
Due Diligence Checklist
Conclusion

iii

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CORPORATE COMPLIANCE MANAGEMENT

Corporate Compliance Management is the effort made by an entity to adhere to various
laws. Under most laws, the persons responsible for compliance are Directors, Company
Secretaries and some of the senior officers who are designated for specific compliance.
Corporate compliance is used for a number of concepts in large business decisions involving
either the performance or strategical aspects of a business or the overall necessity of a deal
with a certain standard of care. Thus, the role of corporate professional in general and
Company Secretary in particular, is very important. Since, business entities are to run for
infinity, the process of Corporate Compliance Management is to continue forever till the
business survives. Therefore, a great degree of onus lies on Company Secretaries to play a
pivotal role in compliance management to shoulder more and more responsibility in these
days as regulatory regime enjoins on them to make compliances in respect of all legal, nonlegal and procedural requirements.

INTRODUCTION
Corporate Compliance Management is as deep and vibrant as ocean. Various agencies
including government and professional institutes, besides corporates have a role to play.
There is no doubt that compliance management with no exception to Corporate Compliance
Management extends beyond legal compliance and procedures, code of conduct and best
practices. It is all about managing compliance of legal, procedural and contractual
obligations and national and international treaties, code of conduct, etc. This is a continuous
process and requires a principle oriented approach as the result of non-compliance of any
law would make the company and professionals liable for prosecution and penalties.

NEED FOR CORPORATE COMPLIANCE MANAGEMENT

During 1990s, Government of India simplified certain stringent laws and gave message to
the corporate world to observe self-discipline and at their own houses for exercising selfcontrol over various legal and general compliances. The Governments endeavour was to
harden the corporate entities to comply with the various provisions of rules, regulations and
statutes. This endeavour of the government inculcated a wave of awareness among the
professionals towards need of compliances with various laws. Thereafter, Corporate
Compliance Management started emerging as a vital aspect of overall management and
Corporate Governance process. Further, the multiplicity of laws, rules, regulations, etc., has
necessitated introduction of a system to ensure compliances under the laws. It was realised
that Corporate Compliance Management not only protects the interests of customers,
1

employees, revenue, directors and officers of the company, but also helps in avoiding any
unwarranted legal actions by the law enforcing agencies and other persons as well. In most
of the cases, the persons responsible for compliance and liable for punishment are directors
and the principal officers of the company. The whole-time directors own greater responsibility
to see that there is a strictest enforcement of law. The decisions of various courts have
contributed a lot for creating a need for corporate compliance management reporting
system.
THREE QUESTIONS BEFORE THE MANAGEMENT OF THE COMPANY
1. Applicability of statutory laws on the Company?
2. Effective and timely compliances of the laws?
3. Ineffective existing Compliance System or upgrading existing Compliance System of
the Company?
Why Corporate Compliance Management?
Clause 49
The Board shall periodically review compliance reports of all laws applicable to the
company, prepared by the company as well as steps taken by the company to rectify
instances of non-compliances.
CEO/CFO certification
The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act,
1956 and the CFO i.e. the whole-time Finance Director or any other person heading the
finance function discharging that function shall certify to the Board that:
a. They have reviewed financial statements and the cash flow statement for the year and
that to the best of their knowledge and belief :
i.

these statements do not contain any materially untrue statement or omit any

ii.

material fact or contain statements that might be misleading;

these statements together present a true and fair view of the companys affairs
and are in compliance with existing accounting standards, applicable laws and
regulations.

 Code of Conduct
i.
The Board shall lay down a code of conduct for all Board members and senior
management of the company. The code of conduct shall be posted on the website of
ii.

the company.
All Board members and senior management personnel shall affirm compliance with
the code on an annual basis. The Annual Report of the company shall contain a
declaration to this effect signed by the CEO.

Information to be placed before Board of Directors

1.
2.
3.
4.
5.

Annual operating plans and budgets and any updates.

Capital budgets and any updates.
Quarterly results for the company and its operating divisions or business segments.
Minutes of meetings of audit committee and other committees of the board.
The information on recruitment and remuneration of senior officers just below the
board level, including appointment or removal of Chief Financial Officer and the

Company Secretary.
6. Show cause demand, prosecution notices and penalty notices which are materially
important.
7. Fatal or serious accidents, dangerous occurrences, any material effluent or
pollution problems.
8. Any material default in financial obligations to and by the company, or substantial
nonpayment for goods sold by the company.
9. Any issue, which involves possible public or product liability claims of substantial
nature, including any judgment or order which, may have passed strictures on the
conduct of the company or taken an adverse view regarding another enterprise that
can have negative implications on the company.
10. Details of any joint venture or collaboration agreement.
11. Transactions that involve substantial payment towards goodwill, brand equity, or
intellectual property.
12. Significant labour problems and their proposed solutions. Any significant
development in Human Resources/ Industrial Relations front like signing of wage
agreement, implementation of Voluntary Retirement Scheme etc.
13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal
course of business.
14. Quarterly details of foreign exchange exposures and the steps taken by
management to limit the risks of adverse exchange rate movement, if material.
15. Non-compliance of any regulatory, statutory or listing requirements and
shareholders service such as non-payment of dividend, delay in share transfer etc.
Section 2(60) of the Companies Act, 2013
Meaning of "officer who is in default

officer who is in default, for the purpose of any provision in this Act which enacts that
an officer of the company who is in default shall be liable to any penalty or punishment
by way of imprisonment, fine or otherwise, means any of the following officers of a
company, namely:
(i)
whole-time director;
(ii)
key managerial personnel;
(iii) where there is no key managerial personnel, such director or directors as specified
by the Board in this behalf and who has or have given his or their consent in writing
to the Board to such specification, or all the directors, if no director is so specified;
(iv) any person who, under the immediate authority of the Board or any key managerial
personnel, is charged with any responsibility including maintenance, filing or
distribution of accounts or records, authorises, actively participates in, knowingly
permits, or knowingly fails to take active steps to prevent, any default;
(v) any person in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act, other than a person who gives advice
to the Board in a professional capacity;
(vi) every director, in respect of a contravention of any of the provisions of this Act, who is
aware of such contravention by virtue of the receipt by him of any proceedings of the
Board or participation in such proceedings without objecting to the same, or where
such contravention had taken place with his consent or connivance;
(vii) in respect of the issue or transfer of any shares of a company, the share transfer
agents, registrars and merchant bankers to the issue or transfer;
Section 210 of the Companies Act, 1956
Annual Accounts and Balance Sheet
1) At every annual general meeting of a company held in pursuance of section 166, the
Board of directors of the company shall lay before the company
a) a balance-sheet as at the end of the period specified in sub-section (3); and
b) a profit and loss account for that period.
2) In the case of a company not carrying on business for profit, an income and
expenditure account shall be laid before the company at its annual general meeting
instead of a profit and loss account, and all references to profit and loss account,
profit and loss in this section and elsewhere in this Act, shall be construed, in
relation to such a company, as references respectively to the income and
expenditure account, the excess of income over expenditure, and the excess of
expenditure over income.
3) The profit and loss account shall relate
a) in the case of the first annual general meeting of the company, to the period
beginning with the incorporation of the company and ending with a day which
shall not precede the day of the meeting by more than nine months; and
4

b) in the case of any subsequent annual general meeting of the company, to the
period beginning with the day immediately after the period for which the
account was last submitted and ending with a day which shall not precede the
day of the meeting by more than six months, or in cases where an extension
of time has been granted for holding the meeting under the second proviso to
sub-section (1) of section 166, by more than six months and the extension so
granted.
4) The period to which the account aforesaid relates is referred to in this Act as a
financial year; and it may be less or more than a calendar year, but it shall not
exceed fifteen months:
Provided that it may extend to eighteen months where special permission has been granted
in that behalf by the Registrar.
5) If any person, being a director of a company, fails to take all reasonable steps to
comply with the provisions of this section, he shall, in respect of each offence, be
punishable with imprisonment for a term which may extend to six months, or with fine
which may extend to [ten thousand rupees], or with both:
Schedule XIII of the Companies Act, 1956
No person shall be eligible for appointment as a managing or whole-time director or a
manager (hereinafter referred to as managerial person) of a company unless he satisfies the
following conditions, namely:a)

he had not been sentenced to imprisonment for any period, or to a fine exceeding
one thousand rupees, for the conviction of an offence under any of the following Acts,
namely.i.
the Indian Stamp Act, 1899 (2 of 1899),
ii.
the Central Excise and Salt Act, 1944 (1 of 1944),
iii.
the Industries (Development and Regulation) Act, 1951 (65 of 1951),
iv.
the Prevention of Food Adulteration Act, 1954 (37 of 1954),
v.
the Essential Commodities Act, 1955 (10 of 1955),
vi.
the Companies Act, 1956 (1 of 1956),
vii.
the Securities Contracts (Regulation) Act, 1956 (42 of 1956),
viii.
the Wealth-tax Act, 1957 (27 of 1957),
ix.
the Income-tax Act, 1961 (43 of 1961),
x.
the Customs Act, 1962 (52 of 1962),
xi.
the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969),
xii.
the Foreign Exchange Regulation Act, 1973 (46 of 1973),
xiii.
the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986),
xiv.
the Securities and Exchange Board of India Act, 1992 (15 of 1992),
xv.
the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992);
Section 633 of the Companies Act, 1956
5

 Power of Court to grant relief in certain cases

1) If in any proceeding for negligence, default, breach of duty, misfeasance or breach of
trust against an officer of a company, it appears to the Court hearing the case that he
is or may be liable in respect of the negligence, default, breach of duty, misfeasance
or breach of trust, but that he has acted honestly and reasonably, and that having
regard to all the circumstances of the case, including those connected with his
appointment, he ought fairly to be excused, the Court may relieve him, either wholly
or partly, from his liability on such terms as it may think fit:
Provided that in a criminal proceeding under this sub-section, the Court shall have no
power to grant relief from any civil liability which may attach to an officer in respect of
such negligence, default, breach of duty, misfeasance or breach of trust.
2) Where any such officer has reason to apprehend that any proceeding will or might be
brought against him in respect of any negligence, default, breach of duty,
misfeasance or breach of trust, he may apply to the High Court for relief and the High
Court on such application shall have the same power to relieve him as it would have
had if it had been a Court before which a proceeding against that officer for
negligence, default, breach of duty, misfeasance or breach of trust had been brought
under sub-section (1).
3) No Court shall grant any relief to any officer under sub-section (1) or sub-section (2)
unless it has, by notice served in the manner specified by it, required the Registrar
and such other person, if any, as it thinks necessary, to show cause why such relief
should not be granted.

SIGNIFICANCE
Apart from avoiding the risks of non-compliance, there are manifold advantages of CCM.
These, inter alia, include:
1.
2.
3.
4.
5.
6.
7.

Better compliance of law

Real time status of legal/statutory compliances
Cost savings- avoiding penalties/fines, minimizing litigation
Better brand image and positioning in the Company
Enhanced credibility/creditworthiness
Goodwill among shareholders, investors & stakeholders
Good Corporate Citizen

What is Corporate Compliance Management to the Company?

Compliance in Letter & Spirit
6

Corporate Compliance not just a legal requirement but a necessity;

Planning the Corporate Compliances;

Treating shareholders & investors are treated as Kings; and

Disclosure &Transparency.
Compliance in Letter

Corporate Compliance merely legal requirement;

Disclosure & Transparency are not given much importance.

THREE STEPS PROCESS

As a first step, companies need to identify the laws applicable to it. Until we have module on
industry specific laws, corporate need to carry out exercise on their own. Few corporates
have already done this exercise and few others are in the process. However lot of
duplication of efforts are happening, so long as companies in the same industry are
7

concerned. Consequently, there are diverse practices within the same industry on legal
compliances. Here, independent professionals certainly provide assistance and their
experience becomes useful.
Once laws applicable are known to corporate, then the compliance requirements under
various contracts may be assessed to get the comprehensive view of compliance
requirements.
Thereafter, corporate need to check/run a test on the existing internal control systems
to

ensure compliance of laws. This can be achieved by calling for information from

departmental heads. Sometimes departmental heads takes help of local professionals.

Departmental heads conventionally deals with business (day to day operations) and hence
has no time to ensure legal compliances.
To ensure value addition, companies need to be smart to carry out audit where it is not
legally required and risk factor is high. Increasingly, it is noticed that companies carry out
audit in areas where the law compels them to do so. For example, compliance certificate of
listing agreement from independent professional on major clauses are required under the
law. In such cases, there is no point in carrying it out again and publishing in annual report
about the same. Companies need to find out laws where the legal compliance certification or
audit may not be required under the law but is critical to its operation. To name a few,
compliance of Foreign Exchange Management Act, Foreign Direct Investments, Industrial
Policy, Intellectual Property Rights, Takeover Regulations and Prohibition of Insider Trading
Regulations are critical to most entities listed on stock exchanges in India.
By remaining focussed on need of the company and ensuring legal compliance as per its
own need, companies can not only reduce the time and cost of compliance but also gain the
highest benefits (value addition) to its efforts.
Based on assessment of existing setup in organization to ensure legal compliance,
corporate need to take call on need for checklist of applicable laws and examining existing
checklists, if any.
The corporate then need to look at developing sustainable structure of legal and contractual
compliance. Use of information technology like intranet on need to know basics is one of the
effective means to achieve that.
It is good to decide at early stage in assigning risk levels to critical legal and contractual
compliances. Depending upon level of compliance and risk associated therewith, corporate
may decide to develop checklists on its weaknesses.
8

Since laws are ever changing, many a times by ignorance, non-compliance may also occur.
As said in legal maxim ignorance of law is no excuse, one cannot escape responsibility by
stating that laws are ever changing. Sometimes such ignorance of law turns out to be
embarrassing moments for CEO and image of corporate also gets badly affected. To avoid
such situations, corporate also need to ensure constantly updating checklists.
Legal compliance management and developing its system is not a one time process. Once
system of legal compliance is in place, corporate need to continue on an ongoing basis to
acquire knowledge, may be through training and seminars and effective communication of
changes in laws in a timely manner to avoid noncompliance and avail benefits under the law
(particularly under tax laws).
The corporate may determine tools for spreading knowledge, updating and review in multiple
ways. Few of them could be using intranet in companies, spreading latest changes,
discussing implications of change of

laws

and modifying/updating master checklists.

Sometimes internal control mechanism may need modifications.

Corporate may choose to have audit done either internally or by independent professional to
assess the level of compliance in the organisation. Report on noncompliance may then be
prepared and discussed with definite action plans and their time limits.

Besides regular internal audit of legal compliances, companies may carry out
full legal compliance audit by an independent professional once in two/three
years.

CASE STUDY
Background of the Company- Financial Services

Broking Company

120 employees

Member of NSE and BSE

Depository Participant with NSDL and CDSL

Issued shares in FDI scheme

Listed on NSE and BSE

New Delhi based

Identification

General Applicability

Companies Act, 1956

Income Tax Act, 1956
Indian Contract Act, 1872

Company Specific

SEBI Act, 1992

Securities Contracts Regulation Act, 1956
Depositories Act, 1996
SEBI (Intermediaries) Regulations, 2008
Prevention of Money Laundering Act, 2002, etc

Labour Laws

Factories Act, 1948

Payment of Wages Act, 1936
The Contract Labour (Regulation and Abolition) Act, 1970,
etc

Transaction based
application

FEMA, 1999

Area Specific

All acts applicable to NCT of Delhi

FDI Scheme

Evaluation

Evaluate the compliance timing of the Company i.e.

Fixed/Regular

Event Based

Identify the gap between the present compliance system and the results of evaluation
process.

Assessment

Preparation of Checklists i.e.

Law wise

Period wise

The management of the Company should move towards developing a robust Compliance
Management System:
1.
2.
3.
4.

Defining of responsibilities
Co-ordinate with respective officials in respect of deviations
Use of questionnaires
Updation of Corporate Compliance Programme
10

ADVANTAGES

Easy Quantification of risk

Establishing Risk appetite

Identify and prioritize controls

Multitude of Compliance obligations

Building Strong Foundations

Extended Confidence to Investors

Gaining Competitive Edge

Good Compliance System leads to

Excellence in Operations

ROLE OF GOVERNMENT
Review of existing laws. Wherever possible to reframe/modify/re-enact existing laws as well
as enact new laws which are as far as possible business friendly so that multiple social
benefits arises like providing employment avenues and promote/create desire for education.
Laws should be such that justice delivery should not only happen but also be felt by all. Help
promote professional institutes to come out with industry specific applicable laws and
compliances thereof. People need to be convinced about the necessacity and mode of
administering laws.

ROLE OF COMPANY SECRETARY

Although, the Company Secretarys role has undergone a marked change over the years
and he has today emerged as an integrated corporate business manager and advisor, the
compliance role is like a fulcrum of the profession. As an officer of the company at the centre
of the decision making process, the Company Secretary is in a powerful position of
influence. The Best Practice Guide on the Duties of a Company Secretary 3 lists, Monitoring
and laying in place procedures which allow for

compliance with regulatory

and legal

requirements, particularly under the Companies Act including legal requirements. as one
of the core duties of the Company Secretary. CCM will therefore be the logical extension of
the fundamental duty discharged by Company Secretaries in industry. It will be both an
opportunity and a challenge. The importance of corporate compliances will now be a matter
for review at the very highest levels of management. This lays a tremendous onus on the
11

Company Secretary to devise, put in place and constantly administer a legal MIS for regular
reporting and monitoring of the corporate legal compliances. This will

accentuate the

Company Secretarys role in the corporate governance process and enhance the levels of
professionalism.

ROLE OF INFORMATION TECHNOLOGY

1. Ministry of Corporate Affairs- MCA21
Empowering Business, Protecting Investors
Regulator Integrator Facilitator Educator
2. eXtensible Business Reporting Language (XBRL-MCA)
i.
XBRL (eXtensible Business Reporting Language) is a language for electronic
communication of business and financial data which is revolutionising
business reporting around the world. It offers major benefits to all those who
have to create, transmit, use or analyse such information. XBRL has been
developed by XBRL International, a not-for-profit consortium of over 450
ii.

companies and organisations which is promoting its worldwide use.

XBRL India is the Indian Jurisdiction of XBRL International. Its main objective
is to promote and encourage the adoption of XBRL in India as the standard
for electronic business reporting in India. Members of XBRL India include

iii.

regulators, stock exchanges, software companies and others.

XBRL India has developed draft General Purpose Financial Reporting XBRL
taxonomy for Commercial and Industrial Companies. It is currently developing
XBRL Taxonomy for the banking sector.

Circulars issued by MCA regarding XBRL:

General

Circular

No: 31.03.2011

37/2011
General

Filing of Balance Sheet & Profit & Loss

Account in eXtensible Business Reporting

Circular 12.05.2011

No:25/2011
General
Circular

No: 07.06.2011

37/2011

Language (XBRL) mode.

Corrigendum to Circular No 09/2011dated
31.03.2011.
Filing of Balance Sheet & Profit & Loss
Account in eXtensible Business Reporting
Language (XBRL) mode.

3. Corporate Filing & Dissemination System (CorpFiling)

12

The portal aims at providing a single interface to the investors to keep track of the
latest filings of all the listed companies in India irrespective of the Stock Exchange.

www.corpfiling.co.in is the common filing and dissemination portal for all

companies listed on the BSE & the NSE.

www.corpfiling.co.in has been developed and is being maintained by IRIS
Business Services (India) Pvt. Ltd.

4. Sebi Complaints Redress System (SCORES)

Securities and Exchange Board of India vide its Circular CIR/MIRSD/17/2011 dated
August 24, 2011:
1. SEBI has commenced processing of investor complaints in a centralized web
based complaints redress system SCORES. The salient features of this
system are:

Centralized database of all complaints

Online movement of complaints to the concerned intermediaries

Online upload of Action Taken Reports (ATRs) by the concerned

entities, and
Online viewing by investors of action on the complaints and its current

status.
2. Accordingly, henceforth all complaints shall be forwarded electronically
through SCORES only. You are hereby directed to view the pending
complaints at http://scores.gov.in/admin and submit the ATR along with
supporting documents electronically in SCORES. Please note that updation of
action taken would not be possible with physical ATRs. Hence, submission of
physical ATR will not be accepted for complaints lodged in SCORES.
3. Intermediaries can view the complaints in the SCORES system by logging in
with their user id and password which will be communicated separately.
4. A daily alert on pending complaints will be forwarded at the e-mail ID
registered with SEBI for regulatory communications.
5. Failure on the part of the entity in updating the Action Taken Report (ATR) on
the SCORES will be considered as non-redressal of complaint and will be
shown as pending against the entity.
6. This circular is issued in exercise of powers conferred under Section 11(1) of
the Securities and Exchange Board of India Act, 1992, to protect the interests
of investors in securities and to promote the development of, and to regulate
the securities market.
5.

NSE Electronic Application Processing System (NEAPS)

13

National Stock Exchange of India vide its communiqu to the listed companies dated
September 29, 2011 has allowed electronic filing of Corporate Governance Report
and Shareholding Pattern through NSE Electronic Application Processing System
(NEAPS) which is a web based portal. This will facilitates speedy paperless
submission of documents to NSE.
Access

to

the

above

web

module

can

be

done

at

https://www.connect2nse.com/LISTING/ .The Company would be allotted a User ID

with an option to designate two optional additional users.
Currently, two documents could be submitted through NEAPS:

Corporate Governance Report under clause 49 of the Equity Listing

Agreement; and
Quarterly Shareholding Pattern under clause 35 of the Equity Listing

Agreement.
These submissions to the NSE shall be digitally signed and the same shall be treated
as final submission to NSE.

SECRETARIAL AUDIT
The Secretarial Audit (SA) is part of Corporate Compliance Management System (CCMS),
but is wider in scope than Compliance Certification (CC). The CC was made statutorily
applicable in 2000, inserted by the Companies (Amendment) Act, 2000, with effect from 1312-2000, which inserted a provision in section 383A(1) of the Companies Act, 1956, making
it mandatory: every company not required to employ a whole time secretary under subsection (1) and having a paid-up a share capital of Rs. 10 lakhs or more shall file with
RoC a certificate from a secretary in whole-time practice in such form and within such
time and subject to such conditions as may be prescribed, as to whether the company has
complied with all provisions of the Act and copy of such certificate shall be attached with
Boards report referred to in Section 217. The Companies (Compliance Certificate) Rules,
2001 prescribe a 33-item formula for CC.
Process of Secretarial Audit
Secretarial Audit is a process to check compliance with the provisions of various laws and
rules/regulations/procedures,

maintenance

of

books,

records

etc.,

by

an

independent professional to ensure that the company has complied with the legal and
procedural requirements and also followed the due process. It is essentially a mechanism to
monitor compliance with the requirements of stated laws.
14

Benefits of Secretarial Audit are manifold. Ever-increasing complexities of laws and

responsibilities of directors (especially non-executive directors) make it imperative that a
PCS reports whether or not there exists proper compliance mechanism and systems in the
corporate structure. PCS has also to verify whether diverse requirements under applicable
laws have been duly complied with or not and if there is a need for any corrective measures
or improvement in the system.
i.

Data Collection About the Company; About Applicable Laws, Rules and
Regulations

ii.

Determining the Period and Scope of Secretarial Audit

iii.

Preparing a List of Preliminary Documents Requirements

iv.

Thorough Analysis of Inputs and Understanding Facts and Circumstances

v.

Compilation of Chronological Order of Events

vi.

Analysis of Events, Applicable Provisions and Level of Compliance

vii.

Generation of Questionnaire General and Specific

viii.

Administration of Questionnaire; Identifying Respondents and Collecting Responses

ix.

Preparing a Record of Findings and Conclusion

x.

Identification of Grey Areas

xi.

Ironing out Differences of Opinion and Ambiguities

xii.

Management Representations, Legal Opinions, Judicial Pronouncements and

Articles Relied Upon

xiii.

Preparation and Submission of Secretarial Audit Report

Beneficiaries of Secretarial Audit

The major beneficiaries of Secretarial Audit include :
(a) Promoters
Secretarial Audit will assure the Promoters of a company that those in-charge of its
management are conducting its affairs in accordance with requirements of laws.
(b) Management

15

Secretarial Audit will assure the Management of a company that those who are entrusted
with the duty and responsibility of compliance are performing their role effectively and
efficiently. This also helps the management to establish benchmarks for the compliance
mechanism, review and improve the compliances on a continuing basis.
(c) Non-executive directors
Secretarial Audit will provide comfort to the Non-executive Directors that appropriate
mechanisms and processes are in place to ensure compliance with laws applicable to the
company, thus mitigating any risk from a regulatory or governance perspective; so that the
Directors not in-charge of the day-to-day management of the company are not likely
exposed to penal or other liability on account of noncompliance with law.
(d) Government Authorities / Regulators
Being a pro-active measure, Secretarial Audit facilitates reducing the burden of the lawenforcement authorities and promotes governance and the level of compliance.
(e) Investors
Secretarial Audit will inform the investors whether the company is conducting its affairs within
the applicable legal framework.
(f) Other Stakeholders
Financial Institutions, Banks, Creditors and Consumers are enabled to measure the law
abiding nature of Company management.
Corporate conduct manifesting good Governance is vital for the healthy, vibrant and ever
growing corporate sector in global economy. In developing economies, inclusive growth is
more than imperative. Adopting effective management tools like Secretarial Audit can go a
long way in fulfilling these objectives.

Secretarial Audit is the most effective mechanism to ensure the compliance of the
multifarious requirements by the corporate enterprises under host of legislations.

MAGIC OF 3-C

16

THE MAGIC OF 3-C the three Cs comprising of Corporate Governance (CG), Corporate
Social Responsibility (CSR) and then Corporate Compliance Management (CCM) are
going to be the three magical concepts of Corporate functioning worldwide. Corporate
governance and corporate social responsibility has now become a necessity.

ICSI National Award for Excellence in Corporate Governance- 2010 presented to Dr.
Reddys Laboratories Limited and Larsen & Toubro Limited.
Certificate of Recognition to other top five companies:
CMC LIMITED
GAIL (India) Limited
Oil and Natural Gas Corporation Limited
Persistent Systems Limited
Union Bank of India
Company Philosophy on Corporate Governance
Dr. Reddys Laboratories Limited
At Dr. Reddy's, our Board of Directors, management and employees are committed to
upholding high standards of corporate governance and business ethics. We firmly believe
that timely disclosures, transparent accounting policies, rigorous internal control systems
and a strong and independent Board go a long way in preserving shareholder trust while
maximizing long-term shareholder value.
17

The Securities and Exchange Board of India (SEBI) through Clause 49 of the listing
agreement with the stock exchange regulates corporate governance for listed companies. Dr
Reddys is in full compliance with Clause 49. It is also in full compliance with the applicable
corporate

governance

standards

of

the

New

York

Stock

Exchange

(NYSE).

The compliance report of Dr Reddys on corporate governance can be found in our Annual
Report, under Management Discussion and Analysis and Additional Shareholder
Information.
Larsen & Toubro Limited
The Company's philosophy on Corporate Governance is built on a rich legacy of fair and
transparent governance and disclosure practices, many of which were in existence even
before they were mandated by legislation.
The Company's essential character revolves round values based on transparency, integrity,
professionalism and accountability. At the highest level, the Company continuously
endeavours to improve upon these aspects and adopts innovative approaches for
leveraging

resources,

converting

opportunities

into

achievements

through

proper

empowerment and motivation, fostering a healthy growth and development of human

resources.
Corporate compliance managementFor addition of substantial business value
Corporate compliance management can add substantial business value and generate
corporate delight in a perfect manner by enhancing investor confidence of other
shareholders in the company including Banks, Financial Institutions, Government and other
Regulatory Authorities. These professionals can ensure technical as well as actual
compliance of different legal requirements not merely as a tick the box exercise but in the
true spirit and purport so that all the stakeholders in particular and the society in general
derives the benefits which are due to them. A company is also a corporate citizen and hence,
it has a greater corporate social responsibility. Moreover, corporate governance is required
to encompass the technical boundaries of company law compliance and should reach
beyond distribution of dividends to make its efforts an enriching experience for all sections of
society.
To achieve the basic purpose of corporate compliance management for addition of
substantial business value, an exercise involving a process of research and analysis as well
as investigation and evaluation should be undertaken. This will help in determining the

18

potential issues and getting a realistic picture as to how the entity is performing and how, it
shall perform in future. Corporate professionals, including company secretaries, should play
a crucial role in this direction.

STRUCTURED APPROACH
Every entity must have systematic and structured approach for making compliances, no
casual system or approach can do well. The casual approach if ticking the bose cannot
serve the purpose. Further, beat the bull when it comes to you, should be avoided as it is
not a befitting theory. The consequences of non-compliance must be kept in mind. The
harkening proposal in the Companies Bill that hefty penalties would imposed for noncompliance cannot be overlooked. Self-discipline and timely action can save an organization
from the results of non-compliances. The Companies Bill vide clauses 396 to 406 also
proposes for establishment of Special Courts under Chapter XXVII to try all offences under
the Act, for the area in which Registered Office of the company concerned would be
situated. These Special Courts would be in the nature of criminal and Sessions Courts and
the person responsible for prosecution shall be known as a Public Prosecutor. Small
contraventions may attract heavy penalties. The governments attitude the non-compliance
of different laws is becoming stiff. The reason for this stiffness is that there is a dire need for
strict compliances as the corporates are dealing with crore of rupees invested by general
public and dealing indigenously, but globally. One more aspect to be noted is that the
jurisdiction of Regional Director or Company Law Board (CLB), is proposed to be
adjudicated with the permission of the court, having jurisdiction to try the offences to be
compounded.

19

Annexure-I
CORPORATE COMPLIANCE REPORT
It is hereby reported that the company has complied with the various statutory enactments,
rules, regulations, orders, guidelines and notifications of both the Central and State
Governments, relating to the business of the company, with specific reference to the
following:
a) The company has complied with the provisions of the Companies Act, 1956 and the
applicable rules and regulations made there under.
b) The company has complied with the various labour legislations (list them out) and the
applicable rules framed there under, being applicable to the company.
c) The company has complied with the provisions of the Income Tax Act, 1961 and the
applicable Rules made there under and the TDS has been made.
d) The Company has complied with the provisions of the various pollution control and
environment related legislations (list them out).
e) The company has complied with the provisions of the various fiscal laws (list them
f)

out)
The company has complied with the provisions of the other applicable laws (list them
out).

(Where there is any non-compliance, the above clauses may be reworded as follows:
The Company has complied with the provisions of the . Laws, subject to (list out
the non-compliances and details thereof). Details of pending litigation and show cause
notices may also be listed herein, if any.)
This report is based on the confirmations/reports submitted by the functional heads and is
given by the undersigned in the full knowledge that on the faith and strength of what is stated
in the report, full reliance is placed by the board of directors.
Date:
Managing Director

20

Due Diligence
An extract from Wikipedia: Due diligence is a term used for a number of concepts involving either the performance of
an investigation of a business or person, or the performance of an act with a certain
standard of care. It can be a legal obligation, but the term will more commonly apply to
voluntary investigations.
The KPMG definition:
A Due diligence is an interactive process requiring inquiry, analysis and interpretation of
financial and operational data to assist a buyer in assessing certain risks and opportunities
involved in a potential transaction.
Indeed, a due diligence is a process built upon the edifice of Performance, Standard of
Care and Investigation.
The expression due diligence, in commercial transactions, include an investigation into the
matters of a company and an assessment of the risks in a commercial context.
Due Diligence, as an exercise, is something which has a set of common principles and
procedure to be followed. Depending on the situation, a due diligence process is referred to
by different names. As the famous saying goes, dont judge a book by its cover, so also,
the relevance and importance of the due diligence is to be recognized with reference to the
type of due diligence

OBJECTIVES
1.
2.
3.
4.
5.
6.
7.
8.

Material information
SWOT analysis
Informed decisions about an investment
Identification of areas where representation and warranties are required
Ensure and complete disclosure
Bridging the gap between the existing and expected
Smooth/accurate actions or decisions
Enhance the confidence of stakeholders

21

TYPES OF DUE DILIGENCE

Business Due Diligence

Operational due diligence It enhances decision making and reduces risk through
a better understanding of how the business works. It provides a more robust
perspective on what a client can expect from the target's future operational
performance. We measure the effectiveness and efficiency of the company's
business units against the management's own performance targets, as well as
industry benchmarks. We also help identify the developments within the industry that
can impact the operational efficiencies of the target, and wherever possible, help the
client develop mitigation plans.

Technical due diligence- In technical Due Diligence during, the risks probability of
occurrence and their potential impact on the project will be detected. The goal is to
firstly ensure that the technical feasibility of the project is such that the investment is
sound, and secondly to ensure the quality. This is accomplished by way of a
thorough review of all the assets and/or the data available to reveal the potential
areas of concern for the investor.

Environmental due diligence- It is the due diligence exercise carried out with
primary focus on Environmental issues (health and safety can also be considered)
22

that may have an implication on the transfer of liability that would take place as a
result of the M&A.

Human Resource due diligence- It is the most detailed service and is aimed at
valuing the contribution of the HR function to the success of the business in a
purchasing, outsourcing or market testing environment.
When two corporations merge, they often encounter differences in corporate mission,
vision and culture, operational procedures, remuneration packages and policies.
Rather than setting aside the HR issues until the merger/acquisition transaction has
been completed, early investigation and identification of potential concerns through a
due diligence exercise can help increase the success of the deal. Our HR due
diligence service can provide management with valuable information on the feasibility
of the deal and involves investigation of the following areas:

Compensation and Benefits Plan

HR Strategy and Integration
Employee Relations
Communications and Culture

Legal Due Diligence

Legal Due Diligence covers the legal aspects of a business transaction, liabilities of the
target company, potential legal pitfalls and other related issues. Legal Due Diligence covers
Intra-corporate and inter-corporate transactions.
It includes preparation of regulatory checklist meeting with personnel, independent check
with regulatory authorities etc. apart from document verification.

Financial Due Diligence

Financial Due Diligence is a reasonable level of enquiry into the financial affairs having a
material impact on the prospects of the business. A FDD review may not only look at the
historical financial performance of a business but will generally consider the forecast
financial performance also. The objective is to ensure that prospective investors make an
informed investment decision. Its a fact gathering exercise with a focused analysis of
information. The main sources of information for a FDD review include:
Historical financial data including statutory accounts, detailed management accounts
and reports and income tax returns
Current financial data such as year-to-date management accounts
Minutes of Directors Meetings and Management Meetings

23

FDD is about: Evaluation, Interpretation and Communication

Purpose of Financial Due Diligence

Identify potential risks for the buyer in its investment decision
Evaluate quality of reported earnings and identify value drivers critical to the

transaction
Corroborate buyer assertions regarding target s targets financial position
Identify issues to be addressed in purchase agreements
Assess strengths of financial personnel and systems
Improve transaction structure
Identify areas for post-acquisition attention
It helps in better negotiation with the discovered information

STEPS /PROCESS OF DUE DILIGENCE

A pre diligence is primarily the activity of management of paper, files and people.
1. Signing the Letter of Intent (Lol) and the Non Disclosure Agreement (NDA).
2. Receipt of documents from the company and review of the same with the checklist of
documents already supplied to the company.
3. Identifying the issues.
4. Organising the papers required for a diligence.
5. Creating a data room.
The first and foremost in a deal for the management of the target company, is that the
investor is to sign a Letter of Intent (LoI) or a term sheet which underlines the various terms

24

on which the proposed deal is to be concluded. Immediately on receipt of the LOl the
investors sign an NDA with the various agencies conducting a diligence, be it finance,
accounting, legal or a secretarial diligence.
The company would usually receive a checklist from the agency conducting the diligence.
The checklist is invariably exhaustive in nature, and therefore, the company may either
collate and compile the documents in-house, or outsource this to an external agency. While
the data is being collated care should be taken to ensure that there are no loose ends that
may probably arise.
As regards a data room, some of the important things that one should take cognizance of
from the corporate view point are the following:
a)
b)
c)
d)
e)
f)
g)
h)

Do not delay deadlines (leads to suspicion).

Mark each module of the checklist provided for separately.
In case some issues are not applicable spell it out as Not applicable.
In case some issues cannot be resolved immediately, admit it.
Put a single point contact to oversee the process of diligence.
Keep a register, to track people coming in and going out.
An overview on the placement of files.
Introduction to the point person.

During the Diligence, care should be taken to adhere to certain hospitality issues, like:
a)
b)
c)
d)
e)

Be warm and receptive to the professionals who are conducting diligence.

Enquire on the DD team (recommended at least thrice a day).
Join them for lunch.
Ensure good supply of refreshments.
In case of any corrections - admit and rectify.

As regards the process of diligence, as a professional care should be taken to scrutinise

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 though things
have to be wrapped up at the earliest. The company may be provided an opportunity to clear
the various issues that may arise out of a diligence.
After the diligence is conducted, the professionals submit a report, which in common
parlance is called the DD report. These reports can be of various kinds, a summary report; a
detailed report or the like; and the findings mentioned in the report can be very significant, in
as much as the deal is concerned.
There are certain terms used to define the outcome of these reports:
Deal Breakers: In this report the findings can be very glaring and may expose various noncompliance may arise - any criminal proceeding or known liabilities.
25

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.
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.
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.
Interestingly, only after the reporting formalities are over and various rectifications are carried
out, the shareholders agreement (which is the most important document) is executed. This
agreement contains certain standard clauses like the tag along and drag along rights;
representations and warranties; condition precedents, and other clauses that have an impact
on the deal.
Post diligence: There can be interesting assignments arising out of the diligence made
by the team of professionals. It can range from making applications / filing of petition for
compounding of various offences or negotiating the shareholders agreement, since the
investors will be on a strong wicket and may negotiate the price very hard.
Hence, arising out of this diligence, there are various opportunities for a professional in
practice, which may include inter-alia, compounding application to the statutory bodies,
amending the various shortcomings and so on. In fact, filing of these applications becomes a
pre condition to close the transaction, and therefore, the expertise of professionals is always
in demand. Diligence is one tool which can add excellence in compliance levels, and is a
business value addition as far as a professional is concerned, whether employed or in
practice.

TRANSACTION REQUIREMENT
Mergers, Amalgamations & Acquisitions
The term due diligence is synonymous with background check and refers
to the period during which buyers make sure they have all the information
they need to proceed with the transaction.
The key objective of the purchaser or acquirer from the transaction is to get
something better than whatever it is that they are presently doing. The
26

prospective purchaser tries to minimize or unveil any post settlement

surprises and reduce uncertainties. The cost of the preparation of a quality
due diligence exercise fades into insignificance when compared to the cost of
a bad acquisition
So, the prospective purchaser conducts extensive due diligence .He sends a
questionnaire to the target company, requesting full details of the businesss
financials, patents and patent applications, licenses and collaboration
agreements,

major

systems,

confidentiality

agreements,

employment

contracts and a whole host of other information. The team doing the due
diligence then reviews regulatory and press filings, media reports, etc. to find
out whether there are any legal and regulatory issues, existing and pending
lawsuits and other litigation involving the entity. The team may also look for
conflicts of interest, insider trading and other problems.
Joint Venture & Collaboration
Before entering into a major commercial agreement like a joint venture or other
collaboration with a company, a collaboration partner will want to carry out a certain
amount of due diligence. This is particularly likely to be the case where a large
company is forming a relationship for the first time with a relatively small start-up
company. The due diligence may not to be as extensive as on an acquisition, but the
larger company will be seeking comfort that its investment will be secure and the
small company has the systems, personnel, expertise and resources to perform its
obligations.

POINT

OF

CONCERN

WHILE

CONDUCTING

DILIGENCE
i.
ii.
iii.
iv.
v.
vi.
vii.

Objectives and purpose

Planning the schedule
Negotiation for time
Risk Minimization
Information from external resources
Report only the material facts
Structure of information

DUE DILIGENCE VS. AUDIT

Particulars

Due Diligence

Audit

27

DUE

Scope

Includes not only financial statements,

Limited to financial statements

but also business plan, management

structure etc.
Data

Historical date + future prospects

Only historical data

Mandatory

Need based

Mandatory

Assurance

Negative

Positive

Type

Forward looking

Post mortem analysis

Nature

Varies with transaction

Always uniform

Repetitiveness Occasional event

Recurring event

CASE STUDIES
Case Study I
Facts:

A leading international advertising firm looking at acquiring a mid-sized Indian firm

DD findings revealed loss of major customers, dependence on CEO for all

relationships, negative feedback from competition

Client asked KPMG Forensic to carry out a promoter background check

Findings revealed:

3 of 7 clients interviewed had delivery issues

The largest customer had blacklisted target, suspecting the account manager of

having been involved in a major fraud with one of its employees

Subsequently, part of the business from this client accepted in the name of another

firm incorporated for this purpose. Client not aware

Other ethics related issues cropped up

What did the acquirer do?

Aborted the deal
Case Study II
Facts

28

A PE house looked at buying majority stake in a super market retail chain, with 75

stores in a South Indian state.

The PE had already earlier acquired another up market chain, 10 outlets, in another

metro
Planned to merge the two, use best practices

DD revealed:

Entire purchasing function with promoters wife and son

All cash collections from all stores sent to promoters house daily, who deposited

them in the bank

Inventory records weak, no reconciliation
Inventories at stores : 40 days of sales, despite a central warehouse that replenished
stocks at stores on a daily basis

What happened?

PE invested, deal consummated

No further work done on cash management and inventory modules
Post transaction, fraud discovered :
i.
Kickbacks from suppliers
ii.
Inventory inflated
iii.
Promoter dressing up sales by inflating cash deposited in bank (cash
generated from other businesses deposited and shown as retail)

DUE DILIGENCE CHECKLIST

A proper Due Diligence investigation requires detailed information about many different
aspects of an entity including its legal and financial obligations, management and
employment issues, tangible and intangible assets, contracts, pending litigation, and
business strategies. Effective Due Diligence is both an art and a science. The art of Due
Diligence lies in asking intelligent questions that can hone in on and elucidate information
needed for a proper understanding of the business or transaction under consideration. The
science of Due Diligence is in the preparation of comprehensive and customized checklists
detailing the specific questions that should be presented to the information provider.

Corporate Documents of the Company and its Subsidiaries

Undertaking and declaration to be obtained
Material Contracts and Agreements
Litigation
Indebtedness
29

Trade union and Labour relations

Financial Information
Confirmations
Title to Property and Real- Estate
Insurance
Undisclosed Liability
Direct and Indirect Taxation
Governmental Regulations
Employees and Related Parties
Guarantees
Exchange control
Statutory documents
Products and Equipment
Environmental Matters
Intellectual Property
Miscellaneous

CONCLUSION
The emphasis of the compliance management is on enabling companies to acquire the skillsets and systems to ensure continued adherence of law. Compliance is one of the steps in
corporate governance initiatives since governance is a strategy while legal compliance is
operational plan of action. Core to good corporate governance is compliance with the law of
land. The compliance with the various laws should be transparent showing that all desirable
disclosures have been made. Comprehensive compliance management system assists
companies in their endeavour towards being a good corporate citizen. Today, compliance is
not optional; it has become cost of doing business and the best possible way of managing of
integrated frame work supported by an automatic IT solution and strong management
commitment. Therefore, the process of corporate compliance management is a continuous.
A due diligence exercise proves the level of compliance in a corporate and acts as a health
check to ensure that the standards are maintained. A due diligence, therefore, can go as far
as the law itself. Though to an extent, it may be a post-mortem exercise, it is still forward
looking, futuristic and brings out the essence of a professional, in the truest sense.
Compliance is a business enabler and not a burden.

30

FCS POONAM AHUJA

(Membership No. 4705)

SWATI GROVER
Reg. no.

31