Tata Finance Limited



Tata Finance LimitedCase AnalysisCarbon, FamilaSamson, Christine MayTable of Contents TOC \o "1-3" \h \z \u CASE BRIEF PAGEREF _Toc282824258 \h 3Case Abstract PAGEREF _Toc282824259 \h 3Auditor’s Dilemma PAGEREF _Toc282824260 \h 3Auditor’s Question PAGEREF _Toc282824261 \h 4Research Question PAGEREF _Toc282824262 \h 4CASE CONTEXT PAGEREF _Toc282824263 \h 4Tata Group PAGEREF _Toc282824264 \h 4Tata Code of Conduct PAGEREF _Toc282824265 \h 6Ownership and Corporate Structure PAGEREF _Toc282824266 \h 13Nature of the Entity PAGEREF _Toc282824267 \h 14Operations PAGEREF _Toc282824268 \h 14Investing PAGEREF _Toc282824269 \h 15Financing PAGEREF _Toc282824270 \h 15Market PAGEREF _Toc282824271 \h 15Industry PAGEREF _Toc282824272 \h 15Regulatory Body- Financial Regulatory Bodies in India PAGEREF _Toc282824273 \h 18RESEARCH QUESTIONS PAGEREF _Toc282824274 \h 20Question 1. PAGEREF _Toc282824275 \h 20Question 2. PAGEREF _Toc282824276 \h 21Question 3. PAGEREF _Toc282824277 \h 23Question 4. PAGEREF _Toc282824278 \h 24Question 5. PAGEREF _Toc282824279 \h 26CASE BRIEFCase AbstractThe accounting scandal at Tata Finance involved a little-known subsidiary of the company, Niskalp Investment & Trading Company. The subsidiary, after incurring huge losses from its large investment in technology stocks, uses intercorporate deposits to maintain its minimum capital adequacy ratio. Moreover, the company opts to desubsidiarise Niskalp to protect its balance sheet by not having to disclose the losses of its subsidiary anymore. This measure failed to remedy the company’s financial problem. After the condition was revealed to the public, Tata group dismissed Dilip Pendse, the senior operating officer for making the unauthorized investments. Pendse claimed that Tata group executives were aware of the fraudulent transactions but the latter disagreed to his statement. To clear their names, Tata retained AFF to investigate the scandal. The audit report confirmed Pense’s allegation and criticized the quality of the company’s corporate governance. Upon public disclosure, AFF retracted the report and dismissed Kale. This has caused AFF’s reputation in distress.Auditor’s DilemmaThe A. F. Ferguson & Company’s dilemma is whether to withdraw of their audit report after it was publicly known. The report which was expected to clear the names of Tata Group’s executives turned out to support Dilip Pendse’s allegation that they were aware of the deceitful transactions. AFF’s independence was threatened by Tata Group because the firm audits several of the largest Tata companies and this close affiliation enhanced AFF’s stature and prestige within the country’s accounting profession. As an independent auditor, AFF has a responsibility to the public. In order to maintain public trust and confidence in the accounting profession, AFF must adhere to standards of ethical conduct that embody and demonstrate integrity, objectivity, and concern for the public.Auditor’s QuestionHow can the auditor decide on withdrawing the audit report?Research Question1.What are the criteria to be considered by the auditor to establish quality audit report?2. What are the standards involved in withdrawing an audit report? 3.What are the threats posed by the engagement to the auditor?4.How should the auditor deal with these threats?5.What recommendations can be made to reinforce the independent audit function?CASE CONTEXTTata Group In the 10th century a group of Iranians fled Iran as refugees in search of somewhere to practise their religion freely. The Iranshah Atash Behram at Udwada - the most scared fire temple in India, which houses the flame that brought by the Parsis on their flight from Iran. They finally ended up on the shores of Gujarat and were granted leave to stay there, thus founding the Indian Parsi community (Parsi being Gujarati for Persian). Over the next centuries, Zoroastrianism survived with just a few minor cultural differences creeping in India. The Zoroastrian response to the increasing urbanisation and cultural diversity of the 20th century was one of flexibility and integrity that reflected the three core values of good thoughts, good words and good deeds. The respect for Zoroastrianism grew through its generous and healthy contributions to the societies it encountered, and its reputation for the honesty of its businessmen. Although there was a decline of the priesthood and the global dispersion of the sparse population of remaining Zoroastrians has become a serious issue for the survival of the Zoroastrian faith. However, the same readiness to defy adversity and insistence on remaining true to the values of Zoroastrianism prevails. These are the same qualities which have ensured its survival for the last 3000 years. The Parsis were among the most ardent supporters of India’s long struggle to become independent of Great Britain. India’s largest privately owned company is controlled by a Parsi family, as is the Tata Group, India’s largest conglomerate. It has helped shape the economic and political history of India over the past century. Tata Group is one of India's largest and most respected business groups. Its name is synonymous with India's industrialization by seeding India’s pioneering business sectors. A visionary entrepreneur, an avowed nationalist and a committed philanthropist Jamsetji Nusserwanji Tata (J.N. Tata) laid the foundations of Tata Group when he started a private trading firm in 1868. The three great ideas of his life: setting up an iron and steel company, generating hydroelectric power and creating an institution that would tutor Indians in the sciences. None of these ideas would come to fruition while Jamsetji Tata lived, but they were realised in full measure by those who followed him.In 1874, Jamsetji Nusserwanji Tata set up the Central India Spinning Weaving and Manufacturing Company Limited and thus marked the Group's entry into textiles. In 1887, he formed a partnership firm, Tata & Sons, with his elder son Sir Dorabji Tata and his cousin Ratanji Dadabhoy Tata. His younger son Sir Ratan Tata joined the firm in 1896. In 1902, the Indian Hotels Company was incorporated to set up the Taj Mahal Palace and Tower, India's first luxury hotel, which opened in 1903. This was the most dazzling of the Tata enterprises that came into being during Jamsetji Nusserwanji Tata’s lifetime. Legend has it that Jamsetji Nusserwanji Tata set his mind on building it after being denied entry into one of the city's fancy hotels for being an Indian. Today, the Taj Group of Hotels is a byword for luxury and quality, with standout properties across the world. In 1904, Jamsetji Nusserwanji Tata died in Germany, the chairmanship of the Tata Group passed to the elder of his two sons, Sir Dorab Tata, who accomplished the daunting task of turning his father’s extraordinary ideas into reality. Sir Dorab was the force behind the setting up, in 1905, of the Tata Iron and Steel Company. Seven years later, India's first iron and steel plant, in Jamshedpur in the eastern part of the country, had started its production. In 1910, the Tata Group broke new ground once again, this time by generating hydroelectric power from a site near Bombay. In 1911, seven years after his death, Jamsetji Tata’s long-cherished dream of establishing an institution where Indians could cultivate their scientific temper was realised. The Indian Institute of Science, set up in Bangalore, would nurture some of the brightest minds in India. In 1912, Tata Steel introduced eight-hour working days well before it became statutory in much of the West, and the first Tata provident fund scheme was started in 1920 (governmental regulation on this came into force in 1952). The Tata townships, and the facilities they have, are an example of the manner in which the Tata Group extends itself to care for its employees. In 1917, Tata Oil Mills Company was established to make soaps, detergents and cooking oils. In 1932, Tata Aviation Service, the forerunner to Tata Airlines and Air India, India’s national carrier, took to the skies. The maiden flight in the history of Indian aviation took off from Drigh Road in Karachi, now in Pakistan, with JRD Tata at the controls of a Puss Moth. In 1953, the Indian government nationalised Air India. Its Trusts have instituted the Tata Institute of Social Sciences in 1936; India's first cancer hospital, the Tata Memorial in 1941, and in 1945, the Tata Institute of Fundamental Research, which became the cradle of India's Atomic energy program. In 1939, Tata Chemicals, presently, the largest producer of soda ash in India, was established. In 1945, Tata Engineering and Locomotive Company (renamed Tata Motors in 2003) was established to manufacture locomotive and engineering products. In 1954, India's major marketing, engineering and manufacturing organisation, Voltas, was established. In 1962, Tata Finlay (now Tata Tea), one of the largest tea producers, was established. In 1968, Tata Consultancy Services (TCS), India's first software services company, was established as a division of Tata Sons. In 1970, Tata McGraw-Hill Publishing Company was created to publish educational and technical books. In 1984, Titan Industries, a joint venture between the Tata Group and the Tamil Nadu Industrial Development Corporation (TIDCO), was set up to manufacture watches.In 1996, Tata Teleservices (TTSL) was established to lead the Group's foray into the telecom sector. In 1998, Tata Indica, India's first indigenously designed and manufactured car, was launched by Tata Motors. In 2000, Tata Tea acquired the Tetley Group, UK. This was the first major acquisition of an international brand by an Indian business group. In 2001, Tata entered into insurance business in joint venture with Tata AIG. In 2007, Tata Steel acquired Corus the fifth largest steel company in the world. The Tata Group presently employs about 350,000 people. Taking good care of this large family is a priority for the Group, and it has a tradition to stay true to while doing so. The Zoroastrian beliefs can best be summed up by the maxim: Humata, Hukhta, Hvarshta. The creed translates in English to “Good Thoughts, Good Words, Good Deeds”. Zoroastrians try to live their daily lives by this creed. Zoroastrians work towards improving the local community and society in general. They tend to give generously to charities and are often behind educational and social initiatives. The Parsi community in India is particularly known for its industrious contributions to Indian society. Because of this, Tata companies have always believed in returning wealth to the society they serve. Two-thirds of the equity of Tata Sons, the Tata promoter company, is held by philanthropic trusts that have created national institutions for science and technology, medical research, social studies and the performing arts. The trusts also provide aid and assistance to non-government organisations working in the areas of education, healthcare and livelihoods. Tata companies also extend social welfare activities to communities around their industrial units. The combined development-related expenditure of the trusts and the companies amounts to around 4 per cent of the net profits of all the Tata companies taken together.Today, Tata Group comprises 96 operating companies in seven business sectors: information systems and communications; engineering; materials; services; energy; consumer products; and chemicals. The Group has operations in more than 54 countries across six continents, and its companies export products and services to 120 nations. Every Tata company or enterprise operates independently. Each of these companies has its own board of directors and shareholders, to whom it is answerable. There are 28 publicly listed Tata enterprises and they have a combined market capitalisation of about $101.3 billion (as on?December 2, 2010), and a shareholder base of 3.4 million. The major Tata companies are Tata Steel, Tata Motors, Tata Consultancy Services (TCS), Tata Power, Tata Chemicals, Tata Global Beverages, Indian Hotels and Tata Communications.Tata Code of ConductThis code serves as an ethical road map for Tata employees and companies, and provides the guidelines by which the group conducts its business.National interestThe Tata group is committed to benefit the economic development of the countries in which it operates. No Tata company shall undertake any project or activity to the detriment of the wider interests of the communities in which it operates. A Tata company’s management practices and business conduct shall benefit the country, localities and communities in which it operates, to the extent possible and affordable, and shall be in accordance with the laws of the land. A Tata company, in the course of its business activities, shall respect the culture, customs and traditions of each country and region in which it operates. It shall conform to trade procedures, including licensing, documentation and other necessary formalities, as applicable.Financial reporting and recordsA Tata company shall prepare and maintain its accounts fairly and accurately and in accordance with the accounting and financial reporting standards which represent the generally accepted guidelines, principles, standards, laws and regulations of the country in which the company conducts its business affairs. Internal accounting and audit procedures shall reflect, fairly and accurately, all of the company’s business transactions and disposition of assets, and shall have internal controls to provide assurance to the company’s board and shareholders that the transactions are accurate and legitimate. All required information shall be accessible to company auditors and other authorised parties and government agencies. There shall be no willful omissions of any company transactions from the books and records, no advance-income recognition and no hidden bank account and funds. Any willful, material misrepresentation of and / or misinformation on the financial accounts and reports shall be regarded as a violation of the Code, apart from inviting appropriate civil or criminal action under the relevant laws. No employee shall make, authorise, abet or collude in an improper payment, unlawful commission or petitionA Tata company shall fully support the development and operation of competitive open markets and shall promote the liberalisation of trade and investment in each country and market in which it operates. Specifically, no Tata company or employee shall engage in restrictive trade practices, abuse of market dominance or similar unfair trade activities. A Tata company or employee shall market the company’s products and services on their own merits and shall not make unfair and misleading statements about competitors’ products and services. Any collection of competitive information shall be made only in the normal course of business and shall be obtained only through legally permitted sources and means.Equal opportunities employerA Tata company shall provide equal opportunities to all its employees and all qualified applicants for employment without regard to their race, caste, religion, colour, ancestry, marital status, gender, sexual orientation, age, nationality, ethnic origin or disability. Human resource policies shall promote diversity and equality in the workplace, as well as compliance with all local labour laws, while encouraging the adoption of international best practices. Employees of a Tata company shall be treated with dignity and in accordance with the Tata policy of maintaining a work environment free of all forms of harassment, whether physical, verbal or psychological. Employee policies and practices shall be administered in a manner consistent with applicable laws and other provisions of this Code, respect for the right to privacy and the right to be heard, and that in all matters equal opportunity is provided to those eligible and decisions are based on merit.Gifts and donationsA Tata company and its employees shall neither receive nor offer or make, directly or indirectly, any illegal payments, remuneration, gifts, donations or comparable benefits that are intended, or perceived, to obtain uncompetitive favours for the conduct of its business. The company shall cooperate with governmental authorities in efforts to eliminate all forms of bribery, fraud and corruption. However, a Tata company and its employees may, with full disclosure, accept and offer nominal gifts, provided such gifts are customarily given and / or are of a commemorative nature. Each company shall have a policy to clarify its rules and regulations on gifts and entertainment, to be used for the guidance of its ernment agenciesA Tata company and its employees shall not, unless mandated under applicable laws, offer or give any company funds or property as donation to any government agency or its representative, directly or through intermediaries, in order to obtain any favourable performance of official duties. A Tata company shall comply with government procurement regulations and shall be transparent in all its dealings with government agencies.Political non-alignmentA Tata company shall be committed to and support the constitution and governance systems of the country in which it operates. A Tata company shall not support any specific political party or candidate for political office. The company’s conduct shall preclude any activity that could be interpreted as mutual dependence / favour with any political body or person, and shall not offer or give any company funds or property as donations to any political party, candidate or campaign.Health, safety and environmentA Tata company shall strive to provide a safe, healthy, clean and ergonomic working environment for its people. It shall prevent the wasteful use of natural resources and be committed to improving the environment, particularly with regard to the emission of greenhouse gases, and shall endeavour to offset the effect of climate change in all spheres of its activities. A Tata company, in the process of production and sale of its products and services, shall strive for economic, social and environmental sustainability.Quality of products and servicesA Tata company shall be committed to supply goods and services of world class quality standards, backed by after-sales services consistent with the requirements of its customers, while striving for their total satisfaction. The quality standards of the company’s goods and services shall meet applicable national and international standards. A Tata company shall display adequate health and safety labels, caveats and other necessary information on its product packaging. Corporate citizenshipA Tata company shall be committed to good corporate citizenship, not only in the compliance of all relevant laws and regulations but also by actively assisting in the improvement of quality of life of the people in the communities in which it operates. The company shall encourage volunteering by its employees and collaboration with community groups. Tata companies are also encouraged to develop systematic processes and conduct management reviews, as stated in the Tata ‘corporate sustainability protocol’, from time to time so as to set strategic direction for social development activity. The company shall not treat these activities as optional, but should strive to incorporate them as an integral part of its business plan.Cooperation of Tata companiesA Tata company shall cooperate with other Tata companies including applicable joint ventures, by sharing knowledge and physical, human and management resources, and by making efforts to resolve disputes amicably, as long as this does not adversely affect its business interests and shareholder value. In the procurement of products and services, a Tata company shall give preference to other Tata companies, as long as they can provide these on competitive terms relative to third parties.Public representation of the company and the groupThe Tata group honours the information requirements of the public and its stakeholders. In all its public appearances, with respect to disclosing company and business information to public constituencies such as the media, the financial community, employees, shareholders, agents, franchisees, dealers, distributors and importers, a Tata company or the Tata group shall be represented only by specifically authorised directors and employees. It shall be the sole responsibility of these authorised representatives to disclose information about the company or the group.Third party representationParties which have business dealings with the Tata group but are not members of the group, such as consultants, agents, sales representatives, distributors, channel partners, contractors and suppliers, shall not be authorised to represent a Tata company without the written permission of the Tata company, and / or if their business conduct and ethics are known to be inconsistent with the Code. Third parties and their employees are expected to abide by the Code in their interaction with, and on behalf of, a Tata company. Tata companies are encouraged to sign a non-disclosure agreement with third parties to support confidentiality of information.Use of the Tata brandThe use of the Tata name and trademark shall be governed by manuals, codes and agreements to be issued by Tata Sons. The use of the Tata brand is defined in and regulated by the Tata Brand Equity and Business Promotion agreement. No third party or joint venture shall use the Tata brand to further its interests without specific authorisation.Group policiesA Tata company shall recommend to its board of directors the adoption of policies and guidelines periodically formulated by Tata Sons.ShareholdersA Tata company shall be committed to enhancing shareholder value and complying with all regulations and laws that govern shareholder rights.The board of directors of a Tata company shall duly and fairly inform its shareholders about all relevant aspects of the company’s business, and disclose such information in accordance with relevant regulations and agreements.Ethical conductEvery employee of a Tata company, including full-time directors and the chief executive, shall exhibit culturally appropriate deportment in the countries they operate in, and deal on behalf of the company with professionalism, honesty and integrity, while conforming to high moral and ethical standards. Such conduct shall be fair and transparent and be perceived to be so by third parties. Every employee of a Tata company shall preserve the human rights of every individual and the community, and shall strive to honour commitments. Every employee shall be responsible for the implementation of and compliance with the Code in his / her environment. Failure to adhere to the Code could attract severe consequences, including termination of employment.Regulatory complianceEmployees of a Tata company, in their business conduct, shall comply with all applicable laws and regulations, in letter and spirit, in all the territories in which they operate. If the ethical and professional standards of applicable laws and regulations are below that of the Code, then the standards of the Code shall prevail. Directors of a Tata company shall comply with applicable laws and regulations of all the relevant regulatory and other authorities. As good governance practice they shall safeguard the confidentiality of all information received by them by virtue of their position.Concurrent employmentConsistent with applicable laws, an employee of a Tata company shall not, without the requisite, officially written approval of the company, accept employment or a position of responsibility (such as a consultant or a director) with any other company, nor provide freelance services to anyone, with or without remuneration. In the case of a full-time director or the chief executive, such approval must be obtained from the board of directors of the company.Conflict of interestAn employee or director of a Tata company shall always act in the interest of the company, and ensure that any business or personal association which he / she may have does not involve a conflict of interest with the operations of the company and his / her role therein. An employee, including the executive director (other than independent director) of a Tata company, shall not accept a position of responsibility in any other non-Tata company or not-for-profit organisation without specific sanction.The above shall not apply to (whether for remuneration or otherwise): (a) Nominations to the boards of Tata companies, joint ventures or associate companies. (b) Memberships / positions of responsibility in educational / professional bodies, wherein such association will benefit the employee / Tata company.(c) Nominations / memberships in government committees / bodies or organisations.(d) Exceptional circumstances, as determined by the competent petent authority, in the case of all employees, shall be the chief executive, who in turn shall report such exceptional cases to the board of directors on a quarterly basis. In case of the chief executive and executive directors, the Group Corporate Centre shall be the competent authority. An employee or a director of a Tata company shall not engage in any business, relationship or activity which might conflict with the interest of his / her company or the Tata group. A conflict of interest, actual or potential, may arise where, directly or indirectly…(a) An employee of a Tata company engages in a business, relationship or activity with anyone who is party to a transaction with his / her company. (b) An employee is in a position to derive an improper benefit, personally or to any of his / her relatives, by making or influencing decisions relating to any transaction. (c) An independent judgement of the company’s or group’s best interest cannot be exercised.The main areas of such actual or potential conflicts of interest shall include the following: (a) An employee or a full-time director of a Tata company conducting business on behalf of his / her company or being in a position to influence a decision with regard to his / her company’s business with a supplier or customer where his / her relative is a principal officer or representative, resulting in a benefit to him / her or his / her relative. (b) Award of benefits such as increase in salary or other remuneration, posting, promotion or recruitment of a relative of an employee of a Tata company, where such an individual is in a position to influence decisions with regard to such benefits. (c) The interest of the company or the group can be compromised or defeated.Notwithstanding such or any other instance of conflict of interest that exist due to historical reasons, adequate and full disclosure by interested employees shall be made to the company’s management. It is also incumbent upon every employee to make a full disclosure of any interest which the employee or the employee’s immediate family, including parents, spouse and children, may have in a family business or a company or firm that is a competitor, supplier, customer or distributor of or has other business dealings with his / her company. Upon a decision being taken in the matter, the employee concerned shall be required to take necessary action, as advised, to resolve / avoid the conflict. If an employee fails to make the required disclosure and the management of its own accord becomes aware of an instance of conflict of interest that ought to have been disclosed by the employee, the management shall take a serious view of the matter and consider suitable disciplinary action against the employee.Securities transactions and confidential informationAn employee of a Tata company and his / her immediate family shall not derive any benefit or counsel, or assist others to derive any benefit, from access to and possession of information about the company or group or its clients or suppliers that is not in the public domain and, thus, constitutes unpublished, price-sensitive insider information. An employee of a Tata company shall not use or proliferate information that is not available to the investing public, and which therefore constitutes insider information, for making or giving advice on investment decisions about the securities of the respective Tata company, group, client or supplier on which such insider information has been obtained. Such insider information might include (without limitation) the following: acquisition and divestiture of businesses or business units, financial information such as profits, earnings and dividends, announcement of new product introductions or developments, asset revaluations, investment decisions / plans, restructuring plans, major supply and delivery agreements, raising of finances.An employee of a Tata company shall also respect and observe the confidentiality of information pertaining to other companies, their patents, intellectual property rights, trademarks and inventions; and strictly observe a practice of non-disclosure.Protecting company assetsThe assets of a Tata company shall not be misused; they shall be employed primarily and judiciously for the purpose of conducting the business for which they are duly authorised. These include tangible assets such as equipment and machinery, systems, facilities, materials and resources, as well as intangible assets such as information technology and systems, proprietary information, intellectual property, and relationships with customers and suppliers.CitizenshipThe involvement of a Tata employee in civic or public affairs shall be with express approval from the chief executive of his / her company, subject to this involvement having no adverse impact on the business affairs of the company or the Tata group.Integrity of data furnishedEvery employee of a Tata company shall ensure, at all times, the integrity of data or information furnished by him/her to the company. He/she shall be entirely responsible in ensuring that the confidentiality of all data is retained and in no circumstance transferred to any outside person/party in the course of normal operations without express guidelines from or, the approval of the management.Reporting concernsEvery employee of a Tata company shall promptly report to the management, and / or third-party ethics helpline, when she / he becomes aware of any actual or possible violation of the Code or an event of misconduct, act of misdemeanour or act not in the company’s interest. Such reporting shall be made available to suppliers and partners, too. Any Tata employee can choose to make a protected disclosure under the whistleblower policy of the company, providing for reporting to the chairperson of the audit committee or the board of directors or specified authority. Such a protected disclosure shall be forwarded, when there is reasonable evidence to conclude that a violation is possible or has taken place, with a covering letter, which shall bear the identity of the whistleblower. The company shall ensure protection to the whistleblower and any attempts to intimidate him / her would be treated as a violation of the Code.Ownership and Corporate StructureThe two Promoter companies of Tata Group are: Tata Sons and Tata Industries. Tata Sons is the promoter of all key companies of the Tata Group and holds the bulk of shareholding in these companies. Tata Sons is the owner of the Tata name and the Tata trademark, which are registered in India and several other countries. Tata Industries was set up by Tata Sons in 1945 as a managing agency for businesses it promoted. Tata Industries' mandate was recast, in the early 1980s, to promote the Group's entry into new and high-tech areas. The Tatas used to manage their companies with very small equity stakes. Prior to restructuring, in 1991, the Tata group was a loose confederacy of 300 companies having sales of around Rs 86 billion and controlling an asset base totaling more than Rs 85 billion with minor ownership stakes. As a consequence the chairmen of larger affiliates had grown accustomed to ruling their domains without interference from the Tatas and once in a while competing with each other in a similar line of business. In the administration of Ratan Tata, Tata Sons Chairman, decided to change all of this and have more control. The Tata group restructuring involved various steps such as building Tata brand, reviving its managerial recruitment and retaining practices (through, reviving TAS), changing the portfolio of business lines, and most importantly making the group more cohesive, and controllable.The ownership structure of Tata group shows signs of both “pyramid” and “cross-shareholding” structures in-group firms. A “pyramid” denotes a hierarchical chain by which a family controls a firm, and cross holding happens when a controlled firm owns any shares in its controlling shareholder or in the firms along that chain of control (including any indirect means). In early 2001, senior executives of the Tata Group, which include its top officer, Ratan Tata, the corporate group’s executive chairman and the great grandson of J.N. Tata, have faced a protracted and widely publicized accounting scandal that threatens to undercut the credibility and prestige of the prominent organization and its founding family. This involves one of the Tata affiliate, Tata Finance Limited, engaged in automobile financing, mortgaged lending, and consumer credit cards. Tata Finance Limited is a public company that was promoted by Tata Industries Ltd. as its wholly owned subsidiary. The Company was incorporated as a private limited company at Mumbai, India on March 16, 1984 and converted into a public company on April 26, 1984. On January 10, 2005, The Board of Directors of Tata Motors Limited (the Company) and Tata Finance Ltd. (TFL) approved the merger of TFL with the Company. The merger was under a Scheme of Amalgamation under Sections 391 and 394 of the Companies Act 1956 and was subject to the approval of the Hon'ble High Court of Judicature at Bombay and took effect on April 1, 2005. In terms of the Scheme of Amalgamation that would be submitted to the Court, all equity shareholders of TFL were entitled to receive 8 Ordinary Shares of the Company of Rs.10/- each for every 100 equity shares of Tata Finance Ltd. of Rs.10/- each. The exchange ratio for the number of shares of the Company to be issued to the shareholders of TFL was based upon a valuation conducted by M/s Bansi Mehta & Co., Chartered Accountants. The merger is expected to enable the vehicle financing business of Tata Finance to grow stronger by leveraging its synergies of the direct business model with the dealer driven business of Bureau of Hire Purchase and Credits (BHPC), a division of the Company. This merger will also allow the TFL shareholders to participate in the growth of the Company, a leading automobile company in the country and thereby significantly gain with an upside of dividend and shareholder value creation. The merger will enable the Company to grow its auto financing business and offer complete solutions in line with the global best practices in the auto industry. This will also enable the Company to provide a hedge against the cyclicality of the automotive business and a significant value creation for its shareholders. Currently, Tata Finance and BHPC finance around 17-18% of the Company's vehicle sales while the global benchmark for captive finance units is to finance 35-40% of the parent Company's vehicle sales. This merger is expected to create a platform that will enable the Company to accelerate its move towards the global benchmark.About Tata Finance Ltd, a Non Banking Finance Company, was formed by its promoters - Tata Industries Ltd. and the Company in 1984 with the primary objective of financing and promoting the Company's products and supporting financing needs of the Company's channel partners and retail finance business. Restructuring initiatives carried out by Tata Finance over the past 36 months have seen the Company divest all its non core activities and focus only on auto financing business. TFL had revenues of Rs.305 Crores and posted a profit before tax of Rs.17.5 crs in FY 03-04.In the first half of this fiscal, TFL had revenues of Rs 118 Crores and posted a profit before tax of Rs.15.6 Crores. The auto financing division of TFL (AFD) is expected to disburse funds of approx. Rs.1500 Crores during the current year as compared to Rs.551 crores disbursed in FY 01-02. Tata Motors, a flagship company of the Tata Group is the largest automobile company in India, with revenues of over US $ 3.5 billion (FY 2003-04). It is the world's fifth largest medium and heavy commercial vehicle manufacturer. The Company is the second largest player in the domestic passenger car market in India.Nature of the EntityOperationsTata Finance is a non-banking financial company engaged in the business of hire purchase, leasing and other finance related activities and also accepts fixed deposits from the public under its various deposit schemes. It was primarily engaged in providing hire purchase for commercial vehicles plant and machinery, equipments two wheelers and consumers durables. It was also engaged in financing trade bills and engaging in money market operations. Other finance related activity includes issuing of commercial paper as an interest reduction exercise in 1993. In 1994, the Company entered the field of finance for construction equipment.The Company has branches in Chandigarh, Jaipur, Calcutta, Baroda, Vishakapatnam, Madurai, Vellore, Salem, Calicut and Cannanore and greatly improved its geographic coverage in the Northern, Western and Southern regions of India. Sources of funds are shareholder’s equity (issuance of equity share capital and preferential share capital) and loan funds (both from secured and unsecured loans).Investing Tata Finance Limited has seven subsidiaries includinge Tata Finance Securities Limited, Niskalp Investment and& Trading Company, and Tata Home Finance. The Company acquired America Express business in India which involves foreign exchange and credit card services. Recently, Niskalp Investment and Trading Company is known as Niskalp Energy Limited.FinancingShareholder’s equity (issuance of equity share capital and preferential share capital) and loan funds (both from secured and unsecured loans) are the Company’s sources of funds. 60.16% of the company’s equity shares were allotted to promoters, directors, and friends, 5% were issued to employees and the 34.84% were issued to the public. 80% of the Company’s cumulative convertible preference shares were allotted to promoters, directors, and friends, 5% were issued to employees and 15% were issued to the public. In 1991, 76.49% equity shares were issued to the erstwhile Tata Industrial Finance Corporation. MarketTransport and construction sectors are the major segments of the company’s business activities. The company also undertakes leasing of plant machinery to a limited extent mainly to corporate clients. It is also engaged in money market operations and finances other companies for their different projects (e.g. TFL is the financier for the complete range of Hero Honda motorcycles of Hero Honda Motors Ltd (HHML)). IndustryTata Finance Limited TAFI, is a leading Non-Banking Finance Company (NBFC) from the Tata Group. It has initiated steps to convert the company into a financial supermarket. Tata Finance Limited AFI had a dominance in the area of commercial vehicle financing and also in the area of car finance and corporate leasing. The company till now has primarily serviced the industrial sector. A non-banking financial company (NBFC) is a company engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. An NBFC must be registered with the Reserve Bank of India (RBI) and have specific authorization?? to accept deposits from the public.NBFCs are doing functions akin to that of banks, however there are a few differences: (i) a NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.(ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and (iii) deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks. In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934. However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. venture capital fund/merchant banking companies/stock broking companies registered with Sebi, insurance company holding a valid certificate of registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or housing finance companies regulated by National Housing Bank.The NBFCs that are registered with RBI are: (i) equipment leasing company; (ii) hire-purchase company; (iii) loan company; and (iv) investment company. With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as (i) Asset Finance Company (AFC), (ii) Investment Company (IC) and (iii) Loan Company (LC). One of the services offered by Tata Finance Limited is hire purchase business.Hire purchase (abbreviated HP) is the legal term for a contract, in thesewhich two persons usually agrees to pay for goods in parts or a percentage at a time. It is also called HYPERLINK "" \o "Closed-end leasing"closed-end leasing. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly HYPERLINK "" \o "Renting"rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. Another service offered by Tata Finance is asset financing. Asset Finance Company (AFC) would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive / economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.The aboveThis type of companyies may be further classified into those accepting deposits or those not accepting deposits. Besides the above class of NBFCs the Residuary Non-Banking Companies are also registered as NBFC with the Bank.A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 2 crore from April 21, 1999).The company is required to submit its application for registration in the prescribed format alongwith necessary documents for bank's consideration. The bank issues certificate of registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid certificate of registration with authorisation to accept public deposits can accept/hold public deposits. The NBFCs accepting public deposits should have minimum stipulated net owned fund and comply with the directions issued by the bank. Presently, the maximum rate of interest a NBFC can offer is 11%. The interest may be paid or compounded at rests not shorter than monthly rests. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.Some of the important regulations relating to acceptance of deposits by NBFCs are as under: * i) The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. * ii) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests. * iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. * iv) NBFCs (except certain AFCs) should have minimum investment grade credit rating. * v) The deposits with NBFCs are not insured. * vi) The repayment of deposits by NBFCs is not guaranteed by RBI. * vii) There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.Other Nonbanking Finance CompaniesThe Tata Group formed TAFI in 1984. TAFI was created to provide hire purchase services. TAFI is a leader in the truck finance business. TAFI has capitalised on the strong brand name of the Tata and the TELCO dealer's infrastructure. Traditionally the company focussed on commercial vehicle financing, but over the period it has started car financing, construction equipment financing, short term lending, leasing, etc. TAFI's subsidiaries are engaged in primary dealership and investments and broking in the equity and debt market.TAFI, is a leading Non-Banking Finance Company (NBFC) from the Tata Group. It has initiated steps to convert the company into a financial supermarket. TAFI had a dominance in the area of commercial vehicle financing and also in the area of car finance and corporate leasing. The company till now has primarily serviced the industrial sector. TAFI has a strong branch network of 75 branches across the country.TAFI has been dominant in meeting the financial needs of the industrial sector. The company has concentrated in the area of commercial vehicle and car financing. The company has an added advantage of financing its group company TELCO's vehicles. Commercial vehicle financing amounts to 70% of total disbursements, while car finance amounts to 17% and leasing contributes 8% of total disbursements of the company.TAFI has plans of entering into power generation through non-conventional renewable energy sources. This unrelated diversification is being done to avail of the incentives offered by the Maharashtra government for wind generation of power. The company has planned to set up a 15-mw wind generated power plant in two phases of 7.5 mw each in Maharashtra. Mortgage Loans in IndiaTata Finance is also engaged in The concept of mMortgage lLoans in India. is growing day by day. The growth of the mortgage loans in India is boosted by the development of the real estate and increment in the activity pertaining to construction. The mortgage loans in India were previously supplied mainly by the financial institutions but now the commercial banks are also providing mortgage based loans to various types of customers. The commercial banks provide mortgage loans on nominal rates of interest.The Oobjectives of mortgage loans in India are: to provide the customer with the best possible services, to put emphasize on the quality of the credit and advance in form of mortgage loan and to focus on management of income and cost. The main functions of the mortgage loans in India are provided for: the purchase of four wheeled vehicles and two wheelers, the purpose of repayment of the previous loans, meeting the expenses pertaining to medical, educational and marriage purposes, undertaking renovation and repair works of the residential property, the purpose of purchasing land plots, houses, construction of houses, meeting the needs for commercial, trade and other business activities, and the requirements of the professionals for any kind of activities such as education, house construction or purchase. The services offered under the Mortgage loans in India are: home equity loans, mortgage refinancing, real estate lending, new home loans, latest mortgage quotes and debt consolidation service. The Mortgage Loans in India is provided against collateral security such as industrial property, urban commercial complex, residential house or apartment, possessed in the name of the receiver of the loan. The security such as rented house can be accepted if that same property is on a lease and the person should also have the authority to collect the rent under the power of anizations offering Mortgage Loans in India: (Competitors) * HDFC Bank Mortgage Service - Housing Development Finance Corporation (HDFC) Bank Mortgage Service is leader in the Indian mortgage market at present with the State Bank of India (SBI) following the lead * Bank Of Baroda - Baroda Advance Against Property: Bank of Baroda Mortgage Scheme is one most important mortgage schemes in the mortgage market in India * United Bank of India - United Mortgage Scheme: United Bank of India Mortgage Scheme is one of the most important part of the financial portfolio of the United Bank of India * Bank of India - BIO Star Mortgage Scheme: Bank of India Mortgage Scheme provides high quality financial product to fulfill the various requirements of the customers * Union Bank of India - Union Mortgage Scheme: Union Bank of India Mortgage Scheme offers a variety of financial products for the individual customers of various types * State Bank of Mysore - Equitable Mortgage of Property: State Bank of Mysore Mortgage Loan is one of the primary financial products of the State Bank of Mysore Credit Card business in IndiaAnother service offered by Tata Finance Limited is the credit card business. A study by the Indian Cards Council (ICC) revealed that the non performing assets in India's credit card business have mounted up to four times. Although the cost of attaining new credit cardholders is very low for the domestic card issuers yet the credit losses are very high as compared to international standards.Conversely the annual credit losses in India on per active card were about Rs 3,420 against Rs 3,070 in the US and Rs 1,220 in Australia. This is despite of the fact that the purchasing power of Indian cardholder is less than the consumers using credit cards in these markets. Also the frequency of using the cards is less amongst the Indian customers.Meanwhile the study stated that there are a high number of inactive cards among the Indian issuers. There were only 56% active cards in India as compared to 80% and 75% in Australia and Singapore respectively. The non performing assets (NPAs) in the segment have been continuously rising and reached over 20% against only to 5-6% in the previous fiscal. As a result the card issuers have been going slow in issuing new cards and are adopting a cautious approach. They are blocking inactive cards in order to reduced cost related to communication and billing.Further the card issuers fear that the inactive cards are been used by potential defaulters who use credit cards to get funds at times of financial trouble.The RBI data also reveals that the credit card number has gone down to 25.51 million in February end. oOn a year-on-year basis,basis; the card population fell by 5% or 1.36 million between February 2008 and 2009. Meanwhile the credit card base also shrank by 359,000 in February.Further the study noted that the markets where the card issuers were charging annual fees from the cardholders have more number of active cards. In India most card issuers do not charge an annual fee on their basic credit cards.However the rising default rate is prompting banks to restart the annual charge. "It is a good time to bring card fees back," said an executive with a foreign bank.ICC is an association of Mastercard Worldwide's banking partners in India.MarketTata Company supports the development and operation of competitive open markets and promotes liberalization of trade and investment in each country and market in which it operates. Specifically, no Tata company or employee shall engage in restrictive trade practices, abuse of market dominance or similar unfair trade activities.Transport and construction sectors are the major segments of the company’s business activities. The company also undertakes leasing of plant machinery to a limited extent mainly to corporate clients. It is also engaged in money market operations and finances other companies for their different projects (e.g. TFL is the financier for the complete range of Hero Honda motorcycles of Hero Honda Motors Ltd (HHML)). Regulatory FrameworkEmployees of a Tata company, in their business conduct, shall comply with all applicable laws and regulations, in letter and spirit, in all the territories in which they operate. If the ethical and professional standards of applicable laws and regulations are below that of the Code, then the standards of the Code shall prevail.Directors of a Tata company shall comply with applicable laws and regulations of all the relevant regulatory and other authorities. As good governance practice they shall safeguard the confidentiality of all information received by them by virtue of their position.Regulatory Body- Financial Regulatory Bodies Inin IndiaFinancial sector in India has experienced a better environment to grow with the presence of higher competition. The financial system in India is regulated by independent regulators in the field of banking, insurance, mortgage and capital market. Government of India plays a significant role in controlling the financial market in India. Ministry of Finance, Government of India controls the financial sector in India. Every year the finance ministry presents the annual budget on 28th February. The Reserve Bank of India is an apex institution in controlling banking system in the country. It's monetary policy acts as a major weapon in India's financial market.MAJOR FINANCIAL REGULATORY BODIES IN INDIA'S FINANCIAL MARKETSecurities and Exchange Board of India (SEBI), Functions of SEBISecurities and Exchange Board of India (SEBI) was first established in the year 1988 as a non-statutory body for regulating the securities market. It became an autonomous body in 1992 and more powers were given through an ordinance. Since then it regulates the market through its independent powers. Since then it regulates the market through its independent powers. The objectives of SEBI, as an important entity in the market it works with following objectives: (1) it tries to develop the securities market, (2) promotes investors interest, and (3) makes rules and regulations for the securities market. The functions of SEBI are the following: it regulates Capital Market, checks trading of securities, checks the malpractices in securities market, enhances investor's knowledge on market by providing education, regulates the stockbrokers and sub-brokers, and promote research and investigation. SEBI from time to time have adopted many rules and regulations for enhancing the Indian capital market. The recent initiatives undertaken are as follows: (1) Sole Control on Brokers, under this rule every brokers and sub brokers have to get registration with SEBI and any stock exchange in India. (2) For Underwriters: For working as an underwriter an asset limit of 20 lakhs has been fixed. (3) For Share Prices: According to this law all Indian companies are free to determine their respective share prices and premiums on the share prices. (4) For Mutual Funds: SEBI's introduction of SEBI (Mutual Funds) Regulation in 1993 is to have direct control on all mutual funds of both public and private sector. It is the duty of SEBI to inter alia protect the interests of investors in securities and to regulate and develop the securities market. This duty recognizes that orderly development of the securities market requires investors’ confidence in the market. It also acknowledges that investors’ confidence depends on the comfort afforded to investors that they are placed on equal footing and that they will be protected against the improper use of inside information by the insiders.? With this objective, section 11 (2) (g) of the SEBI Act empowers SEBI to take measures for prohibiting insider trading in securities. The Insider Trading Regulations have been framed as a measure to prohibit insider trading. The intention behind the prohibitions provided in Insider Trading Regulations is inter alia to ensure that the insiders do not breach the fiduciary duty or the duty arising out of a relationship of trust or confidence towards the investors.? Further, these regulations aim to achieve the objective of growth of securities market by ensuring that the securities market operates in fair manner with all the participants having equal access to all the information so that they can make informed investment decisions.?NSE India, National Stock Exchange IndiaIn the year 1991 Pherwani Committee recommended to establish National Stock Exchange (NSE) in India. In 1992 the Government of India authorized IDBI for establishing this exchange. In National Stock Exchange there is trading of equity shares, bonds and government securities. India's Stock Exchanges particularly National Stock Exchange has achieved world standards in the recent years. The NSE India ranked its 3rd position since last four years in terms of total number of trading per calendar year. Presently there are 24 stock exchanges in India, out of which 20 have exchanges National Stock Exchange (NSE), over the Counter Exchange of India Ltd, (OTCEI) and Inter-connected Stock Exchange of India limited (ISE) have nationwide trading facilities. New NSE Reference Rates: (1) Both MIBOR (Mumbai Inter Bank Offer Rate) and MIBID (Mumbai Inter Bank Bid Rate) are the two new references rates of the National Stock Exchanges. These two new reference rates were launched on June 15, 1998 for the loans of inter bank call money market. (2) Both MIBOR and MIBID work simultaneously. The MIBOR indicates lending rate for loans while MIBID is the rate for receipts. Foreign Investment Promotion BoardThe Foreign Investment Promotion Board is a special agency in India dealing with the matters relating to Foreign Direct Investment. This special board was set up with a view to raise the volume of investment to the country. The sole aim of the board is to create a base in the country by which a larger volume of investment can be drawn to the country.On 18 February 2003, the board was transferred to the Department of Economic Affairs (DEA) Ministry of Finance. Important functions of the Board are as follows: formulating proposals for the promotion of investment, steps to implement the proposals, setting friendly guidelines for facilitating more investors, inviting more companies to make investment and to recommend the Government to have necessary actions for attracting more investment. With regards to the structure of the Foreign Investment Promotion Board, the board comprises the following group of secretaries to the Government: Secretary to Government Department of Economic Affairs, Ministry of Finance- Chairman, Secretary to Government Department of Industrial Policy and Promotion, Ministry of commerce and Industry, Secretary to Government, Department of Commerce, Ministry of Commerce and Industry, Secretary to Government, Economic Relations, Ministry of External Affairs, and the Secretary to Government, Ministry of Overseas Indian Affairs.In the recent years, particularly after the implementation of the new economic policy, the Government has undertaken many steps to attract more investors for investing in the country. The new proposals for the foreign investment are allowed under the automatic route keeping in view the sectoral practices.Bombay Stock Exchange IndiaBombay Stock Exchange is one of the oldest stock exchanges in Asia was established in the year 1875 in the name of "The Native Share & Stock Brokers Association". Bombay Stock Exchange is located at Dalal Street, Mumbai, India. It got recognition in 1956 from the Government of India under Securities Contracts (Regulation) Act, 1956. Presently BSE SENSEX is recognized over the world. Trading volumes growth in the year 2004-05 has drawn the attention over the globe. As to the statistics, the total turnover from BSE transaction as in June 2006 is calculated at 72013.36 crores. Bombay Securities Exchange (BSE) has played a pioneering role in the development of the Indian securities market. Almost every leading corporate in India has sourced BSE's services in capital raising and is listed with BSE. It had formulated a comprehensive set of Rules and Regulations for the securities market. It had also laid down best practices which were adopted subsequently by 23 stock exchanges which were set up after India gained its independence. BSE, as a brand, has been and is synonymous with the capital market in India. Its SENSEX is the benchmark equity index that reflects the health of the Indian economy. BSE Indices: (1) The well-known BSE SENSEX is a value weighted of 30 scrips. Other stock indices of BSE are BSE 500, BSEPSU, BSEMIDCAP, BSESMLCAP, and BSEBANKEX. BSE 100 Index: The equity share of 100 companies from the list of 5 major stock exchanges such as Mumbai, Calcutta, Delhi, Ahmedabad and Madras are selected for the purpose of compiling the BSE National Index. The year 1983-84 is taken as the base year for this index. The method of compilation here is same as that of the BSE SENSEX. BSE 200 Index: The BSE 200 Index was launched on 27th May 1994. The companies under BSE 200 have been selected on the basis of their market capitalisation, volumes of turnover and other fuindamental factors. The financial year 1989-90 has been selected as the base year. BSE 500 Index: BSE 500 Index consisting of 500 scrips is functioning since 1999. Presently BSE 500 Index represents more than 90% of the total market capitalisation on Bombay Stock Exchange Limited. BSE PSU Index: BSE PSU Index has been working since 4th June 2001. This index includes major Public Sector Undertakings listed in the Exchange. The BSE PSU Index tracks the performance of listed PSU stocks in the exchange. Companies In BSE: Companies listed on the Bombay Stock is rising very fast. As to statistics, companies listed to the end of March 1994 reached at 3,200 compared to 992 in 1980.India Reserve Bank SystemReserve Bank of India is the apex monetary Institution of India. It is also called as the central bank of the country. The bank was established on April1, 1935 according to the Reserve Bank of India act 1934. It acts as the apex monetary authority of the country. The preamble of the reserve bank of India is as follows: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." Reserve Bank of India is has put in place a comprehensive regulatory and supervisory framework aimed at protecting the interests of depositors and ensuring that the Non-Banking Finance Company’s (NBFC) function on sound and healthy lines. These regulations are being reviewed by the Bank from time to time keeping in view the emerging situations. This regulatory agency requires companies to maintain a minimum “capital adequacy ratio” (CAR) for the maintenance of liquid assets on its portfolio of deposits. The types of Non-Banking Finance Company’s (NBFCs) registered with the RBI are: (1) Equipment leasing company: is any financial institution whose principal business is that of leasing equipments or financing of such an activity. (2)Hire-purchase company: is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions. (3) Loan company: means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity). (4) Investment company: is any financial intermediary whose principal business is that of buying and selling of securities.The Reserve Bank of India has set guidelines on corporate governance in non-banking financial companies. RBI has advised the NBFCs through these guidelines in five major areas of operations such as auditing, appointment of directors, risk management, disclosure and transparency and lending policies. The extant instructions issued by the RBI are: constitution of audit committee, constitution of Other Financial InstitutionsCredit Rating and Information Services of India Ltd. (CRISIL) is India’s leading Ratings, Research, Risk and Policy Advisory Company based in Mumbai. CRISIL Ratings is India’s leading rating agency with over a 60-percent share of the Indian ratings market. Since its inception in 1987, it has been instrumental in developing the framework and methodology for rating debt in the context of the Indian financial and regulatory system. From time to time, this agency rates the commercial papers offered by the Company.Capital Adequacy, Liquidity And Disclosure Norms For Non-Banking Financial Companies (Nbfcs) in IndiaTo protect the interests of the depositors, deposit taking NBFCs (NBFC-D) were subject to prudential regulation on various aspects of their functioning. However, non-deposit taking NBFCs (NBFCs-ND) were subject to minimal regulation. In the light of the evolution and integration of the financial sector, Reserve Bank of India had decided that all systemically relevant entities offering financial services ought to be brought under a suitable regulatory framework to contain systemic risk.Therefore, as a first step, in a notification dated December 12, 2006 all NBFCs – ND with an asset size of Rs. 100 crore and more as per the last audited balance sheet were considered as systemically important NBFC – ND (NBFC-ND-SI) and specific regulatory framework involving prescription of capital adequacy and exposure norms was put in place from April 01, 2007 for such NBFCs-ND-SI.On a review of the experience with the regulatory framework, RBI in notification dated August 1, 2008, decided to enhance the capital adequacy requirement and put in place guidelines for liquidity management and reporting, as also norms for disclosures.Capital adequacyNBFCs – ND – SI were advised to maintain a minimum Capital to Risk- Assets Ratio (CRAR) of 10% with effect from April 01, 2007. However, in view of recent international developments, the risks associated with highly leveraged borrowings and reliance on short term funds by some NBFCs to fund long gestation assets, concerns have arisen regarding the enhanced systemic risk associated with the activities of these entities. Keeping in view the importance of providing adequate capital charge for the same in order to enhance the cushion for any shocks, it has been decided to increase the minimum capital to risk assets ratio (CRAR) for NBFCs-ND-SI from the present prescription of 10%. They are advised to achieve 12% CRAR by March 31, 2009 and further 15% CRAR by March 31, 2010.Disclosure in the Balance SheetIn the light of the concerns as expressed above, the disclosure norms in respect of NBFCs-ND-SI have been reviewed and it has been decided that such Systemically Important NBFCs-ND shall make additional disclosures in their Balance Sheet from the year ending March 31, 2009 relating to:i. Capital to Risk Assets Ratio (CRAR)ii. Exposure to real estate sector, both direct and indirectiii. Maturity pattern of assets and liabilitiesAsset Liability Management (ALM) – ReportingTo address concerns regarding Asset Liability mismatches and interest rate risk exposures, an ALM System was introduced for the Non-Banking Financial Companies (NBFCs) as part of their overall system for effective risk management in their various portfolios vide Company Circular DNBS (PD).CC.No.15 /02.01 / 2000-2001 dated June 27, 2001. While it was stated therein that the guidelines would be applicable to all NBFCs irrespective of whether they are accepting / holding public deposits or not, to begin with, NBFCs meeting the criteria of asset base of Rs.100 crore (whether accepting / holding public deposits or not) or holding public deposits of Rs. 20 crore or more (irrespective of their asset size) as per their audited balance sheet as of March 31, 2001 were required to put in place the ALM System. The companies were advised that the guidelines should be fully operationalised by the year ending March 31, 2002. A system of half yearly reporting was also put in place for NBFCs holding public deposits.Institute of Chartered Accountants of IndiaThe Institute of Chartered Accountants of India is a statutory body established under the Chartered Accountants Act, for the regulation of the profession of the Chartered Accountants in India. The roles of ICAI are: to regulate the profession of Accountancy, education and examination of Chartered Accountancy, exercise disciplinary jurisdiction, input on policy matters to government, insuring standards of performance of members, formulation of accounting standards, prescription of engagement and quality control standards, laying down ethical standards, continuing professional education, financial report review, monitoring quality through Peer Review and conducting post qualification courses. Involvements of ICAI in National Organizations are: drafting of Income Tax Laws, Competition Law and Company Law, capital market development and regulation, corporate governance, accounting and utilization of governmental resources, import-export policy, commercial and economic legislations ,and non-banking financial .RESEARCH QUESTIONSQuestion 1. What are the criteria to be considered by the auditor to ensure that an independent audit leads to the establishment of quality audit report? Quality audit report results from conducting quality audit that considers regulatory, legal, and ethical requirements. The criteria to be considered are the following: ISA 220 (International Standards on Auditing), requires that the engagement partner shall take responsibility for reviews being performed in accordance with the firm’s review policies and procedures. (Ref: Para. A16-A17, A20). On or before the date of the auditor’s report, the engagement partner shall, through a review of the audit documentation and discussion with the engagement team, be satisfied that sufficient appropriate audit evidence has been obtained to support the conclusions reached and for the auditor’s report to be issued. Also on ISA 220, for audits of financial statement s of listed entities, the engagement partner should determine that an engagement quality control reviewer has been appointed. Engagement quality control review is a process designed to provide an objective evaluation, on or before the date of the auditor’s report, of the significant judgments the engagement team made and the conclusions it reached in formulating the auditor’s report. Engagement quality control reviewer is a partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, none of whom is part of the engagement team, with sufficient and appropriate experience and authority to objectively evaluate the significant judgments the engagement team made and the conclusions it reached in formulating the auditor’s report. The engagement partner shall not issue the auditor’s report until the completion of the quality control review.PSQC 1 (Redrafted), or national requirements that are at least as demanding, deals with the firm’s responsibilities to establish and maintain its system of quality control for audit engagements. It requires the firm to establish a monitoring process designed to provide it with reasonable assurance that the policies and procedures relating to the system of quality control is relevant, adequate and operating effectively.The Code of Ethics for Quality Auditors requires that an engagement partner will be honest and impartial, and served with devotion employers, clients, and the public. He will also undertake only those audits compatible with the degree of training, experience, and proficiency he/ she holds in regard to the technical or systems operations being audited. He will also demonstrate a freedom of mind and approach which will ensure objective viewing of the operation being audited. The engagement partner will be able to document the professional qualifications needed in order to provide clear, objective evidence of the degree of his/her technical and systems training. To insure quality audit, the engagement partner must adhere to the fundamental principles namely integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Throughout the audit engagement, the engagement partner shall remain alert, through observation and making inquiries as necessary, for evidence of noncompliance with relevant ethical requirements by members of the engagement team.Question 2. What are the standards involved in withdrawing an audit report? After the auditor has issued the auditor’s report and has discovered facts which might have affected the report, he may refer to the Guidance Note on Revision of the Audit Report. This explanatory note aims to provide guidance to members regarding revision of the audit report after the same has been issued, in case the auditor considers necessary to do so. It lays down the procedures to be followed by the auditor who, subsequent to the date of his report, becomes aware that facts may have existed at that date which might have affected his report had he been aware of such facts at the time of issuance of the audit report.A revision of the audit report may be warranted in several instances involving reasons such as apparent mistakes, wrong information about facts, subsequent discovery of facts existing at the date of the audit report, etc. .. The revision of the audit report would mean issuing a revised audit report as per procedure hereafter provided. The auditor under no circumstances is permitted to withdraw in any manner whatsoever the audit report once issued. However, the auditor may take steps to prevent reliance on the audit report issued by him in the manner hereafter provided. . It must be appreciated that the revision of the audit report is a matter of great significance since confidence of the stakeholders rests on the opinion expressed by the auditor in the audit report. Such a step on the part of the auditor not only demonstrates the independence of auditor to act in a free and fair manner but would also enhance confidence of the public at large in the profession. Such a step on the part of the auditor not only demonstrates the independence of auditor to act in a free and fair manner but would also enhance confidence of the public at large in the profession. (Guidance Note on Revision of the Audit Report)SA 705 (Standards on Auditing) which deals with the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with SA 700 revised (Forming an Opinion), the auditor concludes that a modification to the auditor’s opinion on the financial statements is necessary. The decision regarding which type of modified of opinion is appropriate depends upon the nature of the mater giving rise to the modification, that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated; and the auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements. Guidance Note on Revision of the Audit Report issued by the Council of the Institute of Chartered Accountants of India states that when management neither agrees to revise the financial statements nor agrees to ensure that anyone in receipt of the previously issued financial statements and audit report thereon will be informed of the situation and would be issued revised audit report, the auditor may also conclude that withdrawal from the further engagement with the entity is necessary. Factors that would affect the auditor's conclusion include the implications of the involvement of the highest authority within the entity which may affect the reliability of management representations, and the effects on the auditor of continuing association with the entity. In appropriate circumstances, the auditor may consider seeking legal advice.Question 3. What is/are the threat/s posed by the engagement to the auditor?Essential to the credibility of the auditor’s report is the concept of independence. Before accepting an audit engagement, the auditor should consider whether there are any threats to the audit team’s independence and objectivity and, if so, whether adequate safeguards can be established.Threats to integrity and professional behavior were faced by the audit firm upon the acceptance of the engagement since AFF was to investigate the accounting scandal to which Tata Finance was involved. This is created from questionable issues associated with the client (its owners, management and activities). This would imply that the audit firm would be dealing with a management that is involved with illegal acts and lacks integrity. Integrity implies not merely honesty but fair dealing and truthfulness. An audit firm should not be associated with information where he believes that the information contains incorrect, incomplete or misleading statements. In professional behavior, the auditor should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession.There is also a threat to professional competence and due care. AFF was retained by Tata group to investigate the case after S.B. Billimoria & Co., the company’s previous audit firm resigned. This change in professional appointment will require AFF to know pertinent facts such as determining whether there are any reasons, professional or other, for resigning as auditors. As noted by the managing partner, S.B, Billimoria presumes full honesty from their clients. Having audited dozens of member companies of the Tata group, one of the threats posed by the audit engagement is self-interest threat. This is because of AFF’s close affiliation with the Tata group which enhances the audit firm’s stature and prestige within the country’s accounting profession. Another circumstance regarding this self-interest threat is the concern about the possibility of losing the engagement. It would be an advantage to AFF if they have a continued affiliation with the Tata group knowing that it is the largest Indian corporate entity. Another circumstance is potential employment with another Tata owned companies (i.e, auditing for more Tata companies). AFF’s regard will be even more increased if they will be engaged to more and more Tata companies.Threats to integrity and professional behavior were faced by the audit firm upon the acceptance of the engagement since AFF was to investigate the accounting scandal whichPotential threats to integrity or professional behaviour may be created from, for example, questionable issues associated with the client (its owners, management and activities). would imply that the audit firm would be dealing with a management that lacks integrity. Integrity implies not merely honesty but fair dealing and truthfulness. An audit firm should not be associated with information where he believes that the information contains incorrect, incomplete or misleading statements. In professional behavior, the auditor should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession.There is also a conflict of interest between the clients, Dilip Pendse, the manager of Tata Finance Limited and the Tata Group are in dispute with each other in relation to the matter or transaction in question. A threat to objectivity or confidentiality can be faced by the auditor. The principle of objectivity imposes the obligation on all auditors to be fair, intellectually honest and free of conflicts of interest. They should not allow influence of others to override objectivity. An auditor who acquire information in the course of performing services shall neither use nor appear to use that information for personal advantage or for the advantage of a third person.Question 4. How should the auditor deal with these threats?Once a threat that is other than insignificant has been identified and evaluated, safeguards should be considered and applied as necessary. The Code of Professional Ethics presents safeguards against self-interest threat. (Code of Ethics)Before accepting the new engagement, AFF, a professional accounting firm in public practice should consider whether acceptance would create any threats to compliance with the fundamental principles. Appropriate safeguards against threats to integrity and professional behavior require that AFF obtains knowledge and understanding of Tata Finance, its owners, and the manager Dilip Pendse, and those responsible for governance. Client’s commitment to improve corporate governance or internal controls should be obtained.Safeguards against threat to professional competence and due care include discussing the client’s affairs fully and freely with S.B. Billimoria, asking Billimoria to provide any known information on any facts or circumstances, that AFF should be aware of before accepting whether to accept the engagement. AFF needs to obtain client’s permission (preferably in writing) to initiate the discussion.Safeguard created by the profession, legislation or regulation which includes the following: educational, training and experience requirements for entry into the profession; continuing education requirements; corporate governance regulations; professional standards and monitoring and disciplinary processes; and external review of a firm’s quality control system. Y.M. Kale, a senior AFF partner who supervised the investigation was easily among the most respected members of Indian’s accounting profession. An employee or partner of AFF for 30 years. Kale, who served on the International Accounting Standards Board, was a former president of the Institute of Chartered Accountants of India and had been elected to ICAI’s governing council 5 times. The ICAI is the Indian federal agency that oversees the nation’s accounting profession, including its independent audit function. He had also served as the Chairman of the ICAI board responsible for issuing accounting standards. And at the time he was elected for the Tata Finance assignment was the Chairman of the ICAI audit practices committee.Firm-wide safeguards in the work environment relate to the identification of threats, the evaluation of the significance of such threat and the identification and application of safeguards to eliminate or reduce the threats, other than those that are clearly insignificant, to an acceptable level. The leadership of the AFF should stress the importance of compliance with the fundamental principles and they should establish the expectation that members of an assurance team will act in the public interest. Seminars regarding ethical conduct should be performed at least annually especially those who are at the top management. This will serve as an evaluation for the employees conduct and could also be an event where they can discuss ethical issues. There should also be an annual retreat that will give ample time for employees to reflect and improve their personal relationship with their God. Improved personal and spiritual characteristics of employees is necessary for this will lead to doing only good deeds as will be reflected in their conduct. These approaches will stress out the importance of ethics in their work.The AFF should have policies and procedures to implement and monitor quality control of engagements. Documented policies regarding the need to identify threats to compliance with the fundamental principles, evaluate the significance of those threats, and apply safeguards to eliminate or reduce the threats to an acceptable level or when appropriate safeguards are not available or cannot be applied, terminate or decline the relevant engagement should be established. A disciplinary mechanism to promote compliance with policies and procedures is also necessary in the firm. This could be done by having sanctions and penalties given to those who will violate with the given policies. Published policies and procedures to encourage and empower staff to communicate to senior levels within the firm any issue relating to compliance with the fundamental principles that concerns them should be observed.Engagement specific safeguards that the AFF should implement is to have the other partners who were not member of the assurance team review the assurance work performed or other procedures as necessary. In the case of Tata, several partners of AFF performed a detailed review and approved the issuance of the report but after part of it was leaked to the media it was withdrawn. This implies that the other AFF partners had not conducted a thorough review of the report before it was issued. Having known that the problem of the client was about the corporate governance structure of the client, they should have discussed these issues with those charged with governance of the client and provides recommendations for improvement. Disclosing to those charged with governance of the client the nature of services provided and extent of fees charged. This will clarify that AFF does not have undue dependence on the fees received from the engagement therefore objectivity is intact and not threatened. ?In addition, AFF may also be able to rely on the safeguards that the client has implemented. Safeguards within the client’s systems and procedures, such as competent client employees, strong corporate governance structure, and effective oversight of engagement work. The root cause of the problem of Tata Finance Limited is the quality of their corporate governance system. This is the problem that needs to be addressed. Strong corporate governance is then recommended. Strong corporate governance calls for two main requirements: transparency in decision-making, and accountability to ensure that responsibility could be assigned easily for actions or inaction and also for the safeguarding the interests of the stakeholders and the investors in the organization. Transparency in decision making involves making sure that the owners are aware of the major decisions made. This discussion with the owners should be properly documented to serve as a proof that the subordinate has permit to make the decision. Dilip Pendse was sued by the Tata’s for breach of trust by engaging into transactions which brought losses to the firm and in which, the Tata were not aware but Pendse claimed that it was permitted. This case proves that proper documentation is needed. It also calls for the efficient supervision which encourages `doing everything better' and protects the interest of the company while conforming to all established laws and ethics. Strong corporate governance in any organisation needs to be principle based and smart, moral, accountable, responsive and transparent. Before accepting a new client relationship, a professional accountant in public practice should consider whether acceptance would create any threats to compliance with the fundamental principles. Potential threats to integrity or professional behaviour may be created from, for example, questionable issues associated with the client (its owners, management and activities).Question 5. What recommendations can be made to reinforce the independent audit function?To strengthen the independent audit function, one recommendation is to address the need for additional rules or legislation on auditor independence. (Report to the Public Oversight Board of the SEC Practice Section, AICPA from the Advisory Panel on Auditor Independence) Many of the concerns that the panel has heard focused more on the perceived lack of objectivity of some auditors in their acquiescence, approval, and even advocacy of what critics believed to be questionable or inappropriate accounting principles and practices of their clients. Integrity is the basis for public trust. The auditor should be honest and candid and never to subordinate principle or professional judgment. Objectivity gives value to the auditor services. The auditor should be impartial, intellectually honest, and free from conflicts of interest. Independence requires an auditor’s freedom from both the fact and appearance of conflicts of interest.For firms that perform assurance engagements, documented independence policies regarding the identification of threats to independence policies regarding the identification of threats to independence, the evaluation of the significance of these threats and the evaluation and application of safeguards to eliminate or reduce the threats, other than those that are clearly insignificant, to an acceptable level. Another recommendation is a better legal environment for auditor professionalism. Litigation has had a damaging and costly impact on the profession and on the public it serves by discouraging new entrants into auditing, by focusing business strategies and management efforts within larger firms on nonaudit services entailing lower litigation risk, by encouraging a proliferation of detailed standards to serve as a protection against second-guessing by litigants and thereby making audits more compliance and rule-book oriented, and by creating an atmosphere in which auditors are reluctant to make independent professional judgment. A better legal and regulatory environment will permit auditors, without fear of exposure to unwarranted and excessive liability, to express their professional judgment to board of directors as experts in accounting and financial reporting. Further, this would encourage the profession to analyze and learn from audit failures. ................
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