Price and output determination under Duopoly

If an industry is composed of only two giant firms, each selling identical products and having half of the total market, there is every likelihood of collusion between the two firms. The firms may agree on a price, or divide the market, or assign quota, or merge themselves into one unit and form a monopoly or try to differentiate their products or accept the price fixed by the leader firm, etc., etc.

In case the duopolists producing perfect substitute engage in price competition, the firm having lower costs, better goodwill and clientele will drive the rival firm out of the market and then establish a monopoly.

If the products of the duopolists are differentiate, each firm will have a close watch on the actions of its rival firms. The firms manufacturing good quality products with lesser cost will earn abnormal profits. Each firm will fix the price of the commodity and expand output in accordance with the demand of the commodity in the market.

Duopoly Models:

There are four main duopoly models which explain the price and quantity determinations in duopoly. These models are:

(i) Classical Model of Cournot and Edge Worth.

(ii) Hotellings Spatial Equilibrium Model.

(iii) Stackelberg’s Model.

(iv) Modern Game Theory Model.

(i) Cournot and Edgeworth Model:

Cournot approach is based, on the assumptions that rivals output remains the same and one duopolists plans to change in his output. Edgeworth model assumes that rival’s price of the good to remain unchanged as one duopolists plans a change in his price of the good.

(ii) Stackberg’s Approach:

It is based on the assumptions that one of the duopolists is a ‘Leader’ and the other is the follower.

(iii) Hotelling Spatial Equilibrium Model:

In this model, the products of the duopolists are differentiate in the eyes of the buyers by virtue of the location of the duopolists.

(iv) Game Theory Approach:

Whenever there are two or a few firms competing in an industry for profit, each firm can and dose react to the price, quantity, quality and product changes which other firm undertakes. The duopolists or oligopoly have a reaction function. As firms under duopoly are independent, they, therefore, employ strategies. The competing firm also make plans to contract and makes decisions about output and price of the good keeping in view the strategy of its rivals. The plans made by these firm, are known as game strategies. The game theory model describes the firms, interaction model. It is the analytical framework in which two or more firms compete for economics profits that depend on the strategy that the others employ.

All games theory models have at least three common elements:

(a) Players: Players in the game theory are the firms.

(b) Strategies: Strategies are the plans, the possible choices of the firms for production of output, prices of goods, changes in the quality of the product

(c) Pay offs (economic profit): These are the profits or losses realized by the firm.

Price and output determination under Oligopoly

A diversity of specific market situations works against the development of a single, generalized explanation of how an oligopoly determines price and output.

Pure monopoly, monopolistic competition and perfect competition, all refer to rather clear-cut market arrangements; oligopoly docs not.

“Oligopoly is an industry structure characterized by a small number of firms producing all or most of the output of some good that may or may not be differentiated”.

Price and Output Determination Under Oligopoly

  • Cournot’s Model
  • Stackelberg Model
  • Bertrand Model
  • Edgeworth Model
  • Collusive Oligopoly

Cournot’s Model

As per Cournot’s model, each duopolist thinks that regardless of his actions and the effect upon the market of the product the other will go on producing the same commodity.

Cournot model says if the output of a firm is two- thirds of the competitive output and the price is two–third, this is most profitable i.e., monopoly price.

Stackelberg Model

The producer under a duopoly structure integrates the decision level of his rival. It then integrates in its own profit function and thereby maximizes profit. Thus, Leader-follower relation emerges.

Bertrand Model

According to this model, producers try to set lower the price until the price is equal to the cost of production.

Edgeworth Model

Each duopolist thinks that his rival will continue to charge the same price as he is just doing irrespective of what price he decided to set. No determinate equilibrium will exist under duopoly.

Collusive Oligopoly

According to this model, firms form a cartel. Firms jointly fix the price and output with a view to maximizing joint profit. For example, OPEC countries form a cartel.

Explanation of Price and Output Determination Under Oligopoly

We cannot explain the pricing and output decisions under duopoly a single theory. It will not be satisfactory. The reasons are:

(i) The number of firms may vary which is dominating the market. Sometimes there may be only two or three firms that dominate the entire market (Tight oligopoly). At another time there are 7 to 10 firms that capture 80% of the market (loose oligopoly).

(ii) The goods produced may or may not be standardized under oligopoly.

(iii) Sometimes the firms under oligopoly cooperate with each other in the fixing of price and output of goods. At another time, they choose to act independently.

(iv) Sometimes barriers to entry are very strong in oligopoly and at another time, they are quite loose.

(v) Sometimes A firm under oligopoly cannot certainly predict with the reaction of the rival firms if any changes occur in the prices and output of its goods. Considering the wide range of diversity of market situations, a number of models have been developed which explain the behavior of the oligopolistic firms.

  • Price Determination in Non-Collusive Oligopoly:

In this case, each firm follows an independent price and output policy on the basis of its judgment about the reactions of his rivals. If the firms are producing homogeneous products, price war may occur. Each firm has to fix the price at the competitive level. On the contrary, in case of differentiated oligopoly, due to product differentiation, each firm has some monopoly control over the market and therefore charge near monopoly price.

Thus, the actual price may fall between the two limits:

(i) The Upper Limit of Monopoly Price and,

(ii) The Linear limit of Competitive Price.

Practically, there is every possibility to determine the exact price within these limits. However, there may be the following possibilities:

(i) There may be complete price instability in the market which results in price war.

(ii) The price may settle down at intermediate level due to the working of the market forces.

(iii) The firm may accept the prevailing price and adjust itself according to prevailing price.

So long as the firm earns adequate profits at the prevailing price, it may not try to change it. Any effort to change it may create uncertainties in the market. A firm will stick to that price to avoid uncertainties. Thus, the price tends to be rigid where oligopolist takes independent action.

  • Equilibrium under Collusion:

The modern economists are of the view that independent price determination cannot exist for long in oligopoly. It leads to uncertainty and insecurity and to overcome them there is a tendency among oligopolists to act collectively by tacit collusion. In addition, the firms can gain the economics of production. All the firms in oligopoly tend to enlarge their size and lower their costs of production per unit and capture maximum share of the market.

Collusive oligopoly is a situation in which firms in a particular industry decide to join together as a single unit for the purpose of maximising their joint profits and to negotiate among themselves so as to share the market.

C-Suite executives-CEO, CFO, COO, CTO, CKO, CRO and CIO

CEO

A CEO, which stands for Chief Executive Officer, is the highest-ranking individual in a company or organization. The CEO is responsible for the overall success of a business entity or other organization and for making top-level managerial decisions. They may ask for input on major decisions, but they are the ultimate authority in making final decisions. There are other titles for CEOs, such as chief executive, president, and managing director.

Roles and Responsibilities of the CEO

In addition to the overall success of an organization or company, the CEO is responsible for leading the development and execution of long-term strategies, with the goal of increasing shareholder value.

The roles and responsibilities of a CEO vary from one company to another, often depending on the organizational structure and/or size of the company. In smaller companies, the CEO takes on a more “hands-on role”, such as making lower-level business decisions (e.g., hiring of staff). In larger companies, he or she usually only deals with high-level corporate strategy and major company decisions. Other tasks are delegated to managers or departments.

There is no standardized list of the roles and responsibilities of a chief executive officer. The typical duties, responsibilities, and job description of a CEO include:

  • Communicating, on behalf of the company, with shareholders, government entities, and the public
  • Leading the development of the company’s short- and long-term strategy
  • Creating and implementing the company or organization’s vision and mission
  • Evaluating the work of other executive leaders within the company, including directors, vice presidents, and presidents
  • Maintaining awareness of the competitive market landscape, expansion opportunities, industry developments, etc.
  • Ensuring that the company maintains high social responsibility wherever it does business
  • Assessing risks to the company and ensuring they are monitored and minimized
  • Setting strategic goals and making sure they are measurable and describable.

Responsibilities of Chief Executive Officer

There is no standardized list of the major functions and responsibilities carried out by position of chief executive officer. The following list is one perspective and includes the major functions typically addressed by job descriptions of chief executive officers.

  1. Board Administration and Support

Supports operations and administration of Board by advising and informing Board members, interfacing between Board and staff, and supporting Board’s evaluation of chief executive

  1. Program, Product and Service Delivery

Oversees design, marketing, promotion, delivery and quality of programs, products and services

  1. Financial, Tax, Risk and Facilities Management

Recommends yearly budget for Board approval and prudently manages organization’s resources within those budget guidelines according to current laws and regulations

  1. Human Resource Management

Effectively manages the human resources of the organization according to authorized personnel policies and procedures that fully conform to current laws and regulations

  1. Community and Public Relations

Assures the organization and its mission, programs, products and services are consistently presented in strong, positive image to relevant stakeholders

  1. Fundraising (nonprofit-specific)

Oversees fundraising planning and implementation, including identifying resource requirements, researching funding sources, establishing strategies to approach funders, submitting proposals and administrating fundraising records and documentation.

CFO

The primary job responsibility of the Chief Financial Officer (CFO) is to optimize the financial performance of a company, including its reporting, liquidity, and return on investment. This guide will answer the question of, “What does a CFO do?”

Within a company, these responsibilities fall into departments typically known as the controller’s group, treasury, and financial planning and analysis (FP&A).

Role

Reporting

Reporting takes up a lot of a CFO’s time, and this responsibility typically resides in the Controller’s group.  This team of professionals prepares all of the company’s historical financial reports required for shareholders, employees, lenders, research analysts, governments, and regulatory bodies.  This group is responsible for ensuring all reporting is prepared in an accurate and timely manner.

Liquidity

The CFO needs to ensure the company is able to meet its financial commitments and manage cash flow in the most efficient way.  These responsibilities are usually carried out by the treasury group, which is often smaller than the reporting team.  This group is tasked with managing the company’s cash balance and working capital, such as accounts payable, accounts receivable, and inventory.  They also carry out the issuing of any debt, managing investments, and handle other liquidity-related decisions.

Return on Investment

The third thing a CFO does is help earn the company earn the highest possible risk-adjusted return on assets and return on capital (or return on equity).  This is where the financial planning and analysis FP&A team comes in to help the CFO forecast future cash flow of the business and then compare actual results to what was budgeted.  The FP&A team plays a critical role in analytics and decision making in the business.

If the company has a corporate development team, they also play a big part in creating (or attempting to create) optimal investment returns for the business.

COO

A chief operating officer (COO), also called a chief operations officer, is one of the highest-ranking executive positions in an organization, comprising part of the “C-suite”. The COO is usually the second-in-command at the firm, especially if the highest-ranking executive is the chairperson and CEO. The COO is responsible for the daily operation of the company and its office building and routinely reports to the highest-ranking executive usually the chief executive officer (CEO).

Responsibilities and similar titles

Unlike other C-suite positions, which tend to be defined according to commonly designated responsibilities across most companies, a COO’s job tends to be defined in relation to the specific CEO with whom they work, given the close working relationship of these two individuals.

The selection of a COO is similar in many ways to the selection of a vice president or chief of staff of the United States: power and responsibility structures vary in government and private regimes depending on the style and needs of the president or CEO. Thus, the COO role meets individual expectations and changes as leadership teams adjust.

The COO position is common in firms that are operationally intensive, such as airline and automotive industries.

Despite the functional diversity associated with the role of COO, there are some common functions the COOs usually perform:

  • At the direction of the CEO and board of directors, marshalling limited resources to the most productive uses with the aim of creating maximum value for the company’s stakeholders
  • Developing and cascading the organization’s strategy/mission statement to the lower-ranking staff, and implementing appropriate rewards/recognition and coaching or corrective practices to align personnel with company goals
  • Planning by prioritizing customer, employee, and organizational requirements
  • Maintaining and monitoring staffing, levels, knowledge-skills-attributes (KSA), expectations and motivation to fulfil organizational requirements
  • Driving performance measures for the operation (including a consideration of efficiency versus effectiveness), often in the form of dashboards convenient for review of high-level key indicators

CTO

A chief technical officer (CTO), sometimes known as a chief technology officer or chief technologist, is an executive-level position in a company or other entity whose occupation is focused on the scientific and technological issues within an organization.

A CTO is very similar to a chief information officer (CIO). CTOs will make decisions for the overarching technology infrastructure that closely align with the organization’s goals, while CIOs work alongside the organization’s IT staff members to perform everyday operations. A CTO should be aware of new and existing technologies to guide the company’s future endeavors. The attributes of the roles a CTO holds vary from one company to the next, mainly depending on their organizational structure.

The CTO may be called a product manager with the primary goal of managing a tech team and making business critical tech decisions, such as tech design planning, product architecture layout, and development platform selection.

A Chief Technology Officer job description could also include some practical aspects if a tech team doesn’t have the knowledge or resources to complete a task, then it is down to the CTO to find a solution. It’s no wonder they have to obtain a wide variety of tech and ‘soft’ skills.

CTO as a service is one more approach that is gaining momentum in 2020. Just as engineering task execution, tech supervision, and management have been outsourced to save project budget costs.

CKO

A chief knowledge officer (CKO) is a loosely defined role in some organizations that achieved some prominence during the 1990s and 2000s that supervises knowledge management. In general, their duties involve intellectual capital and organizing preservation and distribution of knowledge in an organization. The position sometimes overlaps with the title of “chief information officer”; CIOs tend to be more focused on information technology within an organization (computer systems and the like), while CKOs have more nebulous portfolios including matters such as overseeing patent applications, internal training and documentation, knowledge sharing, and promoting innovative research.

CKOs are frequently directly appointed by the CEO given their broad domains, since their responsibilities generally cut across organizational boundaries. As a result, exactly what a CKO works on can vary greatly from organization to organization.

By the 2010s, the role became less common; while knowledge management programs are still an important part of corporations and other organizations, a direct officer called Chief Knowledge Officer has fallen out of favor somewhat.

CKO can help an organization to:

  • Maximize the return on investment (ROI) in knowledge.
  • Maximize benefits from intangible assets, such as branding and customer relationships.
  • Repeat successes and analyze and learn from failures.
  • Promote best practices.
  • Foster innovation.
  • Avoid the loss of knowledge that can result from loss of personnel.

CRO

A chief risk officer is a corporate executive responsible for identifying, analyzing, and mitigating internal and external risks. The chief risk officer works to ensure that the company complies with government regulations, such as Sarbanes-Oxley, and reviews factors that could hurt investments or a company’s business units.

CROs typically have post-graduate education with more than 20 years of experience in accounting, economics, legal, or actuarial backgrounds. They are also referred to as chief risk management officers (CRMO).

The chief risk officer (CRO) or chief risk management officer (CRMO) of a firm or corporation is the executive accountable for enabling the efficient and effective governance of significant risks, and related opportunities, to a business and its various segments. Risks are commonly categorized as strategic, reputational, operational, financial, or compliance-related. CROs are accountable to the Executive Committee and The Board for enabling the business to balance risk and reward. In more complex organizations, they are generally responsible for coordinating the organization’s Enterprise Risk Management (ERM) approach. The CRO is responsible for assessing and mitigating significant competitive, regulatory, and technological threats to a firm’s capital and earnings. The CRO roles and responsibilities vary depending on the size of the organization and industry. The CRO works to ensure that the firm is compliant with government regulations, such as Sarbanes-Oxley, and reviews factors that could negatively affect investments. Typically, the CRO is responsible for the firm’s risk management operations, including managing, identifying, evaluating, reporting and overseeing the firm’s risks externally and internally to the organization and works diligently with senior management such as Chief Executive officer and Chief Financial Officer.

The role of the Chief Risk Officer (CRO) is becoming increasing important in financial, investment, and insurance sectors. According to Watson, the majority of CROs agreed that having only exceptional analytical skill is not sufficient. The most successful CROs are able to combine these skills with highly developed commercial, strategic, leadership and communication skill to be able to drive change and make a difference in an organization. CROs typically have post graduate education with over 20 years of experience in accounting, economics, legal or actuarial backgrounds. A business may find a risk acceptable; however, the company as a whole may not. CROs need to balance risks with financial, investment, insurance, personnel and inventory decisions to obtain an optimum level for stakeholders. According to a study by Morgan McKinley, a successful CRO must be able to deal with complexity and ambiguity, and understand the bigger picture.

The types of threats the CRO usually keeps watch for can be grouped into regulatory, competitive, and technical categories. As noted, companies must ensure they are in compliance with regulatory rules and fulfilling their obligations on reporting accurately to government agencies.

CROs must also check for procedural issues within their companies that may create exposure to a threat or liability. For example, if a company handles sensitive data from a third party, such as personal health information, there may be layers of security that the company is required to maintain to ensure that data is kept confidential. If there are lapses in that security such as when an employee allows an unauthorized person, even within the company, to have access to a company computer that contains such data it can be a form of exposure that a CRO must address. Unauthorized access to sensitive data may also constitute a competitive risk if there is the potential for rival organizations to use such information to take away clients or otherwise damage the public image of the company.

CIO

Chief information officer (CIO) is an executive job title commonly given to the person at an enterprise in charge of information technology (IT) strategy and the computer systems required to support the organization’s unique objectives and goals.

Chief information officer (CIO), chief digital information officer (CDIO) or information technology (IT) director, is a job title commonly given to the most senior executive in an enterprise who works with information technology and computer systems, in order to support enterprise goals.

Typically, the CIO reports directly to the chief executive officer, but may also report to the chief operating officer or chief financial officer. In military organisations, the CIO reports to the commanding officer. The role of chief information officer was first defined in 1981 by William R. Synnott, former senior vice president of the Bank of Boston, and William H. Gruber, a former professor at the Massachusetts Institute of Technology Sloan School of Management. A CIO will sometimes serve as a member of the board of directors.

Roles and responsibilities

The chief information officer of an organization is responsible for several business functions. First and most importantly, the CIO must fulfill the role of a business leader. The CIO makes executive decisions regarding matters such as the purchase of IT equipment from suppliers or the creation of new IT systems. Also, as a business leader, the CIO is responsible for leading and directing the workforce of their specific organization. A CIO is typically “required to have strong organizational skills.” This is particularly relevant for the chief information officer of an organization who must balance roles and responsibilities in order to gain a competitive advantage, whilst keeping the best interests of the organisation’s employees in mind. CIOs also have the responsibility of recruiting, so it is important that they work proactively to source and nurture the best employees possible.

The CIO reports to the chief executive officer (CEO) and at some companies the CIO has a seat on the executive board. CIOs work closely with their IT staff and recent studies show there is a benefit in strengthening the CIO-CMO (chief marketing officer) relationship. According to IBM’s Global C-suite Study, which was published in 2014, companies at which the CEO, CIO and CMO work more closely together than with other C-level executives tend to outperform competitors. The CIO also has a close relationship with the chief financial officer (CFO). In fact, that’s the strongest relationship between CIOs and other C-level execs, according to IBM. After the CFO, the CIO has close relationships with the CEO, CMO, chief supply chain officer (CSCO) and the chief human resources officer (CHRO).

Meaning, Role, Powers and Liabilities of Chairman

A Chairman or Chairperson is a person who is elected to act as the Presiding Officer to conduct the proceedings of a meeting.

The term Chairman is not defined under the Companies Act, 2013 (Act). As per the relevant regulations of Article of Association (AOA) of the Company and relevant Sections casts various powers, obligation and functions for the chairman.

Section 118 of the Act extensibly refers to minutes of proceedings of general meetings and of Board and other meetings, where the Chairman has to conduct the meeting of its Board of Directors and the power of Chairman on inclusion of matters in minutes of meeting.

With reference to the above provisions and as those stated in AOA as a matter of convention, the Chairman of a Company presides over the meetings of the board.  Therefore, the Chairman has the powers under the common law, such as:

  • The power to preside over the meetings,
  • Bring the discussion on any question and
  • The Power

The Chairman is the chief authority to conduct and control the meeting. He is the umpire of debate and the upholder of or­der and decorum.

Motions

A motion is a topic or subject proposed as a basis of dis­cussion. Since a member at a meeting formally introduces or moves a subject for discussion it is called a motion. With the permission of the chairman a motion is moved by an individual. He ‘secures the floor’, addresses the chairman and makes a short speech in support of the motion.

Immediately after that another member stands up and ‘seconds’ it. A motion when seconded is called a proposal and it is before the meeting. If no one seconds a motion, it ‘falls to the ground’ and no discussion takes place on it. A formal motion like ‘point of order’ or a motion by the chairman does not require seconding.

Consequences of a Motion:

Once a motion is moved and seconded the following events will happen:

(1) Discussion on the topic will start- The members or the participants, intending to speak (a proxy cannot speak) on it either in favour or against, will take permission of the chairman or speak.

(2) Amendments or alterations may be suggested by some others. Amendment of an amendment may be suggested.

(3) After a discussion for a long time, the chairman may order or the members may ask for closure.

(4) Voting on the proposal shall take place. If any amend­ment is suggested then the amendment shall be put to vote first. If the amendment is passed then the original motion as altered shall be put to vote. If the amendment is lost then the original motion shall be put to vote. The motion, with or without amendment, if passed, then there is a resolution.

(5) A motion, which is before the meeting, may be withdrawn by the proposer before it has been voted upon provided the secondary also agrees it to withdraw it.

(6) Once a motion passed into a resolution may be recon­sidered if a large number of participants want to reconsider it after their second thought and the chairman permits.

Rules Regarding Motion:

(1) Only one ‘motion can be moved at a time.

(2) A motion should preferably be placed in writing, signed by the mover.

(3) The wording must be properly made so that it can be converted into a resolution in proper form. Generally, the help of the secretary is sought in this respect as he is an expert in this line.

(4) Usually, the language of a motion is ‘affirmative’ i.e., an intention to do something. Some formal motions may be ‘negative’.

(5) The language shall be clear and unambiguous (no double meaning).

(6) It shall be within the powers of the body that is holding the meeting.

(7) It shall be within the scope of the notice.

Types of Motions:

Motions are of different types.

The classifica­tion is on the basis of importance and procedure of moving. They are:

(1) Primary Motion:

It means a motion related to some important function of the organisation. For example, a motion on the section of an individual as director of a company. It is also known as the original motion.

(2) Secondary Motion:

It means a motion related to some amendment of a motion. Sometimes some words are added as adden­dum to a primary motion or a rider is added as a further action.

(3) Substantive Motion:

When a proposed amendment to a motion is voted upon and passed, then the original motion has to be altered before it is put to vote. A motion, when amended, is called a substantive motion.

(4) Formal Motions:

Discussions at a meeting may be interrup­ted by raising various kinds of formal or dilatory motions.

The purposes for such motions are:

(1) To raise any objection against somebody’s speech.

(2) To hasten the decision by shortening discus­sion.

(3) To kill time so that decision is delayed.

Different kinds of formal motions are discussed below:

(A) Point of Order:

It is a motion meant for expressing objection or complaint by a member against the speech made by; another. A member cannot raise a ‘point of order’ because he dis­agrees with the speaker or chairman ordinarily.

But he can raise it on any one of the following justified reasons:

(i) Incorrect proce­dure of meeting is followed. The point of order is raised against the conduct of the chairman. For example, the chairman allows an item not mentioned in the agenda, to be raised by a member.

(ii) Irrelevant things are said by any member unnecessarily and thereby wasting time.

(iii) If a member uses some unparliamentarily language, i.e. words which are not allowed to be used inside Parliament and hence not to be allowed inside any other meeting place.

(iv) If any rule regarding meetings as given in the bye-laws of the association is transgressed or violated.

(v) When a speaker makes some remarks against any member which are defamatory or malicious or insulting.

(vi) When a member draws the attention of the chairman that quorum has fallen due to early leaving of some member or members.

Any member may raise a point of order by drawing the attention of the chairman and ask for his ruling. Such a formal motion does not require seconding. The chairman may approve or disapprove the point of order and accordingly give his ruling. He either says ‘Yes, it is out of order’ or ‘No, it is in order’.

Sometimes unnecessarily ‘points of order’ are raised by a member or a group of members to interrupt the debate and to kill the time so that the proposal under discussion is not put to vote as he or they fears or fear that the resolution, which is sure to be passed will go against his or their interest.

Sometimes a chairman, being biased, consistently disapproves justified points of order. In that case members in a large majority may raise a ‘No confidence’ move against the chairman.

(B) Closures:

There are certain types of motions called closures which are moved for the purpose of stopping discussion. A motion for closure needs seconding. A closure is also known as a ‘gag’. The chairman himself may apply closure to stop a debate but generally he hesitates to take such move because the members may think that he is biased. And he is trying to impose the will of the majority group on the minority group among the members. It is desirable that mem­bers themselves put an end to discussions.

Narayamurthy and Narechandra Chandra committee recommendation of corporate Governance

SEBI constituted this Committee under the chairmanship of N.R. Narayana Murthy, chairman and mentor of Infosys, and mandated the Committee to review the performance of corporate governance in India and make appropriate recommendations. The Committee submitted its report in February 2003.

The main items of Committee recommendations are as follows:

(a) Persons should be eligible for the office of non-executive director so long as the term of office did not exceed nine years (in three terms of three years each, running continuously).

(b) The age limit for directors to retire should be decided by companies themselves.

(c) All audit committee members shall be non-executive directors. They should be financially literate and at least one member should have accounting or related financial management expertise.

(d) Audit committee of listed companies shall review mandatorily the information, viz.:

(i) Financial statements and draft audit reports,

(ii) Management discussion and analysis of financial condition and operating results,

(iii) Risk management reports,

(iv) Statutory auditors’ letter to management regarding internal control weaknesses, and

(v) Related party transactions.

(e) The audit committee of the parent company shall also review the financial statements, in particular, the investments made by the subsidiary company.

(f) A statement of all transactions with related parties including their bases should be placed before the independent audit committee for formal approval/ratification. Of any transaction is not on an arm’s length basis, management should provide an explanation to the audit committee, justifying the same.

(g) Procedures should be in place to inform board members about the risk assessment and minimisation procedures.

(h) Companies raising money through an Initial Public Offering (IPO) shall disclose to the audit committee, the uses/application of funds by major category (capital expenditure, sales and marketing, working capital etc.) on a quarterly basis. On an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus. This statement shall be certified by the independent auditors of the company. The audit committee should make appropriate recommendations to the board to take up steps in this matter.

(i) It should be obligatory for the board of a company to lay down the code of conduct for all board members and senior management of a company. They shall affirm compliance with the code on an annual basis. The annual report of the company shall contain a declaration to this effect signed off by the CEO and COO.

(j) A director to become independent shall satisfy the various conditions laid down by the Committee.

(k) Personnel two observe an unethical or improper practice (not necessarily a violation of law) should be able to approach the audit committee without necessarily informing their supervisors. Companies shall take measures to ensure that this right of access is communicated to all employees through means of internal circulars etc. Companies shall annually affirm that they have not denied any personal access to the audit committee of the company (in respect of matters involving alleged misconduct) and that they have provided protection to whistle blowers from unfair termination and other unfair or prejudicial employment practices. Such affirmation shall form a part of the board report on corporate governance that is required to be prepared and submitted together with the annual report.

(l) For all listed companies there should be a certification by the CEO and CFO confirming, the financial statements as true and fair in compliance with the existing accounting standards, effectiveness of internal control system, disclosure of significant fraud and significant changes in internal control and/or of accounting policies to the auditors and the audit committee. It is worth noting here that majority of the recommendations of this committee have been accepted by SEBI and thereby incorporated in the revised Clause 49 of the Listing Agreement in 2003 and 2004.

Chandra Committee

Consequent to the several corporate debacles in the USA in 2001, followed by the stringent enactments of Sarbanes Oxley Act, Government of India appointed Naresh Chandra Committee in 2002 to examine and recommended drastic amendments to the law pertaining to auditor-client relationships and the role of independent directors.

The main recommendations of the Committee are given below:

(a) The minimum board size of all listed companies as well as unlisted public limited companies with paid-up share capital and free reserves of Rs. 100 million and above, or turnover of Rs. 500 million and above, should be seven, of which at least four should be independent directors.

(b) No less than 50% of the board of directors of any listed company as well as unlisted public limited companies with a paid-up share capital and free reserves of Rs. 100 million and above or turnover of Rs. 500 million and above, should consist of independent directors.

(c) In line with the international best practices, the committee recommended a list of disqualification for audit assignment which included prohibition of:

(i) Any direct financial interest in the audit client,

(ii) Receiving any loans and/or guarantees,

(iii) Any business relationship,

(iv) Personal relationship by the audit firm, its partners, as well as their direct relatives, prohibition of

(v) Service or cooling off period for a period of at least two years, and

(vi) Undue dependence on an audit client.

(d) Certain services should not be provided by an audit firm to any audit client, viz.:

(i) Accounting and book keeping,

(ii) Internal audit,

(iii) Financial information design,

(iv) Actuarial,

(v) Broker, dealer, investment advisor, investment banking,

(vi) Outsourcing,

(vii) Valuation,

(viii) Staff recruitment for the client etc.

(e) The audit partners and at least 50% of the engagement team responsible for the audit of either a listed company, or companies whose paid-up capital and free reserves exceeds Rs. 100 million or companies whose turnover exceeds Rs. 500 million, should be rotated every 5 years.

(f) Before agreeing to be appointed (Section 224 (i)(b)), the audit firm must submit a certificate of independence to the audit committee or to the board of directors of the client company.

(g) There should be a certification on compliance of various aspects regarding corporate governance by the CEO and CFO of a listed company.

It is interesting to note that majority of the recommendations of this committee are the culmination of the provisions of Sarbanes Oxley Act of the USA.

SAXEN-OXLEY ACT

The Sarbanes-Oxley Act of 2002 is a law the U.S. Congress passed on July 30 of that year to help protect investors from fraudulent financial reporting by corporations. Also known as the SOX Act of 2002 and the Corporate Responsibility Act of 2002, it mandated strict reforms to existing securities regulations and imposed tough new penalties on lawbreakers.

The Sarbanes-Oxley Act of 2002 came in response to financial scandals in the early 2000s involving publicly traded companies such as Enron Corporation, Tyco International plc, and WorldCom. The high-profile frauds shook investor confidence in the trustworthiness of corporate financial statements and led many to demand an overhaul of decades-old regulatory standards.

The rules and enforcement policies outlined in the Sarbanes-Oxley Act of 2002 amended or supplemented existing laws dealing with security regulation, including the Securities Exchange Act of 1934 and other laws enforced by the Securities and Exchange Commission (SEC). The new law set out reforms and additions in four principal areas:

  • Corporate responsibility
  • Increased criminal punishment
  • Accounting regulation
  • New protections

Major elements

Public Company Accounting Oversight Board (PCAOB)

Title I consists of nine sections and establishes the Public Company Accounting Oversight Board, to provide independent oversight of public accounting firms providing audit services (“auditors”). It also creates a central oversight board tasked with registering auditors, defining the specific processes and procedures for compliance audits, inspecting and policing conduct and quality control, and enforcing compliance with the specific mandates of SOX.

Auditor Independence

Title II consists of nine sections and establishes standards for external auditor independence, to limit conflicts of interest. It also addresses new auditor approval requirements, audit partner rotation, and auditor reporting requirements. It restricts auditing companies from providing non-audit services (e.g., consulting) for the same clients.

Corporate Responsibility

Title III consists of eight sections and mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports. It defines the interaction of external auditors and corporate audit committees, and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports. It enumerates specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance. For example, Section 302 requires that the company’s “principal officers” (typically the Chief Executive Officer and Chief Financial Officer) certify and approve the integrity of their company financial reports quarterly.

Enhanced Financial Disclosures

Title IV consists of nine sections. It describes enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures and stock transactions of corporate officers. It requires internal controls for assuring the accuracy of financial reports and disclosures, and mandates both audits and reports on those controls. It also requires timely reporting of material changes in financial condition and specific enhanced reviews by the SEC or its agents of corporate reports.

Analyst Conflicts of Interest

Title V consists of only one section, which includes measures designed to help restore investor confidence in the reporting of securities analysts. It defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest.

Commission Resources and Authority

Title VI consists of four sections and defines practices to restore investor confidence in securities analysts. It also defines the SEC’s authority to censure or bar securities professionals from practice and defines conditions under which a person can be barred from practicing as a broker, advisor, or dealer.

Studies and Reports

Title VII consists of five sections and requires the Comptroller General and the SEC to perform various studies and report their findings. Studies and reports include the effects of consolidation of public accounting firms, the role of credit rating agencies in the operation of securities markets, securities violations, and enforcement actions, and whether investment banks assisted Enron, Global Crossing, and others to manipulate earnings and obfuscate true financial conditions.

Corporate and Criminal Fraud Accountability

Title VIII consists of seven sections and is also referred to as the “Corporate and Criminal Fraud Accountability Act of 2002”. It describes specific criminal penalties for manipulation, destruction or alteration of financial records or other interference with investigations, while providing certain protections for whistle-blowers.

White Collar Crime Penalty Enhancement

Title IX consists of six sections. This section is also called the “White Collar Crime Penalty Enhancement Act of 2002”. This section increases the criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines and specifically adds failure to certify corporate financial reports as a criminal offense.

Corporate Tax Returns

Title X consists of one section. Section 1001 states that the Chief Executive Officer should sign the company tax return.

Corporate Fraud Accountability

Title XI consists of seven sections. Section 1101 recommends a name for this title as “Corporate Fraud Accountability Act of 2002”. It identifies corporate fraud and records tampering as criminal offenses and joins those offenses to specific penalties. It also revises sentencing guidelines and strengthens their penalties. This enables the SEC to resort to temporarily freezing transactions or payments that have been deemed “large” or “unusual”.

Borrowed Capital

Borrowed capital consists of money that is borrowed and used to make an investment. It differs from equity capital, which is owned by the company and shareholders. Borrowed capital is also referred to as “loan capital” and can be used to grow profits but it can also result in a loss of the lender’s money.

Businesses need capital to operate. Capital is wealth that is used to generate more wealth. For businesses, capital consists of assets property, factories, inventories, cash, etc. Businesses have two options to acquire these: debt financing and equity financing. Debt is money that is borrowed from financial institutions, individuals, or the bond market. Equity is money the company already has in its coffers or can raise from would-be owners or investors. The term “borrowed capital” is used to distinguish capital acquired with debt from capital acquired with equity.

There are many different borrowing methods that constitute borrowed capital. These can take the form of loans, credit cards, overdraft agreements, and the issuance of debt, such as bonds. In all instances, a borrower must pay an interest rate as the cost of borrowing. Typically, debt is secured by collateral. In the case of a home purchase, the mortgage is secured by the house being acquired. Borrowed capital may also take the form of a debenture, however, and in that case, it is not secured by an asset.

Borrowed capital is commonly used in the economy whether that be for personal reasons or for business reasons.

The upside of investing with borrowed capital is the potential for greater gains. The downside is the potential for greater losses, given that the borrowed money must be paid back somehow, regardless of the investment’s performance.

Capital contributed by the owner or entrepreneur of a business, and obtained, for example, by means of savings or inheritance, is known as own capital or equity, whereas that which is granted by another person or institution is called borrowed capital, and this must usually be paid back with interest. The ratio between debt and equity is named leverage. It has to be optimized as a high leverage can bring a higher profit but create solvency risk.

Borrowed capital is capital that the business borrows from institutions or people, and includes debentures:

  • Redeemable debentures
  • Irredeemable debentures
  • Debentures to bearer
  • Ordinary debentures
  • Bonds
  • Deposits
  • Loans

Foreign bonds

International bonds are bonds issued by a country or company that is not domestic for the investor. The international bond market is quickly expanding as companies continue to look for the cheapest way to borrow money. By issuing debt on an international scale, a company can reach more investors. It also potentially helps decrease regulatory constraints.

Three Categories of International Bonds

There are three general categories for international bonds: domestic, euro, and foreign. The categories are based on the country (domicile) of the issuer, the country of the investor, and the currencies used.

  • Domestic bonds: Issued, underwritten and then traded with the currency and regulations of the borrower’s country.
  • Eurobonds: Underwritten by an international company using domestic currency and then traded outside of the country’s domestic market.
  • Foreign bonds: Issued in a domestic country by a foreign company, using the regulations and currency of the domestic country.

A foreign bond is a bond issued in a domestic market by a foreign entity in the domestic market’s currency as a means of raising capital. For foreign firms doing a large amount of business in the domestic market, issuing foreign bonds, such as bulldog bonds, Matilda bonds, and samurai bonds, is a common practice.

Dollar-denominated Bonds

Dollar-denominated bonds are issued in US dollars and offer investors more choices to increase diversity. The two types of dollar-denominated bonds are Eurodollar bonds and Yankee bonds. The difference between the two bonds is that Eurodollar bonds are traded outside of the domestic market while Yankee bonds are issued and traded in the US.

Eurodollar bonds

Eurodollar bonds are the largest component of the Eurobond market. A Eurodollar bond must be denominated in U.S. dollars and written by an international company. Since Eurodollar bonds are not registered with the SEC, they can not be sold to the U.S. public. However, they can be traded on the secondary market. Even though many portfolios do include Eurodollar bonds in U.S. portfolios, U.S. investors do not participate in the primary market for such bonds. Therefore, the primary market is dominated by foreign investors.

Yankee bonds

Yankee bonds are another type of dollar-denominated bonds. However, unlike the Eurodollar bonds, the Yankee bonds’ target market is within the U.S. These bonds are issued by a foreign company or country that has registered with the Securities and Exchange Commission (SEC). Since Yankee bonds are meant to be purchased by U.S. citizens in the primary market, they must follow regulations set by the SEC. For example, the company issuing the bond needs to be financially stable and capable of making payments throughout the period of the bond.

Non-dollar-denominated Bonds

Non-dollar-denominated international bonds are all the issues denominated in currencies other than the dollar. Since there is currency volatility, U.S. investors face the question of whether to hedge their currency exposure. The different types of non-dollar-denominated bonds depend on the domicile of the issuer and the location of the primary trading market. The three major types are the domestic market, the foreign market, and the Euro market.

Domestic market

The domestic market includes bonds that are issued by a borrower in their home country using that country’s currency. Domestic markets have seen significant growth for several reasons. First of all, for companies, issuing debt in the domestic currency allows them to better match liabilities with assets. By doing so, they also don’t need to worry about the currency exchange risk. Also, by issuing debt in dollar-denominated markets and the domestic market, companies gain access to more investors. This allows them to obtain a better borrowing rate.

Foreign market

The foreign bond market includes the bonds that are sold in a country, using that country’s currency, but issued by a non-domestic borrower. For example, the Yankee bond market is the U.S. dollar version of this market. This is because they are sold in the U.S. using the dollar, but issued by a syndicate outside of the U.S. Other examples include the Samurai market and the Bulldog market. The Samurai market is Yen-denominated bonds issued in Japan but by non-Japanese borrowers. The Bulldog market is pound-denominated bonds issued in the U.K. by non-Brtish groups.

Euro market

Securities that are issued into the international market are called Eurobonds. This market encompasses all the bonds that are not issued in a domestic market and can be issued in any currency. Eurodollar bonds are an example of a U.S. dollar-denominated version of a Eurobond as they are sold in the international markets.

Most of the time, the bonds are written by an international syndicate and sold in several different national markets simultaneously. Issuers of Eurobonds include international corporations, supranational companies, and countries.

Distinctions Between Private and Public Companies

Private Ltd. Company

A Private Limited Company is a joint stock company, incorporated under The Indian Companies Act, 2013 or any other previous act. The maximum number of members is 200, excluding the current employees and the ex-employees who were the members during their employment or continues to be the member after the termination of employment in the company.

The company restricts the transfer of shares and prohibits invitation to the public for the subscription of shares and debentures. It uses the term ‘private limited’ at the end of its name.

Public Ltd. Company

A Public Limited Company or PLC is a joint stock company formed and registered under The Indian Companies Act, 2013 or any other previous act.

There is no defined limit on the number of members the company can have. Also, there is no restriction on the transferability of the shares. The company can invite the public for the subscription of shares or debentures, and that is why the term ‘Public Limited’ gets added to its name.

Difference Public Company:

  1. Ownership: Owned by the State Government or Central Government or both.
  2. Objective/Motive: To promote public welfare.
  3. Social Objectives: They are launched to achieve social objectives like development of backward regions, creation of employment opportunities, etc.
  4. Forms of Organisation: Departmental undertakings, Statutory Corporation and Government Companies.
  5. Management: Managed by bureaucrats; hence efficient.
  6. Financial Resources: Huge financial resources; no problem in expansion and growth.
  7. Accountability: Accountable to the public through Parliament.
  8. Political Interference: Comparatively more Political Interference.
  9. Government Control: They are subject to strict financial control by the government.
  10. Distribution of Income: Equitable distribution of income.

Difference Private Company:

  1. Ownership: Owned by private individuals.
  2. Objective/Motive: To maximize profits.
  3. Social Objectives: Social objectives are not very important.
  4. Forms of Organisation: Sole proprietorship, partnership, joint Hindu family business, cooperative societies and joint stock company
  5. Management: Managed by professional managers; hence efficient.
  6. Financial Resources: Limited financial resources; less scope for expansion.
  7. Accountability: Accountable to the owners.
  8. Political Interference: Less political interference
  9. Government Control: They are not subject to strict financial control by the government.
  10. Distribution of Income: Concentration of wealth in few hands.

Private Company

Public Company

Meaning A private company is a company which is owned and traded privately. A public company is a company which is owned and traded publicly
Minimum members 2 7
Maximum members 200 Unlimited
Minimum Directors 2 3
Suffix Private Limited Limited
Start of business After receiving certificate of incorporation. After receiving certificate of incorporation and certificate of commencement of business.
Statutory Meeting Optional Compulsory
Issue of prospectus / Statement in lieu of prospectus Not required Obligatory
Public subscription Not allowed Allowed
Quorum at AGM 2 members must present in person. 5 members must present in person.
Transfer of shares Restricted Free
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