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MODULE 6: CORPORATE ADVISORY SERVICES

We all are not perfect all the time, we tend to divert from the way of reaching our
goals and when we have completely lost the path we all need an experienced person
or a wise person to help us get back in the track. Similarly to keep the financial goals
of the company intact without any wavering there are Corporate Advisory services
providing organisations.

These organisations can be banks, insurance companies, credit card service providers,
consumer finance operators, stock brokers, and some Government enterprises
specialised for this.

The main areas of duties of these companies are:

▪ Financial solutions for the issues faced by the business operations.
▪ Financial procedures management at the time of mergers and acquisition
▪ Financial guidance in the business operations
▪ Financing for the corporate companies to generate funds.
▪ They act as advisory body that help the company with regard to tax and

accounting, and regulatory compliances.

When a company acquires another company and merger or amalgamation takes place
the transferee company undergoes dissolution and the assets are taken up by the
transferor company. These involve complicated and minute accounting details which
involves settlements to creditors etc. In such cases the companies take up the services
provided by these bodies that are specialised to handle these situations in a
professional way. They simplify the procedure and make it easier for the company the
company to pass through the whole procedure smoothly and calmly.

When a company takes up a new project it will face problems regarding allotment of
funds. These bodies lend a helping hand to estimate the cost of whole project and how
to save the money. When the project goes beyond the budget they look into aspects of
reducing the price thereby fitting the entire project into the budget. They also take up
the responsibility of distribution of the funds allocated for the project.

Also, sometimes a company might not have enough funds to run the business and in
such cases there might be a situation where it might have to borrow money from
external resources. In such situations these service providers help the company to get
the required money from the external resources. Sometimes in rare cases the advisory
bodies act as guarantee for such companies that borrow money.

The also help a company to keep record and proper documentation of financial
records. This is a valuable service that is provided by the company because in the
current scenario there is a dire need for proper documentation of the financial records
of the company. In case of any suit against the company there will be requirement for
these well documented records which might possible help the company to get out of
the allegations.

In case a company plans to restructure itself they would opt for these advisory
services. These bodies will help the company by analysing the market situations and
thereby helping the company to plan their reconstruction accordingly. They also help
them regarding all the legal procedures and with appropriate agreements.

We can also state these bodies are risk managers who help the companies that are
sinking through advice on rehabilitation and turnaround management.

Also, it is pertinent to state that these organisations have wide knowledge about the
domestic as well as the international market conditions.

They appoint professionals who have wide knowledge on various fields so that they
act as expert advisors for the companies that need their help.

The company also helps in the process of due diligence where the financial, legal and
operating aspects of the company are investigated. The due diligence process protects
the company from the unforeseen liabilities that might come up in future. When these
advisory bodies take up the due diligence process they make sure that the process is
not biased and is done with a motivational attitude. Through this process the company
is able to analyse its strengths, weaknesses, opportunities and other threats that can
further development of the company. It also helped the company to know whether it
within the confinement of the legal regulations.

▪ Role of Auditors:

Promote Accountability

The researchers have found out that extent evaluating controls and operations as a role of
auditors enhances corporate governance. Measures and policies introduced by external
auditors are designed to compel accountability in the workplace.

For example, if the financial statements are manipulated by inflating figures or cooking
accounting numbers, auditors could recommend penalties. For such acts, penalties could
include stripping the manager of his position or his compensation, reducing annual bonuses or
pensions. So, if the auditor has the slightest bit of suspicion of the legality and integrity of a
record or transaction, it his/her the duty to investigate and report it, before he certifies it to be
true.

Represent Interest of Shareholders

One of the many important roles of a professional Auditing in India in corporate governance
is to protect the interests of shareholder and stakeholders of a company. It is made possible by
conducting independent reports by the auditors and not being influenced by the company.

External auditors are required to state the finances of the company and attest to the validity of
financial reports that may have been released. It is their job to ensure that the board receives
accurate and reliable information. The board may also question the views expressed and an
assessment made by the auditor on the appropriateness of the principles used by the company.

Crisis Management

By developing efficient crisis management plans to be used in the event of allegations of
corruption or fraud, an auditor helps in ensuring good corporate governance. Typically, the
idea is to assign responsibilities to different officials of the administration. This provides that
if the company becomes involved in a financial crisis, those officials have an action plan that
can be used in making sure that confidence among investors is sustained. Controls measures
that are to be used with the media and law-enforcement officials are part of the crisis
management plans.

Risk Assessment and Mitigation Planning

Auditors help in promoting corporate governance by conducting a period risk assessment.
External auditors reassess the security measures that a company has in place against
corruption or corporate fraud.

Additionally, they also analyze the on the whole risk tolerance of the company and the efforts
that the company has made towards lessening the risks. For example, if a government agency
or a company has a system with an under-performing whistle-blower, then the efforts may be
made to improve the system in question.

Maintain Strong Relationship with Regulators

The efforts put in by an external auditor helps in fostering a good relationship with regulators.
Mostly if the companies and agencies have transparent operations, the regulators are
supportive of them. External auditors evaluate the compliance with the regulations of a
company’s organization. Once an auditor attests the company’s disclosures, it is more likely
that the regulators also show their trust towards them.

Apart from examining the company’s accounts and reports, these days’ auditors are also
asked to comment on internal control being practiced in the company.

All in all, the role of an audit committee and auditors has become very crucial in the current
scenario. Stakeholders expect loyalty and trust from auditor while resolving financial facts
and exposing the fault in an organization.

An auditor’s experience, qualification background, relevant exposures, and in-depth
knowledge need to be highlighted. As, when directors are experts, qualified, experienced and
financial wizards, they can have vision and foresightedness to protect stakeholders.

▪ Role of Policy Makers:

Organizational policymakers i.e. Board of Directors, Management Committee, Executives,
must go about the process of policy formation in a careful way. Policymakers must engage,
and be seen to engage, in the process of consultation. A charge of 'failing to consult' is a
charge of considerable magnitude. Whilst much information can be gleaned by listening to
people, there is also often a need to conduct research i.e. statistical surveys, monitor events,
etc.

The role of the policy maker is acting as a funnel to gather information through consultation
and research and to reduce and extract from the information, a policy or a set of policies
which serve to promote what is the preferred course of action.

Some of the skills that policymakers need to ensure the development of effective policies are:

✓ Collecting statistical information
✓ Convening and chairing discussion forums
✓ Be able to write policy documents in an appropriate language and without ambiguity.
✓ Seeking information from experts from outside the organization (this may include

government personnel, other sport and recreation managers and academics in sport
and recreation management)

Your success in policy development will depend to some extent on your ability to research
examples of policy and to discuss policy issues with numerous other people. Good policies
stem from wide consultation and in-depth discussion.

Policy Setting

Corporate governance is the system used to direct and control organizations. One of the many
important roles played by corporate boards and executive committees are to establish and
enforce policies deemed necessary for the effective operation of the company. These may
include codes of ethical conduct towards customers, vendors, employees and shareholders,
input into the organization's structure, as well as approval of functional positions and
responsibilities. This may include input into the corporate culture or a host of subtle
governance cues that affect the transparency or opaqueness of strategic decision making.

Establishing Corporate Strategy

An organization's corporate board must be intimately involved with establishing a clear
definition of the organization's purpose and desired outcomes. If a company sets the goal to
become the global leader in telecom technology for the military market, for instance, then
corporate objectives, strategic plans, financial allocations, and measurable outcomes should
all be measured against their ability to move the company toward that goal. If resources are
being allocated to places that do not support this strategic goal, then the board's due diligence
must identify the reason why and give input into which is off-strategy: the strategic goal itself
or the resource actions that appear initially to be out-of-sync.

Assurance That Actions Support Strategic Positions

A company's executive team is directly accountable to the board of directors. This requires
that major corporate decisions and results tracked against the corporate goals should be
vetted, if not by the full board, then by the board's executive committee. Key strategic actions,
such as mergers and acquisitions, major new market entries, exiting markets, closing plants,
or changing the diversification mix or pricing position, are examples of decisions that require
the oversight of corporate governance.

Monitoring Investment Decisions and Capital Investments

It is the responsibility of the corporate board to review and understand the financial
statements of the company and to guide the prudent investment of funds to maximize net
income and returns. Especially since the Sarbanes-Oxley Act of 2002 which introduced new
responsibilities for financial reporting, corporate boards must be vigilant regarding the
strategic impact of new requirements for internal controls. Corporate boards must also review
and understand product portfolio and support the executive management team, offering
strategic oversight regarding adjustments to the product mix, approving or shifting capital
investment to product categories with the most potential to maintain and grow revenue
streams and manage expenses. At the same time, corporate board members have a difficult
task: helping the executive team balance the short-term goals so desired by shareholders with
the long-term investment necessary to ensure the company's future.

Accountability to Stakeholders

From a governance perspective, accountability, while often focused on stock shareholders,
can sometimes become something heretofore unconsidered. Historically, business school
curriculum has emphasized responsibility primarily for stock shareholder returns, leaving the
responsibilities of a corporation to be a good corporate citizen often overlooked. As stock
prices and quarterly dividends have taken centre stage, long-term investments are often set
aside. Critical aspects of corporate governance responsibilities, such as infrastructure
investment, plant retooling, workplace safety or disaster planning, have often been ignored or
delayed past safe time parameters. The Gulf oil disaster in 2010 demonstrated questionable
judgment by the corporate governance of British Petroleum (BP). While the lapse was
perhaps shared by many oil producers, it followed years of unprecedented revenue growth
and shareholder returns. As unprecedented profits rolled in, it appeared that little to no
corporate investment was designated to technology, safety inspections or deep water disaster
response plans, even as oil reserves were tapped in deeper and deeper water. Surely the

stakeholders in this disaster go far beyond BP shareholders and include the fishermen and
small business people whose livelihoods were destroyed, the wildlife being killed by it and
the people of the Gulf, whose lives would be impacted for decades to come. A corporate
board that does not prepare for crisis, or consider the broad impact of their operational
decisions, is not fulfilling its board mandate.

▪ Role of Lawyers in Corporate Finance

Corporate finance lawyers advise companies on all aspects of the buying and selling of whole
businesses or business assets. It requires guidance on how to comply with company law
procedures, the raising of funds and, in the case of international transactions, compliance with
foreign laws. It is possible to work on mergers and acquisitions (M&A) with public or
privately owned companies.

The Companies Act, 2013 along with some amendments have come into force with more
bright ideas about financing in companies with the help of lawyers. It has come up with the
change in the concept of loans and investments by a company.

Section 186 (1),2013 states that companies before the 2013 Act that is the companies
registered under 1956 are not restricted but the rest shall make investments in two layers. The
companies outside India are exempted under this amendment.

The exceptions are available from the provisions of the 1956 Act of Companies Act to private
companies that loans made by a holding out to its subsidiary company is not available
anymore under Sec. 372A.

‘Layer’ according to explanation (d) of Section 2(87) of the Act about holding Company
means its subsidiary or subsidiaries.

An Investment Company is a Company whose principal business is the acquisition of shares,
debentures or other securities as according to the Companies Act 2013.

✓ To assure the legality of the transaction done by such corporations.
✓ Advice the corporations on their legal rights and duties.
✓ The responsibilities of such corporations should also be remanded to the corporations.

Corporation means the corporate officers involved in such field.

To do the above-mentioned tasks one should possess, intense knowledge of the laws such as
contract law, tax law, intellectual property rights, banking law, securities law and the laws
which are related to the business corporations for which they work.

In recent cases like Walmart, General Motors, etc., have focused on the corporate lawyers in
investigations in which the corporal privileges had been misused. The confidential
information of clients had been accessed to the society where the clients are less likely to
approach the corporations if the corporate lawyer has not taken proper care of such
circumstances.

Corporate lawyers need to draft documents related to the corporation and clients and review
the agreement if necessary and have to make any amendments or limit the agreements or add
any exceptions or conditions according to the parties, required.

A Corporate lawyer is the one who negotiates the deals between the parties and also
negotiates on behalf of the corporation that he is working with being impartial and with a
lawful objective.

Corporate lawyer’s presence is necessary for the meetings between the parties to facilitate
them, to negotiate and act as a mediator understanding the circumstances of both the sides and
help make decisions and suggestions.

Likewise, not all will include the mergers and acquisitions all the time, as there are many
divisions made under the umbrella of the corporate law.

A corporate lawyer can also be a partner of the firm and can also be a part of other fields.

A corporate lawyer should have a grip on the subject that he is dealing with and should apply
his mind taking decisions or while suggesting with all the pros and cons that are possible to
foresee and advice

A Corporate lawyer should have a piece of additional updated knowledge about the laws and
should apply them in practicality. Some practical knowledge of the same is discussed below.

Restriction on Investment

A corporate lawyer must restrict from investing more than two-fold in the case of shares,
debentures and other securities.

The companies which are outside India can be exempted from such restriction, and the laws
of that country shall be applied.

A subsidiary company having subsidiary investment for meeting the requirements under any
law.

Restriction On Loans to Directors and Other Persons

The loans made or security or guarantee provided to any of the directors or any company or
guarantee is given to any company in which a director is interested in is to be restricted by a
lawyer and prevent them from doing so.

This provision from Companies Act, 2013 was first applied to public companies, but now it
has been extended to the private companies also.

Corporate lawyers are experts in company and business laws. They understand the minute
distinction between legal entities and how to best utilize them for different purposes. They
also assist companies in various transactions supporting business operations and management.

In the field of mergers and acquisitions, corporate lawyers enter into negotiations with the
entity, coming up with a memorandum of understanding (MOU). The next step for the
corporate lawyers would be conducting legal due diligence on the target company, assessing
what legal liabilities exist.

Depending upon the nature of the transaction the lawyers will have to file notices in case of
mergers and acquisition with Take Over And Regulation Panel (TRP).

The lawyer also drafts conditions for such sale agreements and finance related agreements to
the transactions.

Once the transaction is finalized, the corporate lawyer will draft the new shareholder
agreements and advice regarding the shares to be issued in accordance with their
requirements. Furthermore, they will draft the new entities Memorandum Of Incorporation
(MOI) and lodge it at the (CIPC) Companies And Intellectual Protection Commission
together with documents affecting the name changes of the target company.

As the transaction size and value increases, so also the complexity and risk, big law firms are
often preferred as they have specialists who focus exclusively on these types of transactions
as opposed to smaller firms.

Corporate lawyers are experts in all facets relating to company law as well as having a solid
understanding of how companies operate & function. Along with these factors, corporate
lawyers are expected to be excellent contract negotiators and draftsmen. They are expected to
work long hours, often being held too tight schedules in their daily life.

Loans and Borrowings of the Company

The inter-corporate loans shall be limits and give guarantees or securities on behalf of the
company shall be restricted to:

✓ 60% of it’s paid up share capital
✓ 100% of its free reserves and securities premium account Whichever is more.

By passing a special resolution in a general meeting, such restrictions can be overcome, or
changes could be made to such limited conditions.

Changes Made in Such Loans and Borrowings Recently

✓ The restriction was there in case of public companies but has now been extended to
private companies.

✓ Loans to companies are restricted and are extended to individuals and non-corporate
entities.

✓ Where a loan is guaranteed that security for such loan has been provided, in a case
acquisition made by a holding company, where the passing of a particular resolution
is not necessary.

Deposits

A public company can accept deposits from its members and other persons, while private
companies can accept deposits only from its members. The definition of “deposit” as
provided under the Companies Act 2013 and the Rules explicitly indicate that loans obtained
by a company shall also be considered to be a deposit. Previously it did not require private
companies to elaborate requirements to accept deposits in compliance with the companies.
Now it accepts deposits by fulfilling certain details about such deposits like notice to
members of the company, filing of a company with the Registrar of a company, separate bank
account details, every loan made by any member of the company comes under this provision
and should be in knowledge of the corporate lawyer. However, loans made by the director in
personal interest shall not be considered and restricted.

Debt Financing and Equity Financing

1) Starting a business would cost much and needs a sound financial support. Finance is like a
pillar of the business. Such loans shall be borrowed or can but invested from savings. When
one runs short of finance, debt financing can be an option where the money is borrowed from
any commercial finance companies or financial institutions.

2) A lawyer in a corporate field should be aware of all the techniques on how finance can be
created and earn profits with a lawful object to fulfil the purpose of the business commenced.

3) Funding a business could require good credit and solid financials which would give
collateral support for a longer run.

4) Many businessmen are afraid to borrow money or take debts as they may not be able to
repay the loans within the time limit. In case of loss it would be a problem if they are not able
to repay.

5) A Lawyer has to foresee such situations and suggest about the current loan systems,
banking systems, etc.

6) The financial institutions provide loans to start a business and encourage them by offering
loans, but the debt payers are afraid of the interest that is charged by such financial
institutions.

7) Some business men do not have enough credit worthiness to get a loan so they cannot even
afford to think of debts.

8) Lawyers should apply their mind and take decisions. Banking decisions should be
preferably made by the corporate lawyers and with a bona fide intention to earn profits for the
company.

9) In the case of debt financing, it is an advantage that the business ownership is in the hands
of the management unlike equity financing, and they are the whole and sole managers who
control and regulate the business.

10) In case if there is a default, there won’t be a huge loss to the company, but the tangible
assets may be at risk.

11) The collateral and contingent funds which are like reserve funds may help in such
situations. The creative and strategic control is not loss in this kind of financing.

12) Also, taking on debt can build a business credit, which is good for future borrowing and
insurance rates.

13) It’s also worth bearing in mind that interest paid on loans is tax deductible, somewhat
softens the blow of repayment.