by:- Anita

Roll no. 6390

Mba II sec (e)

Ethics in Finance

Meaning of Ethics

Ethics is the study of human behavior which is right or wrong. In general, ethics means doing right things to others, being honest to others, being fair and justice to others. Even ethics in finance is a compartment to general ethics. Ethics are very important to maintain constancy in social life, where people work together with one another. In the process of social development we should not be conscious of ourselves but also conscious to take care of others.

WHAT IS FINANCE

Finance means fund or other financial resources; it deals with matter related to money and the market. The field of finance refers to the concept of time, money and risk and how they are interrelated. Banks are the main facilitators of funding. Funding means asset in the form of money Finance is the set of activities that deals with the management of funds. It helps in making the decision like how to use the collected fund. It is also art and science of determining if the funds of an organization are being used in a right manner or not. Through financial analysis, any company or business can take decision in making financial investments, acquisition of company, selling of company, to know the financial standing of their business in present, past and future. It helps to stay competitive with others in making strategic financial decisions. Finance is the backbone of business; no business can run without finance.

WHAT IS ETHICS IN FINANCE

Ethics in finance is one of the main things which everyone has to follow from the small, medium and big level company because almost all the country depend up on the financial background of the country because without financial component no business can run for a long time. The assumption of modern financial-economic theory runs counter to the ideas of honesty, devotion, dependability and loyalty. Ethics in finance may vary from different industries to different industries but everyone is liable to-do their work at utmost good faith. Peoples who involved in finance activity have to serve both their company and their customers at utmost good faith.

Code of Ethics in Finance1.Act with honesty and integrity, avoiding real or

clear conflicts of interest in personal and professional relationships.

2.To provide information which is full, fair, accurate, complete, objective, relevant, timely and understandable, including in and for reports and documents that the Company files with, or submits to, the other public communications made by the Company.

3.Act in accordance with all applicable laws, rules and regulations of governments, and other appropriate private and public regulatory agencies.

4.Act in good faith, responsibly, with due care, competence and carefulness, without misrepresenting material facts or allowing my independent judgment to be subordinated.

5.Respect the confidentiality of information acquired in the course of business except when authorized or otherwise legally obligated to disclose the information. It should not be used for personal advantage.

6.To promote ethical behavior among our associates.

7.Adhere to and promote this Code of Ethics

Characteristics of Management Prone to Fraud

Unduly aggressive financial Targets

Pressure to reduce tax liabilities

Non-Financial personnel involved in accounting matters

Aggressive accounting practice to keep stock prices high

Ethical issues in Finance

Financial statements

Financial Markets

Insider Trading

Hostile Takeovers

Fraud in Financial StatementsFictitious Revenues

Concealed Liabilities and Expenses

Fraudulent Asset Valuations

Improper or Fraudulent Disclosures or Omissions.

Example : The Satyam Computer Services scandal was a corporate

scandal that occurred in India in 2009 where Chairman Ramalinga

Raju confessed that the company's accounts had been falsified. CID

told in court that the actual number of employees is only 40,000 and

not 53,000 as reported earlier and that Mr. Raju had been

withdrawing 20 crore (US$4 million) every month for paying these

13,000 non-existent employees.

Duties of an Auditor

To give an accurate statement to the members

about the state of affairs of a company

To meet the objectives of the Companies Act

1956 and also the Articles of Association.

To be reasonably skillful and careful in

identifying the true nature of the accounts.

Ethical Issues in Financial Markets

Deception: act of misrepresenting relevant information

Churning: Excessive or inappropriate trading for clients account by a broker who has control over the account with intent to generate commissions rather than to benefit client.

Unsuitability Unfairness in Markets

HARSHAD MEHTA SCAM

HARSHAD MEHTA SCAM Harshad Shantilal Mehta was an Indian stock broker.On

April 23, 1992, journalist Sucheta Dalal exposed Mehta's illegal methods in a column in The Times of India. Mehta was dipping illegally into the banking system to finance his buying. In this scam Mehta needed banks which issued fake BRs (Not backed by any government securities). “Two small and little known banks - the Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) - came in handy for this purpose. These banks were willing to issue BRs as and when required, for a fee,once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned.

This went on as long as the stock prices kept going up, and no one had a clue about Mehta’s operations. Once the scam was exposed, though, a lot of banks were left holding BRs which did not have any value - the banking system had been swindled of a whopping 4,000 crore (US$728 million). When the scam was revealed, the Chairman of the Vijaya Bank committed suicide by jumping from the office roof.He knew that he would be accused if people came to know about his involvement in issuing checks to Mehta. 

Introduction Insider trading

Insider trading essentially denotes dealing in a company’s securities on the basis of confidential information relating to the company which is not published or not known to the public used to make profit or loss. It is fairly a breach of fiduciary duties of officers of a company or “connected” persons as defined under the SEBI regulations,1992, towards the shareholders.

Cont’dInsider terms actually includes both legal and illegal

conduct.The legal version is when corporate insider officer,

directors , and employees buy and sell stock in their own companies. when corporate insiders trade in their own securities , they must report their trades to SEBI.

Illegal insider trading refers generally to buying or selling a security , in breach of fiduciary duty or other relationship of trust and confidence, while in possession of material , non public information about the security.

Who are insider traders ?????

Remember this ‘STONE COLD’ guy????????

Who are insider traders?

Corporate officers, directors , and employees who traded the corporations securities after learning of significant , confidential corporate developments.

Friends , business associates, family members , and other types of such officers , directors , and employees, who traded the securities after receiving such information.

Cont’d

Employees of law, banking , brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded.

Govt employees who learned of such information because of their employment by the Govt .

Other persons who misappropriated ,and took advantage of, confidential information from their employers.

RAJAT GUPTA SCAM

Hostile Takeovers

A hostile takeover is an acquisition in which the company being purchased doesn’t want to be purchased, or doesn’t want to be purchased by the particular buyer that is making a bid. How can someone buy something that’s not for sale? Hostile takeovers only work with publicly traded companies. That is, they have issued stock that can be bought and sold on public stock markets.

Examples hostile takeover

Anti-takeover defense measuresPoison Pills

Green mail

Buy back

People Pill

Poison PillsA strategy used by corporations to discourage hostile

takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills: 

1. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount. 

2. A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger.

Example : Netflix the video-streaming and DVD rental company adopted a shareholder rights plan commonly known as a poison pill, to fend off the activist investor Carl C. Icahn to keep things exciting and place a shareholder-friendly spin on the event.

GreenmailLike blackmail, greenmail is money that is paid to an

entity to make it stop an aggressive behavior. In mergers and acquisitions, it is an antitakeover measure where the target company pays a premium, known as greenmail, to purchase its own stock shares back (at inflated prices) from a corporate raider.

Once the raider accepts the greenmail payment, generally it agrees to stop pursuing the takeover and not to purchase any more shares for a specified number of years. The term "greenmail" stems from a combination of blackmail and greenbacks (dollars). The great number of corporate mergers that occurred during the 1980s led to a wave of greenmailing. During that time, it was suspected that some corporate raiders initiated takeover bids to make money through greenmail, which no intention of following through on the takeover.

exampleThe St. Regis Paper Company provides an

example of greenmail. When an investor group led by Sir James Goldsmith acquired 8.6% stake in St. Regis and expressed interest in taking over the paper concern, the company agreed to repurchase the shares at a premium. Goldsmith's group acquired the shares for an average price of $35.50 per share, a total of $109 million. It sold its stake at $52 per share, netting a profit of $51 million. 

Buy BackA buyback allows companies to invest in

themselves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. Buybacks can be carried out in two ways:

1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them.

2. Companies buy back shares on the open market over an extended period of time.

People Pill A defensive strategy to ward off a hostile takeover.

The target company's management team threatens that, in the event of a takeover, the entire team will resign. The purpose of a people pill is to discourage the acquiring company from completing the takeover, by introducing the possibility of having to put together an entirely new management team. This strategy is only effective if the acquiring company wants to keep the existing management.The first use of the people pill anti-takeover strategy is attributed to a food company called the Borden Corporation. In 1989, the company's board of directors approved a people pill that Borden could use to demand that an acquiring company pay a fair value for the company's shares and that it not fire or demote any of Borden's existing managers. The people pill strategy is a variation of the poison pill defense.

conclusionNo business and company can run

without finance. It is lifeblood for all the organization. So if almost all the field in finance follows ethics in their duty almost all other process will function very well without any discrepancies.