CASE STUDY 4 FACTS OF THE CASE An Indian IT Company (hereinafter referred as 'the Company') is engaged in providing software products and solutions to its clients. The Company specialises in digital transformation, under different platforms, The solutions include Artificial Intelligence, Machine Leaming, Robotic Process Automation, Chatbots, Block Chain and Cyber Security intelligence. The software company also engages in training the employees of its clients, in the journey of digital transformation. The approach adopted by the Company is an unique business model which combines the engineering and industry experience to provide intelligent solutions including (i) Consolidate various IT tools/software programs into a single platform, (ii) minimal design changes in the front end, enabling the users to continue operating the systems in seamless manner and (iii) In-built analytics to help the users in self-learning and exception reporting. The Company provides software solutions to clients located in India and in foreign countries. The Company deploys teams to various projects and provides both on-site & off-shore services to its clients. The Company is a listed company in India as well as in United States of America (USA) and is required to comply with the listing agreements of both the countries. The company has a well-established Financial Reporting and Risk Management Frameworks. The Company's operations are exposed to large number of business and operating risks. The Company is also having a subsidiary company in USA, from where software products are procured from the local vendors and sold to various clients along with software solutions. The subsidiary company, also sells its products to the Indian Holding Company. The arrangement for these sales of products is such that the changes in exchange rates are linked to the selling price of the products, either upwards or downwards. ISSUES IDENTIFED The Risk Management team along with the business teams carries out Country Risk Assessment and also evaluates risks associated with specific projects in each country. On a quarterly basis, the Chief Risk Officer (CRO) makes a presentation to the Risk Management Committee with regard to the process followed, tools adopted and the results of such country risk assessments. The issues identified are: (1) A project team of 25 members was deputed by the Company for providing on-site solutions to one of its client in USA. The team was on deputation for two years. Salaries and other related expenses for providing on-site solutions were paid in US Dollars by the Company. After a period of one year, couple of team members left the Company and taken employment in other Company for better career prospects in Canada. The Company was not ready to accept their resignations and these employees had challenges for getting relieved. After multiple rounds of discussions, the Company finally relieved them, after making certain deductions, as per the employment terms, from their full and final settlements. These employees after getting relieved and joining the new Company have raised certain issues relating to the work ethics & experiences of the Indian IT Company in public forum and social media, which affected the morale of other team members who are continuing to work at the project site. (2) The Company also provides on-site software services to its clients in the Middle-East, However, due to repeated terror attacks near the office of the Company and at residential colonies where its staff resides, the Company has decided to exit from that country and started providing off-shore services from India. (3) Similarly, another team was working in an African country. The United States of America & European Union, have suddenly, imposed financial sanctions against the African country and restricted all financial transactions in US $. This would affect the collections of dues of the Company from the clients located in the African country. However, the Company, due to effective risk management practices, based on triggering events has sold the receivables to another party located in Europe at a discount. (4) The Company has exposure to currencies of different countries. 80% of the Company's revenues are from clients situated outside India. The company takes forward & other hedging instruments to manage the net currency risks. Based on the facts given above, you are requested to answer the following questions: Multiple Choice Questions Choose the most appropriate answer from the given options.
Sub-questions (8)
Adverse publicity regarding an entity's practices will lead to a loss of revenue and leads to litigation. The ex-employees view posted on social media about the Company's work ethics is affecting the work culture of the existing employees. Any such event which is detrimental to the business of the entity is considered as:
(A) Reputation risk.
(B) Strategic Risk
(C) Business Continuity risk.
(D) Governance risk.
Exiting the activities which are giving rise to Business Risk by way of either exiting the service line or exiting the countries, or declining the expansion to a new geography or selling the current operations in a specific country, is the following type of risk response:
(A) Reduce.
(B) Avoid.
(C) Share.
(D) Accept.
The purpose of Risk Evaluation by the Company at the Board Level is not to:
(A) Identify the probabilities of failures and threats.
(B) Calculate the exposure of failures and threats.
(C) Identify the hiring requirements of the Company for specific projects.
(D) Make control recommendations keeping the cost benefit analysis in mind.
If the company has receivables of USD 50,000 and payables of ₹40,000, which of the following statement is not correct?
(A) Their settlement will affect the company's cash flow.
(B) It is not subject to transaction exposure.
(C) If the dollar appreciates relative to rupee, a cash gain occurs.
(D) If the dollar depreciates relative to rupee, a cash loss occurs.
The Company sold its accounts receivable for one of its clients from the African country, to a third party located in a European country at a discount, to hedge the country risk and to facilitate timely recovery of over dues. This method of financing is considered as:
(A) Bill discounting.
(B) Packing credit.
(C) Factoring.
(D) Cash credit.
Under the integrated reporting adopted by the Company, describe the matters covered with respect to the Company's governance structure to support its ability to create value in the short, medium and long term.
Explain the procedures adopted by the business teams and risk management team of the Company, for carrying out the Country risk assessment. Also list the tools available for carrying out such assessment.
Explain briefly the various internal techniques adopted by the company to manage exposure to the foreign currency dues, citing examples from the Case Study.