CASE STUDY - 5 About the Company and its New product HealthHi Pvt Ltd (HHPL) is a Bangalore-based medical-grade equipment manufacturing company. Dr Gaurav, one of the promoters of the Company, is a renowned ENT doctor. He has developed 17 patents. Over five years, he has developed three medical equipment based on his patented technology. The one product that is used for scanning by ENT doctors is getting good acceptance in the market. The ease of operation of the equipment is the reason why both doctors, as well as retail customers, are interested in the equipment. The product is linked with a centralized platform that uses Al and this helps patients in knowing about the status of the disease in no time. A team of doctors then remotely confirms the assessment of the Al which is followed by the prescription of the medicine. The same process is adopted for the review. The Company has created a team of engineers who are working on further improving the machine learning so that more accurate and timely identification of the disease is done based on video captured by the equipment at the patient end. Fresh Investment into the company and its temporary deployment 1. After seeing the initial success of ENT scanning equipment which is very effective and is available at a very affordable cost, a venture capital firm SKUCap has made an investment of USD 2 million. The money received by SKUCap is temporarily parked in certificates of deposits, mutual funds, and bank deposits. Although the Board is concerned with this action, the Chief Finance Officer (CFO) has assured the Board that liquidity risk and market risks arising out of the temporary investment would be managed well. A Board member who does not have a background in finance wants to understand liquidity risk so that a similar agenda note put up before the Board can be examined in detail. The CFO has agreed to provide a short note on the same. 2. Mr David, one of the friends of Dr Gaurav, also wants to make some investment in the company but he wants to understand the role of machine learning in the medical world. The task of explaining the functioning of machine learning has been assigned to one of the team members, working on the machine learning and Al project. 3. The Company is also expecting another fresh investment INR 20 million investment in 5 months' time. The CFO wants to place it on a deposit for four months (120 days) before it is utilized in the business. The CFO has got quotes for the Forward Rate Agreement (FRA) from PTC Bank and the day count convention is actual /360- 0 x 5: 10.09-14 0×4:10.07-12 5 x 9: 10.30-35 Corporate Governance and Risk Mitigation To satisfy the corporate governance requirements of the investor, the Board adopts an active role in reviewing the Company's policies on risk oversight and management. The Board oversees developing the Company's risk appetite, defining the risk framework, and making sure that risk controls are included in management's operational strategy. The Audit Committee oversees evaluating the efficacy of the existing risk management systems and conducting an impartial examination of the risk mitigation strategies created for significant risks. The Risk Committee meets on a monthly basis to perform a thorough evaluation of the risk register and to make sure that management is doing an effective job of identifying and managing risks when they come up. Concerns expressed by the Board 1. While the Board believed the company's approach to risk management was generally satisfactory, previous audits were regarded as superficial and had not provided it with the degree of assurance it required. 2. The Board is not happy with the way the risk register is maintained and has directed for an independent review of the risk register. 3. The Board also wants a robust written risk management policy that should in detail cover the risk responsibilities of all the players starting from the Board. Action taken by the Board 1. As a leading expert in this field, Mr Lal was commissioned to conduct an independent review of the current risk framework, strategy, and process for managing risk and to compare these to best practices. 2. The Board further requested Mr Lal for a professional opinion on the current situation of data management and advice on any further steps that should be taken now to enhance and improve the foundations for risk management. Fund requirements of the company 1. Considering the growth prospect of the Company, it also has a plan to raise a loan from a bank that has agreed to lend an unsecured loan of INR 20 million subject to a review of the credit risk. The management wants you to help it in understanding credit risk-related factors that typically a bank considers. 2. Dr Gaurav believes that HHPL should invest a substantial amount in developing a medical product that can ease the process of kidney dialysis. However, the Board believes the fund should not be diverted for the new unknown product at this stage despite the bigger opportunities as it will derail in positioning of the existing product. Issues relating to Personal Investment by the Promoter Dr Gaurav along with his wife controls a Company named CorpFin which deals in derivatives and investments in equity and bond markets. There are certain matters, relating to operational decisions made by the Investment Division of CorpFin, have come to the notice of Dr Gaurav. He wants to take your opinion on to the following matters to ensure that investment decisions are made based on sound principles, policies, and practices:- 1. CorpFin made a substantial investment two years back in an unlisted company named PPL. The performance of PPL has not been on the expected line. Last year PPL had a bad year and its return on assets fell from plus 10% to minus 25%. It has networking capital assets equal to 35% of total assets and the market value of its equity is 20% of its total debt. Last year's losses wiped out its retained earnings and PPL. turned over its assets 1.90 times last year. 2. CorpFin is exploring dealing in Credit Default Swaps (CDS). A strong case has been made by the chief of treasury, as there are opportunities to make more money by investing in risky debt along with CDS. Multiple Choice Questions Choose the most appropriate answer from the given options