Section II (40 Marks)

Answer Question No 5 which is compulsory and any two

from the rest of this section

Questions:

5. (a) Choose the most appropriate one from the stated options and write it down (only indicate A,B,C,D as you think correct): 1x5

Under the Companies act, 1956, the first directors shall hold office uptoA. The end of the statutory meetingB. The end of the period as prescribed by the articles of the companyC. The end of three years from the date of appointmentD. Till the first Annual General Meeting

Mr. Saxena is a Director of SUVALAXMI LTD. which failed to file its annual return from the year 2005-06.The maximum period for which Mr. Saxena will be disqualified from becoming a Director in any public limited company isA. 3 yearsB. 5 yearsC. 7 yearsD. 10 years

Which of the following items requires special resolution in a general meeting under the CompaniesAct, 1956?A. Issue of shares at discountB. Adoption of Statutory ReportC. Appointment of Managing I whole time Director D. Reduction of Share Capital

The concept of Corporate Governance was initiated on the recommendations ofA. The Report by the Confederation of Indian Industry (CII)B. The Report by Or. Y.V.ReaddyC. The Report by Mr. Kumar Mangalam BirlaD. The Report by Mr. Narayan MurthyAs per section 292a of the Companies Act; 1956 every public company having paid up of not less than_____of rupees shall constitute a committee of the Board known as Audit Committee. (Fill in the gape from the below)A. Fifty lakhB. Twenty five croreC. Five croreD. Ten crore(b) State whether each of the following statement is True (T) or False (F):

1 X 5

(i) The qualification shares required to be taken up by a director must be purchased from theCompany.

(ii) Increasing the voting rights of the shares held by the management can be considered as an actof oppression under the Companies Act 1956.

(iii) Risk Management is not a linear process; it is the balancing of a number of interwoven elements.

(iv) The Companies act 1956 provides a positive definition of the term "Independent Director"

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(v) As per clause 49 of the listing agreement on Corporate Governance, the Audit Committee shall meet at least twice a year. 1 x 5

Answer to question No 5(al:

(i) -D(ii) - B(iii) -0(ill) - c(11) -c

Answer to question No S(b) :(i) -False

ii) -True(iii) -True(iv) -False(v) -False

aue.tlon:8.(a) MIS VIVITHA is a director in 14 public limited companies on 301 November, 2008. Thts apart

she.'s an alternate director in another public limited company. The following particulars are madeavailable to you relating to her appointment as director in various companies in annual genera l

meetings (AGM) held:

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Nametdetalls of Company Date of AGM

Daya Organ1cs Ltd. 15r DECEMBER ,2008Vm1ala PlastiCS LTD. 29"' November,2008Bala11 Va1shnav Association ( a companyregistered under sect1on 25 of the Companies Act, 1956)

30"' November. 2008

Based on the prov1s1ons of the Compan1es Act, 1956. you are requ red to adv1se M1ss. V1v 1tha,as tothe opt1ons available to her for accepting or refus1ng the aforesaid appomtments 8

(b) The Audit Comm1ttee of Yash Telecommun1cat1ons Ltd • const1tuted under sect1on 292a of the Compames Act. 1956 submitted to the Board of D rectors. a report conta nmg tts recommendations .These recommendations were however not accepted by the Board.In th•s scenano, state your v1ews on the followings:

(i) Can the Board adopt the stand of not accepting the Audit Committee's recommendations?

(ii) If yes, the board does not accept the recommendations, what should the Boards do?(iti) How should the Cha1rman of the Aud1t Committee respond? 7

Answer to aueshon No 6(a) .Sect1on 275 of the Compan1es Act, 1956 debars any person to hold off1ce as a director or morethan 15 company's SimultaneouslyAs per the provisions of Section 277(2) of the Companies Act, 1956, where a person holds d1rectorsh1p of 14 or less companies is appointed as a director of other companies, and such appomtments make the total number of his d··ectorsh1ps more than 15,then the person concerned has to choose the d rectorsh1ps which he w1shes to continue to hold or to accept so that the total number of directorships, old or new, henceforth to be held by him does not exceed 15The sa1d section further prov1des that none of the new appointments shall be effective unhl such a choice IS to be made and 1n case of failure of the person to make such a choice with1n 15days of the day on which the last of the new appointments was made, all the new appointments shallbecome vo1d.Section 278 Of the Compan1es Act, 1956 states that lor the purpose of section 275 and 277 the number of companies are not be counted

(a) A pnvate company unless 1t IS a subs1d1ary of a public company

(b) An unhm1ted company.(c) An assoc1allon not carrymg on busmess for prof1t or wh1ch proh1b1ts the payment of d1v1dend

(d) A company in which such person is only an alternate director.In v•ew of the abovement•oned legal provisions, M1ss Viv1tha. Who 1s already a director 1n 14 compames, has to cons•der the following aspects.Alternate d1rectorsh1p or d rectorsh1p m section 25 company 1s not affected. Hence she can takeup the d1rectorsh1p m Balap Vaishnav Assoc•allon, the company reg•stered u's 25The appomtmentm v1mal PlastiCS takes the number to 15 on 29·11·2008. and 1n Daya org:m

csLtd on 1" December, 2008 takes the number of d•rectorship to 16Hence wrth1n 15days from the date on which the last appo1ntment was m,'\de VIZ.1" December,Mlu VMtha has to decide upon one pi the two compan1es 1n wh1ch she would take uptbe d rectors! P.I._ fa•ls to decide ,the two new appo•ntments shall become vo•d and shall nottnlo;o ef!E.'CI

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Suggested Answers to Qudt/UtU (S)IIabus 2008) D mber]/6

Answer to guestjon No 6(b);(i) As per Section 292A(6). the recommendations of the Aud1t Comm1ttee shall be b1nd1ng on the

Board of D rectors. in so far as relating to the financial management 1nclud1ng the aud1t report In

1respect of other matters, the recommendations are not bringing on the board.

(ii) Sechon 292A (7) enjoins that .if the Board does not accept the recommendations of the Auo tCommittee. it shall record the reasons therefor and communicate such reasons to the shareholders .

(iii) As per section 292A (10). the Chairman of the Audit Committee shall attend the Annual General Meeting(s) of the company to provide any clarifications on matters relating to aud1t. Beyond th1s the Chairman of the Audit Committee cannot do anything inthe case of non-listed companies. It may be noted that in case of listed companies. clause 49 of the Listing Agreement gives morepowers to the Audit committee 1n this context.

Question:7.(a) HEMA BIOMWDICALS LTD. is an existing profit making company w1th strong free reserves and

having a huge real estate property. The Managing Director obtains reliable mformation that a group of undesirable persons are Cornering the shares of the company, w1th a view to transfer them to their names and effect change inthe composition of the Board of D rectors. He apprehendsthat such change will be prejudicial to the public interest.You are requested to advise the company with reference to the provisions of the Compan1es Act,1956, as to how the company can block the aforesaid transfer of shares.

7(b) Your help is sought in drafting the relevant portion of directors' Responsibility statement

form1ng part of Directors' Report.Draft the same. 4

(c) S ate the additional requirements stipulated in clause 49 of the Listing Agreement which are Silent 1n sect1on 292A of the Companies Act, 1956. 4

Answer to question No 7!a) :Power to block transfer of sharesAs per Section 250(4) of the Companies Act, 1956,

• Where_ the Company Law Board ( Company Law Board till the company law Tribunal becomes::rat• nal; referred to as CLB hereinafter) has reasonable ground to believe that a transfer of

res 1n a company IS hkely to take place, and

• The CLB is of the opinion tha.t any such change would be prejudicial to the public interest,

suchmay, by an order, dtrect that any Iran 1

period not exceeding th s erh .

s ares In the concerned company. dunngAs per Section 250( 1) & (2) f ree ears, as may be specified in the order, shall be void.

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at==0 compan es Act 1956, if the CLB is of the view

that reasons to lind out the relevant facts about any shares and

lmay. an can not be found out unless the r . . .are

as an intenm measure

order direct that t ra

shares.

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estnction Imposed,'•WIIe n:is4td •n res• pect of such ns1er of any·'such shares shaII be void and no vohng nght sha

IIIIo conferred with the power to vary or rescind

given sn the q t'

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order any t1me

ues IOn squarely tall within h .Act. 1956.The management f H e purv•ew of the proviSions of sectiOI'l 250

0 ema Biomed1cals Ltd.may lodge a tnl

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w1th the CL 0 <tnd prove to 1t that the transf er of shares 1n favour of the group of unscrtJpu oupersons would cl1unge the compos111on of the Board of D1rectors of the Company, wh ch sha bepreJUdicial to the public interest; if the CLB is persuaded of the plea of the company, 1t may passan order as ::.tated above, wh1ch would block the transfer of shares, as mentioned in the quest on

Answer to question r--..o 702).;Directors' Responsibility Statement

Pursuant to the rcqu rements of Section 217(2AA) of the Compan1es Act,1956, 11 1s hereby confirmed.•) that 1n preparation of the annual accounts, the applicable accounting standards have been

followed and that no matenal departures have been made from the same.

ii) That the D rectors has selected such accounting policies and applied them consistently ana made JUdgments and est1mates that are reasonable and prudent so as to give a true and fa1r v1ew of the state of affairs of the Company as at 31" March,2008 and of the profit of the Company for the year ended 31 'march,2008

iii) That the Directors had taken proper and suffic1ent care for the maintenance of adequate account1ng records in accordance with the provisions of the Companies act,1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

iv) That the Directors had prepared the annual accounts for the year ended 31"' March,2008 onAnswer to Question No gomg concern basis.

Answer to question No 7JdAdditional requirements stipulated as per Clause 49The follow1ng additional requirements are stipulated as per Clause 49 of the L1sting Agreements wh1ch are silent in Sect1on 292A of the Companies Act, 1956:

(I) The aud1t comm1ttee should invite such of the executives, as it considers appropriate (andparticularly head of the finance function) to be present at the meeting of the comm1ttee, but onoccas1ons 1t may also met without the presence of any execut1ve of the company.

(u) The company secretary shall act as secretary to the committee. . . .(Iii) The audit committee shall meet at least thrice a year. One meeting shall be held before hnahzalion

of annual accounts and once m every six months.(iv) The quorum of the audit committee shall be two members or one-third of the members of the

aud1t comm1ttee- wh1cl1ever is higher and m1nimum of two mdependent d1rectors.(v) The powers and role of the aud1t committee are elaborately contamed m sub-paragraphs C&D of

paragraph II.Question: · 1

d a prehend that the company s so vency li

B.(a) A group ot shareholders 1n a publiC hmlte company, Pat stake, as the Board of Dtrectors of the compa y IS

1 naging the affa rs tn accordancealmng directions for conduct1ng a

w1th sound busmess pnnc1ples. They seek your a VIce orspec1JIaud1t. d 4Bnefly state the provisions of t he ComPanles act• 1956 1n thiS regar ·

(b) Bnofly diScuss the ptov1s1ons of the Competition act. 2002 relat1ng to

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18 Sug ested An.nwrs to QlUWWm (S;.IIahus 1008) December]

(•) Power of Central Government to exempt,(n) Restrict1on on d•sclosure of information. 2·2(C) What are the act1ons required in identifying suitable responses to Risk 1n the context ol r sv

Management? 7Answer to guestion No 8(a):Provisions regarding Special AuditSection 233A of the Companies Act, 1956 deals with the aspects connected with the Special Aud1t. The Special Audit can be ordered by Central Government if it is of the opinion:

i. That the affairs of the company are not being managed in accordance with sound business principles or prudent commercial practices, or

it. That the company is being managed in manner likely to cause serious inj ury or damage to the

interest of the trade, industry or business to which it pertains,oriii. That the financial position of the company is such as to endanger its

solvency.The dissatisfied group of shareholders should lodge a complaint with the Central Government requesting for conduct of the special audit. If the Central Government is satisfied that there exists sufficient reasons, it may order a special audit to be carried out by a Chartered Accountant who may or may not be company's statutory auditor or who may or may not be in practice.

Advice should be tendered on above lines to the

group. Answer to guestion No 8(b)(i):Competition Act,2002:Power to exemptThe Cent ral Government may, by notification, exempt from the application of the Competition, Act, 2002. or any provisions thereof , and for such period as it may specify in such notification-

a) Any class of enterprises if such exemption is necessary in the interest of security of the State or public interest;

b) Any practice or agreement ansing out of and in accordance with any obligation as-summed byIndia under any treaty, agreement or convention with any other country or countries;

c) Any enterprise which performs a sovereign function on behalf of the Central Government or a State Government;

Provid d that icase an enterprise is engaged in any activity including the activity relatable to the sovere•gn funct1ons of the Government, the Central Government may grant exemption only in respect of activity relatable to the sovereign functions.Answer to question No 8(bl(ij):Completion,Act ,2002:Restriction on disclosure of informationNo informatio r lating to any enterprise, being an information which has been obtained by or on behJof tihf e Co1mthm•ss1on fo·r thbe pu.rpose of the Competition Act• shall,WI'thout the prev1·ous pem11SSIon 10 wr 1ng o e enterpnse, e disclosed otherwise than in compliance 'th 1 h f the Acl or any other law for the time being force. WI or or t e purpose o

AQ6Wer to question N o . B!cl Identify suitable responses to risk.

The action break into broadly five types, as shown below :

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1) PreventiOn: Term1nate the nsk- by doing things differently and thus removing the nsk, where 1t is feasJble to do so. Countermeasures are put in place that e1ther stop the threat or problem from occurnng or prevent 1t hav1ng any impact on the proJect or bus1ness.

2) Reduction:Treat the risk- take act1on to control it m some way where the actions e1ther reduce the hkehhood of the nsk developing or hm1t the impact on the project to acceptable levels.

3) Transference :Th1s 1s a specialist form of risk reductron where the management of the risk IS passed to a th1rd party v1a, for 1nstance, an insurance policy or penalty clause, such that the impact of the nsk rs no longer an 1ssue for the health of the proJect. Nol all risk can be transferred m th1s way

4) Acceptance :Tolerate the risk- perhaps because nothing can be done at a reasonable cost to m1tigate 1t or the likelihood and 1mpact of the risk occurring are at an acceptable level.

5) Contrngency: These are actions planned and organized to come into force as and when the risk

occurs.A. ny given nsk could have appropnate actions in any or all these categories. There may be no cost eftecttve action available to deal with a risk, 1n which case the risk must be accepted or the justification for the proJect rev1sited (to rev1ew whether the project 1s too risky), poss1bly resultmg 1n the terrrunation at the prOJect.The results of the nsk evolution activitieS are documented 1n the Risk Log. If the project 1S part of a pi'Ogfamme, proJeCt nsks should be examined for any impact on the programme (and vice versa). Where any cross-•mpact 1S found, the risk should be added to the other Risk Log.

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12 Suggested Answers to Questions (Syllubus 2008)- June 2009

Sec:noN II ·(CORPORATE LAWS)

Answer Question No. 5 which is compuiSo,Y and any I;.Q, Troir\the rest in this section.Question:5.(a) Choose the r'ost appropriate one from the stated options and write it down (only indicate A,B.

C. D as you tl">mk correct):(i) A public information officer shall as expeditiously as possible provide information

fromthe date of receipt of request but in any case withinA. 15 daysB.30 daysC.45 daysD.60 days

(ii) Under Competition Act, 2002, penalty for offences in relation to fumishing .of information isA. As. 51akhB. As. 10

lakhC. As . 25

lakhD.As. 50 lakh

(iii) Inthe Context of corporate governance,Narayana Committee was formed in the yearA.2002 B.2003 C.2004 0.1999

(iv) An ordinary resolution is one which is passed in a general meeting bya simple majority of votes including the casting vote of the chairman

l

A.B. 3/ th major ty of votesC, 2f?rd.majer f Yol

I D.N-o-ne-of the above · ·

-- .

u (v) Inthcontext of-:cl.assi{the below).

\ A. Credit Risks

i B.Liquidity Risk

j C. Disaster Risks

-ication-

ofrisk, tax risks will fall under----. (Fill in the gap from

D.Legal Risks 1 X 5

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I(b) State whether each of the following statements is True (T) or False (F):

(i) An entity is to obtain certif icate from a company secretary as to compliance of condition s of corporate Governance as provided in c lause 49 of the listing agreement.I (ii) Related party transactions means a transfer resource or pbligations between related parties1regardless of whethe r or not a price is charged.

lt

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Groz p Ill : Paper P II Capuu/ M arker Anul ysi• & Ccrporalt Lau·< /3

(iii) SEBI had in the rev1sed clause 49 of the list1ng agreement mandated that at least 30% of the Board of a listed company comprise of independent Directors.

(iv) An index of members must be maintained by a company when its membership exceeds

100.(v) W1thout the sanction of the Tribunal,the liquidator of a company can appoint an agent to do

any business wht ch he is unable to do himself. 1 x 5Answer to Question No S!i!t

(i) A. (ii) B.(iii) B.(iv) A. (v) B.

Answer to Question N o S(b}.; (i) False. (it) -+ True (iii) False (iv)-+ False (V) -+ True

Question:e.(a) State the importance of a remuneration committee inthe context of corporate Governance.What

are the responsibilities normally assigned to such Committee? 3+3

(b) What are the additional requirements stipulated 1n section 292A of the Compantes Act, 1956which are s1lent in clause 49 of the L•sting Agreement?

3(c) It is said that after the risk identif ication takes place, the actions involved in pinpointing

suitable responses to the risk are broadly of five types.Elaborate on these live types of actions. 1+5

A n s wer t o Q ue s t ion No G(a) : REMUNERTATION COMMITTEE:It is now a universally accepted proposition of corporate governance practice that Boards of directors of companies appoint appropriately .composed remuneration committees to work out executive remuneration on their behalf.The combined code of the UK says that the remuneration committee will be responsible lor working out remuneration package "toattract. retain and motivate exccut1ves of the quality required".The committee should decide where to.poSitionthe11company relat •ve to other companies and take account of comparable remuneratiOn and relative performance. W,ith regard to the composition of the committee, as overwhelming majority of guidehrtes suggest that it be composed exclusively of independent non-executive directors.The committee would makeits well considered recommendations to the board for final decision.The followtng responsibilities are normally assigned to a remunerationcommittee, which should have a writt en terms of reference:

a) Remuneration packages and service contracts of the CEO and other senior executives.b) Remunerat ion packages for non-executive directors.c) Remuneration policies and practice of the company.d) Any company share and other incentive schemes.e) Company superannuat ion and pens1onarrangements.r t Q...Qucstio n N o 6(b);

Additional requirements stipulated as per Section 292AThe f ollow ng additional requirements are stipulated as per Section 292A of the Companies Act,1956 whtch are silent to Clause 49 of the Listing Agreement:

(i) The audit committee constituted shall act in accordance with terms of reference to bespecified in wnt1ng by the board.

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Suggested Answers to Questions (Syllabus 2008}- June 2009

(ii) The recommendations olthe audit committee on any matter relatingto financial management,including the audit report, shall be binding on the board.

(iii) If the board does not accept the recommendation of the audit committee,it shall record thereasons therefore and communicate such reasons to the shareholders.

Answerto Question No 61Cl :Risk IdentificationThis step identifies the potential risks (or opportunities) facing the project . lt.is important not to judge the likelihood of a risk at thts early time.This is done in a controlled manner in a later step. Attempting to form judgments while 'brainstorming' a list of potentialrisks may lead to hurried and incorrect decision to exclude some risks.Once identified, risks are all entered in the Risk log. This contains details of all risks,their assessment, owners and status.The·Risk log is a control tool for the Project Manager, providing a quick reference to the key risks facing the project, what monitoring activities should be taking place and by whom. Reference to it can lead to entries.Ident fies suitable responses to riskThe_actions break into broadly five types, as.shown below,

1."Prevention Terminate the risk- by doing things differently and thus removing the risk where it is feasible to do so. Countermeasures are put in place that either stop the threat or problem from occurring or prevent it having any impact on the project or business.

2. Reduction threat the risk- take action to control it in some way where the actions either reduce the likelihood of the risk developing or limit the impact on the project to acceptable levels.

3. Transference- This is a specialist form of risk reductionwhere the management of the risk is passed to a third p3rty vi3, for incto.nce, aninsurance policy or penalty clause, such that the impact of the risk is no longer an issue f or the health of the project. Not all risk can be transferred in this way.

4. Acceptance- Tolerate the risk -perhaps because nothing can be done at a reasonable costto miti e it or likelihood and impact or the risk occurring are at an acceptable level.

-S....COntlngency-These ere-actions !)fanned and organized to come into force as and when the risk occurs.

f Any given ri k could have appropriate actions in any or all these categories.

There may be no cost-effective actions available to deal with a risk, in which case the risk must be accepted or the justific ation for the project revisited (to review whether the project is too risky),possibly resulting in the termination of the project.The results of the nsk evaluation activities are documented in the Rtsk log. If the project is part of a programme,project risk should be examined for any impact on the programme (and vtce versa).Where any cross-tmpact is found , the risk should be added to the other Risk log.

Question:7 (a) The Board of directors of Vtvitha Pharma Ltd.,decide to termtnate the services of Mr.

Upadhyay, employed as General manager.Mr.Upadhyay is occupying a flat owned by the company at Kolkata. The company fears that he may not vacate the flat. The Board desired to know the action to be taken under the Companies Acn, 1956 to reassume possession of the flat. Advise

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Group Ill · f'ap er P II : Capital Marku Analym & Corporac lA>•'.! 15

appropriately. Will your answer be d1fferent if the flat is not owned by the company,but has been taken on lease? 4

(b) Vasudha Footwear Ltd. is of the view that XYZ Co. ltd.,is abusing its dominant position 1n the footwear industry.It wishes to lodge a complaint against XVZ Co. ltd., before the Competition CommissiOn .Bnefly elucidate the factors which the commission will consider to ascertain whetherZ Co. ltd.,is enjoying a dominant position in the footwear industry. 6

(c) Mr.Janak who had been appointed as director in Madhav Marbles ltd..was to retire by rotation on 21M August , 2008. Due to reasons beyond the company's control, annl@l general meeting could not be heldon scheduled date. Further,inthe adjourned meeting also, the vacancy could not be f illed up.You are required to ascertain whether under the provisions of the Companies Act,1956,Mr.Janak shall be deemed to have vacated office on 21" August,2008 when the annual general meeting was scheduled to be held or whether it will be deemed that he has been reappointed. 5

Answer to Q y es t j on No 7(a) :ACTION AGAINST GENERAL MANAGERThe company can take action under Section S30 of the Companies Act, 1956 if the general manager ref uses to vacate the premises provided by the company.According to Section 630, it is an offence , if any officer or emplc-yee of a company-

(1) Wrongfully obtains possessiOn of any property of a company or(2) Hav ng any S\)Ch property in his possession wrongfully withholds it or knowingly

applies it to purposes other than those expressed or directed in the articles and authorized by the Act and such an offence is punishable with fine up to Rs. 10000/-. Further the court may also order such officer or Amployee to deliver to the company any such property wtongly obtained or wrongfully withheld withi n a.time fixed by the court.

So the company can file a complaint under Sec1ion 630,as 11provides epeedy relief.Section 630 covers either existing as well as past officers or employees. Thus,action mayalso be initiated after termination of the services of Mr. Upadhyay.1t1s not necessary that the property in question should be owned by the company.Even if thecompany exercise only a leasehold right, the provisions of Section 630 can be invoked.

Answer to Quest ion No Z(b ) : Dominant position of an enterpriseThe Competition Commission while inquiring whether the enterprise XYZ Company enjoys a dominant position or not under Section 4 of the Competition Act, 2002 will take the following factors Into account:(a) market share of the enterpnse(b) size and resource of the

enterprise(c) size and 1mportance of the

competitors(d) economic power of the enterprise including commercialadvantages over competitors.(e) Vertical integration of the enterprises or sale or service net work of such

enterprises.(f) Dependence of consumers on the

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enterprises.(g) Monopoly or dominant position whether acquired as result of any statute or by virtue of

beinga Government company or a publ1c sector undertaking or otherwise.

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and how the same is permissible. 5(b) •A promoter stands in a fiduciary relation towards the company, he promotes"-Explain. 3(c) What are the important elements of Good Project Governance? 7

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16 Suggesred Answers ro Questions (.'iyl/obus 1008) June 2009

(h) Entry barriers including barriers such as regulatory-barriers,financial risk,high capital cost of ontry,marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or services for consumers.

(i) Countervailing \>tJying power.

. (j) Market structure and size of market.(k) Social obligations and size of

market.(I) Relative advantage, by way of contribution to the economic development, by the

enterprise enjoying a dominant positive having or likely to have an appreciable adverse effect on competition.

(m) Any other factor which the commission may consider relevant for the inquiry.

A n s w er to Q ue s tion No 7(c) :DEEMED REAPPOINTMENT OF DIRECTORSection 256 of the Companies Act , 1956deals with deemed re-appointment of a retiring director. The vacancies caused by retirement of a dir ctor by rotation should be filled up at the same meeting or at an adjourned meeting. If it is not so done, the retiring director shall be deemed to have been reappointed at such adjourned meeting except in the f ollowing cases-

(i) at any previous mlileting, a resolutionfor his reappointment was put to vote but was lost, or,(ii) the retiring directo-r has, in writing expressed his unw[l_lingne s to continue, 0(

(iii) he is not qualified or is disqualified for the said appointment ,or

(iv) a special or ordinary resolution is necessary for his appointment or reappointment by virtueof any provisions of the Companies Act,1956 or

(v) it is resolved to appoint two or more directors by a single resolution,or

.(vi) it is resolved not to fill the vacancy.It the instant case the above mentioned exception are not applicable and hence Mr.Janak cannot be deemed t.o be retire. He is deemed to be re-appointed as director.

Question :8.(a) Vasudha Group of Companies has under its fold, two public limited companies and a private

!I lin:ii c!Lis...a_s.ubsidiary of one of the _public limited companies). The Groupwishes to appoint Mr. NABIN as the managing director for all the three companies inits Group.

f Briefly advise-the 6roup, with reference to the provisions-of the Companies Act, 1956, whether

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l A nsw e r t o Qycstjon No 8 1a) :

f Number of companies for which a person can be appointed as managing directorAs per the provisions of-sect ion 316(1) of the Companies Act , 1956, no public company znd noprivate company which is a subsidiary of a public. company can appoint or employ a person as its managing director, if such person is a managing director or manager of any other company, whether public company or private company which is a subsidiary of public company, except as provided in sub-section (2) of Section 316. ·Section 316(2) enjoins that a public company or a private company which is a subsidiary of apublic company may appoint or employ a person as its managing director, if he is the

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managing

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Group Ill · l'ap.:r P II . Capitu/ Marla:t A11aly.ris & Corparmt IAII"S 17

director or manager of one, and of not more than one, [other company (includtng a private company which is not a subsidiary of a public company)] .Inview of the above legal provisions. Mr.Nabin cannot,prima facia.be appointed as a managing director of these three companies (two public companies and the pnvate limited company. which is a subsidiary of a public company).An exception to the above is prided by section 316(4), which en1oins that the Central Government may, by order, permit any person to be appointed as a Managing Director of more than two public limited companies. If the CentralGovernment is satisfied that it is necessary that the companies should,for their proper working,functiOn as s1ngle umt and have a common Manag1ng Director.•In the light of the aforesaid exception provided by the Companies Act, 1956,Vasudha Group of Companies should approach the Central Government and convince the Central Gov1:abou1 the importance and advantages of having a common Managing Director for all the three companies. If the Central Government is satisfied and issues an order accepting the plea of the Group, then only the Group can appoint Mr.Nabin as Managing Director of all these three companies of the Group.

Ans w er t o Q u e s t i on No B(.b) :A promoter stands in a fiduciary relation (relation requiring confidence or trust) to the company which ho promotes.The promoter in such a situation (i) must not make,either directly or indirectly. any profit at the expenses of the company which is being promoted.(ii)must give to the company the benefit of any negotiations or contracts into wh1ch he enters in respect of the company,(iii) must give full disclosure of all the relevant facts, including any proht and his personal interest in a transaction with the Company.

A n s w e r t o Question N o 8Cc) ;Important specific elements of good Project Governance are enumerated as follows:

1. A compelling bus1ness case,stating the object of the project specifying the in-scope andout-of scope aspects.

2. A mechanism to assess the Compliance of the completed project to its original objectives.3. Identifying allstockholders with an interest in the project.4. A defined method of communication to each stockholder.5. A set of business -level requirements as agreed by all stockhnlrl,.rs.6. An agreed specification f or the project deliverables.7. The appointment of a Project Manager.8. Clear assignment of project roles and responsibilities.9. A current published plan that spans all project stages from project 1n1hallon through

development to the transition to operations .10. A system of accurate upward status and progress-reporting including time

records.11. A central document repository for the

project.12. A centrally-held glossary of project

terms.13. A process for the management and resolution of issues that anse during tho project.14. A process for the recording and communicat ion of risks identified during the

project.15. A standard for quality review of the key governance documents and of the project

deliverables.

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Net worth of least Rs 1 crore1n all the preceding threeyears of twelve months each

(I) Where a charge requ1nng registrati

o'l is ro: regis eagainst the cred1tor and not aga1nst tr.e

liquidator.(1i) To effect buy back of shares, the same shou!:J be. e' aha. after passing an crdmaryresolution in a meetmg of the Board of directors(ii) Amalgamation in the nature of merger is to be

accountcc<JS per the purchase method.

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3 Net worth 3 1-3-2008 IS I Corr.pany may check up more than one crore rupees th1s aspect as to whether .t No 1nformat1on 1n the p oblem has had net worth of Rs 1 . whether it has been so for crores for minimum 3 yea's, mmimum 3 years

otherw1se fulfill this norm4 In case of change in name, Requirement is relating to No act1on required.

50% of preceding yeai's revenue and not net profit.revenue should be from new More than 50% of revenue has

activity. been from the new activ1ty -"' The aggregate of the Pre-issue net worth bemg ! Anyway . two more years atpropose<l issue and all 1 4 crores. 5 times the same 'I the eas: are required

·previous issue made in is Rs 7 crores only Firm the same financ ial year m a:lotment ... promoters· terms of s,ze (i.e., offer contribution to be culyt hro .;gh offer document+ cons1dered

1cond1t•on 1) Tre corr.oany

I IS lii<ely to :ulf!;l th1s norrr tncn. Act1on to be taken

I accord1ngly.f•rm allotment+ promoters' Icontributionthrough theoffer document). does not exceed five(5) times its pre-issue net worth as per balance sheet of the lastfinancialyea r.)

-SECTION II (40 Marks)(CORPORATE LAWS)

Answer Question No. 5 wh1Ch tS compulsory and any two frorr: t:1e rest tn this section.Question:

5 (a) Fil: up the blanks:(i) Every public company havmg a paid-up capital of not less t .an rupees-----

shallconstitute the Aud1 t Comm1ttee.

(ii) In the context of classification of risk, tax nsk will fall urder ris (credit. liquidity, disaster)

(iii) The Competition Commission shall consist of a Chair person and more than _ other Members to be appointed by the Central Government

(iv) In the context of corporate governance, Narayana Murtt1; Committee was formed in the year 1x4

(b) State with reasons whether true or false (Mere conclus,on ·.vJt r•Jt s:.df1ce)

red 111e charge become s vc'dab e

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Suggested AnJwers to Quetioll! (S.vllobus )008)- Dl!Lw11&41r 1009

Answt:r to question no. 5 1 a) (1) 5 crores(ii) Uqu1dity(iii) 10(iv) 2003

Answer to guestion no. 5 I b) (i) FALSE. Where the comJ)any fails to register the charge, the charge becomes void(not

voidable) as against the creditor as well as the liquidator. The given statement Is thus false on two counts.

(ii) FALSE. As per section 77A(2) of the Companies Acts, 1956, the buy-back of shares can effected , inter alia,where a special resolution ha,s been passed In·the general meeting of the company authorizing the buy bacl<..This clause shall not be applicable,where the buy back is or Jess than 10% of the total paid up equity capital and free reserves of the company and such buy back has been authorized by the Board by means of resolution passed·at irs meeting.

(1ii) FALSE.Amalgamation inthe nature of merger is to beaccounted as perthe Pool ng ofinterest Methodand in case of amalgamation inthe nature of purchase accounting needs lobe done as per the Purchase Method.

Question:6 {a) A public company sought extension of time from the ROC for holdingAGM up to of 3

months and it was granted. However, when the actual AGM was to be held. the company faced a situation that the annual accounts were up to a period beyond which it is permissible. The company contended that since ROCgranted .extension of time for holding the AGM, the same would also be applicable for presentation of accoun as well. Referring to the relevant provisions of the Companies Act, 1956 state whether the contention of the company holds good. 4

(b) The Soard of Directors of Moonshine Ud. are contributing every year to a charitable ti'\JSI a sum of Rs.1lac. Ina particular year. the company suffered lo$.ses and the directors arecontemplating to contribute the same amount in spite of the losses.In this connection,discuss whether the directors can do so. 4

(c} Ganga Plastics Ltd.and Yamuna Tubeplasts Ltd. entered into a scheme of amalgamation by which formerwould transfer itsentire undertaking to the later. However, the Central Government raised an objection that unless 'the·objects clause ol !he companies ate similar and the Memorandum empewers to do so. the scheme of amalgamatioo cannot be permitted. Is the objection of the C

tral Government tenable? 7Answer to question n o . 6(a)

While a company may hold its AGM in a year within the timelimit of 15 months as enjoinedinSection 166(1). it may stW contravene Section 210. A company and its directors may commit offences if they do not fulfill the three requirements and failure to comply with anv of them. unless e n extension of time has been given by ttle ROC for holding the meeting.However theextension of time for holding the AGM is only with reference to the meeting and not to that of submission of accounts.

Answer to question n o . S(b The power to givedonation to general charities does not hinge on the existence of any profitduring the year in question . In such a case they may contribu lc up to the limit given in Section

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2g3 (1) (e), even though the company maybe functioning 1 o loss.As stipulatecr in-t.'le section, a pub c company can contribute in any linanclal year not exceeding Rs.50,000 or 50% of its. average net proftis during t'le three preceding financial years whichevar is grf'.at!!r.

An s w e r t o g ue i tlon " 2· 6 ! c l The power to amalgamate may be derived from the Memoraf;dum of Assoeiat':ln of tfle company or rts may be acquired by resorting to the Companies Act, 1956:Section 17 of the CompaniesAct, 19561ays down that a company which aes1res to amalgamate will'l another company ..viii e nece&Sa.'Y steps to come before a Court for alte.-ation of it:; Memorandum authorizing such amalgamation. The Comr:anies Act, 1956confers a rignt o;1a comp3ny to alter Its Memorandum inaid of amalgamation with anothercompar.y.The ptovisioos con!ained insecltoo 91 to 396 and494 ,illustrate instances of statutory power of amalga111ating a company with anotlier comp.any without any specific power in the Memorandum (Hari Krishna LoKia vs. Hoolur>goor Tee'Co. Ltd. 1996].Section 391 is not coly a corr.pleta code,but 1tis the nature of a single window clearance system to ensure that parties are notput to avoidable, unnecessary and cumbersome procedura lor makll'l9 repea:e: applications to court or va.;ous alternations and changes.What ts to be seen Is: the over an fairness midfeas.ibllity of s<:t1eme of amalgamation and there need not be any 'unison of objects' of l>oth transforor and the transferee company. [R Morarjee Gokvldas spg Wrg.Co., 1995).To amalgamate with another company ·is the power ofthe company and not an object of the company. (Re. Hari Krishna Lohia. 1996). lrre.spec ve of the objects clause, the Cou:t is err.powerQd to sanction scheme of amalgamation provided it does not prejudice Inainterest of the public. Therefore, ba::OO onthe above judicialrulings, tt:e·conl<mtionof the Ctlntrai Ocwrr:ment is not tenable in taw.

Question:7.(a) Fruits ltd. has its subsidiary company Oranges ltd., which was formed to carry out some

of the objqctives of the former.FN1ts Ltd. $USpends one of its severe:!businesses, by passing a resolution at the company's extra-ordinary generalmeeting,with effect from 1''January,2009. The business: so suspended cor.timks to be suspe nded until the end of March. 2009.On 1" April2009 ,a group of shari!ho!ders of Fruits; Ltd. File a petition inthe Co.urt for w ,dmg of the company on the ground of suspension of business by the company.Referring to the provisions of the CompaniesAct,1956,

(ij State whether the content/on of the shareholder s is !ega:ly correct;(ij) Will your answer be Li1e same in case Fruits Ltd. suspends all its business? 8

[b) What do you comprel\end bythe term "Corpprate Governance"? Explain how the provisions of the CompaniesAct. 1956relahng toAud:t Committee v.111 help in reaiizing soma of the objectives of Corporate Governance . 7

A ns w er to g yestlon n o . 7 Cal The problem Isconcernedwi!n suspension ofbosir.ess by a company.Section 433 prov:des that a co'mpc; ny may be wound up the court if it does not commence 1ts business witllill a year from !Is incorporation or suspends 1:s busmess for a whole year, it. The cor\tention of the shareholders of XYZ Ltd:hatthe company is liable to be\I.Ound up on the ground of suspension ofbustness, is nottcmable for the foUow1n9 reasons:

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S11ggested Answers ro Que$rforu ( llob ts 2008)- December 1009

(i) (a} A Company may be woun.d up by court if acompany suspends its business fQr a wholeyear. In the givensituation, the business was suspended only on 01.01.20-09, Hence on 1..April, 2009, it c nnot be said that the business has baen suspended for.the whole year, so as to attract the provisions of Section 433 (c}.

(b) Where a company having more than one business discontinues one of them, it cannot be said to nave suspended business within the meaning of Section433 (c).

(a) Where a company ceases to do any business but isaholding company of subsidiaries engaged inthe pursuit of the business,which itwas previOusly doing, it cannot be said the company has suspended its business (Ref: Easltlfn Telegraph Company Lid.)

(ti) Even if Frutts Ltd suspended aU its businesses,the suspension was not for a period of more that 1 year as on 01.04.2009 and hence the provisions or Section 433(c} are not applicable. Again for the reasons stated in (i) (c) above Fruits Ltd cannot be said to have suspended itsbusiness as its subsidiary Orange Ltd, Is carrying on the business,

Answer to guesUon no.7(b)

CORPORATEGOVERANCE

.The vast amount of literature availableon the- subject ensures that there·exist jnnumera bredefinitionsof corporate governance.To get a fair view on the subject itwoukf be prudent to give a narrow aswell asa boarddefinition of corporate governance .In a narrow sense, c<Jrporate governance Involves a set of relationships amongst the companys' management, its board of direct9rs. its shareholders, its auditors and other s.takehofder5. These relationships, which involve various rules andincentives,provide the structure through whlcl1the objectives of the company are set,and the means·or attainingthese objectives as well as monitoring performanceare determfned. Thus. the ey aspects of goodcorporate gov.ernence include transparency orcorporatestructures andoperations,the accountal>ility of managers andthe boards to shareholders,an<fcorpor:r teresponsibility towards stakeholders . .Ina broader sense, however,good corporate governance, the extent to which companies are run inan open and honest manner.is important tor overall market c<Jnfidenee, the efficiency of capi1al allocation, the growth and development of countries' Industrial bases, and ufhmalely the nations' overall wealth and welfare .AUDIT COMMITTEEFor better corporate governance, the concept of Audit Committee for companies a! ln oduced by section 29?A of the"Companies Act,1956.Every public company having paid upcapital of not ress than Rs.5 Crores must have anAudit Committee.The auditors .the internal auditof, if any,and the dirootor-in-<:harge of finance shall attend and participateat meetings of tha Aud t Committee {Section 292A (5)]As,per section 292A (6) of the sald Act, the functloris of the Audl!Committee include the following:

(a) TheAudit Committee shoulddiscussWith the auditors periodically about lntemal control systems.the scope of audit includif\g the observations of the auditors.

(b) TheAudit Committee should reviewhalfyearlyand annual linancial statements before submissionto the Board.

(c) The AUdit Committee should ensure compliance of internal control systems.- - - - - - ... - - - - .. -- - - · - -

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The Audit Commltt e shafl have aut orlty to Investigate into any matter in relation to the Items specified in this section or referred to it by the Board and for thi? purpo$es,shall have full access to information contained inthe recordsof the company and external professional advice, if necessary (Section 292A(7) ofthe Compal'!lasAct, 1956), ·The recommendations of the AuditCommittee on any matt r relating to financialma,.agement Including the audit report, shall binding on the Boardand if the Board does nor accept the recommendations of the Audit Committee, It shall record the reasons therefore end communicate such reasons to the shareholders.[Section 292A (8} & (9)of the Companies Act. 1956!.The above provisions of the Companies Act, 1956 relating to powers and functions of theAudit Committ&e relating to financial statements willhelpinachieving one of the objectives of corporate governance .I.e., accountability and avoidance of poor.financial reporting. Italso ensures thi:it the companies are managed inclean and transparent ma ner.Question:B.(a) Can it be said that management audit incorporates il'l itself,an efficiency audit? What are the

mainobjects of efficiency audit? 7(b) State the importance of going concern concept in preparation of corporate financial

statements in India. How is the term •foreseeable fvture• defined inthis context? 8Answer to qu!!lloo n9, s (aManagement AuditIncorporates in i elf an efficiency audlt. Efficiency audit ensures "application of the basic economic principle so that resources flow into the mos.t remunerativechannels". Themain object of efficiency audit is to ensure that

1. Every rupee investedincapital or inother fields give the optimvm returns and2. The pla.rmlng of Investment between the different functions and aspects is designed to give

optimum results.The parameters for measuring eftictencywithIts concomitant details

are 1. Overallrate of retum on capital employed2. Better capacity utilizatio"

3. Better utilization of raw material, power, labor; eqvipments ,and finance4. Effective incentive system5. Better export performance and Import substitutron6. CostControl

It is nec&$sary to make study activity wise s.o as to identify areas ot deficiency In particulars activity. To conclu{!e we can infer saying that Investor io order to protect hisinvestment inany company expec}Sproper exhibition of corporate governance which is taken care by Management Audit as ManagementAudit would encompass compliance audit,efficiency audit, propriety audit and systems audit as well as management audit is concerned with the overall objectfves of an organization.Answer to question no. 8fblManagement may not prepare financial statements applying going concern basis in case there exists signlficant doubt about the going concern status olthe enterprises.The point has not been taken care of in section 217(2AA).

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Suggested Answer.! to Questions (S.dlohus 200!/j-· Decem bt·r'*• 2001J

lr lndta preparation and presentation of corporate financial statements are governed by accounting pol'c1es stated 1n the Companies Act and any other statutes Ittat govern the reporting ent1ty, accounting standards and other documents stating accounting policies, measurement and disclosure issued by the Institute o Chartered Accountants of India or any other regulatory authority like SEBI. RBI, IRDA e:c Tt-.ey together form Indian GAAP In fact while preparing financial statements it IS necessary to follow Indian GAAP.Corpora:e ftnanc •al statement are prepared following "go1ng concern' assumption which imphes :hat the repocting ent1ty IS ex pected to continue operations in the foreseeable future and it has ne1ther the trten:1on nor necessity of liquidation or of curtailing the scale of operations. In India the Corporate managernent 1s not requ1rec to make expliCit disclosure as regards the validity of gomg concern assumption. The term foreseeable future is also not defined in the accounting standard. Considering the uncertaint1 es involved t n the predication of business continuity, foreseeable future should not taken as distant future.Paramete ;s of identifying going concern

uncertainty: Forecasts and budgetsBorrovnngs requirement

L1abi l 1ty management Cont1ngent liabilities Produc t and markets Financi al risk management

Other factors tncluding consistency of earning, stability of cost base, recurring operation losses, arrears of divioends, wor i< stoppage, etc.The Institute of Chartered Accountants of India has issued SAP - 16 Going Concern. This audit standard attempt to capture going uncertainty in the of ISA -23. Generally,financ 1cl statements are prepared on the basts of fundamental assumption of going concern. It is necessary for the auditors to cons1der the appropnateness of the going concern assumptions. The auditors should consider the existence of the follow1ng tnd1cat1ons which risks the going concernAssump!IO n :Financial Indications

1i Negative net worth or negative working capital2) Fixed term borrowing approaching maturity without realistic prospects of renewalor repayment

or excessive reliance on short term borrowings to finance long termassets.31 Adverse key financial ratios4) Substantial operating lossesSi Substantial negat> ve cash flow from operations 61 Ar rears or discontinuance of dividends71 Inability :o pay creditors on due dates8) D.Htculiy in complytng with the terms of loan agreements

9l Change from credit to cash on delivery transaction with suppliers10)Inability to obtain financing for essential new product d velopmen t or other essential

investments

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11) Entering into a scheme of arrangement with creditors for reduction of liabilityOperating Indicati

ons1) Loss of key m

anagement without replacement2) Loss of a

maj

or market tranch1se . license. or pnnc1ple supplier3) Labour difficulties or

shortage or importa t

suppliesOther Indications1) Non-Compliance with capita ,or other statutory requirements2) Pending legal proceedmgs against the e"ltity may if successful result 1 n JUdgments that could

not be met3) Changes in legislation or government

policy

4) Sickness of the entit under ny statutory definit i on5) The significance of such de ications can often be mitigated by other factors.

To resolve the doubt about the appropriateness of the going concern assumption the aud1tor should gather sufficient audit evidence.

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12 Suggested Answt'rs to Questions {Syllabus 2008)- June 1010

SECTION II(40 Marks) (CORPORATE

LAWS)

Answer Question No. 5 which is compulsory and any two from the rest in this section.

Question:S(a) State with reasons whether true or false (Mere conclus ion will not suffice):

(i) A company having a paid-up share capital of As.50 lakhs or more can appoint a sole selling agent with the approval of the CentralGovernment.

(ii) A stalement in lieu of prospectus filed when shares are not issued to publ c, but private sources need to be signed by any two Directors of the company.

(iti) The guidelines for good Corporale Government 2009 brought out by Ministry of Company

.affairs are for voluntary compliance and 1\re not mandatory. 2 x 3(b) Fill up the blanks with the appropnate answers:

(i) Alternation of share capital requires lhe passing of resolution.(i) Mr. Anup Kumar is a director of SHEETAL LTD which f ailed to file its annual return

from the year 2006.07.The maximum period for which Mr.Anup will be disqualified from becoming a director in any Public Limited Company is years .

(iii) Clause of the Listing Agreement deals with principles of Corporate Governance.

(iv) The Committee set up by SEBI submitted s report in February 2003 onCorporate Governance 1 x 4

Answer to Question No.S(a)(i) FALSE

A company having a paid up capital of As 50 lakhs or more shall not appoint a sole sellingagent expect with the consent of the company according by a special resolution and the approval of the Central Government. Thu.s passing of a specialresolution in a meeting of members Is also required.

(ii) FALSEStatement in lieu of prospectus needs to be signed by every person who is named as directorin the statement.

(iii) TRUEThe recently gUidelines f or good Corporate G<?vemance 2009 brought out by the Ministry of Companies Affairs are for voluntary compliance and emphasize that good Corporate Governance practices enhance companies' value and stakeholders ' trust resulting in robust development of capital market, the economy and also helps in the evolution of a vibrant and constructive shareholders' activism.

Answer to Question No.5(b)(i) Ordinary(ii) 5 years(iii) 49(iv) Narayana Murthy Committee

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Question:6{a) The official liquidator of VASUDHA LTO receives a notice from a trade creditor of the

Company that the court has passed a decree In its favour, relating to the dues for services rendered to VASUDHA LTD,e.nd the amount specified in the court decree should be paid first, prior to the clearing of dues of workmen.The same is owosed by the workmen.Advice the official Liquidator suitably; with reference to provisions of the.Companies Act ,1956. 7

(b) Anapplication was filed by Mr.Lalit Modi under Sec. 403 of the Companies Act, 1956 seeking direction to an annual general mcet.ng (AGM) scheduled to be held on 10" June, 2010 at the factory premises instead of the reg1steredoffice of the Company, and also to adopt the accounts and reappdintments of auditors at the AGM, in accordance with the outcome of his petition. The respondents submitted that the applicant was a party to the meeting held for the amendment of articles 15 and 16 and to S!Jbstitute a new Artic le 16,that the petitioner had signed the Minutes and lhat the necessary From 23 and filed with the Registrar of companies for shifting the registered office to its new location. Is the claim of the applicant tenable? 4

(c) Where the Central Government is of the opinion that a number of the Competition Commission has acquired such financial interest that would affect prejudicially his functions as member of the Commission,can sucha member be removed? Explainwith reference to the relevant provisions of the Competition Act,2002. 4

Answer to Question No.6(a)The situation in the question is covered by the provis1ons of section 529A of compames Act, 1956 read with section 529 and 530.

The effect of combined reading of these sections that the workmen of the company become secured creditors by operation of law to tho extant of the workmen 's dues and ar entitled to proportionA l payment along with other secured creditors.If there is no secured creditor then the wor1< men ol the company become unsecured preferential creditors under the said 529A to the extent of workmen's dues.The purpose of the said section 529A is to ensure that the workmen should not be deprived of their legitimate cla1ms in the event of the liqu1datron of the company and the assets of the company would remain charged for the payment of workmen's dues and suchcharge will be pari passu with·the charge of other secured creditors. There is no other statutory provisions overriding the claim of the secured creditors except the said section 529A.Thus under the said section 529A,the dues of the workmen and the debt due to the secured creditorsare to be treated pari passu and have to be treated as prior to all other dues.Thus , the law is very much clear in th1s respect and the Hon'ble Supreme court of India held in the case of [UCO BANK (1994) 81 comp, Case 780jthat the provisions of Section 529A of the Compan1es Act 1956 will over ride all other claims of the creditors even where a decree has been passed by aCourt.In view of the stated legal posit1on ,the contentionof the workmen of VASUDA LTO is va!id and the off cial liqUidator will have to pay their dues as provided in section 529A of the Companies Act.Answer to Question No.6{b)

No.Mr Lalit Modi, the applicanVpetitioner is not correct in his claim, since all the formalities for shifting the registered office of the company were undertakenduly taking the approval of the shareholders ina proper1y convened meeting 1n which the petitioner/applicant also had participated and signed in the

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14 Suggested Answers r o (}u1!$lions (Syllabus 2008)- June 2010

Minutes for the alteration of Articles of Association, his present request for changing of venue of AGMis not tenable.As per Sec. 166(2), the Company has to hold the AGM only at its Registered Off1ce and there IS no reason to shift the proposed meeting to a new location.It was so held by the Company L-aw Board in MYLSAMY Vs .SRI GAJENDIRA PAPER AND BOARDSP.LTO (2009) 153 Cornp Cas 2 (CLB) and the application was dismissed.Answer to Question No. 6(c)

1 Provisions of section -11(2) of the competition Act ,2002 empower the Central Government to remove,• by an order, a member of the Competition Commission of India from his office if such member has

acquired such financial interest as is likely to affect as is likely to affect prejudicially his functions as a Member of the Competition Commission.However ,Provisions of section - 11(3) of the said Act put some restrictions on such powers of the Central Government.According to this section. in case as stated in the question, the Central Government wants to remove a member of the Competition Commission from his ofllce, it has to make a reference to the Supreme Court. The Supreme Court shall hold an enquiryinaccordance with the procedure formulated by it and report that the member in question ought to be removed from his office.Thus,the Central Government can remove a member of Competition Commission from his office by following the a\><>ve procedure.Question :7(a) LMN LTD was incorporated on t•June,2007.On 1•March2010a political party

approaches the company lor a contribution of As . 10 lakh:; for political purposes.Your advice is sought w1th re'spect to the under mentioned issues:

(i) Is the company legally authorized to give this political contribution?

(11) Will it make any difference if the company was in existence on 1"April,2007?

(11i) Can the company be penalized for violation of the applicable provisions relating to political

contribution?(iv) What are the disclosure requirements in this regards? 2+2+2+2

(b) The Audit Committee of LATHA PHARMA LTO constituted under section 292A of the Cempanies Act, 1956 submitted to the Board of Directors a report containing its recommend'ations. These recommendations were however not accepted by the Board.In this scenario state your views on the following:

(i) Can the Board adopt the stand of not accepting the audit Committee's recommendations? (il) If yes, that the Board does not accept the recommendations what

should the Board do? (ii) How should the Chairman of the Audit Committee respond? . 2+2+3

Answer to Question No.7 (a)

(i) Only a company which had been in existence for 3 years can make cont ribution to political parties. Since LMN ltd had not completed three years of existence on 1" March,2010 it Is not eligible to-give political contribution.

(ii) Yes,Because In that case,LMN Umited shall complete three financial years of its existence, therefore, will be eligible to give politicalcontnbubon.

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Group Ill : f!aper F-P II . Capital M arker Analysis & Corporate Laws 15

(Iii) A company will b eligible to give political contribution subject to the congition that such a contravention of the provisions of this section will make a company liable to fine which may extend to three tjmes the amount so contributed.

Further every officer of the company in default would be liable to imprisonment for a term whichextended to three years and also toline.

(iv) The amended section 293A seeks to impose an obligation on every company to_disclose inits profrt and loss account contributions made by it to any political party or f or any politicalpurpose. Con1ravention of the provtsions of this section wiff make a company liable to line which may extend to three times the amount so contributed. Further every officer of the company indefault would be liable to imprisonment lor a term which may extend to three years and also to line.

Answer to Question No.7(b)

(i) As per Section 292A (6) the recommendations of the Audtt Committee shall be binding on theBoard of Directors, In so far as relating to the Financial Management including audit report . In·aspect of others matters, the recommendations are not bringing on the board.

(it) Section 292A(7) enjoins that if the Board does not accept the recommendations of the Audtt Committee, it shall record the reasons therefore and communicate such reasons to the share holders.

(n As per Section 292A(t0) of the Companies Act1956 ,the chairman of the Audit Committee shall attend the Annual General Meeting(s) of the company to provide any clarifiCations on matters relating to audit. Beyond this, the Chairman of the Audit Committee cannot do anything in the case of non - listed companies.Itmay be noted that in case of listed companies,clause 49 of the listing Agreement gives more power to the Audit Committeein this context.

Question:8(a) SEBI has introduced Corporate Governance ina comprehensive manner to protect

shareholders interests as well as provide teeth in monitoring Companies' performance through independent Directors. Discuss. 6

(b) State some of the procedures which an auditor has to follow in order to evaluate going concern uncertainties. 6

(c What were the recommendations of the Narasimhan Committee relating to percentage of independent directors? 3

Answer to Question No. 8(a)An outline provided by the Confederation of IndianIndustry (CII) was given concrete shape in the Bir1a Committee report of SEBI,SEBttmplemented the recommendations of Bir1a Committee and the Narayana Murthy Committee worked for further relining the rules of SEBI. These recommendations were implemented through the enactment clause 49 of the listing agreements.The Committees which were created for the purpose were:

1. Audit Committee2. Share holders grievance Committee3. Remuneration Committee4. Share Transfer Committee

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IliI

/6 Suggested Answers to Questions (Syllabus 2008) June 2010

A u d it Co m m ittee :

viewol interest olshareholders andefficiet cy.ThisCon-mttee alsoasc.ISSed indelaiquarterly perfoonances taking care for proper disclosures and transparency. The annual report included a report on a corporate Governance, Corporate Social responsibility and Management discussions on future plans.Sb a r eholdt[l Grleyance C o m mltte:e.: The interests of the shareholders regarding dividend payments ,changes of addresses, any grievance against the company were discussed and disposed of every quarter and the status Is Indicated Inthe quarterly report. ·Re m u ner a t i on C o m m itte e : Remuneration of whole time Managing Directors was recommended after application of mind as well as the relevant sections of the companies Act approval in the GeneralMeetings of the Share holders. Share transfer Committee :With dematerialization. transfer of shares have become more transpare nt. However, the Committee looks into the aspects of insider trading and any possibilities and malpractices.Answer to Question No. B(b)Evaluating the going concern uncertaintiesInorder to evaluate various going concern uncertainties anAuc1or needs to follow certaln procedures which may include

1} Analyze and discuss cash flow, profit and other relevant forecasts with management2) Review vents ......,..urring after the balance sheet date for items affecting the entity's ability

to continue as a going concern3) Analyze and discuss the entity's latest av.ailable interim financial statements4) Review the terms of debentures'and loan agreements and determine whether any have been breached5) Read minutes of the meeting of shareholders, the board of directors and important

committees for reference to financing difficulties.6) Review the status of matters under litigation and claims7) Confirm the existence legahty and enforceability of arrangements to provide or maintain financial

support with related and third parties and assess the f inancial ability of such parties to provide additional funds.

6) Considering the entity's position concerning unfilled orders.Answer to Quest ion No. 8(c)RECOMMENDATION:PE8CENTAGE OF INDEPENDENT DIRECTORS.No less than 50 percent of the board of director of any listed company,as well as unlisted public limited companies with a paid up share capitaland free reserves of As. 10 crores and above, or turnover of 50 crores and above, should consist of independent directors -independence being defined in ear1ier recommendation.However th1s will not apply to

(1) Unlisted public companies, which have no more than50 shareholders and which are without debt of any kind from the public, bank or financial institution,as longas they do notchange their character.

(2) Unlisted subsidiaries of listed companies.Nominee directors will be excluded bothIrom the

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A. 2B. 3c. 40. 5

SECTION - II(40 Marks)(Corporate Laws)

Answer Question No.5 which is compulsory and any two from the rest, m this Section.Question:5. (a) Choose the most appropriate answer from the stated options and write it down (Only indicate

A,B,C or D as you think correct).(i) ESCORT LTO has 12directors on its Board.The maximum number of non-rotational Directors

the Company can have on its Board is:

(ii) The offtee of the Director becomes vacant of he fails to obtain the share qualifications, if anyrequired by the Articles:

A. Within 2 months of appointment;B. Within 1 month of appointment;C. Within 1 year of appointment;D. Before appointment.

(ii The concept of Corporate Governance was initiatedon the recommendation of the report by:A. Confederation of indian Industry (CII)B. Dr. Y.V. Reddy;C. Mr.Kumar Mangalam Birla;D. Narayana Murthy.

(iv) An application to investigate the affairs of a public Company where the shareholders are scattered allover the country can be made to the National Company Law Tribunai(NCLT) byA. Any one hundred members;B. Any two hundred members;C. Not less than one f ifth of the persons on that Company's register of members:0. Not less than one fourth of the persons on that Company's register of members;

1X4=4

(b) Fillin the blanks withappropriate answers;(i) Buy back of equity shares by an Indiancompany should not exceed __% of its paid

up equity capital in the financial year.(ii) In the context of classification of risks, fraud will fall under_ __

(iit) The membership of the Governance and nominating Committee consists of at least----each of whom shall meet the Independent requirements established by the Board.

(iv) In the case of a listed company, in addition to those stipulated In Clause 49of the Usting Agreement,Section__ of the Companies Act 1956contains additional requirements for Corporate Governance.

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(v) The Status of litigation and claims (need to/ need not) be examined lor evaluating going concern uncertainties .

(vi) Annual returns of a Company should be f iled with the Registrar of Companies within _from the·date of annualgeneral meeting. 1x6=6

An s w er t o Ques t i o n N o . 5 la ) :

(1) c(it) A(ii c(iv) B

Answer to Q u estion No.5 (b);

(i) 25%(ii) Legal risks (ill) 2 Directors (lv) 292A(v) Need to(vi) 60 days

Question:6.(a) MR.VASUDEB was appointed as Director of ZISLEEN LTO on 2"" April2010. The

Articles of Association of the Company provides that the qualification of a Director shall be holding of at least 10shares inthe company. Mr.Vasudeb applied for 10equitysharesolthe Company on 31" May 2010.But the shares were allotted only at the Board Mooting held on 12"' Auguct 2010.Examine with reference to the relevant provisions of the Companies Act 1956 whether Mr. Vasudeb has e¢mplled with the requirements relating to qualiftcation shares. If not what are the consequences? 5 + 2

(b) $tate the importance of a remuneration Commtttee.in the con1ex1or Corporate Governance.What are the responsibilities normally assigned to such a committee? 3 + 2

(c) State any 3of the additional requirements stipulated in Clause 49 of the Listing Agreementwhich are silent in Section 292A of the Companies Act 1956.

3Answe r t o Question N o . 6 (a):The e¢mpanies Act 1956 does not provide for any share quahllcation of any director. But Regulatton66 of Table-A Provides that a dtrec1or must held at least one share inthe Company.Usually the Articles of a company provides for holding qualificalton share by a director. Where a share qualification has been prescribed In the Articles of a Company which is a public company or a private company, which is a subsidiary of a public company, the provision of section 270 regarding holding of share qualification by a director shall apply whereby such director must take his qualification share within 2 months after his appointment.If a person acts as a director without acquiring the qualification shall in accordance. With the

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provision of section- 270, he shall be punishable with fine , which may be extending to As. 500 for every day during which he continues to act as director (section -272). Moreover a director who fails to hold qualif ication shares is liable to vacate his office. In this caso MR. VASUDEB was appointed as

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Director of ZISLEEN LTO on 2"" April2010.He appliedfor shares of the Company on 31" May 2010 which was allotted only at the Boardmeeting held on 12"August 2010. Unless the shares applied for by Mr.Vasucleb has been allotted in his favour.it cannot be said that he held the shares before expiry to two months from the date of his appointment Therefore Mr. Vasudeb must vacate his office.Answer to Question No.6 (b}:

Remuneration Committee: Ills now a universally accepted proposition of corporate governance practice that Board of directors of companies appoint appropriately composed remuneration committees to work out executive remuneration of their behalf.The combined code of the UK says that the remuneration committee will be responsible for working out remuneration packages 1oattract retainand motivate executives of the quality required".The committee should decide where to position their company relative to other companies and take account of comparable remuneration and relative performance.W1th regard to the composition of the Committee on overwhelming majority of guidelines suggest that it be composed exclusively of independent non-executive d1rectors. The committee would make its well considered recommendations to the Board for final decision.The following responsibilities are normally flSSigned to a remuneration committee, which should have written terms of reference:

(i) Remuneration packages and service con tracts of the ECO and other senior executives.(i) Remuneration packages for non-executives d rectors(iii) Any company share and other Incentive schemes.(v) Company superannuation andpension arrangements .

Answer to Question No.6 <c :Ad d i t i o n a l Aeauiroments stipulated as oer Clause 4 9: The following add1llonalrequirements are stipulated as per clause 49 of the listing Agreements whichare silent in Section 292A of the companies Act ,1956:

fr) The Audit committee shouldwrite such of the executives as itconsiders appropriate (andparticularly head of finance function) to be present at the meeting of the committee, but on occasions it may also met without the presence of any executive of the company.

(u) The company secretary shallact as secretary to the committee.(iii) The audit committee shall meet at least thrice a year .One meeting shall be held before

finalization of annualaccounts and once in every six months.(iv) The quorum of the·audit committee shall be two members or one-thirdof the members of the

audit committee· whichever Is higher and minimum Gf two independent directors.(v) The powers and role of the audit committee are elaborately contained insub-paragraphs

C&DofParagraph-If .

Question:7.(a)Weak Tweak India ltd made an initial public offer of 2 lakh equity shares.Can these shares be

considered as 'Goods' under the Competition Act 2002 before allotment? 3(b) INSTABLE FERTILIZERS LTDhas been continuously incurring losses; the company mortgaged

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its machinery to Mr.BULLY one ol its creditors on 151 September 2009 relating to outstanding of

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As. 15 lakhs due to him. The other creditors-of the company filed a petition for winding up the Company_ on 19"' December 2009. The company was ordered to be wound up on 30" April 2010. Discuss whether the Official Liquidator can declare the transaction of mortgage with Mr. Bully as Invalid. .6

(c) Write a brief note on Audit Committee. 6Answer to Question N o . 7 (a ) :Share before allotment are not goodsAs per section 2 (i) of the Competition Act,2002.' goods means goods as defined In the sale of GoodsAct,1930, and includes·(a) products manufactured,Processed or mined:(b) debentures, stocks and sharJs after allotment ;and(c) goods imported in India.

Thus 'shares after allotment' can be construed as goods, but 'shares before allotment' are no goods.Answer to Question No.7 (b ) ; Mortgage Infavour of a particular creditor can be declared voidIncase of a winding up by the Court, the winding up shall be deemed to have commenced at the time of presentation of the petition for the wind1ng up. Thus, where a petition is made to the court and the court orders the winding up, the order relates back to the date of the presentation of the petition.As per the section 531,a transaction shall be deemed to be a fraudulent pref erence and consequently invalid if all the following conditions are fulfilled:(a) The transaction relates to transfer to property, delivery of goods,Payment of monGy or

other act relating to the property of the company.(b) It took place within 6 months before the commencement of the winding up the company.(c) It was an entirely voluntary act and not made under any pressure.(d) The dominant motive was to give a creditor a preference over other creditors.

In the given case, the winding up o.f the company , commenced on 31" December 2009that is the date of presentation of petition of winding up. The company had mortgaged its machinery in favour of the creditor on 1•September, 2009, i.e., wrthin the 6 months before the commencement of winding up. The mortgage was voluntarily by the company, without any consideration, and not under any pressure. Thus, the dominant motive behind the transaction was to give the preference to Mr. Bully, the creditor over the others. Since all the requirements of Section 531 are satisfied in the given case, the mortgage of the machinery made in the favour of the creditor amounts tof raudulent preference, and is hence VOid. Therefore the Official Liquidator can declare the mortgage in favour of creditor Mr. Bully as void.

Answer to Question No.7 <c ) ; A udit

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Committee:An audit committee is an operation committee of the Board of Directors charged with oversight of financialreporting and disclosure. Section 292A of the Act requires every public company having paid up capital of not less than rupees five cr'Jres to constitute an audit committee as a commlttee of the Boardof Directors.This Committee shallconsist of suet) number of directors as its members, as may be determined by the Board.

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However, the number shall not be less then three. Audit committees are typically empower toacquire the consulting resources and expertise deemed necessary to perform their responsibilities.

I The role of audit committees continues to evolve as a result of the passage of the Sarbanes xley

Act 2002.Many audit committees also have oversight of regulatory compliance and risk managementactivities.Not for profit entities may also have an audit committee.Responsibilities of the audit oommmee typicallyInclude:

• Overseeing the financial reporting and disclosure process.• Monitoring choice of accounting policies and principles.• Overseeing hiring, performance and independence or the extemaVstatutory Auditors .• Oversight of regulatory compliance, ethics. and whistleblower hotllnes.• Monitoring the internal control process.• Overseeing the performance of the internal audit function .• Discussing risk management policies and practices with management

Question:8.(a) What do you mean by "Right to Information· according to the RTI Act 2004? What are the

objectives of the said Act? 5(b) It is said that after risk identification takes place, the actions involved in pinpointing suitable

responses to the risk are broadly of 5 types. Elaborate on these 5 types of action. 6(c) State any 8 of the 14 key aspects of the Cll (Confederation of Industries) code for

desirable Corporate Governance. 4A nswer to Question No.8 (a):

A bill to operationalise the right to information by s tting out tho practical regime for people to StK;ure access to infOfmation under the control of public authorities, consistent wrth public interest. inorder to promote openness, transparency and accountability in relation to matters connected therewith or incidental thereto.

(i) This Act may be called the Right to ilformation Act-2004(ii) It extends to the whole of India except the state of jammu and Kashmir(Iii) It shall come into force within 120 days-of it being enacted(iv) Where State Legislation exist dealingwith the right to access information; a person will

have the right to seek inf ormation under the State law as well as under this Act, if the Information pertains to a subject under the State list in Schedule 7 of the constitution of India.

Objectives of the Act:) Give effect of the fundamental Right to information, which will contrj bute to

strengthening democracy ,improving governance, il'lCfeasing public participation, promoting transparency and accountability and reducing corruption.

» Establish voluntary and mandatory mechanisms or procedures o give effects to right to ir1formatlon·in a manner which enable persons to obtain access to records of public authorities in a swift,effective inexpensive andreasonable manner.

_. Promote transparency, accountability and effective governance of aU public authorities by

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including but not limited to,empowering and educating all persona to:understand their rights in terms of this Act in Ofder to exercise their rights in relation to Public al!'horities.

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)> Understand the functions an operation of pub1ic autho ties;and effectively participating in decision making by public authorities that affects their rights.

Answer t o Ques 1 lon N o. 8 (b);This step Identifies the potentialrisk (or opportunities) facing the project.It Is important not to judge the nkelihood of a risk at this early stage. This isdone ina controlled manner at a later stage.Attempting to form judgments while brainstorming a fist of potential risks may lead to hurried and incorrect decision to exclude risks.Once identified risks are all external in the risk log. Thiscontains details of all risks,their assessment, owners and status. The risk log isa control tool for the project manager, providing a quick reference to the key risks facing the project, what monitoring activities should be tak1ng place and by whom. Reference to it can lead to entries.Identify suitable responses to ri k:The actions break into broadly 5 categories.

1. Prevention- Terminate the risk: by doing things differently and this removing the risk where it is feasible to do so.Countermeasures are put In place that either stop the threat or problem from occurring or prevent it having any Impact on the project or bus1ness.

2. Reduction- of threat of Risk:take action to control it insome way where the actions either reduce the likelihood of the risk developing and limit the impact on the project to acceptable levels.

3. Transference: This Is a specialform to risk reduction where the management of the risk is passed to a third party via, for instance, and Insurance policy or penalty clause,such that the impact of risk is no longer an issue for the health of the project. Not all risk can be transferred in this manner .

4. Acceptance: Tolerate the rtsk- perhaps because nothing can be done at a reasonable cost to mitigate it, or likelihood and impact or the risk occurring rate at an acceptable level

5. Contingency:These are actionplanned and organized to come into force as and when the nsks occur.Any given risk can have appropriate actionsin any or all of these categories.There may be no cost-effective actions vailable to deal with a risk, in which case the risk must be accepted or thejustificatiOn of the project revisited (to review if the project is too risky). This may possibly result in lt rmination of the project. The results of the risk evaluation activities are documented in the risk tog.If the project is part of a programme,project risk should be examined for any impctc:t on the programme (and vice-versa) .Where any cross-impact is found the risk should be added to the other risk log.

Answer to Question No. 8 (c);

Confederation of Indian Industries code for desirable Corporate Governance:The Cll has recommended the following 14 key as,pects which should be shared with the Board

(i) Annual operatiog plans and budgets together with updated long term plans(ij) Cap1talbudgets, manpower and overhead budgets(iii) Quarterly results for the company as a whole and its operating divisions for business segments(iv) Show cause,demand and prosecution notice received f rom the revenue authorities which are

considered to be materially important

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(v) Internal audit reports,including cases of theft and dishonesty of a material nature(vi) Fatalor serious accidents, dangerous occurrencel!. and any affluent or pollution problems .(vii) Default in payment of interest or non payment of the principal on any·public deposit and/ or

any secured creditors or financial institutions ·(viii) Default such as non-payment of inter-corporate deposits by or to the company or materially

substantial non-payments for goods sold by the company.(oc) Any issue whichInvolves possible public or product liability claims of a

substantialnature,Including any judgment or order which may have been passed, stric1ures on the conduct of the company ,or taken an adverse view regarding another enterprise that can have negative implications for the company

(x) Details of any joint venture or collaboration agreement(xi) Transactions that Involve substantial payment towards goodwin.brandequity or intellectual property

(xii) Recruitment and remuneration of senior offiCers just below the Board level,including appointmentlor removal of the Ghief Financial OffiCer and Company Secretary

(xiii) Labour Problems and their proposed solutions(xiv)Quarterly details of exchange exposure and the steps taken by the management to limit the risk

if adverse exchange rate movement. if materiaJ

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Sugguld AIUWf'r.r To Qw.r Wns- CMA.CL • 13

Number of shares outstanding after rights Issue : 800000 SharesMARKET CAPITAliSATION: Ex-rights price x No of shares outstanding

= Rs.-4().50 X 800000 Rs. 32400000

CALCUlATION OF NEJASSETVAWE PEA SHAREAmR RIGHTS ISSUE;

Paid up capital 8000000Reserves and Surplus : :t"Existing 18000000Premium on Rights issue 6000000 2400000QNetwork of Royal Febrlcs f 32000000 Net asset Value per share :32000000 + 800000 = 40 per share

Answer to Question No 4 (d) :

We know that premium Is comprised of two parts viz Intrinsic value and Time value. Intrinsic value will be greater than zero only If by exerdsing we get gains. In this case since the option Is not exerdsed, these premiums reflect the •time value• of the contract. The fact that there 15 still time left to expiration for the price to move In a favourable direction means that the buyers are Willing to pay a premium for tM contract .We would expect that the premium for the August contract would behigher than the premium for Juty contract and the premium for the July contract would be hlsher than the premium for the Junecontract .Obviously the fact that the August contract expires one month after theJuly contract andthat tfle August contract expires two months after the June contract means that a purchaser would be wRUng to pay correspondlng1y higher prices for later expirations as there is more time available for the buyer to exerdse the contract.

The premium for the June contract might be say 3, the premium for the July Contract might be 4.5, and the premium for the August contract might be S.7S. .

Sl:CTION-U {40 MartcsJ(Corporate Laws)

Answer Question No. s which rs compufso,Y and any twofrom the resc in this Section.Question:

5 (a) Match the items in part A. with the most appropriate one in Part 8:

Part A Part B

(I) Appeal against refusal for registration

(II) First directors of the company

(Iii) Memorandum of Assodatlon to contain

certain particulars(iv) <:adbury Committee(v) Clau 49 of the listing Agreement

I) Section 13 of tile Companies Act, 1956

(li) Are to appointed and not

elected (Ill) Code of best practices

(lv) Governance Standards(v) Section 111of the Companies Act, 1956(vi) Are to beelected and not appointed

(vi!) Code or risk management

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(b) Fill In the blanks in the following sentences by using pproprlate words/Phrases :

(I) For all listed companies as well as public limited ·companies whose paid-up capital and free reserves exceed rupae s crore or turnover exceeds rupees crore there should be a certification by the CEO and CfO.

(ii) The minimum number of member in a Nbminatlon Committee is----·(Ill) Any person aggrieved by any dedslon or order of the Competition Commlsslon may file an

appealto the _

(iv) In the context of dassiftCation of- risks, Elections will fall under_·__(v)' The recommended minimum size of Independent directors In all listed Companies by SEBI is

1)( 5 ::5

Answer to Question No Sla'·. Matching

PlrtA(I)(II){iii). (iv)

M

Par1B(v)(ii)(i)

(Ill)(iv) .

Answer to Question No 5 lb) :

(I) 7 lQ(ii) 7 TWO

(iii) SUpreme Court

(lv) 7 Political Risks

(v) 7 One-half of the board

Question:

6 (a) What is meant by "Sweat Equity Share"? When can the same be Issued by a company as per the provisions of the Companies Act, 1956? 2+4 ..-6{a) Mr. ANUP KUMAR was a member of the Competition Commission of India. He cea to be

such member on 31It March, 2011. Thereafter,he was offered the post of Executive Director with appropriate remuneration and perquisites In the following organizations to join his duties·on from 111 June, 2011:

(I) ASHLEEN LTD.,a privet sector public Umlted company, whose case was disposed off by the Competition Commission under the provisions of the Competition Act, 2002 tn the month of February, 2011

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( ii) life Insurance Corporate of India.

You are required to state with relevant provisions of the Competition Act, 2002, the option available to Mr. Anup l(umar in respect of accepting the above offers. 2+2+2 =6·

(c) . DHONI SYNTHETICS LTD. has sent two different notices for holding two separate Annual General Meetings (AGM),one relating to adjourned AGM of earlier year and another relatins to AGM ofcurrent year.. Both AGMs are scheduled to be held on 30"' June, 2011 one in the forenoon arid another Inthe afternoon: A shareholder raises an objection that two AGMs cannot be held on the same day. Is his Contention Correct? 3

Answer to Question No 6 !a)';

Sweat equity shares

For the purposes of sec. 79-A, the expression 'SWeat equity shares' means equity shares ued at a discount ·or for consideration other than cash providing know-how or maklns available r ghts \n the nature of intellectual property rights or value addition by whatever name caile'd ('Explanation.I!'to Sec. 79-A(l)).

lhe expressiOn ·a company"' means the Mf'llf)al'ty i,oorpora tec:l, formed and re£iSttred ul"der the Compa.. nlesArt, 1956 andlndudes lt5 subs1dl-ary company lnrol'pOTated lna country ou ld'e India [ lanatlon Ito5e<:. 79-A l}),

Issue of sweat equity shares- Notwithstanding anything contained InSec.79 (which deals with the power of a company to Issue shares at a di unt),a company may issue sweat equity shares of a dass of shares already Issued ·If the following conditions are fulfilled, namely - . : · · ·

( ) the lssue of sweat equity shares is authorised by a resOlution passe_d by the company In the general meeting.

(b) the res utlon specifies the number of shares,current market price, consideration, If any, and the class or Classes of directors o.r employees to whom such equity are to be issued.

(c) not less than on year has at the date of the Issue elapsed since the date on which thecompany was entitled to commence business;

(d) the sweat equity shares of the listed company are Issued In accordance with the regulations made by the Securities and E)(change Board of India ih this behalf [sec 79-A (1)).

Answer to Ouutlon No. 6 fb)

. .The Chairperson and other Members shall.not, for a period of one year from the date on which they ceaseto hold office,accept any employment In o connected with the management o af11lnlstratlon

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of,I!'Y enterprise which has been a party to a proceeding before the commission under this Act ·(section 12 of the Competition Act 2002). ·

Provided that nothing contained In this Section shall apply to any employment under the Central Govern ment or a State Government, or local authority or In any statutory author ity or any Corporation estab lished by or under ariy Ce(ltral, S ate or Provincial Act or Government Company as defined in ion - 61'7 of the Companies Act, 1956 (1of 1956). · ·

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Therefore the refusal on tha grounds that the request was not in English and that the same wa :::'!ntthrough email Is not Justffled.

Answer to OUntioo No 7 (b) ;

Checklist onasstanment of risk ownership:

• Have owners been allocated to all the various parts of the complete risk process and the full scope of the risks beina created for? For example, suppliers may be tasted with-ownership of assessing and evaluating risk as part of their contracts.

• Are the various roles ilnd res-ponslbllltles associated with ownership well deflned?

• Do the Individuals who have been allocated ownership actually have the authority In practke tofulfill their responsibilities?

• Have the various roles and responsibilities been communbted and understoOd?'

• Are the nominated owners appropriate?

• In the event of a change, can ownership be quldly and elfe lvely reallocated?

e Are the differences between benefit and delivery r ks dearly understood illnd, If required, do

they have different

owners? Answer to Oyestlori No

7 lei :

Manasement Audit Incorporates In itSelf an efficiently audit. Efficiently audit ensures "appUcatlon of thebasic economic principle so th4llt resources flow Into the most remunerative channels"'.The main object of efficiency audit Is to ensure that

1. E tv rupee Invested Incapital or In other tlelds give the optimum returns and ··

2. The plannlns of Investment between the different filncttons and aspects ts designed to giveoptimum result. • ·

The parameters for measurlna efficiency wl.th Its cancomlt4llnt details are

1. Overall rate of return .on capital employed

2. Better capacity utilization

3. tter utilizat ion of·raw material, power, Sabour, equlpments and flnance

4. Effective Incentive system

s.. Better export performance and Import substitution

6. Cost Controt

It Is necessary to make study activity wise so as to Identify areas of defldency In particular actlvfty.

To c:ondude we can Infer saylns that Investor in order to protect his Investment In arrv company eproper exhibition of corporate governance which is taken care by Management Audit as Manasement

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Audit would encompass compliance audit, efficiency audi . propriety audit and systems audits as well as management audit Is concerned with the overall objectives of an organezation.·

Question:

8,{a)Mc.BHIJSHAN Is holding tlrrepa rofDTredorin ·fivecompanlesoutofwhich SAMAROH LTD. is one.For tfle flnandal yer ended •on in"' March, :2010, Samaroh Ltd. failed to pay Interest on loans taken from a flnandall n!itHutlon andr ta tso R"ed to rep;!!{ tt!e matu red deposits.On 1,. July, 2010 Mr.Bhushan accept lllli the po$1,obddltional dlf'!e«<r In Fl!'dex ltd, submitted a declaration that the disqualification specifiedIn section 274 of the Companies Att, 1956 fs noL a plicable in his case.

Decide whether the declaration submitted by Mr. Shushan to Fedex ltd. IsIn order. 6

(b)"A good Corporate Governance should have certain basic principles"· Enumerate them. 6

(c) State the addltional requlrernents stipulated In Section 292A of the Companies Act,1956, which are silent in clause 49 of the Usting Agreement. 3

lm} W e r t o O u CSSI R fl No C t l ;

As per section 274(1}(&),a director of a public company shall be disqualified from belns appointed as. a director in any other public company,If the public company in which he Is already a director- ·

(a) Does not file the annual accounts and annual returns for any continuous 3 financialyears commendng on and after 1.4.1999; ar

(b) FallSto repay ItsdePosit or Interest thereon due date or redeem Its debentures on due dateon pay dividend and such failure continues for one year more.

In this present case, samaroh Ltd. has cbmmitted the following defaults: '

{a) Flu re. lo pay Jn·terut on loans ta from a f1nanda'f Institution for the flnand t year erldl!d on nn March, 2010. Howelo!ef, such tanuE! does not attract the dls u; nflcallon unc!'er :se«l " .274(11{ 1.since the disqualiflcatlon istncurred only If the default relates to payment of 'public deposl and not on non-payment or lnlefeSt on 'lti ru.' obtainedfrom a finandal Institution.

(b) Failure to repay the matured deposit s on due date for financial year ended on 31" March,

2010. .

DeRwlt lllill payment of rrnat urecHiepqsft1. or Interest there.on ld result In appiiC'iJblllty of s.ection:Z74(l)(g), ontv f such default continues for lyectr or more. 11'1 the absence< o'f nylftfGrmat'IQn,It may bessume(j that sueh de:fiu.rlt has not c:on'trnued for lyear, as on 1" July, 2010.AoalrdJngJy ,none o( Lhe

dl_recton of Samarol'tl trd.are> di$ UaHfted un"tfer !S!!'CIJOn 274 1)(g).Hence Mr. 8husfl9o ei O be appointEd as ail addltlonaldirector of Felled Lid.em t•Ju\y zo o. and so the dedaration given by Mr. IS ushc!!'l Is- in order.

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Suggested Answers To Questions- CMACl. • l9

Answer to Qu stlon No 8 (b) ;

Prlnclp.tes of corporate governance: A good governance should indude the following principles :

(II Re\11ew of opentlon- There should be review of operations of the company at a regular interval. It may Include comparison of monthly/quarterly production and sales targets with actual,

.· cash flow analysis, etc. .

(II) CompUance w1th Statutory and RegulatOfV Requirements - The Board Should ensure compli ance with various statuto and regulatory requirements. It may indude clearance of statutory dues, compliance with FERA regulations,following suitable accounting policies and standard, etc.

(iii) Appointment of various committees- There should be appointment of various committee to look after different matters. There can be following committees-{ a) Audit Committee, (b) Griev ance Committees,(c) Re_muneration Committee and (d) Investment CQmmlttee, etc.

(a) Audit committee- It should meet periodically to review the effectiveneSs oftkesystem ofInternal controls and reports to shareholders.

(b) Grl van committee- It should look after the grievances from customers, suppliers, creditors In respect of price, quality, discount, etc. It should also look after the prob lems of elCecutlves/emplovees of the organization .

(c) Remuneration committee- Its role should be to fix remuneration of non-executive dl· rectors.It may be fixed In relation to company performance.

(d) Investment committ- It should lool< after the Investment decisions. It shOuld be In accordance with the guidelines approved by the Board.Shareholders expect that lnv st ment decisions are judicious and do not Incur any losses, which affect shareholder'sInterest.

(lv) ContrtbutiCH.t of employees' Union- Employees or worker's union 5f:wuld also contribute sig nificantly to good corporilte behaviour by promoting work culture. In this case, Inclusion of employees or worlcer's representative on the board may be thought of.

(v) Conttfbutlon to Community Development· A good corporate governance should help commu nity development programme by active partldpation. It should ad pt measures for pollution control, and follow fair and ethk.al business practices.

Good corporate governance calls for accountabil!tv for all concerned. The Shareholders, Direc tors, auditors, executives, advisers and other staff who are associated with the working of the corporate should combined their efforts to improve the system and ensure good managementpractices .

Answer to Ouestlon No Bfcl:

Additional Requirements Stipulated as per Section 292 A:.

The following additional requirements are stipulated as per section 292A of the companies Act, 19S6which are silent io clause 49 of the Ustlng Agreement :

Pll J2011P19.png

•

(I}

(II)

20 .• SWIIUMI AIUWtn To Q..utiou- CMACL

Theaudit Committee Constttuted shall act In'acxordance with terms of reference to be spedfted tnwrltlnl by the board.The ·rec:omrMnclatton of the audit Committee on any matter relrttng to ftnand;illl manapmentlnducRnc the audit report shala,e blndlrc on the board. ·

(Ill} If the board does not aa:ept the recommendations of the audit committee, It shall record the reasons therefore and c.ommunk:lte such rnsons to the Share holders.

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18

Suggested Answers to Question - CMC

Section II (40 Marks) (Corporate Laws)

Answer Question No 5 which is compulsory and answer any two from the rest in this section.

Question

5. (a) Choose the most appropriate one from the stated options and write it down (only indicate A,B,C

Or D as you think correct):

(i) In a Public Limited Company there are 10 directors including Managing Director and a

nominee of ICICI. How many directors are liable to retire by rotation?

A. Four

B. Five

C. Six

D. Seven

(ii) MR. RAJESH, a director of GROW WELL LTD died in a train accident. The Board of directors

would like to appoint MR. ARUN KUMAR in place of MR. RAJESH. Which of the following

statements is true?

A. The company has to call for extra-ordinary general meeting

B. The company has to continue with the existing number of Directors till the next

Annual General Meeting.

C. The Board can fill up the vacancy at the Board Meeting

D. None of the above

(iii) Buy-back of equity shares in a financial year shall not exceed

A. 25% of total authorised equity capital of the company

B. 25% of total paid-up equity capital of the company

C. 25% of total called-up equity capital of the company

D. None of the above.

(iv) In the context of classification of Risks war risks will fall under

A. Political Risks

B. Credit Risks

C. Disaster Risks

D. Systems Risks [1×4=4]

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Suggested Answers to Question - CMC

(b) Fill in the Blanks in the following sentences by using appropriate words/phrases:

(i) As per clause -49 of the listing agreement where chairman is a Non-executive director, at

least.................................of Board should consist of independent directors.

(ii) After the commencement of the Companies (Amendment) Act,2011, no person, shall, save

as otherwise provided in section 276, hold office at the same times as director in more

than...................companies.

(iii) Section...................to....................of the Companies Act, 1956 contain elaborate provisions

for regulating payment of compensation to directors for loss of office.

(iv)In the case of a public limited company, the director must obtain qualification shares

within..................from the date of appointment.

(v) To examine how a result will change if the predicted financial outcomes are not achieved or if

an underlying assumption changes, managers can use..........................analysis.

(vi) Related party disclosure requirements are spelt out in IAS................................. [1×6=6]

A n s w e r t o Q u est ion N o 5 ( a) :

(i) C

(ii) C

(iii) B

(iv) A

A n s w e r t o Q u est ion N o 5 (b):

(i) On e thir d

(ii) 1 5

(iii) 31 8 t o 32 8

(iv) Tw o m o nth s

(v) Sensitivit y

(vi) 2 4

20

Suggested Answers to Question - CMC

Question

6. (a) MS. SUCHANDA has entered into a transaction with GLAMOUR LTD for a contract value of

` 40 lacs. The Articles of Association enjoin that contracts above ` 10 lacs should be

approved in Board Meeting. Mr. Dhuruv, an officer of the company, produces forged

documents to her,

which show a resolution having been passed in a Board Meeting approving the contract. Later,

the forgery comes to light. MS. Suchanda pleads that she is protected by the Doctrine of Indoor

Management.-Discuss. [3+2=5]

(b) Can any fine or penalty be imposed on the Public Information Officer of a Government

Department, where he has deliberately delayed the furnishing of information sought for properly,

under the RTI Act,2004?

Is such Levy automatic?

How can the fine or penalty imposed, be recovered from him? [1+2+2=5]

(c) “Corporate governance is merely the set of processes, customs, policies, laws and institutions

affecting the way a corporation is directed, administered or controlled”. Critically examine this

statement. [5]

A n s w e r t o Q u est ion N o 6 ( a) :

Doctrine of Indoor Management

The Doctrine of Constructive Notice protects a company from outsiders. There is one limitation to

that doctrine. The Doctrine of Indoor Management is an exception to the Doctrine of Constructive

Notice. The Doctrine of Constructive Notice provides that an outsider must read the

Memorandum and Articles of a company. But he is not expected to do more. As far as internal

procedures are concerned, an outsider is entitled to presume that every thing has been done

according the procedures laid down and there is no irregularity. An outsider cannot find out what

is going inside the doors as the doors of the management are closed to an outsider. Therefore

protection to such an outsider becomes necessary. Thus while the Doctrine of Constructive

Notice is a protection to the company against an outsider, the Doctrine of Indoor Management is

protection to the outsiders against the company.

In certain exceptional situations, the doctrine of indoor management is not applicable. The

doctrine of indoor management is not applicable where a person relies upon a document that

turns out to be a forged since nothing validate forgery. A company cannot be held liable for

forgeries committed by its officers.

Thus MS SUCHANDA will not succeed in her Pleading.

21

Suggested Answers to Question - CMC

A n s w e r t o Q u est ion N o 6 (b):

As per section 12(4) of the RTI Act, 2004 subject to sub-section (3), where any Public Information

Officer has, without any reasonable cause, failed to supply the information sought, within the

period specified under section 7(1), penalty can be levied.

Such levy of penalty is not automatic. The relevant Information Commissioner shall, on appeal,

impose a penalty of rupees two hundred fifty, which amount must be increased by regulation at

least once every five years, for each day’s delay in furnishing the information, after giving such

Public Information Officer a reasonable opportunity of being heard.

Any fines imposed under sub-sections (1), (2),and (3) shall be recoverable from the salary of the

concerned officer, including the Public Information Officer, or if no salary is drawn, as an arrears

of land revenue, recoverable within a maximum of six months of the order imposing the fine.

A n s w e r t o Q u est ion N o 6 ( c) :

Corporate Governance

To say that Corporate Governance is merely the set of processes, customs, policies, laws and

institutions affecting the way a corporation is directed, administered or controlled , depicts a

narrow view. It is much more than this. Corporate Governance also includes the relationships

among the many stakeholders involved and the goals for which the corporation is governed. The

principal stakeholders are the shareholders, management and the board of directors. Other

stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the

environment and the community at large.

The stakeholders may be internal stakeholders (promoters, members, employees, management

and the board of directors) and external stakeholders (suppliers, customers, lenders, banks, the

environment and the community at large, government and regulators.)

Corporate governance is a voluntary ethical code of business of companies. According to

Cadbury Committee on financial aspects of corporate governance, “It is the system by which

companies are directed and controlled. The Board of directors are responsible for the

governance of their companies. The shareholders role in the governance is to appoint the

directors and the auditors and to satisfy themselves that an appropriate governance structure is

in place”.

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Suggested Answers to Question - CMC

Question

7. (a) Discuss the role, membership and operations of a Nomination Committee. [6]

(b) In the context of management audit, what is meant by “control risk” vis-a-vis detection of material

misstatements in the financial statements?

In this regard, what is “ Control Risk at the maximum” and “ Control Risk at less than the

maximum”? [6]

(c) An understanding has been reached among the manufacturers of cotton to control the price of

cotton, but the understanding is not in writing and it is also not intended to be enforced by legal

proceedings.-Examine whether the above understanding can be considered as an ‘agreement’

within the meaning of section 2(b) of the Competition Act,2002. [3]

A n s w e r t o Q u est ion N o 7 ( a) :

NOMINATION COMMITTEERoleThe Governance and Nominating Committee’s role is to determine the slate of director nominees

for election to the Company’s Board of Directors, to identify and recommend candidates to fill

vacancies occurring between annual shareholder meetings, to review, evaluate and recommend

changes to the Company’s Corporate Governance Guidelines, and to review the Company’s

policies and programmes that relate to matters of corporate responsibility, including public issues

of significance to the Company and its stakeholders.

MembershipThe membership of the Committee consists of at least two directors, each of whom shall meet the

independence requirements established by the Board and applicable laws, regulations and listing

requirements. The Board appoints the members of the Committee and the chairperson.

The Board may remove any member from the Committee at any time with or without cause.

OperationsThe Committee meets at least twice a year. The Committee shall meet periodically in executive

session without Company management present. Additional meetings may occur as the

Committee or its chair deems advisable. The Committee will cause to be kept adequate minutes

of its proceedings, and will report on its actions and activities at the next quarterly meeting of the

23

Suggested Answers to Question - CMC

Board. Committee members will be furnished with copies of the minutes of each meeting and any

action taken by unanimous consent. The Committee is governed by the same rules regarding

meetings (including meetings by conference telephone or similar communications equipment),

action without meetings, notice, waiver of notice and quorum and voting requirements as are

applicable to the Board. The Committee is authorized and empowered to adopt its own rules of

procedure not inconsistent with (a) any provision of this Charter, (b) any provision of the Bylaws

of the Company, or (c) the laws of the State.

A n s w e r t o Q u est ion N o 7 (b):

Assessing Control Risk

Control Risk- the risk that the client’s internal control policy and procedures are not effective in

preventing or detecting material misstatements in the financial statements.

1. Control risk at the maximum-Conclusion based upon the auditor’s judgement that the client’s internal control policies and

procedures do not reduce to a low level the potential that the financial statements are free of

material errors and / or irregularities.

-After reaching this assessment the auditor would only be required to document in his/her

work papers the fact that control risk is at the maximum and not the basis for reaching this

conclusion.

The auditor may decide control risk is at the maximum based upon management accounting

technique called cost benefit decisions.

2. Control risk at less than the maximumBased upon his / her initial understanding of the internal control components, the auditor

may conclude that control risk may be less than the maximum.

The auditors in this situation must evaluate the cost/benefit of existing his/her understanding

of internal controls to make a final decision concerning control risk.

The cost / benefit decision is based upon the audit time involved in extending the auditor’s

understanding of internal controls, including tests of control versus the time that may be

saved with the possible reduction of substantive audit tests.

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Suggested Answers to Question - CMC

A n s w e r t o Q u est ion N o 7 ( c) :

As per section 2 (b) of the Competition Act 2002” “agreement” includes any arrangement

or understanding or action in concert-----

(i) Whether or not, such arrangement, understanding or action is formal or in writing; or

(ii) Whether or not such arrangement, understanding or action is intended to be

enforceable by legal proceedings;

In view of the above definition of agreement; an understanding reached by the

manufacturers of Cotton to Control the price of cotton will be an agreement within the

meaning of section 2(b) of the Competition Act 2002 even though the understanding is not

in writing and it is not intended to be enforceable by legal proceedings.

Question

8. (a) VAIBHAV POLYMERS LTD has an authorised capital of ` 250 lacs. Its paid up capital is

` 200 lacs. The free reserves are to the tune of ` 120 lacs. The company has advanced to

other companies to the tune of ` 180 lacs, as on 30th November 2011. On this date, the

Board of directors of the company wants to advance ` 35 lacs to Vasudha Textiles Ltd.,

without the prior permission of the shareholders in a general meeting.

- Discuss the correctness of the proposal. [6]

(b) MR. JYOTIRMAYEE has supplied goods worth ` 3,000 to TWINKLE LTD. The company

proposes to appoint him as an independent director in the Board. The total annual purchases of

the company amount to ` 4 crores.

- Discuss about the appropriateness and correctness of this proposal, in the light of provisions of

the Companies Act, 1956. [5]

(c) A group of shareholders of DECEPTIVE TECHNO LTD. filed an application before the Company

Laws Board (CLB) alleging various acts of frauds and mismanagement by MR NAVIN, the

Managing Director & his associates. During this course of hearing before the CLB, the authorized

representatives of the said company contended that the alleged transactions had taken place

several years ago and the company has already removed the Managing Director, who was

responsible for such transactions and hence there is no case before the CLB to interfere in the

working of the company. Against the submission on behalf of the company, the applicants

submitted that although the fraudulent transactions were done in the past and the Managing

25

Suggested Answers to Question - CMC

Director has been removed, but the company is still controlled by the person, who are in leage

with the erstwhile Managing Director and are working as his Henchman.

- State the merits of the applicants’ arguments and power of the CLB. [4]

A n s w e r t o Q u est ion N o 8 ( a) :

Inter-corporate loansAccording to the provisions of section 372A of the Companies Act,1956, a public company and

private company, which is a subsidiary of the public company shall not, directly or indirectly, inter alia,

make any loan to any other body corporate, exceeding 60% of its paid up Share Capital and free

reserves or 100% of its free reserves, whichever is more without prior authorization by way of a

special resolution passed in a general meeting.

In order to arrive at the conclusion whether the directors of Vaibhav Polymers Ltd. Can make the

proposed investments without seeking approval from the shareholders, the amount upto which they

can invest has to be arrived at. In the given case, the two limits are:

Limit 1 (` in lacs)

(i) Paid up Capital 200

(ii) Free reserves 120

(iii) Total 320

(iv) 60% thereof 192

Limit 2

100% of free reserves ` 120 lakh

Higher of the two ` 192 lacs has to be reckoned.

The company has advanced to companies to the tune of ` 180lacs, as on 30th November, 2011.

On this date, the company wants to advance ` 35 lacs to Vasudha Textiles Ltd. The total comes

to ` 215 lacs, which exceeds the ceiling limit of ` 192lacs.

Hence the Board of Directors of the company cannot advance of ` 35 lacs to Vasudha Textiles Ltd,,

without the prior permission of the shareholders in a general meeting.

(As required U/s 372A of the Companies Act 1956)

26

Suggested Answers to Question - CMC

A n s w e r t o Q u est ion N o 8 (b):

Independent DirectorsThere have been a lot of discussions and debates going on in corporate circles and among

academicians in recent times on the need for role of and importance of independent directors.

An independent director is defined as a non-executive director who is free from business or other

relationship which could materially interfere with the exercise of his “independent judgement”.

The Companies Act provides a negative definition of an independent director, inasmuch as it renders

ineligible eleven categories of persons to be appointed as independent directors in a company, for

instance, if a person has held any post in a company at any point of time is disqualified to be

independent director of the company. Likewise, any vendor, supplier or customer of goods and

services of the company would stand disqualified, no t w i t h sta n ding t h e fa c t t h a t t he a m ounts o f tran s a c tion are insignif i cant. In the light of the above, the proposal to appoint Mr. Jyotirmayee, who has supplied goods worth

` 3000 to Twinkle Ltd. as an independent director of the said company is incorrect. Though the

annual purchases may be in crores, the factum of Mr. Jyotirmayee being a vendor, stands in the way

of his being appointed as an “independent director”

A n s w e r t o Q u est ion N o 8 ( c) :

The powers of the CLB under section 397 and section 398 can be invoked for obtaining relief from

oppression and mismanagement, only where the affairs of the company are being conducted in a

manner oppressive of any member or members or in a manner prejudicial to the interest of the

company. The words are being conducted would indicate that oppression and mismanagement

should be continuous course of conduct and should be present on the date of the application to the

CLB.

Thus, the CLB does not have power to interfere with past and concluded transactions entered into by

a company. At best, the CLB can exercise its power to set aside any transfer of property effected

within 3 months before the date of the application. Further, the CLB can exercise the power conferred

by section 406 to direct the delinquent directors, managers and other officers to refund any funds of

the company that they have retained or misapplied or pay compensation for loss arising on account of

misfeasance or breach of trust. As the applicants have not established the above facts beyond a

vague statement that the management of the company is still controlled by the henchman of Mr

Navin, the CLB will not exercise its powers under the Act. This view is supported by the decision in

Seth Mohanlal Ganpatram v. Shri Satyaji Jubliee Cotton and Jute Mills Company Ltd. (1964) 34

Comp.Cas777.

12 + Suggested Answers to Question — CMC

Answer 4. (b)

Banking Ombudsman :The Reserve Bank of India (RBI) brought about crucial amendments to the Banking Ombudsman Scheme, 2006 which will now enable aggrieved customers to not only appeal against any Ombundsman’s decision but also to appeal in case of complaints being rejected. The appeal could be made to the deputy governor’s office of the RBI.

The Ombudsman, however, has the right to reject complaints if they are; not on the grounds of complaint referred to in clause 8; beyond the pecuniary jurisdiction of Banking Ombudsman prescribed; frivolous, vexatious, malafide; without any sufficient cause; that it is not pursued by the complainant with reasonable diligence; in the opinion of the Banking Ombudsman there is no loss or damage or inconvenience caused to the complainant; or requiring consideration of elaborate documentary and oral evidence and the proceedings before the Banking Ombudsman.In case of a complaint being aggrieved by the award under clause 12 or by rejection of a complaint, he may exercise the option of an appeal within 30 days, the RBI said in its notification.

Answer 4. (c)

(i) The first one indicates that SBI stock futures are traded now at ` 1441. They expire on the last Thursday of March, 2012. Mr. Karuna has to deposit 10% of 1441 × 100 = ` 14410 as initial margin.

(ii) The second one indicates that NIFTY Index futures are traded now at 4280. They expire on the Last Thursday of April 2012.Mr. Karuna has to deposit 10% of 4280×100 = ` 42800 as initial margin.

SECTION - II (40 Marks)(Corporate Laws)

Answer Question No. 5 (carrying 10 marks) which is compulsory and answer any two(carrying 15 marks each) from the rest in this Section.

Q. 5. (a) Choose the most appropriate one from the stated options and write it down (only indicate A or B or C or D as you think correct)

(i) Which of the following statements is true, in respect of constitute an ‘Audit Committee’ under section 292A of the Companies Act, 1956?’(A) The Audit Committee shall have a minimum of three members.(B) The members of an Audit Committee are elected by the members of a Company in

general meeting.(C) All Companies whether private or public have to constitute an Audit Committee.(D) None of the above.

Suggested Answers to Question — CMC + 13

(ii) If in a general meeting of a Company, a matter could not be resolved because of tie, then(A) Meeting will be adjourned(B) Meeting will be postponed(C) Chairman of the meeting can give his second/casting vote(D) Managing Director can give his casting/second vote

(iii) The Competition Commission shall consist of a chairperson and not less than two but not more than other members to be appointed by the Central Government. (Fill in the gap from the below.)(A) 7(B) 10(C) 5(D) None of the above.

(iv) Which of the following committee set up by SEBI had submitted its report in February, 2003 on Corporate Governance?(A) Narasimham Committee(B) Kumar Mangalam Birla Committee(C) Narayana Murthy Committee(D) Naresh Chandra Committee.

(v) In the context of classification of Risks, System Risks fall under :(A) Obsolescence risks(B) War Risks(C) Tax Risks(D) Contract Risks [1×5=5]

(b) Fill in the blanks in the following sentences by using appropriate word(s)/phrase(s)/number(s) :

(i) The prospectus issued by a financial institution for one or more issues of securities specified therein, is called prospectus.

(ii) When two firms working in different stages of production of the same product combine, merger takes place.

(iii) The requirement of minimum 50 percent of the total number of directors to be independent directors in the case of listed companies, is mandated by Clause of the Listing Agreement.

(iv) As regards corporate governance, apart from those mandated by the Listing Agreement, section of the Companies Act, 1956 contains additional requirements.

(v) is not a linear process; it is the balancing of a number of interwoven elements.[1x5=5]

14 + Suggested Answers to Question — CMC

Answer 5. (a)

(i) (A)

(ii) (C)

(iii) (B)

(iv) (C)

(v) (A)

Answer 5. (b)

(i) Shelf

(ii) Vertical

(iii) 49

(iv) 292A

(v) Risk Management

Q. 6. (a) The General norms is that after the risk identification takes place, the actions involved in pinpointing suitable responses to the risk are broadly of five types. Sketch these five types of actions. [6]

(b) SHAKSHI TELECOM LTD., a private mobile operator had furnished confidential information relating to customer complaints lodged with the company during the quarter ended 31.3.2012 to a public authority. On an application under the Right to Information Act, 2004, the public authority wants to furnish the said information. The authority seeks the objections of SHAKSHI TELECOM LTD.Can SHAKSHI TELECOM LTD. ask the public authority not to furnish the same on the grounds that the said information is confidential and that it may endanger its image in the market?What decision should the public authority take? [5]

(c) The Competition Commission has served notice on VIPUL PAINTS LTD. to look into alleged contravention of certain provisions. The company wants to object to the same on the ground that the same was consequent to a complaint made by the State Government, which is not in order.Advise the company suitably. [4]

Answer 6. (a)

Action taken after identification of risks :

The actions break into broadly five types, as shown below :

(i) Prevention terminates the risk - by doing things differently and thus removing the risk where it is feasible to do so. Countermeasures are put in place that either stop the threat or problem from occurring or prevent it having any impact on the project or business.

Suggested Answers to Question — CMC +

15

(ii) Reduction threat the risk- take action to control it in some way where the actions either reduce the likelihood of the risk developing or limit the impact on the project to acceptable levels.

(iii) Transference – This is a specialist form of risk reduction where the management of the risk is passed to a third party via, for instance, an insurance policy or penalty clause, such that the impact of the risk is no longer an issue for the health of the project. Not all risk can be transferred in this way.

(iv) Acceptance – tolerate the risk- perhaps because nothing can be done at a reasonable cost to migrate it or likelihood and impact of the risk occurring are at an acceptable level.

(v) Contingency – these are actions planned and organized to come into force as and when the risk occurs.

Any given risk could have appropriate actions available to deal with a risk, in which case the risk must be accepted or the justification for the project revisited (to review whether the project is too risky), possibly resulting in the termination of the project.The results of the risk evaluation activities are documented in the Risk Log. If the project is part of a programme, project risk should be examined for any impact on the programme (and vice versa).Where any cross-impact is found, the risk should be added to the other Risk Log.

Answer 6. (b)SHAKSHI TELECOM LTD.

Disclosure of Information treated as confidential by third party :As per section 11 (1) of the Right to Information Act, 2004 where a public authority intends to disclose any information or record, or part thereof on a request made under this Act which relates to, or has been supplied by a third party and has been treated as confidential by that third party, the Public Information Officer shall, within five days from the receipt of a request, give written notice to such third party of the request and of the fact that the public authority intends to disclose the information or record, or part thereof and invite the third party to make a submission, in writing or orally, regarding whether the information should be disclosed, which submission shall be taken into account when determining whether to disclose the information.Provided that except in the case of trade or commercial secrets protected by law, disclosure may be allowed if the public interest in disclosure outweighs in importance any possible harm or injury to the interests of such party.SHAKSHI TELECOM LTD. cannot ask the public authority not to furnish the same on the grounds that the said information is confidential and that it may spoil its image in the market. This is not trade or commercial secrets protected by law. Hence the public authority should overrule the objections of SHAKSHI TELECOM LTD and furnish the information to the applicant under the RTI Act.

Answer 6. (c)Inquiry into certain agreements and dominant position of enterprise :As per section 19 (1) of the Competition Act, 2000, the Competition Commission may inquire into any alleged contravention of the provisions contained in subsection (1) of section 3 or sub-section (1) of section 4 either on its own motion or on -

(a) receipt of a complaint, accompanied by such fee as may be determined by regulations, from any person, consumer or their association or trade association ; or

(b) a reference made to it by the Central Government or a State Government or a statutory authority.

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It can be seen from above that a State Govt. can refer the matter to Competition Commission. Hence the company cannot raise an objection that the Competition Commission cannot enquire into the alleged violations on the strength of reference made by the State Government.Advice should be tendered on the above lines.

Q. 7. (a) Discuss the role of Nomination Committee in the context of the principle of Corporate Governance.

What are the principal functions and responsibilities of the Governance and the NominationCommittee in this regard? [2+6=8]

(b) What is meant by oppression? State whether the aggrieved party would succeed in obtaining relief from Company Law Board on the ground of oppression in the situations given below :

(i) The complaint is by the minority Directors that the majority of the Board of Directors override the minority Directors;

(ii) A petition by majority shareholders complaining oppression by minority shareholders.[4+3=7]

Answer 7. (a)Nominating Committee : RoleThe governance and Nominating Committee’s role is to determine the state of director nominees for election to the Company’s Board of Directors to identify and recommend candidates to fill vacancies occurring between annual shareholder meetings, to review, evaluate and recommend changes to the Company’s Corporate Governance Guidelines, and to review the company’s policies and programs that relate to mater of corporate responsibility, including public issues of significance to the company and its stakeholder.

Responsibilities and functions of the governance and Nominating CommitteeSubject to the provisions of the Corporate Governance Guidelines, the principal responsibilities and functions of the governance and Nominating Committee are as follows :

1. Annually evaluate and report to the Board of the performance and effectiveness of the Board to facilitate the directors fulfilling their responsibilities in a manner that serves the interests of corporate shareholders.

2. Annually present to the Board a list of individuals recommended for nomination for election to the Board at the annual meeting of shareholders, and for appointment to the committees of the Board (including this committee). Review and consider shareholder recommended candidates for nomination to the Board.

3. Before recommending an incumbent, replacement or additional director, review his or her qualifications, including capability, availability to serve, conflicts of interest, and other relevant factors.

4. Assist in identifying, interviewing and recruiting candidates for the Board.

5. Annually review the composition of each committee and present recommendations for committee memberships to the Board as needed.

6. Develop and periodically review and recommend to the Board appropriate revisions to the Company’s Corporate Governance Guidelines.

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7. Monitor compliance with the Corporate Governance Guidelines.

8. Regularly review and make recommendation about changes to the charter of Governance and Nominating Committee.

9. Regularly review and make recommendation about charges to the charter of other Board committees after consultation with the respective committee chairs.

10. Obtain or perform an annual evaluation of the Committee’s performance and make applicable recommendations.

11. Assist the Chairman of the ‘Board, if the Chairman is a non-management director, or otherwise the Chairman of the Committee acting as Lead Independent Director, in leading the Board’s annual review of the Chief Executive Officer’s performance.

12. Annually review the Company’s policies and programs that relate to corporate responsibility.

Answer 7. (b)Oppression :The term oppression’ is not defined in the Companies Act, 1956. Oppression, according to the Dictionary meaning of the word, is any act exercised in a manner burdensome, harsh and wrongful. The meaning of the term ‘oppression’ was explained by Lord Cooper in the Scottish case of Elder v. and Watson Ltd, as given below :

“The conduct complained of should be at lowest involve or visible departure from the standards of fair dealing and a violation of the conditions of fair play or which every shareholder who entrusts his money to a company is entitled to rely.”

(i) Majority group of the Board overriding the minority group : The oppression dealt with by section 397 is only oppression of members in their character as such, and it is only in that character they can involve section 397. The harsh treatment, for instance, of a member who is a Director or other officer or employee, by the Board of Directors or management does not come within (section 397). It has been held in Re. Bellador Silk Ltd. that if the majority of the Board of Directors override the minority Directors the latter cannot resort to section 397 and hence the minority Directors will not succeed in getting relief from CLB on the ground of oppression.

(ii) Right not confined to minority : According to section 399, the right to apply for relief under section 397/398 is given to 100 members or 1/10th of the total numbers or any member or members holding not less than 1/10th of the issued share capital of the company. There is nothing in this section which suggests even indirectly that unless the application is made by minority shareholders it is not maintainable. The right to apply is, therefore, not confined to oppressed minority of the shareholders alone. It was held by Calcutta High Court in Re. Sindhri Iron Foundry(P) Ltd. that the oppressed majority also might apply for relief under Section 397. Therefore, the petitioners are likely to succeed in getting relief provided the other condition laid down in section 397 (i.e. that to wind up the company would unfairly prejudice such members, but that otherwise the facts would justify the making of a winding-up order on just and equitable ground) is satisfied, even though the Delhi High Court held a contrary view in Suresh Kumar Singhi v. Supreme Motors Ltd.

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Q. 8. (a) What is the role of SEBI in promoting Corporate Governance? [5]

(b) MR MUKHOPADHYAY was appointed as director of EXCEL FITTINGS LTD., a public limited company on 1.2.2012. He bought 1000 equity shares of ` 10 each from his cousin on 11.06.2012.Discuss the compliance with the applicable provisions of the Companies Act, 1956 relating to qualification shares and the ensuing consequences. [5]

(c) The Board of Directors of GREEN ENVIRON LTD. at a meeting held on 15.1.2012 resolved to borrow a sum of ` 50 crores from a Nationalised Bank. Subsequently the said amount was received by the Company. One of the Directors who opposed the said borrowing as not in the interest of the Company has raised an issue that the said borrowing is outside the powers of the Board of Directors.

The Company seeks your advice and the following data is given for your information:(i) Share Capital (Paid-up) ` 15 crores

(ii) Reserves and Surplus ` 20 crores(iii) Secured Loans ` 50 crores(iv) Unsecured Loans

Advice the Management of the Company (Green Environ Ltd.).

` 15 crores

[5]

Answer 8. (a)

Good Governance in capital market has always been high on the agenda of SEBI. This is evident from the continuous updation of’ guidelines, rules and regulations by SEBI for ensuring transparency and accountability. In the process, SEBI had constituted a Committee on Corporate Governance under the Chairmanship of Shri Kumar Mangalam Birla.Based on the recommendations of the Committee, the SEBI had specified principles of Corporate Governance and introduced a new clause 49 in the Listing agreement of the Stock Exchanges in the year 2000. These principles of Corporate Governance were made applicable in a phased manner and all the listed companies with the paid up capital of ` 3 crores and above or net worth of ` 25 crores or more at any time in the history of the company, were covered as of March 31, 2003.SEBI, as part of its endeavour to improve the standards of corporate governance in line with the needs of a dynamic market, constituted another Committee on Corporate Governance under the Chairmanship of Shri N. R. Narayana Murthy to review the performance of Corporate Governance and to determine the role of companies in responding to rumour and other price sensitive information circulating in the market in order to enhance the transparency and integrity of the market.With a view to promote and raise the standard of Corporate Governance, SEBI on the basis of recommendations of the Committee and public comments received on the report and in exercise of power conferred by Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with section 10 of the Securities Contracts (Regulation) Act 1956, revised the existing clause 49 of the Listing agreement vide its circular SEBI/MRD/SE/31/2003/26/08 dated August 26, 2003. It clarified that some of the sub-clauses of the revised clause 49 shall be suitably modified or new clauses shall be added following the amendments to the Companies Act 1956 by the Companies (Amendment) Bill/ Act 2003, so that the relevant provisions of the clauses on Corporate Governance in the Listing Agreement and the Companies Act remain harmonious with one another.

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Answer 8. (b)The Companies Act, 1956 does not provide for any share qualification of any Director but Regulation 66 of Table ‘A’ provides that a Director must hold at least one share in the company. Usually, the Articles of the Company provided for holding qualification shares by a Director. Where a share qualification has been prescribed in the Articles of a company which is a public company or a private company which is a subsidiary of a public company, the provisions of Section 270 of the Companies Act, 1956 is applicable where-under, a Director must take his qualification shares within 2 months after his appointment. Any provision in the Articles of the company shall be void in so far as it requires a person to hold the qualification shares before his appointment as a Director or to obtain them within a shorter time than two months after his appointment as a Director or to obtain them within a shorter time than two months after his appointment as such. The nominal value of the qualification shares shall not exceed ` 5,000/- or where nominal value exceeds ` 5,000, share qualification will be one share.A person acting as a Director without acquiring qualification shares is punishable under Section 272 of the said Act. Moreover, a Director who fails to hold qualification shares is also liable to vacate his office under Section 283 of the Companies Act, 1956.In the instant case Mr. Mukhopadhyay was appointed as Director of EXCEL FITTINGS Limited on 1st

February, 2012, he bought the shares from his cousin only on 11-06-2012, which were registered the same day. It can not therefore be said that he held the shares before expiry of 2 months from the date of his appointment. In view of this Mukhopadhyay has to vacate the office and is also punishable u/s 227.

Answer 8. (c)According to the provisions of Section 293(1)(d) of the Companies Act, 1956 there are restrictions on the borrowing powers to be exercised by the Board of Directors. According to that section, the borrowings should not exceed the aggregate of the paid up capital and free reserves. While calculating the limit, the temporary loans obtained by the company from its bankers in the ordinary course of the business will be excluded. However, from the figures available in the present case the proposed borrowing of ` 50 crores will exceed the limit mentioned. Thus the borrowing will be beyond the powers of the Board of Directors. However the share holders have the power to ratify the act of the Board of Directors, if it not beyond the powers of the company as laid down in the memorandum of association. In that case the shareholders can rectify as it is intra vires the Company even though it may be beyond the powers of the Board of Directors.Thus the management of GREENENVIRON LTD, should take steps to convene the annual general meeting and pass a resolution by the members in the meeting as stated in Section 293(1)(d) of the Act. Then the borrowing will be valid and binding on the company and its members.