ppt - corporate law

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Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 1

Paper-13: CORPORATE LAWS AND COMPLIANCE




Learning objectives Verbs used Definition

L E V E L C

KNOWLEDGE

What you are expected toknow

List Make a list of

State Express, fully or clearly, the details/facts

Define Give the exact meaning of

COMPREHENSION

What you are expected to

understand

Describe Communicate the key features of

Distinguish Highlight the differences between

Explain Make clear or intelligible/ state the

meaning or purpose of

Identity Recognize, establish or select after

consideration

Illustrate Use an example to describe or explain

something

APPLICATION

How you are expected to

apply

your knowledge

Apply Put to practical use

Calculate Ascertain or reckon mathematically

Demonstrate Prove with certainty or exhibit by practicalmeans

Prepare Make or get ready for use

Reconcile Make or prove consistent/ compatible

Solve Find an answer to

Tabulate Arrange in a table

ANALYSIS


analyse the detail of what you

have learned

Analyse Examine in detail the structure of

Categorise Place into a defined class or division

Compare

and contrast

Show the similarities and/or differences

between

Construct Build up or compile

Priorit ise Place in order of priority or sequence for

action

Produce Create or bring into existence

SYNTHESIS


utilize the information

gathered to reach an

optimum

conclusion by a process of

reasoning

Discuss Examine in detail by argument

Interpret Translate into intelligible or familiar terms

Decide To solve or conclude

EVALUATION

How you are expected to use

your learning to evaluate,

make decisions or

recommendations

Advise Counsel, inform or notify

Evaluate Appraise or asses the value of

Recommend Propose a course of action





Full Marks: 100 Time Allowed: 3 Hours

This paper contains 3 questions. All questions are compulsory, subject to instructions provided

against each question. All workings must form part of your answer. Assumptions, if any, must

be clearly indicated.

Question 1: Answer all questions [20 Marks]

(a)

Yusuf, an employee of ABC Ltd., was appointed as an alternate director. In the meantime,

the original director returned and wanted to attend the Board meeting. Advise. 3

(b)

Is there any maximum limit on shareholding by the promoter in an Indian Insurancecompany, as per Insurance Act, 1938? 3

(c) The Promoters of a Company to be registered under the Companies Act, 1956 having its

main object of carrying on the business as manufacturer and stockist of Iron and Steel,

proposes that the names of the Companies is to be "ABC Steel Bank Limited". You are

required to state with reference to the provisions of the Banking Regulation Act, 1949,

whether the said Company with the proposed name can be registered. 3

(d) In a proceeding before the Competition Commission of India involving two

pharmaceutical companies, the plaintiff requested the presiding officer to call upon the

services of experts from the pharmaceutical sector to determine' the truth of the

allegations levelled by it against the respondent. The respondent opposed the request onthe ground that such action cannot be taken by the Competition Commission. You are

required to state with reference to the provisions of the Competition Act, 2002, whether the

contention of the respondent is tenable. 3

(e) The object clause of the Memorandum of Association of LSR Private Ltd, Lucknow

authorized to do trading in fruits and vegetables. The company, however, entered into a

Partnership with Mr. J and traded in steel and incurred liabilities to Mr. J. The Company,

subsequently, refused to admit the liability to J on the ground that the deal was 'Ultra Vires'

the company. Examine the validity of the company's refusal to admit the liability to J. Give

reasons in support of your answer. 3

(f) Can CSR be integrated with decision making? 3

(g)

What are the functions of the supervisory board under Cromme Code. 2

Answer:

(a)

An alternate director shall not hold office for a period longer than that permissible to the

original director. The alternate director shall vacate his office when the original director returns

back to India, irrespective of the fact as to whether the original director attends the Board

meetings or not. Thus, after an original director comes back to India, only he can attend the

Board meetings. The alternate director would automatically cease to be director.

In the given case, the contention of the original director is correct and he is entitled to attend

the Board meeting.




(b)

As per section 6AA of Insurance Act, 1938, no promoter shall at any time hold more than

26% or such other percentage as may be prescribed, of the paid-up equity capital in an

Indian Insurance company.

(c) As per section 7(1), no company other than a banking company shall use as part of its

name or, in connection with its business any of the words "bank", "banker" or "banking".

In the given case, the main object of the proposed company is to carry on the business of

manufacturing and acting as stockist of iron and steel. The proposed company is not a

banking company as defined u/s 5(c) of the Act.

In view of the provisions of section 7(1), the name 'ABC Steel Bank Limited' is not permissible.

(d) Section 36 of the Competition Act, 2002 empowers the Commission to call upon the

experts from the fields of economics, commerce, accountancy, international trade or from

any other discipline to assist the Commission in the conduct of any inquiry before it.

Therefore, in the given case, the contention of the respondent is not correct. The Commissionhas the power to call upon the services of experts from the pharmaceutical sector to

determine the truth of the allegations levelled by the Plaintiff against the respondent.

(e) The company is not liable to J because of the following reasons:

since the partnership agreement for trading in steel is an ultra vires contract, and an ultra

vires contract is void ab initio, and is not binding on the company or the other party;

since the power to enter into partnership is not an ancillary or incidental power;

since such power can be legally exercised by the company only if the object clause of

memorandum expressly authorises the company to enter into partnership

(f) Integration of CSR in decision making:

CSR is viewed as a comprehensive set of policies, practices and programs that are

integrated into decision-making processes throughout the organisation. Therefore, an

entity should incorporate CSR initiatives in its core business operations and strategies.

The organisation should set specific goals for CSR.

At the stage of planning, the organisation should lay down the measures for evaluating

the progress from time to time.

As far as possible, the goals should be laid down in quantifiable terms.

(g) The supervisory board carries out a number of important functions as follows:

1. It provides independent advice and supervision regularly to the management board on

the management of the business;

2. The management board and the supervisory board should ensure that there is a long-term

succession plan in place;

3. The supervisory board may delegate some duties to other committees, which include

compensation and audit committees;

4. The chairman of the supervisory board, who should not be the chairman of the audit

committee, co-ordinates work within the supervisory board and chairs its meetings and

attends to the affairs of the supervisory board externally.



Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)

Question 2: Answer any four questions [60 Marks]

Question 2(a)

(i) Dev Limited issued a notice for holding of its annual general meeting on 7th November,

2014. The notice was posted to the members on 16.10.2014. Some members of the company

allege that the company had not complied with the provisions of the Companies Act, 2013with regard to the period of notice and as such the meeting was not validly called. Referring to

the provisions of the Act, decide -

(a) Whether the meeting has been validly called?

(b) If there is a shortfall in the number of days by which the notice falls short of the statutory

requirement, state and explain by how many days does the notice fall short of the

statutory requirement?

(c) Can the shortfall, if any, be condoned?

(ii) The promoters of a public company propose to have the strength of the Board of directors

as eleven. They also propose to make the managing director and whole time directors as

directors not liable to retire by rotation. They seek your advice on the following matters:

(a) Maximum number of persons, who can be appointed as directors not liable to retire byrotation.

(b) How many of the remaining directors will have to retire by rotation every year at the

annual general meeting?

(iii)

Advise the Board of directors of a public company about their powers in respect of the

following proposals explaining the relevant provisions of the Companies Act, 2013;

Buy-back of shares of the company upto 10% of the paid up equity share capital.

[5+6+4 = 15]

Answer:

(i)

Day of holding the AGM 7th November, 2014.

Day of despatch of notice 16th October, 2014.

Days to be excluded ■ Day of holding the AGM (i.e., 7th November,

2014)

■ Day of despatch of notice (16th October, 2014)

■ 2 days for service of notice (i.e., 17th and 18th

October, 2014).

Number of days notice given = 19 days.

Number of days notice required u/s 101 = 21 days.

(a) AGM has not been validly called - since 21 days' notice of the AGM has not been

given to the members.

(b) The notice is short - by 2 days.

(c) The shortfall may be condoned - if consent is given for such shorter notice by at

least 95% of the members entitled to vote at such

AGM.





(ii) As per section 152(6), not less than 2/3rd of total number of directors shall be the directors

whose period of office is liable to determination by retirement by rotation (any fraction

contained in that 2/3rd shall be rounded off as 1). Such directors are referred to as rotational

directors. However, the articles of a company may provide for greater number of rotational

directors. In other words, in no case, the number of non-rotational directors shall exceed 1/3 rd

of total number of directors.

As per section 152(6), at the first annual general meeting and every subsequent annual

general meeting, 1/3rd (or nearest to 1/3rd) of directors liable to retire by rotation shall retire

from the office.

Applying the provisions of section 152(6) to the given case –

(a) At least 8 directors shall be rotational directors (2/3rd of 11 is 7.33; taken as 8 since not less

than 2/3rd of total directors shall be rotational directors). Accordingly, only 3 directors can

be appointed as non-rotational directors. Therefore, it is permissible to appoint managing

director and whole time director as non-rotational directors.

(b) In case 3 directors are appointed as non-rotational directors, 1/3rd of rotational directorsshall retire at the ensuing annual general meeting, i.e. 3 directors (1/3 of 8 is 2.67; nearest

to 2.67 is 3). These 3 directors shall be eligible for reappointment.

(iii) As per section 179(1), the Board is entitled to exercise all such powers as the company is

authorised to exercise. Similarly, the Board is authorised to do all such acts and things as the

company is authorised to do. However, the provisions of section 179(1) are subject to the

other provisions of the Companies Act, 2013 (e.g. Sections 179(3), 180,181 and 182 of the

Companies Act, 2013).

The Board shall exercise the powers mentioned under section 179(3) only by means of a

resolution passed at a meeting of the Board. Among other powers, the power to buy-back as

referred to in section 68 is also included in section 179(3). Section 68 empowers the Board tobuy-back not more than 10% of the total paid-up equity capital and free reserves of the

company.

Therefore, in the present case, the Board is authorised to buy-back the shares of the company

upto 10% of the paid up equity share capital, provided the resolution authorising the

buy-back is passed at a Board meeting and not by circulation.

Question 2(b)

(i) 500 equity shares in 'XYZ Limited' were acquired by Mr. 'B'. But the signature of Mr. 'A', the

transferor, on the transfer deed was forged. Mr. 'B', after getting the shares registered by thecompany in his name, sold 200 equity shares to Mr. 'C on the strength of the share certificate

issued by 'XYZ Limited'. Mr. 'B' and Mr. 'C were not aware of the forgery. What are the rights of

Mr. 'A', 'B' and 'C against the company with reference to the aforesaid shares?

(ii) Apple Company Limited has 10 directors on its board. Two of the directors have retired by

rotation at an Annual General Meeting. The place of retiring directors is not so filled up and the

meeting has also not expressly resolved 'not to fill the vacancy'. Since the AGM could not

complete its business, it is adjourned to a later date. At this adjourned meeting also the place

of retiring directors could not be filled up, and the meeting has also not expressly resolved 'not

to fill the vacancy'. Advice:

(a) Whether in such a situation the retiring directors shall be deemed to have been

re-appointed at the adjourned meeting?





(b) In case at the adjourned meeting, the resolutions for re-appointment of these directors

were lost?

(c) Whether such directors can continue in case the directors do not call the Annual General

Meeting?

(iii) What is the required quorum for holding a Board meeting? Examine the following cases:

(a)

In a Board meeting, only 3 directors were present out of the total of 11 directors. None ofthe 3 directors was interested in any of the items of the agenda. Examine the validity of

meeting.

(b) In a meeting of the Board, out of the total of 11 directors, 7 directors were present of which

only 2 directors were not interested in one of the transactions. How should the meeting

deal with the matter?

[4+5+6 =15]

Answer:

(i)

Rights of A He can compel the company to restore his name on the register of members

(since a forged transfer is without any legal effect and the true ownercontinues to be the member of the company).

Liabilities of B 'B' is liable to compensate the loss caused to the company since he had

lodged the forged transfer deed, even though he was not aware of the

forgery.

Rights of C ■ The company can refuse to register 'C as a member.

■ The company is liable to 'C since the company had issued share certificate

to B, and therefore, the company shall be stopped from denying the

liability accruing to it from its own default.

(ii) The provisions relating to automatic reappointment are contained in section 152(7) of the

Companies Act, 2013. Applying these provisions, the given problem is answered as under:

(a) As per Section 152(7), if the vacancy in the place of retiring director is not filled up and the

meeting has not resolved not to fill the vacancy, the annual general meeting shall adjourn

to the next week at the same time and place or if that day is a public holiday, then to next

succeeding day which is not a public holiday.

If at the adjourned meeting also, the vacancy in the place of retiring director is not filled

up and the meeting has not resolved not to fill the vacancy, the retiring director shall be

deemed to be reappointed.Thus, in the given case, both the retiring directors shall be deemed to have been

reappointed at the adjourned annual general meeting.

(b) In case at the adjourned meeting, the resolutions for reappointment of retiring directors

were lost, there is no question of reappointment or automatic reappointment. They shall

have to vacate their offices.

(c) In case the AGM is not called, the directors liable to retire cannot continue beyond the

last day the AGM ought to have been held, and so their offices shall be vacated as such,

as was held in B. R. Kundra v Motion Pictures Association.

(iii)

The provisions relating to quorum for a Board meeting are contained in section 174. Unlessthe articles provide for a higher quorum, the quorum shall be l/3rd of the 'total strength' (any





fraction contained in that l/3rd shall be rounded off to one) or two directors whichever is

higher [Section 174(1)]. However, section 174(3) states that where at any time the number of

interested directors (present in the Board meeting) exceeds or is equal to 2/3rd of the 'total

strength' (any fraction contained in that 2/3rd shall be rounded off as one), the number of

disinterested directors present at the meeting, being not less than two, shall be the quorum.

(a) In the instant case, 1/3rd of 11 comes to 3.67; the fraction 0.67 shall be rounded off to 1.Thus, at least 4 disinterested directors must be present in the Board meeting. However, only

3 directors are present in the Board meeting.

Moreover, there is no interested director present in the meeting and so the benefit of

section 174(3) cannot be availed. Therefore, the quorum was not present and so the

meeting has not been validly held.

(b) In the given case, the required quorum comes to 4 directors, but only 2 disinterested

directors are present. So, the quorum is not present as per section 174(1).

2/3rd of the 'total strength' comes to 8 (Being 2/3rd of 11 is 7.33; the fraction 0.33 shall be

rounded off to 1). Since the number of interested directors (present in the Board meeting)

is only 5, section 173(3) is not attracted. Thus, the remaining 2 directors who are not

interested do not constitute a quorum and hence the Board meeting cannot be validly

convened.

Question 2(c)

(i) ABC Company Limited at a general meeting of members of the company passes an

ordinary resolution to buy-back 30% of its equity share capital. The articles of the company

empower the company for buy-back of shares. The company further decides that the

payment for buy-back be made out of the proceeds of the company's earlier issue of equity

shares. Explaining the provisions of the Companies Act,2013 and stating the sources through

which the buy-back of companies own shares be executed, examine:

(a) Whether company's proposal is in order?

(b) Would your answer be still the same in case the company, instead of 30%, decides to

buy-back only 20% of its equity share capital?

(ii) Asim, a 15% shareholder of a company and other shareholders have lost confidence in

the Managing Director (MD) of the company. He is a director not liable to retire by rotation

and was re-appointed as Managing Director for 5 years w.e.f. 1.4.2005 in the last Annual

General Meeting of the company.

Mr. Asim seeks your advice to remove the MD after following the procedure laid down under

the Companies Act, 2013.

(a) Specify the steps to be taken by Mr. Asim and the Company in this behalf;

(b) Is it necessary to state reasons to support the resolution for his removal?

(iii) Prithvi Limited is paying remuneration to its non-executive directors at the rate of one

percent of the net profits of the company distributed equally among all the non-executive directors.Is it possible for the company to pay minimum remuneration to non-executive directors besides

sitting fees in the event of loss in a financial year? Answer with reference to Companies Act,

2013.

[4+(4+4)+3 = 15]

Answer:

(i)

(a) The proposal of the company to buy-back its shares is not valid

since the company has passed OR instead of SR, as required u/s 68;

since the company proposes to buy-back 30% of the equity share capital which

exceeds the statutory ceiling of 25% of total paid up equity capital;





since the company proposes to buy-back out of the proceeds of an earlier issue of

same kind of shares, which is prohibited u/s 68.

(b) The decision to buy-back 20% of equity share capital shall not be valid

since buy-back by passing OR is violative of Sec. 68;

since buy-back out of the proceeds of an earlier issue of same kind of shares is

prohibited u/s 68.

(ii) Removal of a non-rotational managing director is possible, since section 169 empowers

the members to remove any director, whether he is a rotational or non-rotational director, or

managing director, whole time director or a non-executive director.

The given problems are answered as under:

(a) Steps to be taken by Mr. Asim

Mr. Asim shall have to give a special notice to the company in accordance with the

provisions of section 115 of the Companies Act, 2013. In the special notice, Mr. Asim shall

propose a resolution for removal of the managing director. The special notice must be -

(i) given to the company not earlier than 3 months before the date of the generalmeeting but at least 14 days before the general meeting (excluding the day on which

such notice is given and the day of the general meeting);

(ii) signed by member(s) holding not less than 1% of total voting power or member(s)holding paid up share capital of ` 5 lakh.

Steps to be taken by the company

(a) The company shall send a copy of special notice to the managing director.

(b) The managing director has a right to make a representation against his removal.

(c) Representation given by the managing director, if any, shall be sent by the company

to every member at least 7 days before the general meeting.

(d) If the representation is not sent to the members, the representation shall be read at the

general meeting.(e) The general meeting shall be held.

(f) The managing director shall have a right to be heard at the meeting. The right to

make an oral representation is in addition to written representation.

(b) Whether the special notice must disclose the reasons for removal of a director.

It was held in LIC v Escorts Ltd. (1986) 59 Comp Cas 548 that it is not necessary for a

member to state the grounds of removal of a director at the time of calling the

extraordinary general meeting. The Court held that, under section 102, it is the duty of the

Board to disclose the material facts in the explanatory statement. Neither section 169 nor

section 102 requires a member to disclose the reasons for the resolutions proposed at the

meeting. In other words, a member cannot be compelled to disclose the reasons for

proposing a resolution for removal of a director.

Therefore, non-disclosure of reasons for removal of managing director does not make a

special notice invalid. Accordingly, the special notice given by Mr. Asim is as per the

requirements of section 169 of the Companies Act, 2013, and the company is required to

act on such notice.

(iii) As per second proviso to Sec 197(1) of Companies Act, 2013, the remuneration of

non-executive directors shall not exceed -

(a) 1% of net profits, if the company has employed a managing director or whole time

director or manager; or

(b) 3% of net profits, if the company has not employed any managing director, whole





time director and

Remuneration to a non-executive director may be paid only if the company has made profits

[sec 197(3) of Companies Act, 2013]. Schedule V does not empower a company to pay

remuneration to its non-executive directors where the company has suffered a loss.

There is no prohibition on payment of sitting fees even where the company has not earnedany profits or its profits are inadequate.

Question 2(d)

(i) A company issued a prospectus. All the statements contained therein were literally true. It

also stated that the company had paid dividends for a number of years, but did not disclose

the fact that the dividends were not paid out of trading profits, but out of capital profits. An

allottee of shares wants to avoid the contract on the ground that the prospectus was false in

material particulars. Decide.

(ii) The last three years' balance sheets of Fantastic Ltd. contain the following information and

figures:

As at 31.03.2013(

)As at 31.03.2014

(

)As at 31.03.2015

(

)

Paid up capital 50,00,000 50,00,000 75,00,000

General Reserve 40,00,000 42,50,000 50,00,000

Credit Balance in Profit & Loss Account 5,00,000 7,50,000 10,00,000

Debenture Redemption Reserve 15,00,000 20,00,000 25,00,000

Secured Loans 10,00,000 15,00,000 30,00,000

On going through other records of the company, the following is also determined:

Net profit for the year12,50,000 - As at 31.03.2013

19,00,000 - As at 31.03.2014

34,50,000 - As at 31.03.2015

In the ensuing Board meeting scheduled to be held on 5th November, 2015, among other

items of agenda, following items are also appearing:

(a) To decide about borrowings from financial institutions on long-term basis.

(b) To decide about contributions to be made to charitable funds.

Based on above information, you are required to find out as per the provisions of the

Companies Act, 2013 the amount upto which the Board can borrow from financial institutions

and the amount upto which the Board of directors can contribute to charitable funds during

the financial year 2015-16 without seeking the approval in general meeting.

(iii) Explain the power of the Registrar to conduct inspection and inquiry as per the provisions

of Companies Act, 2013.

[4+6+5 = 15]

Answer:

(i) The prospectus is misleading

since non-disclosure of the fact that the company was making losses and that the

dividends were paid out of past year profits gave a false impression that the company

was making profits;

since suppression of such fact might have affected investor's decision to subscribe for





shares.

since the prospectus does not disclose all the material facts truly, honestly and

accurately.

The allottee of shares is entitled to avoid allotment since the allottee has a right to rescind the

contract of allotment of shares if he had relied and acted on the prospectus, i.e., he

subscribed for shares after being influenced by a misleading prospectus [Rex v Kylsant].

(ii) The given problem relates to sections 180(1)(c) and 181 of the Companies Act, 2013.

(a) As per section 180(1)(c) of the Companies Act, 2013, without the prior consent of the

members in general meeting by a special resolution, the Board of directors of a company

shall not borrow moneys where the borrowings (already made plus proposed) exceed the

aggregate of the paid up capital and free reserves. However, temporary loans obtained

from the company's bankers in the ordinary course of business shall not be considered as

borrowings.

In the given case, the aggregate of paid up capital and free reserves comes to ` 1,35,00,000 (75,00,000 + 50,00,000 + 10,00,000). Since the company has already borrowed

` 30,00,000 (it has been assumed that secured loans of ` 30,00,000 is not a temporary loan,

i.e. it is not a loan obtained from the company's bankers in the ordinary course ofbusiness), the long term borrowings from financial institutions shall not exceed ` 1,05,00,000

without the consent of the members by way of a special resolution.

(b) As per section 181 of the Companies Act, 2013, without the prior consent of the members

in general meeting, the Board shall not contribute to bonafide charitable and other funds

exceeding 5% of average net profits during immediately preceding 3 financial years.

The average net profits during immediately preceding 3 financial years comes to `

22,00,000, viz., 1/3rd of ( ` 12,50,000 + Rs. 19,00,000 + Rs. 34,50,000). 5% of ` 22,00,000 comesto ` 1,10,000. Therefore, the Board may make contributions to charitable funds upto `

1,10,000 during the financial year 2015-16 without prior permission of the company in

general meeting.

(iii)

(a) Duty of officers and employees to furnish documents and information [Section 207(1)]

Where a Registrar or inspector calls for the books of account and other books and papers

under section 206, it shall be the duty of every director, officer or other employee of the

company to -

(i) produce all such documents to the Registrar or inspector and furnish him with such

statements, information or explanations in such form as the Registrar or inspector mayrequire; and

(ii) render all assistance to the Registrar or inspector in connection with such inspection.

(b) Power of Registrar or Inspector to make copies and place identification marks [Section

207(2)]

The Registrar or inspector, making an inspection or inquiry under section 206 may, during

the course of such inspection or inquiry, as the case may be, -

(i) make or cause to be made copies of books of account and other books and papers;

or

(ii) place or cause to be placed any marks of identification in such books in token of the

inspection having been made.





(c) Powers of civil court vested in the Registrar and Inspector [Section 207(3)]

The Registrar or inspector making an inspection or inquiry shall have all the powers as are

vested in a civil court under the Code of Civil Procedure, 1908, in respect of the following

matters:

(i) The discovery and production of books of account and other documents, at such

place and time as may be specified by such Registrar or inspector making the

inspection or inquiry.(ii) Summoning and enforcing the attendance of persons and examining them on oath.

(iii) Inspection of any books, registers and other documents of the company at any place.

Question 2(e)

(i) M, who was appointed as additional director at the Board meeting held on 31st May, 2014

continues to be in his office on the ground that the annual general meeting for the

financial year 2013-14 was not held as required under the Act. Whether continuation of M

in the office is valid? Will your answer be different if M was also appointed as managing

director for a period of 5 years with effect from 1st June 2014 at the same Board meeting?

(ii) Can an insurer assume risk without receiving the premium, as per Insurance Act, 1938?

(iii) Trinity Bank Limited acquired a building from ABC College in discharging a term loan

advanced. The building had been mortgaged as security with the bank and the college

had failed to repay the loan. The bank proposes to retain the building with it and let out on

commercial basis to shops.

[6+5+4 = 15]

Answer:

(i)

As per section 161(1) of the Companies Act, 2013, an additional director holds office uptothe date of next annual general meeting or the last day on which the annual general

meeting should have been held, whichever is earlier. Thus, an additional director vacates his

office on the last day on which the annual general meeting ought to have been held as per

the provisions of section 96 of the Companies Act, 2013, and cannot continue in office

thereafter on the ground that the meeting was not called or could not be held within the time

prescribed under section 96.

A managing director must be a director of the company. Therefore, if a managing director

ceases to be a director, he automatically ceases to be a managing director. Accordingly,

where an additional director, who is also appointed as a managing director, vacates the

office of the additional director at the annual general meeting, the office of the managing

director also ceases simultaneously with the cessation of office of additional director.However, if the additional director is re-elected as a regular director at the annual general

meeting (by complying with the provisions of section 160 of the Companies Act, 2013) and

thereby he continues as a director, he shall continue as a managing director also for the

period for which he has been appointed as a managing director.

Thus, in the given case -

■ M would vacate the office of a director on the last day on which the annual general

meeting ought to have been held as per section 96.

■ Only a director can be appointed as a managing director. Since, M vacates the office of

additional director, the office of managing director is also vacated, as he is not re-elected

as a regular director at the annual general meeting. He shall vacate the office of

managing director irrespective of the fact that his appointment as a managing director





was made for a period of 5 years.

(ii) As per section 64VB, no insurer shall assume any risk without receiving the premium in

advance. The provisions of section 64 VB are explained below:

(a) No risk to be assumed unless premium received in prescribed manner [Section 64VB(1)]

No insurer shall assume any risk in respect of any insurance business unless and until thepremium payable is received by him or is guaranteed to be paid by such person in such

manner and within such time as may be prescribed or unless and until deposit of such

amount as may be prescribed, is made in advance in the prescribed manner.

(b) Date of assuming risk [Section 64VB(2)]

The risk may be assumed not earlier than the date on which the premium has been paid in

cash or by cheque to the insurer.

(c) Situation where premium is tendered by postal money order or cheque [Explanation to

Section 64VB(2)]

Where the premium is tendered by postal money order or cheque sent by post, the risk

may be assumed on the date on which the money order is booked or the cheque isposted, as the case may be.

(d) Refund to be made directly to the insured and not to the agent [Section 64VB(3)]

Any refund of premium which may become due to an insured on account of the

cancellation of a policy or alteration in its terms and conditions or otherwise shall be paid

by the insurer directly to the insured by a crossed or order cheque or by postal money

order and a proper receipt shall be obtained by the insurer from the insured, and such

refund shall in no case be credited to the account of the agent.

(e) Duty of agent to deposit the premium with the insurer within 24 hours [Section 64VB(4)]

Where an insurance agent collects a premium on a policy of insurance on behalf of an

insurer, he shall deposit with, or despatch by post to, the insurer, the premium so collectedin full without deduction of his commission within 24 hours of the collection excluding bank

and postal holidays.

(iii) As per section 9, no banking company shall hold any immovable property howsoever

acquired, except such as is required for its own use, for any period exceeding 7 years from the

acquisition thereof or any extension of such period as in this section provided, and such

property shall be disposed of within such period or extended period, as the case may be.

As per Proviso to Section 9, the Reserve Bank may in any particular case extend the aforesaid

period of 7 years by such period not exceeding 5 years where it is satisfied that such extension

would be in the interests of the depositors of the banking company.

In the given case, Trinity Bank Limited proposes to retain the building for letting out on

commercial basis to shops, and not for its own use. In view of the provisions of section 9, Trinity

Bank Limited cannot retain the building permanently with it for the purpose of letting out on

commercial basis to shops. It shall have to dispose of the Building within 7 years from the date

of its acquisition.

However, the Reserve Bank may permit Trinity Bank Limited to hold the building for such

extended period, not exceeding 5 years, as it may deem f it.





Question 3: Answer any two questions [20 Marks]

Question 3(a)

(i) “The concept of Memorandum of Understanding (MoU) has been designed to provide

flexibility and autonomy to CPSEs such that it facilitates them in pursuing the objectives

and purposes, for which the enterprises have been set up.”In the light of the abovestatement, explain the concept of MoU in India.

(ii) Triple Bottom Line Approach of Corporate Social Responsibility (CSR).

[5+5 = 10]

Answer:

(i) The Memorandum of Understanding (MoU) System in India was introduced in the year

1986, after the recommendations of the Arjun Sengupta Committee Report (1984). Twenty six

years after its inception, the MoU system has evolved and is being strengthened, through

regular reviews, to become a management tool that helps in performance evaluation as wellas performance enhancement of CPSEs in the country.

The concept of Memorandum of Understanding (MoU) has been designed to provide

flexibility and autonomy to Central Public Sector Enterprises (CPSEs) such that it facilitates

them in pursuing the objectives and purposes, for which the enterprises have been set up.

Accountability has to be understood in a wider sense by associating it with answerability for

the performance of the tasks and the achievement of targets negotiated mutually between

the Government and the CPSE. The rationale for MoU could be derived from principal/agent

theory. The principal (administrative ministry on behalf of real owners - the people) can only

observe outcomes and cannot measure accurately the efforts expended by the agent (CPSE

managers). Also the Principal can only, to a l imited extent, distinguish the effects of influencesfrom other factors, which affect the performance. Therefore extensive intervention by

administrators, who might not be too knowledgeable about the nature of problems

confronting the enterprises, not only impacts productivity and profitability but also makes it

impossible to fix accountability for non-achievement of targets.

A negotiated incentive contract (MoU), hence, is viewed as a device to reveal information

and motivate managers to exert effort. Notwithstanding the spectacular performance of

CPSEs in several areas, there has been a sense of disillusionment with some aspects of CPSE

performance such as low profitability and lack of competitiveness. The extensive regulation of

CPSEs by government had stifled the initiative and growth of public sector. The Economic

Administration Reforms Commission (Chairman: L. K. Jha) had dwelt on issue of autonomy and

accountability. The Commission had recommended a careful re-consideration of extantconcepts and instrumentalities relating to the accountability of public enterprises with a view

to ensuring (a) that they do not erode the autonomy of public enterprises and thus hampers

the very objectives and purposes for which these enterprises have been set up and given

corporate shape and for which they are to be accountable; and (b) accountability has to be

secured in the wider sense of answerability for the performance of tasks and achievements of

results. The adoption of MoU system in India could be seen as an attempt to operationalize this

very vital recommendation.

In the backdrop of the dynamic external environment, “wor ld - wide competition” and

globalization, it is critical that the MoU system is strengthened such that it facilitates the CPSEs

in becoming economically viable through efficient management and control. Hence, the

MoU system aims at offering autonomy to CPSEs and is designed such that it can aid in the





assessment of the extent to which mutually agreed objectives (Mandal, 2012) are achieved.

This section of the report traces the evolution of the MoU system through various committee

reports and highlights the major observations, along with the actions taken thereafter. This

would act as an indicator of the developments that have happened in the MoU system in

India and, through the study of extant literature, would also highlight the areas of concern

raised after each study.

The various committees formed over the years are:

1. Arjun Sengupta Committee Report (1984)

2. National Council of Applied Economic Research (2004)

3. Report of the Working Group (2008)

4. S.K. Roongta Committee Report (2011)

5. Mankad Committee and Task Force (2012)

(ii) Within the broader concept of corporate social responsibility, the concept of Triple Bottom

Line (TBL) is gaining significance and becoming popular amongst corporate. Coined in 1997

by John Ellington, noted management consultant, the concept of TBL is based on the premise

that business entities have more to do than make just profits for the owners of the capital, only

bottom line people understand. “People, Planet and Profit” is used to succinctly describe theTBL. “People” (Human Capital) pertains to fair and beneficial business practices toward

labour and the community and region in which a corporations conducts its business. “Planet”

(Natural Capital) refers to sustainable environmental practices. It is the lasting economic

impact the organization has on its economic environment A TBL company endeavors to

benefits the natural order as much as possible or at the least does no harm and curtails

environmental impact. “Profit” is the bottom line shared by all commerce. The peop le issues

faced by the organization includes -

i) Health

ii) Safety

iii) Diversity

iv) Ethnicity

v) Education and literacyvi) Prevention of child labour

vii) Differently – abled

The planet concerns include

i) Climate change

ii) Energy

iii) Water

iv) Air pollution

v) Waste management

vi) Ozone layer depletion, etc.

The need to apply the concept of TBL is caused due to – i) Increased consumer sensitivity to corporate social behavior

ii) Growing demands for transparency from shareholders/stakeholders

iii) Increase environmental regulation

iv) Legal costs of compliances and defaults

v) Concerns over global warming

vi) Increased social awareness

vii) Awareness about and willingness for respecting human rights

viii) Media‟s attention to social issues

ix) Growing corporate participation in social upliftment

While profitability is a pure economic bottom line, social and environmental bottom lines are

semi or non - economic in nature so far as revenue generation is concerned but it has





certainly a positive impact on long term value that an enterprise commands.

But discharge of social responsibilities by corporate is a subjected matter as it cannot be

measured with reasonable accuracy.

Question 3(b)

(i) State the factors influencing Corporate Social Responsibility (CSR).

(ii) Would you advocate the following understandings with relation to CSR? Discuss.

Businesses invest the money, therefore they decide the modus operandi of the CSR

initiative

Financial resources alone can meet CSR needs of an enterprise.

CSR is interchangeable with corporate sponsorship, donation or other philanthropic

activities.

[5+5 = 10]

Answer:

(i) Many factors and influences, including the following, have led to increasing attention

being devoted to CSR:

1. Globalization – coupled with focus on cross-border trade, multinational enterprises

and global supply chains – is increasingly raising CSR concerns related to human

resources management practices, environmental protection, and health and safety,

among other things.

2.

Governments and intergovernmental bodies, such as the United Nations, The OECD

and the ILO have developed compacts, declarations, guidelines, principles and other

instruments that outline social norms for acceptable conduct.

3.

Advances in communications technology, such as the Internet, Cellular phones andpersonal digital assistants, are making it easier to track corporate activities and

disseminate information about them. Non-governmental organizations now regularly

draw attention through their websites to business practices they view as problematic.

4. Consumers and investors are showing increasing interest in supporting responsible

business practices and a demanding more information on how companies are

addressing risks and opportunities related to social and environmental issues.

5. Numerous serious and high-profile breaches of corporate ethics have contributed to

elevated public mistrust of corporations and highlighted the need for improved

corporate governance, transparency, accountability, and ethical standards.

6. Citizens in many countries are making it clear that corporations should meet standards

of social and environmental care, no matter where they operate.

7.

There is increasing awareness of the limits of government legislative and regulatory

initiatives to effectively capture all the issues that CSR addresses.

8. Businesses are recognizing that adopting an effective approach to CSR can reduce

risk of business disruptions, open up new opportunities, and enhance brand and

company reputation.

(ii)

In the absence of a universally accepted definition for CSR, there are some myths that

surround the concept, and the ones stated are a few of the same. They should be dealt as

follows.





Myth # 1: Businesses invest the money; therefore they decide the modus operandi of the CSR

initiative

There is a notion that since businesses invest money in society, they are the one who will be

deciding upon the modus operandi of the CSR initiative. However this is not true. CSR driven

by the mandate of an enterprise alone may not generate desired results. Stakeholders must

be involved from the onset in defining an initiative to make it successful. Corporates must not

assume that they understand the needs of a community by taking them at face value;stakeholder‟s needs must be considered within the local context and culture.

Myth # 2: Financial resources alone can meet CSR needs of an enterprise.

In fact, financial resources are only part of the equation. Besides financial resources, it is

equally or even more important for the CSR programmes to be well defined and well

accompanied by adequate human resources if they are to meet the intended objectives.

Myth # 3: CSR is interchangeable with corporate sponsorship, donation or other philanthropic

activities.

The focus of responsible business practices in the profit sector is hitherto largely confined to

community charity-based projects.

While this may have been relevant for the historical context in the mid- 90s when Carroll‟s

definition was coined, the current thinking of CSR has moved beyond philanthropy to in fact

en-compass all internal and external segments of business operations: employees, market

environment and community.

The rationale for CSR has been articulated in a number of ways. In essence, it is about building

sustainable businesses, which need healthy economies, markets and communities.

Question 3(c)

(i) Explain the importance of „Ethics‟ for a finance and accounting professional.

(ii) If you are an accounting professional in a large multinational corporation, what steps

would you undertake to create an ethical accounting environment? [5+5 = 10]

Answer:

(i) The importance of „Ethics‟ for a finance and accounting professional may be discussed

as two-fold:

1.

Public Responsibility:

Finance and Accounts is perhaps the only business function which accepts responsibility

to act in public interest. Finance and accounting professional's responsibility is not

restricted to satisfy the needs of any particular individual or organization. While acting in

public interest, it becomes imperative that the finance and accounting professional

adheres to certain basic ethics in order to achieve his objectives.

2.

To restore Public Confidence:

Various accounting scandals witnessed during the past few years have put a serious

question mark on the role of the finance and accounting professional in providing the

right information for decision making both within and outside their respective

organizations.

As these finance and accounting professionals are in public practice, they should take

reasonable steps to identify circumstances that could pose the conflict of interest and

thus leading to follow unethical behavior.





(ii) The factors that are to be considered for creating an ethical accounting environment

are:

1. Employee Awareness:

Make the employees aware of their legal and ethical responsibilities.

Train and motivate employees towards ethical behaviour. Encourage employees to report cases of violations, frauds, manipulations,

misappropriations, etc.

2. Reporting of Frauds: For reporting violations, manipulations, misappropriations, etc., -

without any fear of being reprimanded or fired,

provide facilities to employees.

3. Whistle Blowers:

A whistle blower is an employee /person who reports frauds, mismanagement or

creating good accounting environment in a business enterprise. Fair treatment and

appreciation of Whistle Blowers is necessary to check fraud.





L E V E L C

KNOWLEDGE


know

List Make a list of



COMPREHENSION


understand






consideration


something

APPLICATION


apply

your knowledge



Demonstrate Prove with certainty or exhibit by practical

means





ANALYSIS



have learned



Compare

and contrast


betweenConstruct Build up or compile


action


SYNTHESIS




optimum


reasoning




EVALUATION



make decisions or

recommendations













(a)

Is a company incorporated outside India required to pay fees for registration of

documents? 3

(b)

State whether contracts entered into by a company before registration continue to bebinding after incorporation of the company under the Companies Act, 2013? 3

(c) Shruti Furniture Limited was willing to purchase teakwood estate in Jharkhand State. Its

prospectus contained some important extracts from an expert report giving the number of

teakwood trees and other relevant information in the estate in Jharkhand State. The report

was found inaccurate. Mr. „X‟ purchased the shares of Shruti Furniture Limited on the basis

of the above statement in the prospectus. Will Mr. „X‟ have any remedy against the

company? When an expert will not be liable? State the provisions of the Companies Act, in

this respect. 3

(d) Mr. Om is a director of Vidhi Ltd. He intends to construct o residential building for his own

use. The cost of construction is estimated at `

1.35 crores, which Mr. Om proposes tofinance partly from his own sources to the tune of ` 60 lacs and the balance ` 75 lacs from

housing loan to be obtained from a housing finance company. For the purpose of

obtaining the loan, he has approached the housing finance company which has in

principle agreed to grant the loan, but has put a condition. The condition put by the

housing finance company is that the Company Vidhi Ltd. of which Mr. Om is a director

should provide the guarantee for repayment of the loan and interest as per the terms of

the proposed agreement for granting the loan to Mr. Om. You are required to advise Mr.

Om on the matter with reference to the provisions of the Companies Act, 2013. 3

(e) State the provisions of the Insurance Act, 1938 relating to refund of deposit. 3

(f)

Do you consider business ethics to be a professional code? 2

(g) What responsibility towards public should a Management Accountant professional have?

3

Answer:

(a) As per section 385, where any provision contained in this Chapter (viz. Chapter XXIII

consisting of sections 379 to 393) requires registration of any document, there shall be paid to

the Registrar such fee, as may be prescribed.

As per Rule 8(2) of the Companies (Registration of Foreign Companies) Rules, 2014, fee as

provided in the Companies (Registration Offices and Fees) Rules, 2014 shall be paid to the

Registrar for registration of any document.




(b)

As per section 369, the registration of a company in pursuance of Part I of Chapter XXI

shall not affect its rights or liabilities in respect of any debt or obligation incurred by the

company before registration. Similarly, any contract entered into by the company before

registration shall not be affected.

(c)

Mr. X is entitled to repudiate the allotment since he purchased the shares relying on amisstatement contained in the prospectus.

An expert is not liable if he proves that the prospectus was issued without his knowledge or

consent, and that on becoming aware of its issue, he forthwith gave a reasonable public

notice that it was issued without his knowledge or consent.

(d) As per section 185 of the Companies Act, 2013, no company shall, directly or indirectly,

give any guarantee in connection with a loan taken by a director. Section 185 does not

permit a company to give guarantee even with the approval of the Central Government.

However, the prohibition under section 185 shall not apply to a company, which, in the

ordinary course of its business, gives guarantees for the repayment of any loan.

In the given case, guarantee cannot be given by Vidhi Ltd. in respect of a loan advanced toMr. Om by a housing finance company, unless Vidhi Ltd., in the ordinary course of its business,

gives guarantees for the repayment of any loan.

(e) As per section 9, where an insurer has ceased to carry on in India all classes of insurance

business and his liabilities in India in respect of all classes of insurance business have been

satisfied or are otherwise provided for, the court may, on the application of the insurer, order

the return to the insurer of the deposit made by him under this Act.

(f) Business ethics is not a pure science but a professional practice, and society expects

businessmen to abide by the principles of a civil society, just as it expects professionals from other

areas such as medicine, bureaucracy, politics and sports to do so. Thus, instead of a value-free

business ethics, we have a value- loaded or value-based business practice.

(g) Members should accept the obligation to act in a way that will serve the public interest,

honour public trust and demonstrate commitment to professionalism. A distinguishing mark of a

profession is acceptance of its responsibility to the public. The accounting professions public

interest of clients, credit grantors, governments, employers, investors, the business and financial

community and others who rely on the objectivity and integrity of certified public accountants to

maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility

on the professionals. The public interest is defined as a collective well being of the community of

people and institution the profession serves.


Question 2(a)

(i) Mr. Zeo has been arrested for a cognizable and non-bailable offence punishable for a term

of imprisonment for more than three years under the prevention of Money Laundering Act,

2002. Advise, as to how can he be released on bail in this case?

(ii) A producer company has received applications from Mr. Richard, a Director of thecompany, and Mr. Pichai, a member of the Company, for grant of loan of ` 2,00,000 and `

25,000 respectively. Discuss the relevant provisions of the Companies Act, 1956 as to how the

applications for grant of loan will be disposed of by the Company.

(iii) Write a short note on non-disclosure of the source of information with respect to an




investigation of the Company, as per Companies Act, 2013. [7+6+2 = 15]

Answer:

(i) Analysis of the case of Mr. Zeo as per Prevention of Money Laundering Act, 2002

(a) Conditions for release of accused on bail [Section 45(1)]

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, no person

accused of an offence punishable for a term of imprisonment of more than 3 years under

Part A of the Schedule shall be released on bail or on his own bond unless -

(1) the Public Prosecutor has been given an opportunity to oppose the application for

such release; and

(2) where the Public Prosecutor opposes the application, the court is satisfied that there

are reasonable grounds for believing that he is not guilty of such offence and that he is

not likely to commit any offence while on bail.

(b) Conditions for release of a person aged less than 16 years [First Proviso to Section 45(1)] Where a person who is under the age of 16 years is a woman or is sick or infirm, he may be

released on bail, if the special court so directs.

(c) Cognisance of offences [Second Proviso to Section 45(1)]

The Special Court shall not take cognisance of any offence punishable under section 4

except upon a complaint in writing made by -

(1) the Director; or

(2) any officer of the Central Government or State Government authorised in writing in this

behalf by the Central Government by a general or special order made in this behalf

by that Government.

(d) No power of police officer to investigate [Section 45(1 A)]Notwithstanding anything contained in the Code of Criminal Procedure, 1973, or any

other provision of this Act, no police officer shall investigate into an offence under this Act

unless specifically authorised, by the Central Government by a general or special order,

and, subject to such conditions as may be prescribed.

(e) Other conditions for grant of bail [Section 45(2)]

The limitation on granting of bail specified in sub-section (1) is in addition to the limitations

under the Code of Criminal Procedure, 1973 or any other law for the time being in force

on granting of bail.

(ii) Loan to Mr. Richard, the director of the company

As per section 581R, the Board is authorised to do all such acts and things as the company is

entitled to do.

However, the Board shall not sanction any loan or advance, in connection with the business

activities of the Producer Company to any director or his relative.

As per section 581S, the members may sanction a loan to a director in annual general

meeting. Further, the conditions and limits of loan shall also be specified in the resolution so

passed in the annual general meeting.

As per section 581ZG, it shall be the duty of the auditor to report on the loans given by the

Producer Company to its directors.




As per section 581ZK, any loan or advance to any director or his relative shall be granted only

after the approval by the Members in general meeting.

In the present case, it is permissible for the Board to give a loan of ` 2,00,000 to Mr. Richard, a

director, only if such a loan is approved by the members in the annual general meeting, and

the conditions and limits of loan are specified in the resolution so passed in the annual generalmeeting.

Loan to Mr. Pichai, a member of the company

The Board may, subject to the provisions made in articles, provide financial assistance to the

Members of the Producer Company by way of –

(a) credit facility, to any Member, in connection with the business of the Producer Company,

for a period not exceeding 6 months,

(b) loans and advances, against security specified in articles to any Member, repayable

within a period exceeding 3 months but not exceeding 7 years from the date of

disbursement of Such loan or advances.

Accordingly, loan of ` 25,000 to Mr. Pichai can be made provided that –

(a) such loan is secured by any security specified in the articles;

(b) such loan is repayable after 3 months but within 7 years.

(iii) As per section 457 of Companies Act, 2013, notwithstanding anything contained in any

other law for the time being in force, the Registrar, any officer of the Government or any other

person shall not be compelled to disclose to any court, Tribunal or other authority, the source

from where he got any information which -

(a) has led the Central Government to order an investigation; or

(b) is or has been material or relevant in connection with such investigation.

Question 2(b)

(i) Fun Toys Limited and Bright Toys Limited marketing their products in India propose to be

amalgamated. The enterprise created as a result of the said amalgamation will haveassets of value of ` 300 crore and turnover of ` 1000 crore. Examine whether the proposed

amalgamation attracts the provisions of the Competition Act, 2002?

(ii) Sundar, a citizen of India, left India for employment in Australia on 1st June 2007. Mr.Sundar purchased a flat at New Delhi for ` 15 lakhs in September, 2008. His brother, Mr.

Satya employed in New Delhi, also purchased a flat in the same building in September,

2008 for ` 15 lakhs. Mr. Satya's flat was financed by a loan from a housing financecompany and the loan was guaranteed by Mr. Sundar. Examine with reference to the

provisions of Foreign Exchange Management Act, 1999, whether purchase of flat and

guarantee by Mr. Sundar are capital account transactions and whether these transactions

are permissible.

(iii) What power does the Central Government have to make Rules relating to winding up?

[4+6+5 = 15]

Answer:

(i)

The given problem relates to section 5 of the Competition Act, 2002.

As per section 5, an amalgamation shall be a combination if the enterprise created as a resultof the amalgamation, shall have the assets of the value of more than ` 1,000 crores or




turnover more than ` 3,000 crores.

In the given case, the enterprise created as a result of the amalgamation will have assets ofvalue of ` 300 crore (i.e. less than the amount specified under section 5, viz. ` 1,000 crores)

and turnover of ` 1,000 crore (i.e. less than the amount specified under section 5, viz. ` 3,000

crores). Thus, as per the provisions of section 5, the said amalgamation does not amount to

'combination', and so such amalgamation shall come into effect without obtaining anyapproval of the Competition Commission of India.

(ii) Capital account transaction means a transaction which alters the assets or liabilities,

including contingent liabilities, outside India of persons resident in India or assets or liabilities in

India of persons resident outside India. It also includes -

(a) acquisition or transfer of immovable property in India, other than a lease not exceeding 5

years, by a person resident outside India.

(b) giving of a guarantee or surety in respect of any debt, obligation or other liability incurred

by a person resident outside India.

In general, a capital account transaction is not permissible, unless otherwise provided in the

Act, rules or regulations made thereunder, or with the general or special permission of ReserveBank of India.

In the given case Mr. Sundar left India for employment in Australia in June 2007. Therefore, he

becomes a person resident outside India as from June 2007.

(a) The purchase of flat in India by Mr. Sundar (a person resident outside India) is a capital

account transaction. Therefore, this transaction shall be permissible in accordance with

the regulations framed in this behalf, i.e., Foreign Exchange Management (Acquisition

and Transfer of Immovable Property in India) Regulations, 2000.

Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India)

Regulations 2000 imposes restrictions on a person resident outside India from acquiringimmovable property in India. However, Regulation 3 of these regulations permits a person

resident outside India to acquire any immovable property in India provided he fulfills both

the following conditions:

The person resident outside India is a citizen of India.

The immovable property acquired in India is not agricultural/plantation/farm house.

Therefore, in the instant case, the purchase of flat by Mr. Sundar is permissible under FEMA.

(b) Guarantee involves a long term commitment which alters the assets and liabilities of a

person and therefore it is considered as a capital account transaction and thus restricted

under FEMA.

Accordingly, Mr. Sundar can give a guarantee to the Housing Finance Company in

respect of purchase of flat by Mr. Satya with the permission of Reserve Bank of India.

(iii) Powers of the Central Government to make rules relating to winding up (Section 468 of the

Companies Act, 2013)

(a) The Central Government shall make rules for all matters relating to the winding up of

companies.

(b) The Rules shall be consistent with the Code of Civil Procedure, 1908.

(c) In particular, and without prejudice to the generality of the foregoing power, such rules

may provide for all or any of the following matters, namely:

1) as to the mode of proceedings to be held for winding up of a company by the

Tribunal;

2)

for the voluntary winding up of companies, whether by members or by creditors;3) for the holding of meetings of creditors and members;




4) for giving effect to the provisions of this Act as to the reduction of the capital;

5) generally for all applications to be made to the Tribunal under the provisions of this

Act;

6) the holding and conducting of meetings to ascertain the wishes of creditors and

contributories;

7)

the settling of lists of contributories and the rectifying of the register of members whererequired, and collecting and applying the assets;

8) the payment, delivery, conveyance, surrender or transfer of money, property, books or

papers to the liquidator;

9) the making of calls; and

10) the fixing of a time within which debts and claims shall be proved.

Question 2(c)

(i)

State the formalities that has to be followed with respect to registration of prospectus of

Companies Incorporated outside India, as per provisions contained in the Companies Act,

2013.

(ii) A company created a floating charge of its current assets in favour of a bank to secure acurrent account, which was in debit of ` 5 lakhs and also to secure further working Capital

facilities provided by the bank. The charge created on 1st January, 2013 was dulyregistered with the Registrar of Companies. The bank advanced ` 10 lakhs subsequent to

the creation of charge. The company has gone into voluntary liquidation pursuant to a

resolution passed on 1st September, 2013. Examine the validity of the floating charge in

case it is a creditors‟ voluntary winding up, but there is no fraudulent preference. Would

your answer be different, if it was a member's voluntary winding up?

(iii) The issued, subscribed and paid-up capital of Super Supplements Limited is ` 2 crore

consisting of 20,00,000 equity shares of ` 10 each. The said company has 800 members.For the purpose of relief against oppression and mismanagement, a petition was

submitted before the appropriate authority duly signed by 90 members holding 1,00,000

equity shares of the said company. Subsequently, 30 members, who signed the petition,

withdrew their consent. Decide, under the provisions of the Companies Act, 1956 whether

the said petition is maintainable?

[3+7+5 = 15]

Answer:

(i) The provisions of Registration of Prospectus is contained in section 389 of Companies Act,

2013 and are explained as follows:

Conditions for issue or circulation of prospectus

No person shall issue, circulate or distribute in India any prospectus by which securities are

offered for subscription unless before such issue, circulation or distribution, -

(a) a certified copy of the prospectus is delivered to the Registrar for registration;

(b) the prospectus states on the face of it that a copy has been so delivered; and

(c) expert's consent to the issue of the prospectus (as required under section 388) and

such documents as may be prescribed are attached to the prospectus.

Manner of certification of prospectus

The copy of the prospectus shall be certified by -




(a) the chairperson of the company; and

(b) 2 other directors of the company.

The provisions of section 389 shall apply with respect to any prospectus of a company -

(a) incorporated outside India (and whether or not it has established a place of business in

India); or(b) to be incorporated outside India (and whether or not it will establish a place of business in

India).

(ii) As per section 534 of Companies Act, 1956, a floating charge created by the company

within 12 months preceding the commencement of its winding up shall be invalid. However,

this rule is subject to the following two exceptions:

(a) A floating charge shall not be invalid where it is proved that the company was solvent

immediately after the creation of the charge.

(b) A floating charge shall be valid upto the amount of any cash paid to the company

(whether at the time of creation of charge or thereafter) as a consideration for the

charge. Also, interest shall be allowed on that amount at the rate of 5% per annum or such

other rate as may be notified by the Central Government in the Official Gazette.

A company had created a floating charge of its assets in favour of a bank to secure a current

account which was in debit. The bank advanced monies to the company subsequent to the

creation of charge.

The bank would not have advanced such monies if the company had not given the security

(by way of creation of floating charge) to the bank. Therefore, it was held that money

advanced to the company was in consideration of creation of charge, and so the charge

was valid as it fell in the exception mentioned in section 534 [Re, Yeovil6love Co. Ltd. (1962) 3

All ER 400].

The facts of the given are exactly similar to the facts of the case discussed above. Therefore, itcan be said that the floating charge created by the company on 1st January, 2013 shall bevalid to the extent of ` 10 lakhs along with interest at the rate of 5% per annum or such other

rate as may be notified by the Central Government in the Official Gazette.

Section 534 falls under Chapter V of Part VII of the Companies Act, 1956. The Title of said

Chapter V reads, 'Provisions applicable to every mode of winding up'. Therefore, it is evident

that section 534 shall apply notwithstanding that it is members' voluntary winding up or

creditors' voluntary winding up.

(iii)

As per section 399, in the case of a company having a share capital, members eligible to

apply for oppression and mismanagement shall be lowest of the following:

(a)

100 members; or(b) 1/10th of the total number of members; or

(c) Members holding not less than 1/10th of the issued share capital of the company.

It must be noted that the term 'member' includes an equity shareholder as well as preference

shareholder.

The consent to be given by shareholder is reckoned at the beginning of the proceedings. The

withdrawal of consent by shareholder(s) during the course of proceedings does not affect the

maintainability of the application [Rajahmundri Electric Supply Corporation v Nageshwara

Rao AIR 1956 SC 213].

In the present case, the application is valid since it has been made by 90 members (beingmore than the eligibility criteria of 1/10th of total number of members).




Such application shall remain valid despite the fact that some of the applicants have

subsequently withdrawn their consents [Rajahmundri Electric Supply Corporations

Nageshwara Rao AIR 1956 SC 213].

It has been assumed that the members making the application have paid all the calls due ontheir shares.

Question 2(d)

(i) Discuss whether property of the company before registration vests in the company

incorporated under the Companies Act, 2013?

(ii) Examine the extent to which the legal representatives of a deceased director against

whom misfeasance proceedings were initiated by the liquidator of the company, under

the Companies Act 1956, can be held liable.

(iii)

Answer the following with reference to a scheme of amalgamation of companies

explaining the relevant provisions of the Companies Act, 1956.

(a) Whether companies being amalgamated must be companies registered in India.

(b)

What is the majority required for approving the scheme of amalgamation in a

meeting of members of a company called as per directions of the Court? Is the

scheme to be approved by preference shareholders?

(c)

When will the Court order dissolution of the Transferor company?

[5+4+6 = 15]

Answer:

(i) As per section 368 of Companies Act, 2013, all the property belonging to the company

before registration, shall pass to the company incorporated under the Companies Act, 2013.

In other words, all the property vested in the company before registration of the company

shall vest in the company as incorporated under the Companies Act, 2013. The provisions of

section 368 shall apply to all property, whether movable or immovable as well as to all

actionable claims.

The effect of section 368 is that there is automatic vesting and divesting of the property. The

company (before registration) is divested of all the properties, and the company

incorporated under the Companies Act, 2013 is vested with all such properties. The vesting of

property is as a result of the statute, and therefore, no registered instrument of transfer is

necessary [Rama Sundari Ray v Syamendra Lal Ray, ILR (1947) 2 Cal 1].

If the constitution of a partnership firm is changed into that of a company by registering under

Part I of Chapter XXI of the Companies Act, 2013, there shall be statutory vesting of title of all

the property of the previous firm in the newly incorporated company without any need for a

separate conveyance deed or sale deed [Vali Pattabhirama Rao v Sri Ramanuja Ginning &

Rice Factory P. Ltd. (1968) 60 Com Cases 568 (AP-DB)].

(ii) Under section 543 of Companies Act, 1956, the Court has the power to initiate

misfeasance proceedings against any delinquent director or any other officer of the

company.

The Supreme Court has held that misfeasance proceedings initiated under section 543




against a director of a company in winding up can be continued on his death against his

legal heirs for the purpose of determining and declaring the loss or damage caused to the

company. The amount declared to be due in the misfeasance proceedings shall be realised

from the estate of the deceased in the hands of his legal representatives [Official Liquidator v

Parthasarathi Sinha (1983) 53 Comp Cas 163 (SC)]. However, such liability shall not extend to

any sum beyond the value of the estate of the deceased in their hands.

(iii)

(a) For effecting the reconstruction of a company or amalgamation of two or more

companies, an application shall be made to the Court under section 391 (Section 394).

The benefit of section 394 is available only if the transferee company (i.e., new company)

is a company within the meaning of Companies Act, 1956. However, the transferor

company may be anybody corporate, whether a company within the meaning of the

Companies Act, 1956 or not. As such, a foreign company can be a 'transferor company'

but not a 'transferee company'. Therefore, a scheme of amalgamation may provide for

transfer of foreign companies to Indian companies.

(b) The scheme shall be approved by a majority of the members, who are present and voting.Such majority of members must also be members representing three-fourths in the value of

members present and voting at the meeting. It is to be noted that members not present in

the meeting or present in the meeting but remaining neutral are not to be counted

[Section 391(2)].

Section 391(2) uses the expression 'member', which includes a preference shareholder

also. As such, both equity and preference shares shall be taken into account. However, if

a separate meeting of preference shareholders and equity shareholders is ordered, then

the scheme shall be approved by preference shareholders and equity shareholders in

their separate meetings.

(c) The order of the Court may provide for the dissolution, without winding up, of any transferor

company [Section 394(1)]. However, the Court will not make such an order unless itreceives a report from the official liquidator to the effect that the affairs of the company

have not been conducted in a manner prejudicial to the interests of its members or to

public interest [Second Proviso to Section 394 (2)].

Question 2(e)

(i)

Elite Ltd. is engaged in the business of construction. Arun, Barun and Kiran, directors of the

Elite Ltd. are holding 75% of the capital of this company. The company passed a resolution

at its general meeting that it would not be interested in a particular contract for

construction of a bridge. Subsequently, the same contract was obtained by Arun, Barun

and Kiran in their own names.

(ii) Shyam, a Director of Radha Studio Ltd., was appointed on 1st April, 2014. One of the terms

of appointment was that in the absence of adequacy of profits or if the company had no

profits in a particular year, he will be paid remuneration in accordance with Schedule V.

For the financial year ended 31st March, 2015, the company suffered heavy losses. Thecompany paid him a remuneration of ` 50 lacs for the financial year 2014-15.

The effective capital of the company is ` 150 crores. Referring to the provisions of

Companies Act, 2013, as contained in Schedule V, examine the validity of the above

payment of remuneration to Shyam.

(iii) The Board of Directors of Laxmi Jewellery Limited propose to donate ` 3,00,000 to a school

established exclusively for the benefit of children of employees and also donate ` 50,000

to a political party during the Financial year ending 31st March, 2010. The average netprofits during the three immediately preceding financial years is ` 40,00,000.




Examine with reference to the provisions of the Companies Act, 2013 whether the

proposed donations are within the powers of the Board of Directors of the Company.

[4+5+6 = 15]

Answer:

(i) The Majority Rule governs the internal management of the company. As such if any

wrong is done to the company, the proper plaintiff to institute a suit is the company itself and

the Court would not interfere at the instance of the individual shareholders [Foss v Harbottle

(1843) 2 Hare 461]. However, if the majority misuses its powers to defraud or oppress the

minority, an action can be brought by an individual member.

Three directors holding 75% of the share capital of the company used their positions as

directors and obtained a contract in their own names. As it amounted to breach of duty

towards the company, they called a general meeting in which a resolution was passed to the

effect that the company had no interest in the contract. It was held that directors utilised the

contract belonging to the company for their personal gain and it amounted to a fraud on the

minority. The company could claim profits realised by the directors [Cook Deeks (1916)1 AC554].

The facts of the given case are identical to the facts specified in the above case and so it can

be said that the minority shareholders will succeed.

(ii) Where a company does not make any profits or its profits are inadequate, it may pay

remuneration to its managing director or whole time director or manager in accordance with

Section II of Part II of Schedule V.

The payment of remuneration as per Schedule V is possible only if the company has not made

any default in repayment of any of its debts (including public deposits) or debentures or

interest payable thereon for a continuous period of 30 days in the preceding financial yearbefore the date of appointment of such managerial person.

In the present case, the effective capital of the company is ` 150 crores. As per Schedule V, a

company having effective capital of ` 100 crore or more, but less than ` 250 crore may pay to

its managerial person, a maximum remuneration of ` 60 lakh per year. Thus, payment of ` 50

lakh for the financial year 2014-15 is within the limit specified under Section II of Part II of

Schedule V, and is, therefore, valid. No approval of the Central Government shall be required

for such payment.

(iii)

As per section 181 of the Companies Act, 2013, without the prior consent of the members

in the general meeting, the Board shall not contribute to bona fide charitable and other

funds, if the amounts contributed in a financial year will exceed 5% of average net profitsduring immediately preceding 3 financial years:

In the given case, donation of ` 3,00,000 to a school run exclusively for the benefit of children

of employees amounts to welfare expenses for the employees by which the employees are

likely to receive benefits, and there will be an inducement on the part of the employees toincrease the effort. As such, the donation of ` 3,00,000 is outside the purview of charitable

donations. Therefore, donations of ` 3,00,000 to the school established exclusively for the

benefit of children of employees is within the powers of the Board, and so the permission of

members in general meeting is not required.

As per section 182 of the Companies Act, 2013, a company shall not make a political

contribution unless all the following conditions are satisfied.




(a) The company is not a Government company.

(b) The company has been in existence for 3 or more financial years.

(c) The aggregate amount of political contribution in a financial year shall not exceed 7.5% of

average net profits during immediately preceding 3 financial years.

(d) The Board shall make a political contribution only by passing a resolution at a Board

meeting.(e) The company shall disclose in its profit and loss account the amount of political

contribution and the name of the political party or the person to whom such amount has

been contributed.

In the given case, the company satisfies all the conditions prescribed under section 182 of theCompanies Act, 2013. Accordingly, it can make political donations upto ` 3,00,000 (being

7.5% of ` 40,00,000). As in the given case, the Board has donated only ` 50,000, the donation is

within the limits and is in accordance with section 182 of the Companies Act, 2013. The Board

shall make such political contribution only by passing a resolution at a Board meeting. Further,

adequate disclosure shall be made in the profit and loss account.


Question 3(a)

1. What is Project Governance? What are the benefits of Project Governance?

2. “Corporate Social Responsibility is to be considered as an investment and not as a

charity” – Discuss

[4+6 = 10].

Answer:

1. Project Governance extends the principle of Governance into both the management of

individual projects via Governance structures, and the management of projects at the

business level, for example via Business Reviews of Projects. Today, many organisations are

developing models for ‘Project Governance Structures’, which can be different to a

traditional Organisation Structure in that it defines accountabilities and responsibilities for

strategic decision-making across the project. This can be particularly useful to project

management processes such as change control and strategic (project) decision-making.

When implemented well, it can have a significantly positive effect on the quality and

speed of decision making on significant issues on projects.

Benefits of Project governance:

Project governance will:

i) Outline the relationships between all internal and external groups involved in the

project.

ii) Describe the proper flow of information regarding the project to all stakeholders.

iii) Ensure the appropriate review of issues encountered within each project.

iv) Ensure that required approvals and direction for the project is obtained at each

appropriate stage of the project.

2.

The originally defined concept of CSR needs to be interpreted and dimensionalised in the

broader conceptual framework of how the corporate embed their corporate values as a new

strategic asset, to build a basis for trust and cooperation within the wider stakeholder

community.

Though there have been evidences that record a paradigm shift from charity to a long-term




strategy, yet the concept still is believed to be strongly linked to philanthropy. There is a need

to bring about an attitudinal change in people about the concept.

By having more coherent and ethically driven discourses on CSR, it has to be understood that

CSR is about how corporates place their business ethics and behaviors to balance business

growth and commercial success with a positive change in the stakeholder community.

Several corporates today have specific departments to operationalise CSR. There are either

foundations or trusts or a separate department within an organisation that looks into

implementation of practices.

Being treated as a separate entity, there is always a flexibility and independence to carry out

the tasks. But often these entities work in isolation without creating a synergy with the other

departments of the corporate. There is a need to understand that CSR is not only a pure

management directive but it is something that is central to the company and has to be

embedded in the core values and principles of the corporate.

Whatever corporates do within the purview of CSR has to be related to core business. It has toutilise things at which corporates are good; it has to be something that takes advantage of

the core skills and competencies of the companies. It has to be a mandate of the entire

organisation and its scope does not simply begin and end with one department in the

organisation.

Charity means the act of donating money, goods, time or effort to support a charitable cause

in regard to a defined objective. Charity can be equated with benevolence and charity for

the poor and needy. It can be any selfless giving towards any kind of social need that is not

served, underserved, or perceived as unserved or underserved. Charity can be by any

individual or by a corporate.

Corporate Social Responsibility is about how a company aligns their values to social causes byincluding and collaborating with their investors, suppliers, employees, regulators and the

society as a whole. The investment in CSR may be on people centric issues and/or planet

issues. A CSR initiative of a corporate is not a selfless act of giving; companies derive long-term

benefits from the CSR initiatives and it is this enlightened self interest which is driving the CSR

initiatives in companies.

Question 3(b)

1. What is Corporate Governance? What is the need for Corporate Governance in India?

2. State the advantages of Good Corporate Citizenship.

[5+5 = 10]

Answer:

1. Corporate governance is:

(i) The system by which companies are directed and controlled -The Cadbury Report, 1992.

(ii) The process of supervision and control intended to ensure that the company‘s

management acts in accordance with the interests of shareholders -Parkinson, 1994.

(iii) Corporate Governance is the acceptance by management of the inalienable rights of

shareholders as the true owners of the corporation and of their own role as trustees on

behalf of the shareholders. It is about commitment to values, about ethical business

conduct and about making a distinction between personal and corporate funds in the




management of a company – Report of N.R.Narayana Murthy Committee on Corporate

Governance constituted by SEBI (2003).

Need for Corporate Governance:

Corporate Governance is integral to the existence of the company. It is needed to create a

corporate culture of transparency, accountability and disclosure.

i. Corporate Performance: Improved governance structures and processes help ensure

quality decision-making, encourage effective succession planning for senior

management and enhance the long-term prosperity of companies, independent of

the type of company and its sources of finance.

ii.

Enhanced Investor Trust: Investors consider Corporate Governance as important as

financial performance when evaluating companies for investment.

iii. Combating Corruption: Companies that are transparent, and have sound system that

provide full disclosure of accounting and auditing procedures, allow transparency in

all business transactions, provide environment where corruption will certainly fade out.

iv.

Better Access to Global Market: A Good Corporate Governance system attractsinvestment from global investors, which subsequently leads to greater efficiencies in

the financial sector.

v. Enhancing Enterprise Valuation: Improved management accountability and

operational transparency fulfill investors ‘expectations and confidence on

management and corporations, and return, increase the value of corporations.

vi. Accountability: An Investor relation ‘is essential part of good Corporate Governance.

Investors have directly/indirectly entrusted management of the company for creating

enhanced value for their investment.

vii. Easy Finance from Institutions: Evidence indicates that well-governed companies

receive higher market valuations.

viii.

Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governanceensures efficient risk mitigation system in place

2. Business cannot exist in isolation; business cannot be oblivious to societal development. The

social responsibility of business can be integrated into the business purpose so as to build a

positive synergy between the two.

i. CSR creates a favourable public image, which attracts customers. Reputation or

brand equity of the products of a company which understands and demonstrates its

social responsibilities is very high. Customers trust the products of such a company and

are willing to pay a premium on its products. Organizations that perform well with

regard to CSR can build reputation, while those that perform poorly can damagebrand and company value when exposed. Brand equity is founded on values such as

trust, credibility, reliability, quality and consistency.

ii. CSR activities have its advantages. It builds up a positive image encouraging social

involvement of employees, which in turn develops a sense of loyalty towards the

organization, helping in creating a dedicated work force proud of its company.

Employees like to contribute to the cause of creating a better society. Employees

become champions of a company for which they are proud to work.

iii. Society gains through better neighbourhoods and employment opportunities, while

the organization benefits from a better community, which is the main source of its

workforce and the consumer of its products.




iv.

Public needs have changed leading to changed expectations from consumers. The

industry/business owes its very existence to society and has to respond to needs of the

society.

v.

The company‘s social involvement discourages excessive regulation or intervention

from the Government or statutory bodies, and hence gives greater freedom andflexibility in decision-making.

vi. The internal activities of the organization have an impact on the external environment,

since the society is an inter-dependent system.

vii. A business organization has a great deal of power and money, entrusted upon it by

the society and should be accompanied by an equal amount of responsibility. In

other words, there should be a balance between the authority and responsibility.

viii. The good public image secured by one organization by their social responsiveness

encourages other organizations in the neighbor hood or in the professional group to

adapt themselves to achieve their social responsiveness.

ix. The atmosphere of social responsiveness encourages co-operative attitude between

groups of companies. One company can advise or solve social problems that other

organizations could not solve.

x. Companies can better address the grievances of its employees and create

employment opportunities for the unemployed.

xi. A company with its ―ear to the ground‖ through regular stakeholder dialogue is in a

better position to anticipate and respond to regulatory, economic, social and

environmental change that may occur.

xii. Financial institutions are increasingly incorporating social and environmental criteria

into their assessment of projects. When making decisions about where to place their

money, investors are looking for indicators of effective CSR management.

In a number of jurisdictions, governments have expedited approval processes for firms thathave undertaken social and environmental activities beyond those required by regulation.

Question 3(c)

1. „Corporate Governance is about promoting fairness‟. Is it truly beneficial?

2. Write a short note on SA 8000. [6+4 = 10]

Answer:

1. Corporate Governance deals with promoting corporate fairness, transparency and

accountability. It is concerned with structures and processes for decision-making,

accountability, control and behavior at the top level of the organizations. It influences how

the objectives of an organization are set and achieved, how risk is monitored and assessed

and how performance is optimized. It is truly beneficial and it has the following benefits:

1. Improved Financial Performance: Socially responsible business practices are linked to

positive financial performance.

2. Operating Cost Reduction: CSR initiatives can help to reduce operating costs.

3. Brand Image and Reputation: CSR helps a company to increase its brand image and

reputation among the public, which in turn increase its ability to attract investors and

trading partners. Proactive CSR Practices would lead to a favourable public image

resulting in various positive outcomes like consumer and retailer loyalty, easier acceptance




of new products and services, market access and preferential allocation of investment

funds.

4. Increased Sales & Customer Loyalty: Businesses must first satisfy customer's key buying

criteria, i.e., price, quality, safety and convenience.

5. Productivity and Quality: Improved working conditions, reduced environmental impacts or

increased employee involvement in decision-making, leads to (a) increased productivity,

and (b) reduced errors.

6. Ability to attract and retain employees: Companies perceived to have strong CSR

commitments find it easier to recruit and retain employees, resulting in reduction in

turnover and associated recruitment and training costs.

2. Social Accountability 8000:

SA 8000 is a comprehensive, global, verifiable performance standard for auditing and

certifying compliance with corporate responsibility. The heart of the standard is the belief that all workplaces should be managed in such a

manner that basic human rights are supported and that management is prepared to accept

accountability for this.

SA 8000 is an international standard for improving working conditions. This standard is based

on the principles of international human rights norms as described in International Labour

Organisation Conventions, the UN Convention on the Rights of the Child and the Universal

Declaration of Human Rights.

The requirements of this standard apply regardless of geographic location, industry sector, or

company size.





L E V E L C

KNOWLEDGE

What you are expected toknow

List Make a list of



COMPREHENSION


understand






consideration


something

APPLICATION


apply

your knowledge


Calculate Ascertain or reckon mathematicallyDemonstrate Prove with certainty or exhibit by practicalmeans





ANALYSIS



have learned



Compareand contrast

Show the similarities and/or differencesbetween


Priorit ise Place in order of priority or sequence foraction


SYNTHESIS


utilize the informationgathered to reach an

optimum


reasoning




EVALUATION



make decisions or

recommendations













(a) Poppy Limited, a banking company maintained the record of all transactions for a period

of 3 years from the date of cessation of the transactions between the clients and the

company. Decide whether the Company has fulfilled its obligation under the provisions of

the Prevention of Money Laundering Act, 2002. 3

(b) Mrs. Sukla, a resident outside India, is likely to inherit from her father some immovable

property in India. Are there any restrictions under the provisions of the Foreign Exchange

Management Act, 1999 in acquiring or holding such property? State whether Mrs. Sukla

can sell the property and repatriate outside India the sale proceeds. 3

(c) Indus Inc. is a company registered in USA and carrying on Trading Activity, with Principal

Place of Business in Mumbai. Since the company did not obtain registration or make

arrangement to file Return, the State VAT Officer having jurisdiction, intends to serve show

cause notice on the Foreign Company. As Standing Counsel for the Department, advise

the VAT Officer on valid service of Notice. 3

(d) The Super Traders Association was constituted by two Joint Hindu Families consisting of 51

major and 5 minor members. The Association was carrying the business of trading as

retailers with the object for acquisitions of gain. The Association was not registered as a

company under the Companies Act or other law.

State whether Super Traders Association is having any legal status? Will there be any

change in the status of this Association if the members of the Super Traders Association is

subsequently reduced to 45. 3

(e) Desert Rose Limited submitted the documents for incorporation on 5th October, 2014. It

was incorporated and certificate of incorporation of the company was issued by the

Registrar on 20th October, 2014. The company on 14th October, 2014 entered into a

contract which created its contractual liabilities. The company denies the said liability onthe ground that company is not bound by the contract entered into prior to issuing of

certificate of incorporation. Decide under the provisions of the Companies Act, 2013

whether the company can be exempted from the said contractual liability. 3

(f) “In the long run those business who do not respond to society’s needs favorably, will

survive”. Comment 3

(g) How the meetings of the audit committee should be undertaken as per clause 49 of listing

agreement. 2

Answer:




(a) As per section 12, the records of prescribed transactions shall be maintained for a periodof 5 years from the date of such transaction (viz. the transaction between the clients and the

banking company).

In the given case, Poppy Limited has maintained the records of transactions only for a period

of 3 years from the date of cessation of the transactions. Thus, Poppy Limited has failed to

maintain the records for the period of 5 years as prescribed under section 12. Therefore,Poppy Limited has defaulted in compliance of section 12.

(b) As per Section 6(5), a person resident outside India may hold, own or transfer any

immovable property situated in India if such property is inherited from a person resident inIndia.

Accordingly, Mrs. Sukla is entitled to acquire as well as hold the immovable property in India

inherited by her. Also, Mrs. Sukla is entitled to sell the immovable property in India and

repatriate outside India the sale proceeds of such immovable property.

(c) The VAT Officer is advised to serve the show cause notice on the foreign company in

accordance with the provisions of section 383 of the Companies Act, 2013, i.e. by addressingit to the person whose name and address had been delivered to the Registrar under section

380, and sending it to such person by -

(i) post; or

(ii) hand delivery; or(iii) electronic mode, viz. e-mail.

(d) Super Traders Association is an illegal association since the number of adult membersexceeds 50.

Effect of subsequent reduction in number of members would not make any change in the

status of Super Traders Association, since an illegal association continues to be an illegal

association even though, subsequently, the number of members is reduced below 50.

(e) The company is not bound by the contract entered into on 20.10.2014 since a

pre-incorporation contract is not binding on the company, as the company was not inexistence when such contract was entered into. Thus, the company is exempted from the

said liability.

However, the company shall be bound by the contract entered into on 20.10.2014, if The

company, after incorporation, has adopted the pre-incorporation contract in accordancewith the provisions of Sec. 15 and 19 of Specific Relief Act, 1963.

(f) Society gives business the license to exist which may be revoked or amended at anytime

if the business fails to fulfill the expectations of the society. Thus, in order to retain its powers, a

business organization should fulfill its social responsibility. The iron law states that, in the long

run, those who do not use power in a manner which society considers responsible will tend to

lose it. The implication of the ’iron rule’ is that the business organizations must recognize that

avoiding social responsibility would lead to the gradual erosion of power. Hence, the given

statement is incorrect.

(g) The Audit Committee should meet at least four times in a year and not more than four

months shall elapse between two meetings. The quorum shall be either two members or one

third of the members of the audit committee whichever is greater, but there should be a

minimum of two independent members present.





Question 2(a)

(i) Examine the validity of the resolution passed at the Annual General Meeting of a public

company for payment of dividend at a rate higher than that recommended by the board of

directors.

(ii) Explain the manner in which the 'Accounting Standards' may be prescribed under the

Companies Act, 2013.

(iii) Abhishek Company Ltd. in its first general meeting appointed six directors whose period

of office is liable to be determined by rotation. Briefly explain the procedure and rules

regarding retirement of these directors.

[4+6+5 = 15]

Answer:

(i) As per Regulation 80 contained in Table F of Schedule I to the Companies Act, 2013, acompany in general meeting may declare dividends, but no dividend shall exceed the

amount recommended by the Board. Following conclusions are worth noting:

(a) The power to declare dividend vests in the members, but the members can exercise suchpower only if the dividend is proposed/recommended by the Board.

(b) The rate of dividend proposed/recommended by the Board may be reduced by the

members.(c)

The rate of dividend proposed/recommended by the Board cannot be increased by the

members.

(d) Any provision in the articles, which authorises the members to declare dividend higher

than the rate recommended by the Board, is void.

Therefore, in the given case, the resolution passed at the Annual General Meeting declaring

dividend at a rate higher than that recommended by the Board of directors is not valid.

(ii) The Accounting Standards are prescribed under section 133 of the Companies Act, 2013.

The provisions of section 133 are explained as follows:

The power to prescribe the accounting standards vests with the Central Government.

Stages in prescribing the accounting standards are as follows:

(a) At the first stage, the Institute of Chartered Accountants of India (ICAI) recommends

the Standards of Accounting.

(b) At the second stage, these Standards of Accounting shall be examined by theNational Financial Reporting Authority (NFRA). NFRA may also make its own

recommendations.

(c) At the third stage, the Central Government examines the recommendations made by

NFRA. Then, the Central Government may prescribe, after consultation with NFRA, the

Accounting Standards.

The standards of accounting as specified under the Companies Act, 1956 shall be

deemed to be the accounting standards until accounting standards are specified by the

Central Government under section 133 of the Companies Act, 2013 (Rule 7(1) of theCompanies (Accounts) Rule, 2014).




Till the National Financial Reporting Authority is constituted under section 132 of the Act,

the Central Government may prescribe the standards of accounting or any addendum

thereto, as recommended by ICAI in consultation with and after examination of therecommendations made by the National Advisory Committee on Accounting Standards

constituted under section 210A of the Companies Act, 1956 (Rule 7(2) of the Companies

(Accounts) Rule, 2014).

(iii) Not less than 2/3 rd of total number of directors shall be the directors whose period of

office is liable to determination by retirement by rotation (any fraction contained in that 2/3 rd

shall be rounded off as 1).

Such directors are referred to as rotational directors. However, the articles of a company may

provide for greater number of rotational directors. Articles may even provide that all the

directors shall be rotational directors [Section 152(6)].

As per 152(6), at the first annual general meeting and every subsequent annual general

meeting, 1/3rd (or nearest to 1/3 rd) of directors liable to retire by rotation shall retire from the

office. The directors liable to retire by rotation shall be those who have been longest in theoffice. In case, two or more directors were appointed on the same day, the directors liable to

retire shall be determined by an agreement between them. In the absence of any such

agreement, their names shall be determined by lots.

In the given case, it is given that the first general meeting has appointed 6 directors whoseperiod of office is liable to be determined by rotation. It means that all the 6 directors

appointed in the first general meeting shall be the rotational directors. Therefore, 2 directors

(1/3rd of 6) shall retire at the ensuing annual general meeting. These directors shall be eligiblefor reappointment.

A separate resolution shall be moved for reappointment of both the directors (Section 162 of

the Companies Act, 2013).

Question 2(b)

(i) A company is required to pay dividend to its shareholders within 30 days of its

declaration. State the circumstances when a company will not be deemed to have

committed any offence even if it does not pay within 30 days.

(ii) What are the legal provisions to be complied with, in respect to remuneration of auditors.

(iii) In Arjun Ltd. three Directors were to be appointed. The item was included in agenda for

the Annual General Meeting scheduled on 30th September, 2014, under the category of

'Ordinary Business'. All the three persons as proposed by the Board of Directors were elected

as Directors of the company by passing a 'single resolution' avoiding the repetition(multiplicity) of resolution. After the three directors joined the Board, certain members

objected to their appointment and the resolution. Examine the provisions of Companies Act,

2013 and decide whether the contention of the members shall be tenable and whether both

the appointment of Directors and the 'single resolution' passed at the Company's Annual

General Meeting shall be void.

[6+5+4 = 15]

Answer:

(i)

(a) Time limit for payment of dividend - The dividend shall be paid within 30 days from the

date of declaration of dividend.




(b) Exceptions - In the following cases, no default is deemed to have been committed by thecompany, even though the dividend is not paid within 30 days of its declaration:

1. Where dividend could not be paid by reason of the operation of any law.2.

Where a shareholder has given directions to the company regarding payment of

dividend, but those directions cannot be complied with.

3.

Where dividend is lawfully adjusted by the company against any sum due to it fromthe shareholder.

4.

Where there is a dispute regarding the right to receive the dividend.

5. Where the non-payment of dividend is not due to any default of the company.

(c) Penalty for non-payment

1. Director: Every director who is knowingly a party to the default shall be liable for simpleimprisonment upto 2 years and a fine of ` 1,000 per day for each day of default.

2. Company: The Company shall be liable to pay simple interest @ 18% per annum during

the period for which the default continues.

(ii) The provisions relating to remuneration of auditors are explained as follows:

1. Remuneration to be fixed in general meeting - The remuneration of the auditor of a

company shall be fixed -(a)

in the general meeting; or

(b) in such manner as may be decided in the general meeting.

2. Remuneration to be fixed by the Board - In case, the first auditor is appointed by theBoard, the remuneration of the first auditor shall be fixed by the Board.

3. Certain sums to be included in remuneration

The remuneration shall, in addition to the fee payable to an auditor, include -(a) the expenses, if any, incurred by the auditor in connection with the audit of the

company; and(b)

any facility extended to the auditor.

However, the remuneration shall not include any remuneration paid to the auditor for

any other service rendered by him at the request of the company.

(iii) At a general meeting, two or more persons cannot be appointed as directors by a single

resolution unless a resolution that appointment shall be so made has first been agreed to by

the meeting without any vote being cast against it. A resolution moved in contravention of

this provision shall be void, whether or not objection was raised at the time when suchresolution was passed (Section 162).

In the present case, appointment of 3 directors has been made by passing a single resolution.The resolution is void since before moving the resolution for appointment of 3 directors by a

single resolution, no resolution was passed to the effect that the appointment of 3 directors

shall be made by a single resolution. It is immaterial that no member objected to such

appointments.

Thus, the contention of the members that the appointment of the 3 directors is void, is correct.

Also, the single resolution passed for appointments, is void.

Question 2(c)

(i) Is it possible for the Board of directors of the company to revoke the dividend declared atthe Annual General Meeting?




(ii) Is it possible for a retiring director to continue in his office beyond the date of the annual

general meeting which had to be adjourned due to disturbances at the meeting? Explain.

(iii) A Public Company secures residential accommodation for the use of its managing

director by entering into a license arrangement under which the company has to deposit a

certain amount with the landlord to secure compliance with the terms of the licenseagreement. Can it be considered as a loan to a director?

[5+7+3 = 15]

Answer:

(i) No revocation of dividend

Revocation of dividend is not possible. Section 127 of the Companies Act, 2013 requires that

dividend once declared must be paid within 30 days of its declaration. Section 127 of theCompanies Act, 2013 also contains certain grounds on which non-payment of dividend does

not result in a penalty. 'Revocation of dividend' is not a ground for non-payment of dividend

as per Section 127 of the Companies Act, 2013. Therefore, dividend once declared becomesa debt due from the company and so it cannot be revoked.

Exceptions

In the following cases, the declared dividend may be revoked:

(a) Where declaration of dividend is ultra vires (i.e., where dividend is declared although the

company has not earned sufficient profits), the declared dividend can be revoked.However, if illegally declared dividend is paid, the directors shall be liable to indemnify the

company, i.e., they shall be personally liable.

(b) Where the company ceases to be a going concern, declared dividend may be revoked.

For example, if, after declaration of dividend, but before payment of dividend, certainevents happen which make the 'going concern' assumption invalid (e.g., loss of

undertaking of the company by fire), declared dividend may be revoked.

Complaint relating to non-payment of dividend

(a) Right to complain: Where an application for transfer of shares {i.e., transfer deed) ispresented to the company, but the company wrongfully refuses to transfer the shares,

complaint for non-payment of dividends can be made by the transferor and not by the

transferee.

(b)

Jurisdiction of Court: Failure to pay dividend arises at the place where the registered office

of the company is situated. Therefore, only the court having jurisdiction over the registeredoffice can entertain the complaint (Hanuman Prasad Gupta v Hiralal).

(ii) At every annual general meeting, 1/3rd (or nearest to 1/3rd) of rotational directors shall

retire from office [Section 152(6)]. If the place of retiring director is not filled and the meeting

has not resolved not to fill the vacancy, the meeting shall be adjourned automatically to thenext week at the same time and place or if that day is a public holiday, then to next

succeeding day which is not a public holiday. If at the adjourned meeting also, the place of

retiring director is not filled and the meeting has not resolved not to fill the vacancy, the

retiring directors shall be deemed to be reappointed [Section 152(7)].

Where the company does not hold annual general meeting, the directors liable to retire at

the annual general meeting cannot continue in office [B.R. Kundra v Motion PicturesAssociation (1976) 46 Comp Cas 339].




In the given case the annual general meeting has been duly convened and therefore the

directors have fulfilled their obligation of convening the annual general meeting. So, pending

the decision in the annual general meeting, a retiring director can continue in office evenafter the date of annual general meeting. His reappointment depends upon the decision

taken in the adjourned annual general meeting and may be discussed as follows:

(a) If the adjourned meeting resolves to reappoint him, he shall be reappointed.(b)

If the resolution for the reappointment of retiring director is lost in the adjourned annual

general meeting, he shall not be reappointed.

(c) If no resolution is passed at the adjourned meeting relating to his appointment and theadjourned meeting does not resolve not to fill the vacancy, he shall be automatically

reappointed. However, the automatic reappointment shall not apply in the following

cases:

(i) Where a resolution for his appointment was put and lost.

(ii) Where a resolution is required for his appointment.(iii)

Where he is disqualified for appointment.

(iv) Where the retiring director has, in writing, expressed his unwillingness to be

reappointed.(v)

Where a resolution in contravention of section 162 is passed.

(iii) As per section 185 of the Companies Act, 2013, no company shall, directly or indirectly,

make any loan to a director.

In the present case, the company has provided the managing director with a housing

accommodation. It does not amount to a loan because of the following reasons:

The company has not given any deposit or advance to the managing director. The

amount deposited with the landlord cannot be said to be an 'indirect loan' to the

managing director.

It is a usual practice to give a security deposit to the landlord with whom a rent or lease

agreement is entered into. Thus, the company has made the security deposit on account

of bonafide business considerations.

It is of no concern of the managing director as to the terms on which the company

secures residential accommodation for him.

It is the company and not the director who has entered into the lease agreement. Therefore,

the company can at anytime use the accommodation for any other purpose and the

managing director will have to vacate it, as and when desired by the company.

Question 2(d)

(i) Notice has been received from a member proposing himself for appointment as a

director after the issue of notice convening the annual general meeting. As a secretary of a

public company, how will you deal with the above situation?

(ii) Yash, one of the directors of the company, sends a letter to the company secretary for

convening the Board meeting at an early date. Comment.

(iii) Advise M/s Super Flop Ltd. in respect of payment of remuneration of ` 40,000 per month to

the whole time director of the company running in loss and having an effective capital of `

95.00 lacs.

[6+4+5 = 15]




Answer:

(i) Section 160 recognises the right of a person, who is not a retiring director, to stand fordirectorship. A notice received under section 160 shall be valid, if it complies with the following

requirements:

The notice is given at least 14 days before the general meeting. It is deposited at the registered office of the company.

The notice is signed by the person eligible to give notice. A sum of ` 1 lakh or such higher amount as may be prescribed, is deposited along with the

notice.

As per Section 101, the notice of every general meeting shall be sent by the company to the

members at least 21 clear days before the meeting. However, section 160 does not require

that the notice to be given to the company under section 160 must be received by thecompany before issue of notice of the general meeting by the company.

In the present case, the notice under section 160 has been received by the company from a

member after the company has issued the notice of the annual general meeting. The noticegiven by the member shall be in accordance with the provisions of section 160 if it is received

by the company at least 14 days before the general meeting and the notice complies with

other requirements of section 160. In case, the notice given by the member is in accordancewith the provisions of section 160, the company shall inform its members about the

candidature of the proposed director by serving individual notices or by advertisement in

accordance with the provisions of section 160 read with Rule 13 of the Companies

(Appointment and Qualification of Directors) Rules, 2014.

(ii) Regulation 67 of Table F provides that any director may requisition a Board meeting. On

such requisition -

(a) the manager or the secretary shall summon the Board meeting; and

(b)

any director may summon the Board meeting.

However, neither the Companies Act, 2013 nor Table F contains any provision regardingpostponement of a Board meeting or convening a Board meeting at an early date. Thus, a

Board meeting may be convened at an early date if the articles of the company contain a

provision in this regard. However, in the absence of any provision in the articles, the secretary

should consult the chairman or the managing director and discuss the suitability of holding the

Board meeting at an early date.

(iii) Remuneration to a whole time director or managing director may be paid by way of

monthly payment or/and specified percentage of net profits. However, except with theapproval of the company in general meeting, such remuneration shall not exceed –

(a) 5% of net profits, if the company has one whole time director or managing director ormanager; or

(b) 10% of net profits, if the company has more than one whole time director or managing

director or manager, taken together.

Section II of Part II of Schedule V empowers a company to pay minimum remuneration to its

whole time director, managing director or manager, even in case of inadequacy of profits or

in case of a loss. As per Section II of Part II of Schedule V, the remuneration to a whole timedirector depends upon the effective capital of the company. In case of a company havingan effective capital of less than ` 5 crore, the remuneration payable to whole time director

shall not exceed ` 30 Lakh per year.

In the given case, M/s Super Flop Ltd. has suffered a loss and so it may pay remuneration to its




whole time director in accordance with Section II of Part II of Schedule V. Since the effectivecapital of the M/s Super Flop Ltd. is less than ` 5 crore, it may pay a maximum of ` 30 Lakh per

year to its whole time director. Since the remuneration proposed to be paid to the whole timedirector is ` 40,000 per month, it is permissible, and therefore, no approval of the Central

Government is required.

Question 2(e)

(i) The Board of directors of M/s. Serious Consultants Limited, registered in Calcutta, proposes

to hold the next Board meeting in the month of December, 2014. They seek your advise in

respect of the following matters:

1. Can the Board meeting be held in Chennai, when all the directors of the company reside

at Calcutta?

2. Whether the Board meeting can be called on a national holiday and that too after

business hours as the majority of the directors of the company have gone to Chennai on

vacation.

3. Is it necessary that the notice of the Board meeting should specify the nature of business to

be transacted?

Advise with reference to the relevant provisions of the Companies Act, 2013.

(ii) The Central Government has powers to fix limit on remuneration of managerial personnel.

Comment.

(iii) Explain the duty of the Registrar to make a report on the inspection made by him.

[(2.5+3+2.5) + 4+3 = 15]

Answer:

(i) There is no provision in the Companies -Act, 2013 which requires that a Board meeting

shall be held -

(a)

only on a day that is not a national holiday;(b) only at the registered office of the company or at any other place within the city, town or

village in which the registered office of the company is situated;(c)

only during business hours.

The answer to the given problem is as under:

1. Section 96 requires that an annual general meeting shall be held only at the registered

office of the company or at any other place within the city, town or village in which the

registered office of the company is situated. However, there is no similar provision in respect of

holding of a Board meeting. As such, a Board meeting can be held anywhere in India or even

outside India.

2. As per section 174, if a Board meeting could not be held for want of quorum, then, unlessthe article: otherwise provide, the meeting shall automatically stand adjourned to the same

day, time and place in the next week, or if that day is a national holiday, then to next

succeeding day, which is not a national holiday. It means that a Board meeting adjourned forwant of quorum can be held only on a day which is not a national holiday. However, there is

nothing in the Act which prohibits the holding of an original Board meeting on a national

holiday. Similarly, the Act does not require that a Board meeting shall be held only during

business hours.In the instant case, the directors intend to hold a Board meeting on a national holiday and

after business hours, which is permissible.

3. No form or contents of notice has been specified by the Act. Agenda of a Board meetingis not required to be sent along with the notice of a Board meeting unless there is some




express provision of the Ac which requires a specific notice to move a resolution at a Boardmeeting.

Therefore, the notice of Board meeting need not specify the nature of business to be

transacted.

(ii) The Central Government or a company may, while according its approval under section

196, to any appointment or to any remuneration under section 197 in respect of cases wherethe company has inadequate or no profits, fix the remuneration within the limits specified inthis Act, at such amount or percentage of profits of the company, as it may deem fit and

while fixing the remuneration, the Central Government or the company shall have regard to

the following:(a)

The financial position of the company

(b) The remuneration or commission drawn by the individual concerned in any other

capacity

(c) The remuneration or commission drawn by him from any other company

(d) Professional qualifications and experience of the individual concerned(e) Such other matters as may be prescribed.

3. The duties of the Registrar is as follows: (a)

After the inspection of the books of account or an inquiry under section 206 and other

books and papers of the company under section 207, the Registrar or inspector shall

submit a report in writing to the Central Government along with such documents, as he

may deem fit.(b)

The report of the Registrar may include a recommendation that further investigation into

the affairs of the company is necessary. The Registrar shall state the reasons supporting

such recommendation.


Question 3(a)

(i) Analyze CSR as a Corporate Brand

(ii) Discuss the relevance of OECD Guidelines for Corporate Governance of State-owned

enterprises.

[5+5 =10]

Answer

(i) CSR as a Corporate Brand:

In an economy where corporates strive for a unique selling proposition to differentiate

themselves from their competitors, CSR initiatives enable corporates to build a stronger brandthat resonates with key external stake-holders – customers, general public and the

government.

Businesses are recognising that adopting an effective approach to CSR can open up new

opportunities, and increasingly contribute to the corporates’ ability to attract passionate and

committed workforces.

Corporates in India are also realising that their reputation is intrinsically connected with how

well they consider the effects of their activities on those with whom they interact. Wherever

the corporates fail to involve parties, affected by their activities, it may put at risk their ability tocreate wealth for themselves and society.




Therefore, in terms of business, CSR is essentially a strategic approach for firms to anticipate

and address issues associated with their interactions with others and, through those

interactions, to succeed in their business endeavours. The idea that CSR is important toprofitability and can prevent the loss of customers, shareholders, and even employees is

gaining increasing acceptance.

Further, CSR can help to boost the employee morale in the organisation and create a positivebrand-centric corporate culture in the organisation. By developing and implementing CSR

initiatives, corporates feel contented and proud, and this pride trickles down to their

employees.

The sense of fulfilling the social responsibility leaves them with a feeling of elation. Moreover it

serves as a soothing diversion from the mundane workplace routine and gives one a feeling of

satisfaction and a meaning to their lives.

(ii) The relevance of OECD Guidelines for Corporate Governance of State-owned enterprises:

Many of the developing countries still continue to have a dominant presence of state-owned

enterprises. Hence, OECD thought it appropriate to evolve a set of governance guidelines for

the state-owned enterprises as it did for the private enterprises in member countries.According to OECD, A major challenge is to find a balance between the state’s responsibility

for actively exercising its ownership functions, such as, the nomination and election of the

board, while at the same time refraining from imposing undue political interference in the

management of the company. Another important challenge is to ensure that there is a level

playing field in markets where private sector companies can compete with the state-owned

enterprises, and that governments do not distort competition in the way they use their

regulatory or supervisory powers.’

According to OECD, the guidelines ‘suggest that the state should exercise its ownership

functions through a centralized ownership entity, or effectively co-ordinated entities, which

should act independently and in accordance with a publicly disclosed ownership policy. Theguidelines also suggest the strict separation of the state’s ownership and regulatory functions.

If properly implemented, these and other recommended reforms would go a long way to

ensure that state ownership is exercised in a professional and accountable manner, and that

the state plays a positive role in improving corporate governance across all sectors of our

economies. The result would be healthier, more competitive, and transparent enterprises’.

The major recommendations in OECD guidelines are as discussed below:

Ensuring an effective legal and regulatory framework for state-owned enterprises

There should be a clear separation between the state’s ownership function and other

state functions that may influence the conditions for state-owned enterprises, particularly

with regard to market regulation.

State-owned Enterprises should not be exempt from the application of general laws andregulations. Stakeholders including competitors should have access to efficient redress and

an even-handed ruling when they believe that their rights have been violated.

State-owned Enterprises should face competitive conditions regarding access to finance. Their

relations with state-owned banks, state-owned financial institutions, and other state-ownedcompanies, should be based on purely commercial grounds.

Question 3(b)

(i) What is the role of SEBI in promoting Corporate Governance?

(ii) What is Corporate Citizenship? Is this fundamentally different from Corporate SocialResponsibility?




[5+5 = 10]

Answer

(i) The role of SEBI in promoting Corporate Governance:

Good Governance in capital market has always been high on the agenda of SEBI. This isevident 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 madeapplicable 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 withthe needs of a dynamic market, constituted another Committee on Corporate Governance

under the Chairmanship of Shri N. R. Narayana Murthy to review the performance ofCorporate 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 standards of Corporate Governance, SEBI on the basis

of recommendations of the Committee and public comments received on the report and in

exercise of powers conferred by Section 11(1) of the Securities and Exchange Board of IndiaAct, 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 besuitably modified or new clauses shall be added following the amendments to theCompanies Act 1956 and 2013, 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.

(ii) A new terminology that has been gaining grounds in the business community today is

Corporate Citizenship. Corporate citizenship is defined by the Boston College Centre for

Corporate Citizenship, as the business strategy that shapes the values underpinning acompany’s mission and the choices made each day by its executives, managers and

employees as they engage with society.

According to this definition, the four key principles that define the essence of corporatecitizenship are:

Minimise harm,

Maximise benefit,

Be accountable and responsive to key stakeholders and

Support strong financial results.

Corporate citizenship, sometimes called corporate responsibility, can be defined as the waysin which a company’s strategies and operating practices affect its stakeholders, the natural

environment, and the societies where the business operates. In this definition, corporate

citizenship encompasses the concept of corporate social responsibility (CSR), which involvescompanies, explicit and mainly discretionary efforts to improve society in some way, but is also

directly linked to the company’s business model in that it requires companies to pay attentionto all their impacts on stakeholders, nature, and society. Corporate citizenship is, in this




definition, integrally linked to the social, ecological, political, and economic impacts thatderive from the company’s business model; how the company actually does business in the

societies where it operates; and how it handles its responsibilities to stakeholders and the

natural environment.

Thus, corporate citizenship, similar to its CSR concept, is focusing on the membership of the

corporation in the political, social and cultural community, with a focus on enhancing socialcapital. Notwithstanding the different terminologies and nomenclature used, the focus forcompanies today should be to focus on delivering to the basic essence and promise of the

message that embodies these key concepts – CSR and Corporate Citizenship.

Corporate Social Responsibility is not a fad or a passing trend, it is a business imperative thatmany Indian companies are either beginning to think about or are engaging within one way

or another. While some of these initiatives may be labeled as corporate citizenship by some

organisations, their basic message and purpose is the same.

Question 3(c)

(i) Can whole life risk be analysed?

(ii) Discuss, “Governance in India – The Path Ahead”

[5+5 = 10]

Answer

(i) Several methodologies are available to deal with WLCC risk analysis. The techniques thatcan be used in WLCC risk assessment decision making might be summarised as deterministic,

probabilistic and AI. Deterministic methods measure the impact on project outcomes of

changing one uncertain key value or a combination of values at a time. In contrast,

probabilistic methods are based on the assumption that no single figure can adequately

represent the full range of possible outcomes of a risky investment (Fuller & Petersen 1996).Rather, a large number of alternative outcomes must be considered and each possibility must

be accompanied by an associated probability from a probability distribution, followed by astatistical analysis to measure the degree of risk. Using a deterministic approach, the analyst

determines the degree of risk on a subjective basis. AI methods differ from the above

approaches and use historical data to model cost and uncertainty in WLCC analysis. None of

these techniques can be applied to every situation. The best method depends on the relativesize of the project, availability of data and resources, computational aids and skills, and user

understanding of the technique being applied.

Following the identification, quantification and development of risk responses, the related

vulnerabilities of building assets need to be determined and planned for. This provides the

basis on which risk management plans and decisions are made. The risk management

planning process is concerned with putting in place the procedure for:

(i) What response actions are needed

(ii) When these response actions are needed

(iii) How these actions are implemented

(iv) Who is responsible for the implementation, control and monitoring of the actual progress

of risk responses and management strategies that have been developed to deal with the

identified risk.

(ii) Governance in India: The Path Ahead




The Indian economy on the eve of the Twelfth Plan is characterized by strong

macro-fundamentals and good performance over the Eleventh Plan period, though clouded

by some slowdown in growth in the current year with continuing concern about inflation and

a sudden increase in uncertainty about the global economy. The objective of the Eleventh

Plan was faster and inclusive growth and the initiatives taken in the Eleventh Plan period haveresulted in substantial progress towards both objectives. Inevitably, there are some

weaknesses that need to be addressed and new challenges that need to be faced. Some of

the challenges themselves emanate from the economy’s transition to a higher and more

inclusive growth path, the structural changes that come with it and the expectations it

generates. There are external challenges also arising from the fact that the global economic

environment is much less favourable than it was at the start of the Eleventh Plan. These

challenges call for renewed efforts on multiple fronts, learning from the experience gained,

and keeping in mind global developments. We focus on the backdrop of target setting and

areas of focus of the Eleventh Plan. India entered the Eleventh Plan period (2007-2012) with an

impressive record of economic growth. The vision for the Eleventh Plan prominently included

an improvement in governance. Over the years, the governments at the Centre and the

States have launched a large number of initiatives at substantial public expense to achieve

the objectives of growth with poverty alleviation and inclusiveness. Experience suggests that

many of these initiatives have floundered because of poor design, insufficient accountability

and also corruption at various levels. Increasingly, there is demand for effective

implementation without which expanded government intervention will be infructuous. The

strategy for the Eleventh Plan was therefore aimed at bringing about major improvements in

governance which would make government-funded programmes in critical areas more

effective and efficient. The best possible way of achieving this objective may be by involving

communities in both the design and implementation of such programmes, although such

involvement may vary from sector to sector. For achieving the vision of the Eleventh Plan, it isextremely important to experiment with programme design to give more flexibility to decision

making at the local level. It is especially important to improve evaluation of the effectiveness

of how government programmes work and to inject a commitment to change their designs in

the light of the experience gained. Evaluation must be based on proper benchmarks and be

scientifically designed to generate evidence-based assessment of different aspects of

programme design. Along with greater transparency and feedback from community

participation, this is particularly important in the case of programmes delivering services

directly to the poor. Accountability and transparency are critical elements of good

governance. The Right to Information Act (RTI) enacted in 2005 empowers people to get

information and constitutes a big step towards transparency and accountability.



Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 1







L E V E L C

KNOWLEDGE


know

List Make a list of



COMPREHENSION


understand






consideration


something

APPLICATION


apply

your knowledge


Calculate Ascertain or reckon mathematicallyDemonstrate Prove with certainty or exhibit by practical

means





ANALYSIS



have learned



Compare

and contrast


between



action


SYNTHESIS




optimum


reasoning




EVALUATION



make decisions or

recommendations











against each question. All workings must form part of your answer. Assumptions, if any, must be

clearly indicated.


(i) Asha Pvt Ltd Co is having only 5 members. All the members of the company were travelling

by car to go to a business meeting. An accident took place and all of them died on the spot.

Answer with reasons with reference to Companies Act, 2013 whether the existence of AshaLtd. has also come to an end. [3]

(ii) Virat Ltd. wants to be a small company. What are the conditions that need to be satisfied?

[3]

(iii) When can dividend be held in abeyance? [3]

(iv) Mr. Angad, a former bank executive, was convicted by a court eight years ago for

embezzlement of funds and was sentenced to imprisonment for one year. Can Mr. Angad

become the director of Sushma Jewelers Ltd., a public company? [3]

(v) Mr. Sundeep, a director states that he will not be able to attend the next Board meeting.

Advise whether notice is required to be sent to him. [3]

(vi) Write a note on Smith Report (2003). [3]

(vii) State the elements of Ethics. [2]

Answer

(i) The existence of the company does not come to an end, since the existence of the

Company does not depend upon the life of any or all the members of the company. [Sec 9of Companies Act, 2013]. The existence of a company can only come to an end only in

accordance with the provisions of law, viz. dissolution of the company.

Since one of the characteristics of a company is „perpetual succession‟, the existence of the

company does not come to an end with the death of the members of Asha Ltd.

(ii) As per Sec 2(85) of Companies Act, 2013 a company shall be a small company only if it

satisfies any one or both of the following conditions:





1. Its paid up share capital does not exceed –

` 50 lakhs; or

Such higher amount as may be prescribed (not being more than ` 5 crores)

2. Its turnover (as per the last profit and loss account)does not exceed –

` 2 crores; or

Such higher amount as may be prescribed (not being more than ` 20 crores)

A company shall not be a small company, if, it is a –

1. Public company; or

2. Holding Company of any company; or

3. Subsidiary company of any company; or

4. Company registered u/s 8 (viz. a non-profit company); or

5. Company or a body corporate governed by any special act.

Hence Virat ltd. cannot be a small company.

(iii)

The object of section 126 of Companies Act, 2013 is to ensure that pending the transfer ofshares by the company, the right of the transferee to receive dividend, right shares and

bonus shares remains intact. The provisions of Section 126 are as follows-

1. Where a duly signed transfer deed is deposited with the company, but the transfer of

shares has not yet been registered, the company shall-

Transfer the dividend in relation to such shares to the Unpaid Dividend Account,

unless the registered shareholder authorizes the company to pay such dividend to

the transferee.

Keep in abeyance in relation to such shares any offer of rights shares or bonus shares.

2. Section 126 shall apply not withstanding anything contained in any other provision of the

Act.

(iv) A person is disqualified if he is convicted by a Court of any offence (whether involving moral

turpitude or otherwise) and sentenced to imprisonment for 6 months or more. However, such

disqualification shall remain in force for a period of 5 years only. [Section 164(1)(d) of

Companies Act, 2013]

In the present case Mr. Angad was convicted 8 years ago. Since the requirement of

164(1)(d) of Companies Act, 2013 are not satisfied, he is, at present, eligible to become a

director of Sushma Jewelers Ltd.

(v) As per section 173(3) of Companies Act, 2013, a meeting of the Board shall be called by

giving not less than 7 days‟ notice in writing to every director at his address registered with

the company and such notice shall be sent by hand delivery or by post or by electronic

means.

Notice is to be sent to a director even if he waives his right to receive the notice [Re.

Portuguese Consolidated Copper Mines Ltd. (1889) 42 Ch D 160(CA)]. Thus, the notice of

Board meeting must be sent to Mr. Sundeep.

(vi) The Smith Review of Audit Committees, a group appointed by the financial reporting

council, reported in January 2003. The review made clear the important role of the audit





committee: „While all directors have a duty to act in the interests of the company, the audit

committee has a particular role, acting independently from the executive, to ensure that the

interests of shareholders are properly protected in relation to financial reporting and internal

control‟. The review defined the audit committee‟s role in terms of a high-level overview-it

needs to satisfy itself that there is an appropriate system of controls in place but it does not

undertake the monitoring itself .

(vii) Ethics fundamentally comprises of two elements:

Firstly, ethics refers to well founded standards of right and wrong that describe what

humans ought to do in terms of rights, obligations, benefits to society, etc.

Secondly, ethics refers to the study and development of one‟s ethical standards.


Question 2(a)

(i) The paid up share capital of Vishnu Private Ltd. is one crore consisting of 8,00,000 equity

shares of 10 each fully paid up and 2,00,000 cumulative preference shares of 10 each

fully paid up. Priya Pvt. Ltd. and Radha Pvt. Ltd. are holding 3,00,000 equity shares and

1,50,000 equity shares respectively in Vishnu Private Ltd. Priya Pvt. Ltd. and Radha Pvt. Ltd. are

the subsidiaries of Parvati Estates Pvt. Ltd. Examine with reference to the provisions of the

Companies Act, 2013 whether Vishnu Private Ltd. is a subsidiary of Parvati Estates Pvt. Ltd. Will

your answer be different, if Parvati Estates Pvt. Ltd. controls the composition of Board of

Directors of Vishnu Private Ltd.?

(ii) Ms. Preeti the secretary of Strong Limited issues a Share certificate in favour of Mr. Akshaye

purporting to be signed by the directors and the secretary and the seal of the companyaffixed to it. In fact the secretary forged the signature of the directors and has affixed the

seal without authority. Can Mr. Akshaye hold the company liable for the shares covered by

the Share certificate?

(iii) With a view to issue shares to the general public a prospectus containing some false

information was issued by a company. Mr. Javed received a copy of the prospectus from

the company, but did not apply for allotment of any shares. The allotment of shares to the

general public was completed by the company within the stipulated period. A few months

later, Mr. Javed bought 2000 shares through the stock exchange at a higher price which

later on fell sharply. Javed sold these shares at a heavy loss. Mr. Javed claims damages

from the company for the loss suffered on the ground that the prospectus issued by the

company contained a false statement. Referring to the provisions of the Companies Act,

2013 examine whether Javed's claim for damages is justified.

(iv) The Board of directors of a company decides to pay 5% of issue price as underwriting

commission to the underwriters. On the other hand the articles of association of the

company permit only 3% commissions. The Board of directors further decides to pay the





commission out of the proceeds of the share capital. Are the decisions taken by the Board of

directors valid under the Companies Act, 2013?

(v) Define “Sweat Equity Shares” as per Companies Act, 2013.

[5+2+2+4+2= 15]

Answer

(i) Total Equity Share Capital of Vishnu Pvt. Ltd. is ` 80,00,000.

Equity Share Capital held by Priya Pvt. Ltd. in Vishnu Pvt. Ltd. is ` 30,00,000.

Equity Share Capital held by Radha Pvt. Ltd. in Vishnu Pvt. Ltd. is ` 15,00,000.

Equity Share Capital held by Parvati Estates Pvt. Ltd. in Vishnu Pvt. Ltd. is ` 45,00,000.

Since for the purpose of determining holding-subsidiary relationship, Equity Share Capital

held in Vishnu (Private) Ltd. by its Subsidiaries Priya Pvt. Ltd. (viz. ` 30,00,000) and Radha Pvt.Ltd. (viz. ` 15,00,000) shall be considered.

Vishnu Pvt. Ltd. is a subsidiary of Parvati Estates Pvt. Ltd. Since Parvati Estates Pvt. Ltd. holds

more than one-half of ESC of Vishnu Pvt. Ltd.

Answer would remain same even if Parvati Estates Pvt. Ltd. controls the composition of Board

of Directors of Vishnu Pvt. Ltd.

(ii) Mr. Akshaye is not entitled to shares and he cannot hold the company liable for any loss

Since in case of forgery, there is not a defect in consent, but absence of consent and

therefore the share certificate issued by way of forgery is invalid. [Rubben v Great Fingall

Consolidated Company]

(iii) Mr. Javed is not an original allottee of shares [Sec 35 of Companies Act, 2013]

Since he purchased the shares from the market, and not from the company.

Mr. Javed cannot claim damages from the company

Since Mr. Javed is not an original allottee of shares;

Since Mr. Javed did not subscribe for shares on the faith of a misleading prospectus

[Peek v Gurney]

(iv) The company cannot pay underwriting commission of 5%

since the rate of underwriting commission cannot be more than 5% of issue price of

shares or such lower rate as prescribed under the articles (3% in the present

case);

since the maximum permissible underwriting commission in this case is 3%.

The company may pay underwriting commission out of the proceeds of the share capital





Since Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014

expressly permits payment of underwriting commission out of the proceeds of the issue,

i.e. out of the proceeds of share capital.)

(v) As per section 2(88) of Companies Act, 2013, 'Sweat equity shares' means such equity shares

as are issued by a company to its directors or employees – (a) At a discount; or

(b) For consideration, other than cash,

For providing their know-how or making available rights in the nature of intellectual property

rights or value additions, by whatever name called.

Question 2(b)

(i) Srishti Ltd. is authorised by its articles to accept the whole or any part of the amount of

remaining unpaid calls from any member although no part of that amount has been called up.

'Arjun', a shareholder of the Srishti Ltd., deposits in advance the remaining amount due on hisshares without any calls made by Srishti Ltd.

Referring to the provisions of the Companies Act, 2013 state the rights and liabilities of Mr. Arjun,

which will arise on the payment of calls made in advance.

(ii) Mr. „Vasu‟, the transferee, acquired 250 equity shares of BHARAT Limited from Mr. 'Sneh', the

transferor. But the signature of Mr. 'Sneh', the transferor, on the transfer deed was forged. Mr.

„Vasu‟ after getting the shares registered by the company is his name, sold 150 equity shares

to Mr. „Anil' on the basis of the share certificate issued by BHARAT Limited. Mr. „Vasu‟ and

'Anil' were not aware of the forgery. State the rights of Mr. 'Sneh', „Vasu‟, and 'Anil' against the

company with reference to the aforesaid shares.

(iii) Rahul had applied for the allotment of 1,000 shares in a company. No allotment of shares

was made to him by the company. Later on, without any further application from Rahul, the

company transferred 1,000 partly-paid shares to him and placed his name in the Register of

Members. Rahul, knowing that his name was placed in the Register of Members, took no

steps to get his name removed from the Register of Members. The company later on made

final call. Rahul refuses to pay for this call. Referring to the provisions of the Companies Act,

2013 examine whether his (Rahul's) refusal to pay for the call is tenable and whether he can

escape himself from the liability as a member of the company.

[6+5+4 = 15]

Answer

(i) Acceptance of calls in advance by Srishti Ltd. is valid (Sec. 50 of the Companies Act, 2013)

Since Srishti Ltd. has express provision in the articles authorising it to accept calls in

advance;

Since the power to receive calls in advance has been exercised for the benefit of the

company.





Rights and liabilities of Arjun:

Arjun shall not be entitled to any voting rights in respect of 'calls in advance' until the call

becomes presently payable (Sec. 50 of the Companies Act, 2013).

The dividend is paid on the nominal value of a share. However, Srishti Ltd. shall pay

dividend in proportion to the paid up capital held by each member, if the articles soprovide (Sec. 51 of the Companies Act, 2013).

Interest on calls in advance shall be paid to Arjun at such rate as may be specified in the

articles.

Arjun becomes an unsecured creditor of the company.

The amount paid as calls in advance is non-refundable.

The liability of Arjun to pay the future calls is extinguished to the extent of calls paid in

advance by him.

In case of surplus in winding up, before repayment of capital to the members, the

amount paid as calls in advance along with interest shall be repaid to Arjun.

(ii)

Rights of Mr. „Sneh‟ He can compel the company to restore his name on the register of members (since a forged

transfer is without any legal effect and the true owner continues to be the member of the

company).

Liabilities of Mr. „Vasu‟

„Vasu‟ is liable to compensate the loss caused to the company since he had lodged the

forged transfer deed, even though he was not aware of the forgery.

Rights of Mr. „Anil‟

The company can refuse to register Mr. 'Anil' as a member.

The company is liable to Mr. „Anil‟ since the company had issued share certificate to Mr.„Vasu‟, and therefore , the company shall be stopped from denying the liability accruing

to it from its own default.

(iii) Register of members is a prima-facie evidence of any matters directed or authorised to be

inserted therein by the Act [Sec. 95 of Companies Act, 2013].

Rahul is a member by estoppels

Since he knowingly permitted entering his name in the register of members.

Rahul is liable to pay the final call

Since a member by estoppel is liable to pay the unpaid calls.

Question 2(c)

(i) The Board of Directors of Sreeja Company Limited at its meeting declared a dividend on its

on its paid-up equity share capital which was later on approved by the company's Annual

General meeting. In the meantime the directors at another meeting of the Board decided by

passing a resolution to divert the total dividend to be paid to shareholders for purchase of





investments for the company. As a result dividend was paid to shareholders after 45 days.

Examining the provisions of the Companies Act, 2013, state:

1. Whether the act of directors is in violation of the provisions of the act and also the

consequences that shall follow for the above act of directors?

2. What would be your answer in case the amount of dividend to a shareholder is adjusted

by the company against certain dues to the company from the shareholder?

(ii) Mr. Prem recently acquired 76% of the equity shares of M/s Good-day Company Ltd. in the

hope of earning good dividend income. Unfortunately the existing Board of Directors has

been avoiding declaration of dividend due to alleged inadequacy of profits. Unconvinced,

Mr. Prem seeks permission of the company to allow him to examine the Books of Accounts,

which is summarily rejected by the Company. Examine and advise the provisions relating to

inspection of Books of Accounts and remedy available under Companies Act, 2013.

(iii) Mr. Ashu was appointed as managing director for life by the articles of association of a

private company incorporated on June, 2014. The articles also empowered Mr. Ashu to

appoint a successor. Mr. Ashu appointed, by will, Mr. Jay to succeed him after his death.Can Mr. Jay succeed Mr. Ashu as managing director after the death of 'X? Analyze with

reference to Companies Act, 2013.

[5+6+4 = 15]

Answer

(i) As per section 127 of the Companies Act, 2013, the dividend shall be paid within 30 days

from the date of declaration of dividend. In case, the dividend warrant is posted by the

company within 30 days of declaration of dividend, it is considered to be a sufficient

compliance of section 127 of the Companies Act, 2013.

1.

In the present case, Sreeja Company Limited has failed to pay the dividend within 30

days of declaration of dividend, and so, this amounts to violation of section 127 of the

Companies Act, 2013, attracting the penal provisions of section 127 of the Companies

Act, 2013, stated as under:

(a) Sreeja Company Limited is liable to pay simple interest @ 18% per annum.

(b) Every director who is knowingly a party to the default, is liable for imprisonment upto

2 years and is also liable for fine of not less than ` 1,000 per day for each day of

default.

2. As per section 127, there shall not be a contravention of section 127 where dividend is

lawfully adjusted by the company against any sum due to it from the shareholder.

Thus, where the amount of dividend is adjusted by the company against sums due to the

company from the shareholders, it shall not amount to a violation of section 127.

(ii) The present problem relates to section 128 of the Companies Act, 2013 read with Rule 4 of

the Companies (Accounts) Rules, 2014 and Regulation 89 of Table F contained in Schedule I.

1. As per section 128 read with Rule 4, a director of the company is entitled to inspect the





books of account of the company, but no member of the company is entitled to make

inspection of the books of account.

2. Regulation 89 of Table F reads as under:

(i) The Board shall from time to time determine whether and to what extent and at what

times and places and under what conditions or regulations, the accounts and booksof the company, or any of them, shall be open to the inspection of members not

being directors.

(ii) No member (not being a director) shall have any right of inspecting any account or

book or document of the company except as conferred by law or authorised by the

Board or by the company in general meeting.

In the given case, Mr. Prem has not been authorised to inspect the books of account by

the Board or by the members in the general meeting. Thus, Mr. Prem shall not have any

right to inspect the books of account even if he holds 76% of the equity shares of the

company.

3.

Mr. Prem may, by using the majority of voting power held by him and complying with theprovisions of the Act, get appointed as a director of M/s Good-day Company Ltd., and

then, he shall be entitled (in the capacity of director) to make the inspection of books of

account.

(iii) No director shall assign his office to any other person. If he does, the assignment shall be void

[Section 166 of Companies Act, 2013].

The articles of a company empowered its managing director to appoint a successor. The

managing director appointed, by his will, Mr. Jay to succeed him as a managing director

after his death. The Court observed that a director is prohibited from assigning his office. The

word 'his' used in section 166 indicates that the prohibition applies only when an office heldby a director is assigned to any other person. Where a director dies, the office held by him

becomes vacant and therefore. Such office cannot be assigned to any other person.

Therefore, appointment of a new person in such office does not amount to an assignment

within the meaning of section 166. [Oriental Metal Pressing Pvt. Ltd. v B.K. Thakoor (1961) 31

Comp Cas 143].

The facts of the given case are identical to the facts discussed in the above case.

Accordingly, it can be said that appointment of Mr. Jay is valid and it does not amount to

an assignment of office by Mr. Ashu.

Question 2(d)

(i) On recommendation of the Board of Directors of Ganga Company Limited, Mr. Ranjan is

appointed at the company's Annual General Meeting held on 1st October, 2014 as auditor

for period of 10 years. A resolution to this effect was passed unanimously with no vote

against the resolution. Explaining the provisions of the Companies Act, 2013 relating to the

appointment and re-appointment of auditors:

1. Examine the validity of the above resolution.

2. What shall be your answer in case an audit firm Messrs Ranjan & Associates is appointed





as the company's auditor?

(ii) Mr. Azad is a director of Down Limited which failed to repay matured deposits from 1st April,

2014 onwards and the default continues. But Down Limited is regular in filing annual

accounts and annual returns. Mr. Azad is also a director of Hope Limited and Trust Limited.

Answer the following questions with reference to the relevant provisions of the Companies

Act, 2013:

1. Whether Mr. Azad is disqualified and if so, whether he is required to vacate his office of

director in Hope Limited and Trust Limited.

2. Is it possible for Board of directors of Faith Limited to appoint Mr. Azad as an additional

director at the Board meeting to be held on 15th May, 2015? Would your answer be

different if Mr. Azad ceased to be a director of Down Limited by resignation on 1st March,

2015?

State also the auditor's liability with regard to reporting of disqualification under section

164(2).

(iii) Andrew, one of the shareholder of a company, filed a civil suit in a Court for removal of

directors Bikash, Shraddha and Elle. Is the suit maintainable? Advice in the light of


[6+6+3 = 15]

Answer

(i) The present problem relates to section 139(1) and 139(2) of the Companies Act, 2013.

1. As per section 139(1), when any appointment of auditor is made at any AGM, the

auditor so appointed shall hold office till the conclusion of 6th AGM, with the AGM

wherein such appointment has been made being counted as the first AGM. At everyAGM (viz. 2nd, 3rd, 4th and 5th AGM), the matter relating to appointment of auditor shall

be placed before the members for ratification.

2. In case the company is covered under subsection (2) of section 139 (i.e. the concept of

rotation of auditors is applicable to the company), then, -

(a) No individual shall be appointed or reappointed as auditor for more than 1 term of 5

consecutive years.

(b) In case, the auditor is a firm, no audit firm shall be appointed or reappointed as

auditor for more than 2 terms of 5 consecutive years.

The given case is answered as under:

1. The resolution passed in the AGM appointing Mr. Ranjan as an auditor for a period of 10

years is not valid, since such appointment is in contravention of section 139(1) as well as

139(2). It is immaterial that in the AGM, no vote has been cast against the resolution.

2. The answer remains same even where the M/S Ranjan & Associates, an audit firm was

appointed as auditor, since section 139(1) as well as 139(2) do not permit appointment for

10 years. Even in case of an audit firm, the term shall be 5 years. However, on completion of

one term of 5 years, the audit firm may be reappointed for another term of 5 years.





(ii) As per section 164(2), a director of a company shall be disqualified from being reappointed

as a director in that company or appointed as a director in any other company, if the

company of which he is already a director fails to repay its deposits or interest thereon on

the due date and such failure continues for 1 year or more. Such disqualification shall remain

in force for a period of 5 years. As per section 167(1)(a), the office of a director shall becomevacant if he incurs any of the disqualifications specified under section 164.

In the given case Down Limited has failed to repay its deposits on the due date (i.e.

1.4.2014) and such default has continued for more than 1 year (i.e. beyond 31.3.2015).

Therefore -

Mr. Azad shall not be eligible to be appointed as a director in any other company or

reappointed in Down Limited after 31.3.2015 for a period of 5 years. Accordingly, Faith

Limited cannot appoint Mr. Azad as an additional director on 15.5.2015.

Mr. Azad cannot continue as a director in Down Limited, Hope Limited and Trust Limited.

His office of director shall become vacant on expiry of 31.3.2015

If Mr. Azad had ceased to be a director of Down Limited by resignation on 1st March, 2015,

he would have escaped the disqualification specified under section 164(2) and accordingly

Faith Limited could appoint Mr. Azad as an additional director on 15.5.2015.

As per section 143(3)(g) of the Companies Act, 2013, the auditor of the company shall state

in his report as to whether any of the directors of the company are disqualified from being

appointed as a director under section 164(2).

(iii) A Civil Court has no jurisdiction to entertain a suit for removal of a director since the matter

relates to the internal management of the company which is governed by the Companies

Act, 2013 [Khetan Industries Pvt. Ltd. v Manju Ravindra Prasad Khetan (1995) 16 CLA 169

(Bom)]. Section 169 has given to the shareholders necessary powers (subject to adequatesafeguards) to remove a director and thus a Civil Court has no jurisdiction to entertain a suit

for removal of a director.

Question 2(e)

(i) One of the directors of your company has been prosecuted for non-payment of sales tax by

the company. He intends to obtain relief under the Companies Act, 2013. Will he succeed?

(ii) Mr. Harris was appointed as a director of Imperial Woodens Ltd. with effect from 1st April,

2014. Since the company, namely, Imperial Woodens Ltd. wanted to take full advantage of

the wisdom and expertise of Mr. Harris, it offered him remuneration payable on monthly basis

and made an application to the Central Government for approval for payment of such

remuneration. Anticipating the approval of the Central Government, Imperial Woodens Ltd.

started paying such remuneration from the date of appointment and continued to do so till

31st March, 2015. The Central Government did not fully approve the remuneration proposed

by the company and restricted the same to a lower amount.





On scrutiny of the accounts, it was established that the company, till 31st March, 2015, has

paid to Mr. Harris a total sum of 1.20 lakhs in excess of the remuneration sanctioned by the

Central Government.

You are required to State with reference to the provisions of Companies Act, 2013 in respect

of recovery and waiver of recovery of the excess remuneration so paid, whether Mr. Harris

can keep the excess remuneration so received and under what conditions.

(iii) Mr. Ram goes abroad for four months from 4.1.2015 and an alternate director has been

appointed in his place. Advice as to sending of notice as required under section 173 of the


[6+6+3 = 15]

Answer

(i) The Court may, in its discretion, relieve an officer of the company from liability, if it appears

to the Court that -

(a)

he is or may be liable for negligence, default, breach of duty, misfeasance or breach oftrust;

(b) he has acted honestly and reasonably; and

(c) having regard to all the circumstances of the case, he ought fairly to be excused.

Relief under section 463 of the Companies Act, 2013 cannot be extended in respect of any

liability under any Act, other than the Companies Act. The expression 'any proceedings'

occurring in section 463 of the Companies Act, 2013 cannot be read out of context and

treated in isolation, and must be confined to the Companies Act only.

Accordingly, section 463 of the Companies Act, 2013 applies to all legal proceedings under

the Companies Act only. Otherwise the application of section 463 of the Companies Act,

2013 would result in the penal provisions of other Acts being rendered ineffective.Furthermore, if the parliament had intended that section 463 of the Companies Act, 2013

should apply to other Acts also, it would have specifically provided for it. It is a sound rule of

construction to confine the provisions of a statute to itself and therefore section 463 of the

Companies Act, 2013 cannot be availed in respect of any proceedings under any other Act

[Rabindra Chamariaw ROC(1992) 73 Comp Cas 257].

In the present case a director of the company has been prosecuted under the Sales Tax

Act. Since the application of section 463 is restricted to Companies Act only, the Court

cannot grant any relief to the directors.

(ii) As per section 197, if any director draws any remuneration in excess of the remuneration

approved by the Central Government, he shall refund such excess remuneration to the

company. Until such excess remuneration is refunded, he shall hold it in trust for the

company. The company shall not waive the recovery of any sum refundable to it (i.e. the

excess remuneration drawn by the director) unless permitted by the Central Government.

The answer to the given problem is as follows:

(a) Mr. Harris was appointed as a non-executive director. He was paid monthly





remuneration awaiting the approval of the Central Government. However, the

remuneration sanctioned by the Central Government was lesser than the remuneration

actually paid to Mr. Harris. As per section 197, Mr. Harris cannot keep remuneration

drawn by him which is in excess of the remuneration sanctioned by the Central

Government. Accordingly, he shall refund to the company ` 1,20,000. Until such refund is

made, he shall hold it in trust for the company. Further, the company cannot waive therecovery of excess remuneration.

(b) However, if on an application made to the Central Government, the Central

Government permits the waiver of recovery of such excess remuneration, the company

may waive the recovery of excess remuneration, and then Mr. Harris shall have a right to

retain the excess remuneration drawn by him.

(iii) As per section 173(3), a meeting of the Board shall be called by giving not less than 7 days'

notice in writing to every director at his address registered with the company and such

notice shall be sent by hand delivery or by post or by electronic means. As can be seen,

section 173(3) does not specifically state that notice to an alternate director shall be served.However, an alternate director is a director in his own right. He is not a proxy or

representative of the original director. The grounds of vacation of office also apply to him as

these apply to the original director, i.e. an alternate director shall vacate his office if he does

not attend all the Board meetings during a period of 12 months as per the provisions of

section 167(1)(b). Therefore, notice to an alternate director is to be given. Thus, notice shall

be served to both, the alternate director as well as the original director at their addresses

registered with the company.


Question 3(a)

(i) What is Corporate Citizenship? Is this fundamentally different from Corporate Social

Responsibility?

(ii) Discuss the OECD Guidelines for Corporate Governance of State-owned Enterprises.

[5+5 =10]

Answer

(i) A new terminology that has been gaining grounds in the business community today is

Corporate Citizenship. Corporate citizenship is defined by the Boston College Centre for

Corporate Citizenship, as the business strategy that shapes the values underpinning a

company‟s mission and the choices made each day by its executives, managers and

employees as they engage with society.

According to this definition, the four key principles that define the essence of corporate

citizenship are:

1. Minimise harm,

2. Maximise benefit,

3. Be accountable and responsive to key stakeholders and





4. Support strong financial results.

Corporate citizenship, sometimes called corporate responsibility, can be defined as the ways in

which a company‟s strategies and operating practices affect its stakeholders, the natural


citizenship encompasses the concept of corporate social responsibility (CSR), which involves

companies‟ explicit and mainly discretionary efforts to improve society in some way, but is alsodirectly linked to the company‟s business model in that it requires companies to pay attention to

all their impacts on stakeholders, nature, and society. Corporate citizenship is, in this definition,

integrally linked to the social, ecological, political, and economic impacts that derive from the

company‟s business model; how the company actually does business in the societies where it

operates; and how it handles its responsibilities to stakeholders and the natural environment.


corporation in the political, social and cultural community, with a focus on enhancing social

capital. Notwithstanding the different terminologies and nomenclature used, the focus for

companies today should be to focus on delivering to the basic essence and promise of the


Corporate Social Responsibility is not a fad or a passing trend, it is a business imperative thatmany Indian companies are either beginning to think about or are engaging with in one way or

another.

While some of these initiatives may be labeled as corporate citizenship by some organisations,

there basic message and purpose is the same.

(ii) According to OECD, a major challenge is to find a balance between the state‟s responsibility

for actively exercising its ownership functions, such as, the nomination and election of the

board, while at the same time refraining from imposing undue political interference in the

management of the company. Another important challenge is to ensure that there is a level

playing field in markets where private sector companies can compete with the state-owned

enterprises, and that governments do not distort competition in the way they use theirregulatory or supervisory powers.‟

According to OECD, the guidelines suggest that the state should exercise its ownership functions

through a centralized ownership entity, or effectively co-ordinated entities, which should act

independently and in accordance with a publicly disclosed ownership policy. The guidelines

also suggest the strict separation of the state‟s ownership and regulatory functions.



There should be a clear separation between the state's ownership function and other



SOEs should not be exempt from the application of general laws and regulations.

Stakeholders including competitors, should have access to efficient redress.

SOEs should face competitive conditions regarding access to finance. Their relations with

state-owned banks, state-owned financial institutions, and other state-owned

companies, should be based on purely commercial grounds.

State acting as an owner





The state should act as an informed and active owner, and establish a clear and consistent

ownership policy, ensuring that governance of state-owned enterprises is carried out in a

transparent and accountable manner with the necessary degree of professionalism and

effectiveness.

The government should develop and issue an ownership policy that defines the overall

objectives of state ownership, the state's role in corporate governance of SOEs, and howit will implement its ownership policy.

The government should not be involved in the day-to-day management of SOEs and

allow them full operational autonomy to achieve their defined objectives.

The state should let SOE boards exercise their responsibilities and respect their

independence.

The state should exercise its ownership rights according to the legal structure of each

company. Keeping this in mind, it should ensure that remuneration schemes for SOE

board members foster the long-term interest of the company, and can attract and

motivate qualified professionals.

Equitable treatment of shareholders The SOEs should recognize the rights of all shareholders and in accordance with the OECD

principles of corporate governance, ensure their equitable treatment and equal access to

corporate information.

SOEs should observe a high degree of transparency towards all shareholders.

The co-ordinating or ownership entity and SOEs should ensure that all shareholders are

treated equally.

The participation of minority shareholders in shareholder meetings should be facilitated in

order to allow them to take part in fundamental corporate decisions, such as board

election.

Relations with stakeholders The state ownership policy should fully recognize the state-owned enterprises' responsibilities

towards stakeholders and report their relations with them.

Listed on large SOEs, as well as SOEs pursuing important public policy objectives, should

report on stakeholder relations.

Transparency and disclosure

State-owned enterprises should observe high standards of transparency in accordance with the

OECD Principles of Corporate Governance.

SOEs should develop efficient internal audit procedures and establish an internal audit

function that is monitored by and reports directly to the board and to the audit

committee or the equivalent company organ.

SOEs, especially large ones, should be subject to an annual independent external audit

based on international standards. The existence of specific state control procedures dots

not substitute for an independent external audit.

Responsibilities of the boards of state-owned enterprises

The boards of state-owned enterprises should have the necessary authority, competencies, and

objectivity to carry out their function of strategic guidance and monitoring of management.

They should act with integrity and be held accountable for their actions.





The boards of SOEs should be assigned a clear mandate and ultimate responsibility for

the company's performance. The board should be fully accountable to the owners, act

in the best interest of the company, and treat all shareholders equally.

SOE boards should carry out their functions of monitoring of management and strategic

guidance, subject to the objectives set by the government and the ownership entity.

They should have the power to appoint and remove the CEO. The boards of SOEs should be so composed that they can exercise objective and

independent judgement. Good practice calls for the chair to be separate from the

CEO.

SOE boards should carry out an annual evaluation to appraise their performance.

Question 3(b)

(i) “The development of Corporate Governance in the UK was initially the findings of a trilogy of

codes.” Explain the same in brief.

(ii)

“Family ownership of firms is the prevalent form of ownership in many countries around theglobe.”

In view of the above statement, explain the concept and need of Ownership structures.

[5+5 =10]

Answer

(i) As in other countries, the development of Corporate Governance in the UK was initially the

findings of a trilogy of codes: the Cadbury Report (1992), the Greenbury Report (1995), and

the Hampel Report (1998). These are explained as under:

Cadbury Report (1992)

Following various financial scandals and collapses (Coloroll and Polly Peck, to name but two)and a perceived general lack of confidence in the financial reporting of many UK companies,

the Financial Reporting Council, the London Stock Exchange, and the accountancy profession

established the Committee on the Financial Aspects of Corporate Governance in May 1991.

After the Committee was set up, the scandals at BCCI and Maxwell happened, and as a result,

the committee interpreted its remit more widely and looked beyond the financial aspects to

Corporate Governance as a whole. The Committee was chaired by Sir Adrian Cadbury and,

when the Committee reported in December 1992, the report became widely known as „the

Cadbury Report‟.

The recommendations covered: the operation of the main board; the establishment,

composition, and operation of key board committees; the importance of, and contribution that

can be made by, non-executive directors; the reporting and control mechanisms of a business.

The Cadbury Report recommended a code of Best Practice with which the boards of all listed

companies registered in the UK should comply, and utilized a „comply or explain‟ mechanism.

This mechanism means that a company should comply with the code but, if it cannot comply

with any particular aspect of it, then it should explain why it is unable to do so. This disclosure

gives investors detailed information about any instances of non-compliance and enables them

to decide whether the company‟s non-compliance is justified.





Greenbury Report (1995)

The Greenbury committee was set up in response to concern at both the size of directors‟

remuneration packages and their inconsistent and incomplete disclosure in companies‟ annual

reports. It made, in 1995, comprehensive recommendat ions regarding disclosure of directors‟

remuneration packages. There has been much discussion about how much disclosure there

should be of directors‟ remuneration and how useful detailed disclosures might be. Whilst thework of the Greenbury Committee focused on the directors of public limited companies, it

hoped that both smaller listed companies and unlisted companies would find its

recommendations useful.

Central to the Greenbury report recommendations were strengthening accountability and

enhancing the performance of directors. These two aims were to be achieved by (i) the

presence of a remuneration committee comprised of independent non-executive directors who

would report fully to the shareholders each year about the company‟s executive remuneration

policy, including full disclosure of the elements in the remuneration of individual directors; and (ii)

the adoption of performance measures linking rewards to the performance of both the

company and individual directors, so that the interests of directors and shareholders were more

closely aligned.Since that time (1995), disclosure of directors‟ remuneration has become quite prolific in UK

company accounts.

Hampel Report (1998)

The Hampel Committee was set up in 1995 to review the implementation of the Cadbury and

Greenbury Committee recommendations. The Hampel Committee reported in 1998. The

Hampel Report said: „We endorse the overwhelming majority of the findings of the two earlier

committees‟. There has been much discussion about the extent to which a company should

consider the interests of various stakeholders, such as employees, customers, suppliers, providers

of credit, the local community, etc., as well as the interests of its shareholders. The Hampel report

stated that the directors as a board are responsible for relations with stakeholders; but they areaccountable to the shareholders‟. However, the report does also state that directors can meet

their legal duties to shareholders, and can pursue the objective of long-term shareholder value

successfully, only by developing and sustaining these stakeholder relationships‟.

The Hampel Report, like its precursors, also emphasized the important role that institutional

investors have to play in the companies in which they invest (investee companies). It is highly

desirable that companies and institutional investors engage in dialogue and that institutional

investors make considered use of their shares, in other words, institutional investors should

consider carefully the resolutions on which they have a right to vote and reach a decision based

on careful thought, rather than engage in „box ticking‟.

(ii)

In many countries, family-owned firms are prevalent. Corporate governance is of relevance

to family-owned firms, which can encompass a number of business forms including private

and publicly quoted companies, for a number of reasons. Family-owned firms may face

difficulties in initially finding appropriate independent non-executive directors but the

benefits that such directors can bring is worth the time and financial investment that the

family-owned firm will need to make.





One advantage of a family-owned firm is that there should be less chance of the type of

agency problems. This is because ownership and control rather than being split are still one and

the same, and so the problems of information asymmetry and opportunistic behaviour should (in

theory, at least) be lessened. As a result of this overlap of ownership and control, one would

hope for higher levels of trust and hence less monitoring of management activity should be

necessary. However, problems may still occur and especially in terms of potential for minorityshareholder oppression, which may be more acute in family-owned firms.

In family business group firms, the concern is that managers may act for the controlling family,

but not for shareholders in general. These agency issues are: the use of pyramidal groups to

separate ownership from control, the entrenchment of controlling families, and non-arm‟s-length

transactions (aka „tunneling‟) between related companies that are detrimental to public

investors.

Possible stages in a family firm‟s governance

The advantages of a formal governance structure are several. First of all, there is a defined

structure with defined channels for decision-making and clear lines of responsibility. Secondly,

the board can tackle areas that may be sensitive from a family viewpoint but which nonetheless

need to be dealt with - succession planning is a case in point (deciding who would be best to fill

key roles in the business should the existing incumbents move on, retire, or die). Succession

planning is important too in the context of raising external equity because, once a family

business starts to seek external equity investment, then shareholders will usually want to knowthat succession planning is in place. The third advantage of a formal governance structure is

also one in which external shareholders would take a keen interest: the appointment of non-

executive directors. It may be that the family firm, depending on its size, appoints just one, or

maybe two, non-executive directors. The key point about the non-executive director

appointments is that the persons appointed should be independent; it is this trait that will make

their contribution to the family firm a significant one. Of course, the independent non-executive

directors should be appointed on the basis of the knowledge and experience that they can

bring to the family firm: their business experience, or a particular knowledge or functional

specialism of relevance to the firm, which will enable them to „add value‟ and contribute to the

strategic development of the family firm. Another advantage of family-owned firms may be their

ability to be less driven by the short-term demands of the market. Of course, they still ultimatelyneed to be able to make a profit but they may have more flexibility as to when and how they

do so.

Cadbury (2000) sums up the three requisites for family firms to manage successfully the impacts

of growth: „They need to be able to recruit and retain the very best people for the business, they

need to be able to develop a culture of trust and transparency, and they need to define logical

and efficient organisational structures‟. A good governance system will help family firms to

achieve these requisites.

Family Assembly Family Council Advisory BoardBoard Of Directors(Including Outside

Directors)





Question 3(c)

(i) Write short notes on:

Whole Life Cycle Costing

Golden Parachute Proposals

(ii) What are the pros and cons in adopting Corporate Social Responsibility?

[(2.5×2)+5 = 10]

Answer

(i)

Whole Life Cycle Costing (WLCC):

Towards the late 1990s, the concepts of „whole life costing‟ (WLC) and „whole life -cycle costing‟

(WLCC) emerged. The terms whole life costing and whole life-cycle costing are

interchangeable. WLCC is a new term that appears to have been adopted by many buildingeconomists involved in the preparation of forecasts for the long-term cost assessments of capital

projects.

„Whole life-cycle costing (WLCC) is a dynamic and ongoing process which enables the

stochastic assessment of the performance of constructed facilities from feasibility to disposal. The

WLCC assessment process takes into account the characteristics of the constructed facility,

reusability, sustainability, maintainability and obsolescence as well as the capital, maintenance,

operational, finance, residual and disposal costs. The result of this stochastic assessment forms

the basis for a series of economic and noneconomic performance indicators relating to the

various stakeholders‟ interests and objectives throughout the life-cycle of a project.‟

Currently, the application of WLCC in the construction industry is still hindered significantly by the

lack of standard methods and the excuse of lack of sound data upon which to arrive at

accurate decisions. As a result, the output from WLCC models is looked on as unreliable.

Combined with WLCC, risk assessment should form a major element in the strategic decision-

making process during project procurement and also in value analysis, especially in today‟s

highly uncertain business environment. WLCC decisions are complex and usually comprise an

array of significant factors affecting the ultimate cost decisions. WLCC decisions generally have

multiple objectives and alternatives, long-term impacts, multiple constituencies in the

procurement of construction projects, generally involve multiple disciplines and numerous

decision makers, and always involve various degrees of risk and uncertainty. Project cost, design

and operational decision parameters are often established very early in the life of a given

building project. The existing methods do not adequately quantify the true economic impacts of

many quantitative and qualitative parameters.

Golden Parachute Proposals:





The Securities and Exchange Commission‟s (the “SEC”) new disclosure and advisory vote

requirements for compensation based on or relating to merger and similar transactions, often

referred to as golden parachute arrangements, became effective for proxy statements and

other acquisition related filings initially filed on or after April 25, 2011 for Corporate Governance

in USA. The SEC adopted the rules to implement Section 951 of the Dodd-Frank Wall Street

Reform and Consumer Protection Act (the “Dodd-Frank Act”).

The Dodd-Frank Act requires companies to hold separate shareholder votes on potential

“golden parachute” payments when they seek approval for mergers, sales and certain other

transactions. In determining the recommendation with respect to a golden parachute proposal,

the 2013 Updates include the consideration of any existing change-in-control arrangements

maintained with named executive officers, rather than focusing only on the new or extended

arrangements. The list of features considered problematic has been refined. Recent

amendments that incorporate problematic features will tend to carry more weight in the overall

analysis. However, close scrutiny will also be given if multiple legacy problematic features are

present.

(ii) Pros & Cons of adopting Corporate Social Responsibility:

Corporate social responsibility refers to a method of running a company that seeks to address

not only profitability, but also the environmental and social consequences of the business. While

most corporate social responsibility concerns are directed at very large businesses, even small

and medium-sized businesses that employ a large number of local residents or participate in

environmentally problematic industries can face pressure to adopt corporate social

responsibility.

Costs

Cost represents one of the biggest arguments against adopting corporate social responsibility as

a policy. Programs to reduce environmental impact often require expensive changes in

equipment or ongoing costs without any clear way to recoup those losses. The decision to

maintain domestic production facilities or call centers or to buy from domestic producers rather

than outsource or move production overseas can drive up costs for a business. Additionally,

there is no clear evidence that adhering to a policy of corporate social responsibility generates

a significant increase in sales or profit.

Improved Company Reputation

Embracing a policy of corporate social responsibility, paired with genuine action, can serve to

build or improve the reputation of a business. If a company‟s behavior creates a negative

backlash that leads to lost profitability -- over environmental issues, for example -- corporate

social responsibility becomes a method to repair reputation damage and restore profitability. In

other cases, adopting such a policy works as part of a business‟ essential brand, and consumers

often demonstrate more loyalty to brands that can demonstrate a commitment to

environmental concerns.





Shareholder Resistance

Some investors do look to acquire stock in socially responsible corporations, but, on the whole,

investors purchase stock on the expectations of turning a profit. While some companies, such as

Toyota and GE, have profited from corporate social responsibility, companies that adopt such

policies often prove as likely to lose money. Given the spotty track record of corporate socialresponsibility in demonstrating profit increase, investors may resist attempts by executives to

move a company in that direction.

Better Customer Relations

One of the hallmarks of corporate social responsibility is staying involved in the communities

where the business operates. This community involvement goes a long way toward building trust

between customers and the business. If a business builds trust with its customers, they tend to

give the business the benefit of the doubt if something goes wrong, rather than assuming

malicious intent or raw negligence. Customers also tend to stick with businesses they trust, rather

than actively seeking out new companies, which helps keep a business profitable over the longhaul.



Answers to PTP_Final_Syllabus 2012_Jun 2015_Set 2








L E V E L C

KNOWLEDGE


know

List Make a list of



COMPREHENSION


understand






consideration


something

APPLICATION


apply

your knowledge




means





ANALYSIS



have learned



Compare

and contrast


between

Construct Build up or compilePriorit ise Place in order of priority or sequence for

action


SYNTHESIS




optimum


reasoning




EVALUATION



make decisions or

recommendations











against each question. All workings must form part of your answer. Assumptions, if any, must be

clearly indicated.


(i) Manish applies for shares on the basis of prospectus which contains mis-statement. The

shares were allotted to him, who afterwards transfers them to Nishant. Can Nishant bring an

action for a recession on the ground of mis-statement? Decide under the provisions ofCompanies Act, 2013. [3]

(ii) Gagan Ltd. an engineering company has distributed 20 lacs to scientific institutions for

furtherance of scientific education and research. Referring to the provisions of Companies

Act, 2013 decide whether the said distribution of money was „ultra vires‟ the company?

[3]

(iii) Arun, a member of Priya & co Ltd., holding some shares in his own name on which final call

money has not been paid, is denied by the company voting right at a general meeting on

the ground that the articles of association do not permit a member to vote if he has not paidthe calls on the shares held by him.

With reference to the provisions of Companies Act, 2013 examine the validity of company‟s

denial to Arun of his voting rights. [3]

(iv) The minutes of the meeting must contain fair and correct summary of the proceedings

thereat. Can the chairman direct exclusion of any matter from the minutes? Some of the

shareholders insist on inclusion of certain matters which are regarded as defamatory of a

director of the company. The chairman declines to do so. State how the matter can be

resolved based on Companies Act, 2013. [3]

(v) The apple producers from Kashmir have formed an association to control production of

oranges. Examine whether it will be considered as a cartel within the meaning of sec 2© of

the Competition Act, 2002.

(vi) Write a note on CSR reporting. [3]





(vii) State the role of „Audit Committee‟ in regulating Corporate Governance. [2]

Answer

(i) This case is based on the provisions of Sec 35 of Companies Act, 2013. Nishant is not the

original allottee of the shares, since he obtained the shares by way of transfer from Manish.

Nishant cannot claim damages from the company since Nishant is not an original allottee of

shares and he did not subscribe for shares on the faith of a misleading prospectus. [Peek v

Gurney]

(ii) Donation of ` 20 lacs for furtherance of scientific education and research is permissible since

it is incidental or ancilliary to the main object of the company and it is conducive to the

continued growth of the company as engineering goods manufacturers as was held in

Evans v Brunner, Mood & Co. Ltd.

(iii)

The decision of the company is valid since the member is restrained from exercising his

voting right on one of the grounds specified under section 106 of Companies Act, 2013 (viz.

non-payment of calls on shares). And the ground restricting voting rights is contained in the

articles.

(iv) It relates to the provisions of Sec 118 of Companies Act, 2013. Chairman has the power to

determine whether a matter is defamatory of any person or not and to direct not to include

in the minutes any matter which is defamatory of any person. Hence, refusal by chairman is

valid since the matter discussed in General Meeting is, in the opinion of the Chairman,

defamatory of a director.

(v) As per Sec 2(c) of Competition Act, 2002, „cartel‟ includes an association of producers,

sellers, distributors, traders or service providers who, by agreement amongst themselves, limit

control or attempt to control the production, distribution, sale or price of, or, trade in goods

or provision of services. In the given case, the association that has been formed is that of

apple producers. It clearly falls within the def inition of „cartel‟ as given under Sec 2(c) of

Competition Act, 2002.

(vi) CSR reports highlights the CSR activities undertaken by the entity and details of employees

who played a key role in achievement of CSR initiatives. CSR reporting reflects seriousness of

top management towards CSR. It helps the entity to build and reinforce trust with all the

stakeholders. CSR reports are aimed at increasing the awareness and importance of CSR.

CSR report also encourages internal efforts to achieve the CSR objectives.

(vii)The „Audit Committee‟ ensures and reports to the Board the adequacy of internal control

systems. It periodically reviews the financial statements. It periodically holds discussions with





the auditors relating to the internal control system, scope of audit and observation of

auditors.


Question 2(a)

(i) Sita & Co. Ltd. made a loss of 20 lakhs after providing for depreciation for the year ended

31st March, 2015 and as a result the company was not in a position to declare any dividend

for the said year out of profits. However, the Board of Directors of the company

announced the declaration of dividend of 15% on the equity shares payable out of the free

reserves. The paid up share capital of the company and its free reserves as on 31st March,

2015 are 2 crores and 10 crores respectively. The average dividend declared by the

company in the last three years is 25%. Examine the validity of declaration of Dividend.

(ii) The Board of directors of a company decides to revise the accounts which have been

submitted to the auditors, but the auditors have not yet given their report. Examine the validity.

(iii) How is the subsequent auditor appointed in case of a government company? Answer with

reference to Companies Act, 2013.

[8+2+5 = 15]

Answer

(i)

The fundamental principle with respect to payment of dividend is that dividend is to be paid

only out of profits. In other words, the dividend can be paid only out of the following sources:

(a) Profits of current financial year

(b) Undistributed profits of previous financial years, i.e., accumulated profits of previous years

(c) Moneys provided by the Central Government or State Government in pursuance of a

guarantee given by it.

Payment of dividend out of reserves

As per Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 , dividend

can be declared out of the profits transferred to the reserves by complying with the following

conditions:

(a) The rate of dividend declared shall not exceed the average of the rates at which

dividend was declared by it in the 3 years immediately preceding that year.

(b) The total amount to be drawn from such accumulated profits shall not exceed l/10th of

the sum of its paid-up share capital and free reserves as appearing in the latest audited

financial statement.





(c) The amount so drawn shall first be utilised to set off the losses incurred in the financial

year in which dividend is declared before any dividend in respect of equity shares is

declared.

(d) The balance of reserves after such withdrawal shall not fall below 15% of its paid up share

capital as appearing in the latest audited financial statement.

(e)

No company shall declare dividend unless carried over previous losses and depreciation

not provided in previous year or years are set off against profit of the company of the

current year.

The present case is discussed as under:

(a) The average rate of dividend declared by the company during the preceding 3 financial

years is 25%. So, for the current financial year, the rate of dividend shall not exceed 25%.

(b) The maximum amount that may be drawn from the reserves shall not exceed 10% of ( ` 2

crore + ` 10 crore), i.e. ` 1.2 crore.

(c) Out of the amount drawn from the reserves (viz. ` 1.2 crore), loss for the current financial year

(viz. ` 0.20 crore) shall first be set off. Thus, maximum amount that can be utilized for dividend

shall be ` 1.2. crore less ` 0.20, viz. ` 1 crore (i.e. rate of dividend shall not exceed 50%).-

(d) After the dividend is declared out of reserves, the balance of reserves shall not fall below 15%

of paid up share capital, viz. 15% of ` 2 crore, viz. ` 30 lakh. Thus, maximum amount that can

be utilized for dividend shall be ` 10 crore less ` 20 lakh less ` 30 lakh, viz. ` 9.5 crore (i.e. rate

of dividend shall not exceed 475%).

(e) There is no carried over previous losses or depreciation.

Thus, in the present case, the company may distribute dividend at the rate of 25% in

accordance with the conditions contained in Rule 3 of the Companies (Declaration and

Payment of Dividend) Rules, 2014.

(ii) Where the auditors have not yet given their report, the Board may revise the accounts. The

revised accounts shall be approved by the Board and thereafter signed on behalf of the

Board in accordance with the provisions of section 134 of the Companies Act, 2013. Then,

the revised accounts shall be submitted to the auditors. The auditors' report shall be based

on the revised accounts submitted by the Board.

(iii) The provisions relating to appointment of subsequent auditor in case of a government

company are discussed as follows:

1. Applicability of Section 139(5) of Companies Act, 2013





(a) Government companies

(b) Any other company owned or controlled, directly or indirectly, by –

(i) the Central Government; or

(ii) one or more State Government; or

(iii) partly by the Central Government and partly by one or more State Government.

2. Appointment or reappointment of auditor

In case of aforementioned companies, CAG shall, in respect of a financial year, appoint an

auditor duly qualified to be appointed as an auditor of companies under this Act, within 180

days from the commencement of the financial year.

3. Tenure

The auditor shall hold office till the conclusion of the AGM.

Question 2(b)

(i) M/s. Super India Ltd. issued shares of the nominal value of 10 per share, out of which 5 was

payable on application and balance 5 was payable on call. The call money was invited by

the Board of directors but some shareholders, including a non-executive director, failed to

pay the same within the prescribed period. Explain the status of director who defaulted in

paying call money. Answer with reference to Companies Act, 2013.

(ii) Mr. Abhinav is named as a director for life in the articles of association of M/s. Aarti Private

Limited which was incorporated on 1st April, 1977. The articles of association of the company

also provide that he cannot be removed by the members in general meeting. Some of the

members want to remove 'Abhinav' by passing an ordinary resolution in general meeting.

State with reference to the relevant provisions of the Companies Act, 2013 whether the

proposed action is valid.

(iii) Vibrant Ltd. has 12 Directors on its Board and has the following clause in its Article of

Association:

“The question arising at any meeting of the Board of Directors or any Committee thereof shall

be decided by a majority of votes, except in cases where the Companies Act, 2013

expressly provides otherwise."

In one of the meeting of the Board of Directors of Vibrant Ltd 8 Directors were present. After

completion of discussion of matter, voting was done. 3 Directors voted in favour of the

motion, 2 Directors voted against the motion while 3 Directors abstained from voting.

State whether the motion was carried or not. It is clarified that the motion being voted up to

was not concerning a matter which requires consent of all the Directors present in the

meeting.

[4+5+6 = 15]





Answer

(i) As per section 167 read with section 164 of the Companies Act, 2013, a director shall vacate

his office if he fails to pay a call on the shares of the company held by him within 6 months

from the last day fixed for the payment of the call. Similarly, a person shall be disqualified

from becoming a director if he fails to pay a call on the shares of the company held by him

within 6 months from the last day fixed for the payment of the call (Section 164).

In the given case, a non-executive director has failed to pay a call on the shares of the

company. If the call is not paid for 6 months from the last date fixed for the payment of the call,

he shall vacate the office of director held by him. The vacation of office shall be automatic, i.e.

the non-executive director shall forthwith (i.e. immediately on expiry of 6 months from last date

of payment of call) vacate the office of director held by him. Also, in such a case, he shall be

disqualified from being appointed as a director in M/s Super India Ltd.)

(ii) Section 169 of Companies Act, 2013 gives a statutory right to the shareholders to remove any

director before the expiry of his term by following the prescribed procedure. It applies to

both public and private companies.

Any provision in the articles that a director shall not be removed, violates the statutory right

given to the shareholders, and is ultra vires the Act as provided by section 6 of Companies Act,

2013. Section 6 stipulates that the provisions of the Act have an overriding effect on clauses

contained in the memorandum, articles or any other agreement, if they are not in conformity

with the provisions of the Act.

The articles of a company entitled a director to hold office for life. The Court held that section

169 has been enacted to enable the shareholders to exercise control over the directors and

therefore the shareholders have been empowered to remove the directors. Therefore, the said

permanent director could be removed from the office [Tarlok Chand Khanna v Rajkumar

Kapoor (1983) 54 Comp Cas 12].

In the present case the articles of the company provide that Abhinav shall be a director holding

office for life and he shall not be removed by the members in general meeting. In view of the

over-riding effect of section 6, this clause is repugnant to section 169 and is therefore void.

Accordingly, the proposed action of removal of Abhinav by passing an ordinary resolution in

general meeting is valid subject to compliance of the procedure laid down in section 169.

(iii) As per Regulation 68 of Table F contained in Schedule I of Companies Act, 2013, except

where the Act requires a unanimous resolution, questions arising at a Board meeting shall be

decided by a majority of votes.





In the given case, the articles of Vibrant Ltd. contain a Regulation similar to Regulation 68 of

Table F. The articles of Vibrant Ltd. state that a resolution shall be deemed to be passed in a

Board meeting if it is approved by a majority of votes. In this regard, following points are worth

noting:

(a)

In a Board meeting, every director has one vote only.

(b) Only those directors who are present in the meeting and vote on a resolution are

considered while determining majority, i.e. following directors are not considered while

ascertaining the result of a resolution:

■ A director who is absent at a Board meeting.

■ A director who abstains from voting.

In the given case, the company has 12 directors, out of which only 8 are present in the Board

meeting. Out of 8 directors present, 3 directors have voted in favour, 2 directors have voted

against the resolution, and 3 directors have abstained from voting. The directors absent in the

Board meeting, and the directors present but abstaining from voting shall be ignored. The

number of votes cast in favour of the resolution exceeds the number of votes cast against the

resolution, and therefore the said resolution is passed. Following assumptions have been made in

the above case:

(a) No director voting in favour of the resolution is interested in the resolution, as per the

provisions of section 184.

(b) At least 4 disinterested directors are present in the Board meeting to form the quorum

required at the time of passing the resolution (section 174).

(c) The resolution does not require consent of all the directors present in Board meeting.

Question 2(c)

(i) The Board of directors of ABC Ltd. met thrice in the year 2015 and the 4th meeting, though

called could not be held for want of quorum. Examine with reference to the relevant

provisions of the Companies Act, 2013, the following:

1. Whether any provisions of the Companies Act, 2013 have been contravened?

2. Is a director bound to attend the Board meetings and when his frequent absence from

the Board meetings may be excused?

(ii)

Mr. Deva was appointed as the managing director of Sure Leather Industries Ltd. for a period

of five years with effect from 01.04.2012 on a salary of 12 lakhs per annum with other

perquisites. The Board of Directors of the company, oncoming to know of certain

questionable transactions, terminated the services of the managing director from 01.03.2015.

Mr. Deva termed his removal as illegal and claimed compensation from the company.

Meanwhile the company paid a sum of 5 lakhs on ad hoc basis to Mr. Deva pending

settlement of his dues. Discuss whether:





1. The company is bound to pay compensation to Mr. Deva, and, if so, how much.

2. The company can recover the amount of 5 lakhs paid on the ground that Mr. Deva is not

entitled to any compensation, because he is guilty of corrupt practices.

(iii) Discuss in brief the issue of certificate of registration of existing companies, under Companies

Act, 2013

[6+6+3 = 15]

Answer

(i)

1. The present problem relates to sections 173 and 174 of the Companies Act, 2013.

A. As per section 173, at least four Board meetings shall be held in each calendar year

and not more than 120 days shall intervene between two consecutive meetings of

the Board.

B.

As per section 174, if a Board meeting could not be held for want of quorum, then,

unless the articles of the company otherwise provide, the meeting shall automatically

stand adjourned -

(a) to the same day in the next week, or if that day is a national holiday, till the next

succeeding day, which is not a national holiday;

(b) at the same time;

(c) at the same place.

C. An adjourned Board meeting cannot be held, if the quorum is not present.

D. The issues raised in the given problem are answered as under:

Under the Companies Act, 2013, if a Board meeting is duly called but it is not held for

want of quorum, and as a consequence the minimum number of 4 Board meetings in a

calendar year as required under Section 173 is not held, it would amount to a

contravention of Section 174.

Conclusion: The Company has violated the provisions of section 173.

2. A director should endeavor to attend the maximum number of Board meetings. But he is

not duty bound to attend all the Board meetings.

However, if loss is caused to the company because of continuous absence of a director

from the meetings of the Board, it would amount to negligence and breach of duty.

Moreover, a director shall vacate his office if he absents himself, with or without obtaining

leave of absence from the Board, from all the Board meetings 'held during a period of 12

months [Section 167(1)(b)].

(ii) As per section 202 of Companies Act, 2013 –

■ Compensation can be paid only to a managing director or whole time director or manager.





■ The compensation payable shall not exceed the remuneration which he would have earned

if he had been in office for the unexpired residue of his term or for 3 years, whichever is

shorter.

■ Where the director has been guilty of fraud or breach of trust or gross negligence in the

conduct of the affairs of the company, he shall not be paid any compensation.

The answers to the given problem are as under:

1. The company is not bound to pay compensation to Mr. Deva if he has been found guilty of

any fraud or breach of trust. However, it is not proper for the company to withhold the

payment of compensation on the basis of allegations, unless there is a proper finding on the

involvement of Mr. Deva in corrupt practices.

The compensation payable shall not exceed ` 25 lakhs, i.e. at the rate of ` 12 lakhs per

annum for unexpired period of 25 months.

2.

As per the decision in Bells v Lever Bros [1932] AC 161 House of Lords, the compensation of ` 5

lakh already paid by the company to Mr. Deva cannot be recovered back if the company

later comes to know that Mr. Deva was guilty of serious breaches of duty and corrupt

practices which would have entitled the company to end the employment of Mr. Deva

without any compensation. It was also held that the managing director was under no

obligation to disclose to the company the breach of duty so as to give an opportunity to the

company to remove him without paying compensation.

(iii) The provisions of Section 367, of Companies Act, 2013 with respect to certificate of

registration are as follows:

1. On compliance with the requirements with respect to registration, and on payment of

prescribed fees, the Registrar shall issue a certificate of registration to the existing

company.

2. The certificate shall be signed by the Registrar.

3. The certificate shall state that the company applying for registration has been

incorporated as a company under Companies Act, 2013.

4. The company shall be incorporated from the date of issue of the certificate.

5. In case the company has been registered as a limited company, the certificate shall

state that the company is a limited company.

Question 2(d)

(i) Explain the provisions relating to investigation into the affairs of a company as per






(ii) As per provisions of the Companies Act, 2013, what is the status of Star Ltd., a company

incorporated in London, U.K., which has a share transfer office at Mumbai? Would the case

have been the same, if Star ltd. would have been formed by Indian citizens, but it did not

have its Mumbai branch?

(iii)

Examine, with reference to the provisions of the Foreign Exchange Management Act, 1999,

the residential status of the branches mentioned below:

1. Mita Limited, an Indian company having its Registered Office at Mumbai, India

established a branch at New York U.S.A. on 1st April, 2004.

2. Wella Ltd., a company incorporated and registered in London established a branch at

Chandigarh in India on 1st April, 2004.

3. Wella Ltd.'s Singapore branch which is controlled by its Chandigarh branch.

[5+4+6 = 15]

Answer

(i)

1. Power of CG to order investigation [Section 210(1)]

Where the Central Government is of the opinion, that it is necessary to investigate into the

affairs of a company, -

(a) on the receipt of a report of the Registrar or inspector under section 208;

(b) on intimation of a special resolution passed by a company that the affairs of the

company ought to be investigated; or

(c) in public interest,

it may order an investigation into the affairs of the company.

2. Duty of CG to order investigation [Section 210(2)]

Where an order is passed by a court or the Tribunal in any proceedings before it that the

affairs of a company ought to be investigated, the Central Government shall order an

investigation into the affairs of that company.

3. Appointment of inspectors by CG [Section 210(3)]

For the purposes of this section, the Central Government may appoint one or more persons as

inspectors to investigate into the affairs of the company and to report thereon in such manner

as the Central Government may direct.

(ii) As per Section 2(42) of the Companies Act, 2013, 'foreign company' means any company or

body corporate incorporated outside India which -

(a) has a place of business in India whether by itself or through an agent, physically or

through electronic mode; and

(b) conducts any business activity in India in any other manner.






1. A share transfer office or share registration office constitutes a place of business (Section 386

of the Companies Act, 2013). Since, the company incorporated outside India has a share

registration office at Mumbai; the company is a foreign company.

2. In the later case, Indian citizens have formed a company outside India. Since, the company

has not established any place of business in India, and the company does not conduct any

business activity in India in any other manner, the company cannot be said to be a foreign

company. The fact that Indian citizens have formed a company in a foreign country is

immaterial in deciding whether the company is a foreign company or not.

(iii) Section 2(u)of FEMA, 1999 defines a 'person'. As per this definition, the following shall be

covered in the definition of a 'person':

(a) A company

(b)

Any agency, office or branch owned by a 'person'.

Section 2(v) defines a 'person resident in India'. As per this definition, the following shall be

covered in the definition of a 'person resident in India':

(a) Any person or body corporate registered or incorporated in India.

(b) An office, branch or agency in India owned or controlled by a person resident outside

India.

(c) An office, branch or agency outside India owned or controlled by a person resident in

India.


1. Mita Limited as well as the New York branch of Mita Limited is a 'person'. Therefore,

residential status under FEMA shall be determined for each of them separately.

■ Mita Limited is incorporated in India. Therefore, it is a 'person resident in India'.

■ Mita Limited (a 'person resident in India') has established a branch outside India.

Therefore, the New York branch of Mita Limited falls under the clause 'an office, branch

or agency outside India owned or controlled by a person resident in India' and so the

New York branch is a 'person resident in India'.

2.

Wella Ltd. as well as Chandigarh branch of Wella Ltd. is a 'person'. Therefore, residential

status under FEMA shall be determined for each of them separately.

■ Wella Ltd. (a foreign company) does not fall under any of the clauses of the definition of

a 'person resident in India'. Therefore, Wella Ltd. is a person resident outside India.

■ The Chandigarh branch of Wella Ltd. is a 'person resident in India' since it falls under the

clause 'an office, branch or agency in India owned or controlled by a person resident

outside India'.





3. The Singapore branch of Wella Ltd., though not owned, is controlled by the Chandigarh

branch. The Singapore branch is a 'person resident in India' since it falls under the clause 'an

office, branch or agency outside India owned or controlled by a person resident in India'.

Question 2(e)

(i) The Central Government, without referring the matter to the Supreme Court of India for

inquiry, removed a member of the Competition Commission of India on the ground that he

has become physically or mentally incapable of acting as a member. Decide, under the

provisions of the Competition Act, 2002, whether removal of the member by the Central

government is lawful?

(ii) Is the Authority required to furnish any returns to the Central Government, as per provisions of

IRDA Act, 1999?

(iii) State the provisions relating to incorporation of Insurance Association of India, as per

Insurance Act, 1938.

(iv) Point out the circumstances where under the following powers may be exercised by the

Securities and Exchange Board of India:

1. Prohibiting a company from issuing or publishing any document or advertisement

soliciting money from public for the issue of securities.

2. Pass cease and desist order in relation to any listed company.

What remedies are available to the companies against such orders under the Securities and

Exchange Board of India Act, 1992.

[4+4+3+4 = 15]

Answer

(i) Section 11 of the Competition Act, 2002 empowers the Central Government to remove the

Chairperson or any member of the Competition Commission of India in certain cases. One of

the grounds mentioned in section11 is, "where he has become physically or mentally

incapable of acting as a Member."

However, in the following two cases, the Chairperson or a Member may be removed from

office only if the matter is referred by the Central government to the Supreme Court, and the

Supreme Court makes an order that the Chairperson or Member ought to be removed:

1. Where he has acquired such financial or other interest as is likely to affect prejudicially his

functions as a Member.





2. Where he has so abused his position as to render his continuance in office prejudicial to

the public interest.

In the given case, the ground under which the Central Government has ordered removal of a

Member does not fall under any of the above two grounds. So, the matter is not required to be

referred to the Supreme Court. Therefore, the order of removal made by the Central

Government is valid and lawful.

(ii) The provisions of section 20 may be explained as follows:

1. Furnishing of returns, statements etc. [Section 20(1)]

The Authority shall furnish to the Central Government at such time and in such form and

manner as may be prescribed, or as the Central Government may direct to furnish such

returns, statements and other particulars in regard to any proposed or existing programme

for the promotion and development of the insurance industry as the Central Government

may, from time to time, require.

2. Furnishing of Report describing its activities [Section 20(2)]

Without prejudice to the provisions of sub-section (1), the authority shall, within 9 months

after the close of each financial year, submit to the Central Government a report giving a

true and full account of its activities including the activities for promotion and

development of the insurance business during the previous financial year.

3. Laying of Report before the Parliament [Section 20(3)]

Copies of the reports received under sub-section (2) shall be laid, as soon as may be after

they are received, before each House of Parliament.

(iii) The provisions relating to incorporation of Insurance Association of India are explained

below:

1. Insurance Association of India to be a body corporate [Section 64A(1)]

All insurers are hereby constituted a body corporate by the name of the Insurance

Association of India.

2. Members of the Association [Section 64A(2)]

All insurers shall be known as members of the Insurance Association of India.

3. Characteristics of the Association [Section 64A(3)]

The Insurance Association of India shall have perpetual succession and a common seal

and shall have power to acquire, hold and dispose of all property, both movable and

immovable, and shall by the said name sue and be sued.





(iv) Section 11D empowers SEBI to pass an order requiring a person to cease and desist from

committing or causing the violation of the Act or rules made thereunder. SEBI may pass a

cease and desist order by complying with the following 2 requirements:

(a) SEBI shall cause an inquiry to be made to determine whether any person has violated, or

is likely to violate, any provisions of this Act or any rules or regulations made thereunder.

(b) SEBI shall not pass a cease and desist order against any listed company or a public

company which intends to get its securities listed on any recognised stock exchange,

unless it has reasonable ground to believe that such company has indulged in insider

trading or market manipulation.


Question 3(a)

(i) “The German Corporate Governance system is based around a dual board system”.

Elucidate the statement.

(ii) Discuss the various reasons for Corporate Social Responsibility (CSR). [5+5 = 10]

Answer

(i) The committee on corporate governance in Germany was chaired by Dr. Gerhard Cromme

and is usually referred to as the Cromme Report or Cromme Code. The code harmonizes a

wide variety of laws and regulations and contains recommendations and also suggestions

for complying with international best practice on Corporate Governance. The Cromme

Code was published in 2002 and was amended in 2005.

The German Corporate Governance system is based around a dual board system, and

essentially, the dual board system comprises a management board (Vorstand) and a supervisory

board (Aufsichtsrat).

The management board is responsible for managing the enterprise. Its members are jointly

accountable for the management of the enterprise and the chairman of the management

board co-ordinates the work of the management board. On the other hand, the supervisory

board appoints, supervises, and advises the members of the management board and is directly

involved in decisions of fundamental importance to the enterprise. The chairman of the

supervisory board co-ordinates the work of the supervisory board. The members of the

supervisory board are elected by the shareholders in general meetings. The co-determination

principle provides for compulsory employees representation. So, for firms or companies which





have more than five hundred or two thousand employees in Germany, employees are also

represented in the supervisory board which then comprises one-third employee representative

or one-half employee representative respectively. The representatives elected by the

shareholders and representatives of the employees ar e equally obliged to act in the enterprise‟s

best interests.

The idea of employee representation on boards is not always seen as a good thing because the

employee representatives on the supervisory board may hold back decisions being made that

are in the best interests of the company as a whole but not necessarily in the best interests of the

employees as a group. An example, would be where a company wishes to rationalize its

operations and close a factory but the practicalities of trying to get such a decision approved

by employee representatives on the supervisory board, and the repercussions of such a decision

on labour relations, prove too great for the strategy to be made a reality.

(ii) The rationale for CSR has been articulated in a number of ways. In essence, it is about

building sustainable businesses, which need healthy economies, markets and communities.

The major reasons for CSR can be outlined as:

1. Globalisation

As a consequence of cross-border trade, multinational enterprises and global supply chains,

there is an increased awareness on CSR concerns related to human resource management

practices, environmental protection, and health and safety, among other things. Reporting on

the CSR activities by corporates is therefore increasingly becoming mandatory.

In an increasingly fast-paced global economy, CSR initiatives enable corporates to engage in

more meaningful and regular stakeholder dialogue and thus be in a better position to anticipate

and respond to regulatory, economic, social and environmental changes that may occur.

There is a drive to create a sustainable global economy where markets, labour and communities

are able to function well together and companies have better access to capital and new

markets.

Financial investors are increasingly incorporating social and environmental criteria when making

decisions about where to place their money, and are looking to maximise the social impact of

the investment at local or regional levels.

2. International Legal Instruments and Guidelines

In the recent past, certain indicators and guidelines such as the SA 8000, a social performance

standard based on International Labour Organization Conventions have been developed.

International agencies such as United Nations and the Organization for Economic Co-operation

and Development have developed compacts, declarations, guidelines, principles and other

instruments that set the tone for social norms for organisations, though these are advisory for

organisations and not mandatory.





One of the United Nations Millennium Development Goals calls for increased contribution of

assistance from country states to help alleviate poverty and hunger, and states in turn are

advising corporates to be more aware of their impact on society. In order to catalyze actions in

support of the MDGs, initiatives such as Global Compact are being put in place to

instrumentalise CSR across all countries.

As the world‟s largest, global corporate citizenship initiative by the UN, the Global Compact, a

voluntary initiative is concerned with building the social legitimacy of business.

The Global Compact is a framework for businesses that are committed to aligning their business

operations and strategies with ten universally accepted principles that postulate that companies

should embrace, support and enact, a set of core values in the areas of human rights, labour

standards, the environment, and anti-corruption.

3. Changing Public Expectations of Business

Globally companies are expected to do more than merely provide jobs and contribute to the

economy through taxes and employment. Consumers and society in general expect more from

the companies whose products they buy. This is coherent with believing the idea that whatever

profit is generated is because of society, and hence mandates contributing a part of business to

the less privileged.

Further, separately in the light of recent corporate scandals, which reduced public trust of

corporations, and reduced public confidence in the ability of regulatory bodies and

organisations to control corporate excess. This has led to an increasing expectation that

companies will be more open, more accountable and be prepared to report publicly on their

performance in social and environmental arenas.

4.

Corporate Brand


themselves from their competitors, CSR initiatives enable corporates to build a stronger brand

that resonates with key external stakeholders, customers, general public and the government.


opportunities, and increasingly contribute to the corporates‟ ability to attract passionate and


Corporates in India are also realising that their reputation is intrinsically connected with how well

they consider the effects of their activities on those with whom they interact. Wherever the

corporates fail to involve parties, affected by their activities, it may put at risk their ability to

create wealth for themselves and society.

Therefore, in terms of business, CSR is essentially a strategic approach for firms to anticipate and

address issues associated with their interactions with others and, through those interactions, to

succeed in their business endeavors. The idea that CSR is important to profitability and can

prevent the loss of customers, shareholders, and even employees is gaining increasing

acceptance.





Further, CSR can help to boost the employee morale in the organisation and create a positive

brand-centric corporate culture in the organisation. By developing and implementing CSR

initiatives, corporates feel contented and proud, and this pride trickles down to their employees.




Question 3(b)

(i) Briefly discuss the various issues regarding the MoU System in Indian CPSEs.

(ii) “The typical organizational structure of PSUs makes it difficult for the implementation of

corporate governance practices as applicable to other publicly-listed private enterprises.”

In view of the above, list the difficulties encountered in governance.

[5+5 = 10]

Answer

(i) The Memorandum of Understanding (MoU) is a negotiated document between the

Government, acting as the owner of Centre Public Sector Enterprise (CPSE) and the

Corporate Management of the CPSE. It contains the intentions, obligations and mutual

responsibilities of the Government and the CPSE and is directed towards strengthening CPSE

management by results and objectives rather than management by controls and

procedures.

The beginnings of the introduction of the MoU system in India can be traced to the

recommendation of the Arjun Sengupta Committee on Public Enterprises in 1984. The first set of

Memorandum of Undertaking (MoU) was signed by four Central Public Sector Enterprises for the

year 1987-88. Over a period of time, an increasing number of CPSEs was brought within the MoU

system. Further impetus to extend the MoU system was provided by the Industrial Policy

Resolution of 1991 which observed that CPSEs will be provided a much greater degree of

management autonomy through the system of Memorandum of Undertaking.

Broadly speaking, the obligations undertaken by CPSEs under the MoU are reflected by three

types of parameters i.e., (a) financial (b) physical and (c) dynamic.

The Figure below clearly brings out the several challenges which the MoU system in India,

currently faces.





Dark Lines Connect Broad Themes (Issues)

Dotted lines connect Sub-Themes (Issues)

Despite the overwhelming success of the MOU system, there is a need to strengthen the exercise

further to make it more value added. Some of the suggestions in this regard are as follows:

CPSEs may detract themselves from soft targeting. This could be seen from the fact that your

MOU goals set by most of the CPSEs are achieved in the third quarter of a financial year

itself.

The internal systems need to be revamped to contribute to MOU effectiveness. This may

mean making the internal budgeting, pricing, materials control, MIS, performance appraisal,

recruitment systems to be brought in line with the goals set in MOU.

There is a need to percolate MOU system down the line.

The wage negotiations should go beyond the managerial cadre in the same split and form

as in the case of the process followed relating to executives.

Balance scorecard concept should be stressed further to yield a composite MOU index.

MoU instrumentlacks the ability to

propel New

Product/ Service

Development

Issues regarding the MoU System in Indian CPSEs

Impact of

External

Environment

Lacks the ability to

foster Good

Governance

Scientific

Setting of

the Base

Existing Balance Score

Card approach might

not be suitable in a

dynamic environment

Pressured

functioning amongst

CPSEs due torepetitions in the

financial parameters

Concept of

Benchmarking

needs more

emphasis

PSUs lacking

in

appropriate

CSR initiatives

Lack of MoU

as a Business

Review Tool

Making the

inclusion of

Offsetting

Parameters

Objective





The basic targets need to be fixed very carefully and questioning the very logic of taking the

previous year‟s accomplishments as good.

(ii) While routine governance regulations become applicable for public sector companies

formed under the Companies Act, 1956 and come under the purview of SEBI regulations the

moment they mobilize funds from the public, the typical organizational structure of PSUs

makes it difficult for the implementation of corporate governance practices as applicable to

other publicly-listed private enterprises. The typical difficulties faced are:

The board of directors will comprise essentially of bureaucrats drawn from various

ministries which are interested in the PSU. In addition, there may be nominee directors

from banks or financial institutions who have loan or equity exposures to the unit. The

effect will be to have a board much beyond the required size, rendering decision-

making a difficult process.

The chief executive or managing director (or chairman and managing director) and

other functional directors are likely to be bureaucrats and not necessarily professionals

with the required expertise. This can affect the efficient running of the enterprise.

Difficult to attract expert professionals as independent directors. The laws and regulations

may necessitate a percentage of independent component on the board; but many

professionals may not be enthused as there are serious limitations on the impact they

can make.

Due to their very nature, there are difficulties in implementing better governance

practices. Many public sector corporations are managed and governed according to

the whims and fancies of politicians and bureaucrats. Many of them view PSUs as a

means to their ends. A lot of them have turned sick due to overdoses of political

interference, even when their areas of operations offered enormous opportunities for

advancement and growth. And when the economy was opened up, many of them

lacked the competitiveness to fight it out with their counterparts from the private sector.

Question 3(c)


1. Influence of Cromme code on Corporate Governance in Germany

2. Risk and uncertainty in Whole Life Cycle Costing

(ii) According to “Altered Images: The 2001 State of Corporate Responsibility in India Poll”‟ a

survey conducted by Tata Energy Research Institute (TERI), the evolution of CSR in India has

followed a chronological evolution of 4 thinking approaches. Explain the same.

[(2.5 × 2) + 5 = 10]

Answer

(i)





1. Influence of Cromme code on Corporate Governance in Germany:

The German corporate governance system could be termed an „insider‟ system. The German

Corporate Governance system is based around a dual board system, and essentially, the dual

board system comprises a management board (Vorstand) and a supervisory board (Aufsichtsrat).


accountable for the management of the enterprise and the chairman of the management board

co-ordinates the work of the management board. On the other hand, the supervisory board

appoints, supervises, and advises the members of the management board and is directly involved

in decisions of fundamental importance to the enterprise. The chairman of the supervisory board

co-ordinates the work of the supervisory board. The members of the Supervisory board are elected

by the shareholders in general meetings. The co-determination principle provides for compulsory

employees representation. So, for firms or companies which have more than five hundred or two

thousand employees in Germany, employees are also represented in the supervisory board which

then comprises one-third employee representative or one-half employee representative

respectively. The representatives elected by the shareholders and representatives of the

employees are equally obliged to act in the enterprise‟s best interests.

The committee on corporate governance in Germany was chaired by Dr. Gerhard Cromme

and is usually referred to as the Cromme Report or Cromme Code. The code harmonizes a wide

variety of laws and regulations and contains recommendations and also suggestions for

complying with international best practice on Corporate Governance.

The Cromme Code was published in 2002 and is split into a number of sections, starting with a

section on shareholders and the general meeting. The Cromme Code also reflects some of the

latest developments in technology. The Cromme Code was amended in 2005.

Table: Key characteristics influencing German corporate governance

Feature Key characteristic

Main business form Public or private companies limited by shares

Predominant ownership structure Financial and non-financial companies

Legal system Civil law

Board structure Dual

Important aspect Compulsory employee representation on supervisory

board.

2. Risk and uncertainty in Whole Life Cycle Costing:






stochastic assessment of the performance of constructed facilities from feasibility to disposal.

WLCC decisions are complex and usually comprise an array of significant factors affecting the

ultimate cost decisions. WLCC decisions generally have multiple objectives and alternatives,

long-term impacts, multiple constituencies in the procurement of construction projects, generally

involve multiple disciplines and numerous decision makers, and always involve various degrees

of risk and uncertainty. Project cost, design and operational decision parameters are often

established very early in the life of a given building project. Often, these parameters are chosen

based on owner‟s and project team‟s personal experiences or on an ad hoc static economic

analysis of the anticipated project costs. While these approaches are common, they do not

provide a robust framework for dealing with the risks and decisions that are taken in the

evaluation process. Nor do they allow for a systematic evaluation of all the parameters that are

considered important in the examination of the WLCC aspects of a project. The existing

methods also do not adequately quantify the true economic impacts of many quantitative and

qualitative parameters.

Decisions about building-related investments typically involve a great deal of uncertainty about

their costs and potential savings. Performing a WLCCA greatly increases the likelihood of

choosing a project that saves money in the long run. Yet, there may still be some uncertainty

associated with the WLCC results. WLCCAs are usually performed early in the design process

when only estimates of costs and savings are available, rather than certain dollar amounts.

Uncertainty in input values means that actual outcomes may differ from estimated outcomes.

There are techniques for estimating the cost of choosing the "wrong" project alternative.

Deterministic techniques, such as sensitivity analysis or breakeven analysis, are easily done

without requiring additional resources or information. They produce a single-point estimate of

how uncertain input data affect the analysis outcome. Probabilistic techniques, on the other

hand, quantify risk exposure by deriving probabilities of achieving different values of economic

worth from probability distributions for input values that are uncertain. However, they have

greater informational and technical requirements than do deterministic techniques. Whether

one or the other technique is chosen depends on factors such as the size of the project, its

importance, and the resources available. Since sensitivity analysis and break-even analysis are

two approaches that are simple to perform, they should be part of every WLCCA.

(ii) According to “Altered Images: the 2001 State of Corporate Responsibility in India Poll”, a


followed a chronological evolution of 4 thinking approaches:

Ethical Model (1930 – 1950): One significant aspect of this model is the promotion of “trusteeship”

that was revived and reinterpreted by Gandhiji. Under this notion the businesses were motivated

to manage their business entity as a trust held in the interest of the community. The idea

prompted many family run businesses to contribute towards socioeconomic development. The

efforts of Tata group directed towards the well being of the society are also worth mentioning in

this model.





Statist Model (1950 – 1970s): Under the aegis of Jawahar Lal Nehru, this model came into being in

the post independence era. The era was driven by a mixed and socialist kind of economy. The

important feature of this model was that the state ownership and legal requirements decided

the corporate responsibilities.

Liberal Model (1970s – 1990s): The model was encapsulated by Milton Friedman. As per this

model, corporate responsibility is confined to its economic bottom line. This implies that it is

sufficient for business to obey the law and generate wealth, which through taxation and private

charitable choices can be directed to social ends.

Stakeholder Model (1990s – Present): The model came into existence during 1990s as a

consequence of realisation that with growing economic profits, businesses also have certain

societal roles to fulfill. The model expects companies to perform according to “triple bottom line”

approach. The businesses are also focusing on accountability and transparency through several

mechanisms.






L E V E L C

KNOWLEDGE


know

List Make a list of



COMPREHENSION


understand






consideration


something

APPLICATION


apply

your knowledge




means





ANALYSIS



have learned



Compare

and contrast


between

Construct Build up or compilePriorit ise Place in order of priority or sequence for

action


SYNTHESIS




optimum


reasoning




EVALUATION



make decisions or

recommendations










This paper contains 3 questions. All questions are compulsory, subject to instructions providedagainst each question. All workings must form part of your answer. Assumptions, if any, must be

clearly indicated.


(i) Nitya Builders Ltd decides to pay 2.5 percent of value of debentures as underwriting

commission to the underwriters but the articles of the company authorizes to pay only 2

percent underwriting commission on debentures. Comment on the validity based on

Companies Act, 2013. [3]

(ii) The object clause of Memorandum of Association of the XYZ (Pvt.) Ltd., authorized to do

trading in diamonds. The company, however, entered into partnership with Mr. Andy and

traded in diamonds and incurred liabilities to Mr. Andy. The company subsequently, refused

to admit the liability to Mr. Andy on the ground of „ultra vires‟ the company. Advice whether

stand of the company is legally valid and if so, gives reasons to support your answer.

[3]

(iii) Mr. Bakshi resided for a period of 170 days in India during the financial year 2013-14 and

thereafter went abroad. He came back to India on 1.04.2014., as an employee of a businessorganization. What would be his residential status during the financial year 2014-15 under

FEMA, 1999? [3]

(iv) During the year 2015, Excel ltd. held four meetings of the Board on 2nd January 2015, 10th

May, 2015, 16th October 2015 and 31st December 2015. Examine whether this was in

accordance with the provisions of Companies Act, 2013. [3]

(v) Who is authorized to call a Board meeting? [3]

(vi)

State the core elements that CSR should cover. [2]

(vii)State the responsibility of State Owned Enterprises in providing equitable treatment to

shareholders. [3]

Answer





(i) As per the provisions contained in Rule 13 of the Companies (Prospectus and Allotment of

Securities) Rules, 2014, a company cannot pay underwriting commission of 2.5% since the

rate of underwriting commission cannot be more than 2.5% of issue price of debentures or

such lower rate as prescribed under the articles, i.e. 2% in the present case

Hence, the maximum permissible underwriting commission in this case is 2%.

(ii) The company is not liable to Mr. Andy since the partnership agreement for trading in

diamonds is an „ultra vires‟ contract, and is not binding on the company or the other party.

The power to enter into partnership is not an ancillary or incidental power. Such power can

be legally exercised by the company only if the object clause of memorandum expressly

authorizes the company to enter into partnership.

(iii) The residential status of an individual for a particular financial year is determined with

reference to his residence in India in the immediately preceding financial year. In the

problem given, Mr. Bakshi resided in India for less than 183 days in the financial year 2013-14.

Therefore, for the financial year 2014-15 he is a „Person resident in India‟ irrespective of the

purpose or duration of his stay. Unless an individual resides in India for more than 182 days in

the preceding financial year, he can in no case be termed as a person resident in India.

(iv) As per Sec 173(1) of Companies Act, 2013 at least four Board meetings shall be held in each

calendar year and not more than 120 days shall intervene between two consecutive

meetings of the Board.

In the present case the gap between two consecutive Board meetings held on 2 nd January

2015 and 10th May, 2015 was more than 120 days, and also the gap between two

consecutive Board meetings held on 10th May and 16th October, was more than 120 days.

Hence section 173 has been violated.

(v) The Companies Act, 2013 does not contain any provision as to who can convene a Board

meeting. As per Regulation 67 of Table F, an individual director may requisition a Board

meeting. On such requisition of a director, the manager or secretary shall be duty bound to

summon a Board meeting. Any director (including the director requisitioning the Board

meeting) may also summon the Board meeting. The notice of the Board meeting should be

sent on behalf of the company.

(vi) The CSR Policy should normally cover following core elements:

1. Care for all Stakeholders

2. Ethical functioning

3. Respect for Workers‟ Rights and Welfare

4. Respect for Human Rights





5. Respect for Environment

6. Activities for Social and Inclusive Development

(vii) The SOEs should recognize the rights of all shareholders and in accordance with the OECD

principles of corporate governance ensure their equitable treatment and equal access to

corporate information.

SOEs should observe a high degree of transparency towards all shareholders.

The coordinating or ownership entity and SOEs should ensure that all shareholders are

treated equally.

The participation of minority shareholders in shareholder meetings should be facilitated in

order to allow them to take part in fundamental corporate decisions, such as board

election


Question 2(a)

(i) Explain the power of the central Government to exempt a class of banks or financial

institutions, as per Sarfaesi Act, 2002.

(ii) Accounts and Balance Sheet along with auditor's reports has been filed with Reserve Bank of

India after nine months from the end of the period to which these relate. Comment on the

validity based on Banking Regulation Act, 1949.

(iii)

Point out the circumstances where under the following powers may be exercised by the

Securities and Exchange Board of India:

1. Prohibiting a company from issuing or publishing any document or advertisement

soliciting money from public for, the issue of securities.

2. Pass cease and desist order in relation to any listed company.

What remedies are available to the companies against such orders under the Securities and

Exchange Board of India Act, 1992.

(iv) Examine with reference to the relevant provisions of the Competition Act, 2002 whether

Government department supplying water for irrigation to the agriculturists after levying

charges for water supplied (and not a water tax) can be considered as an 'enterprise'.

[4+3+4+4 = 15]

Answer





(i) The Provisions of section 31A of Sarfaesi Act, 2002 are explained as follows:

1. Nature of exemption

The Central Government may, by notification in the public interest, direct that any of the

provisions of this Act, -

(a) Shall not apply to such class or classes of banks or financial institutions; or

(b) Shall apply to the class or classes of banks or financial institutions with such

exceptions, modifications and adaptations,

as may be specified in the notification.

2. Laying a copy of Notification before Parliament

A copy of every notification proposed to be issued shall be laid in draft before each

House of Parliament, while it is in session, for a total period of 30 days which may be

comprised in one session or in two or more successive sessions, and if, before the expiry

of the session immediately following the session or the successive sessions aforesaid, both

Houses agree in disapproving the issue of the notification or both Houses agree in

making any modification in the notification, the notification shall not be issued or, as the

case may be, shall be issued only in such modified form as may agreed upon by both

the Houses.

(ii) As per section 31 of the Banking Regulation Act, 1949 , the accounts and balance sheet

together with the auditor's report shall be furnished as returns to the Reserve Bank within 3

months from the end of the period to which they refer, viz. close of the financial year.

However, the Reserve Bank may extend the said period of 3 months by a further period not

exceeding 3 months.

In the given case, the required documents have not been filed with the Reserve Bank upto 9

months of close of the financial year. This amounts to contravention of section 31 of the

Banking Regulation Act, 1949.

(iii) SEBI may take the following measures for the protection of investors:

1. It may specify by regulations -

(a) the matters relating to issue of capital, transfer of securities and other matters

incidental thereto; and

(b) the manner in which such matters shall be disclosed by the companies;

2. It may, by a special or general order, -

(a) prohibit any company from issuing of prospectus, any offer document, or

advertisement soliciting money from the public for the issue of securities; and

(b) Specify the conditions subject to which the prospectus, such offer document or





advertisement, if not prohibited, may be issued.

3. It may specify the requirements for listing and transfer of securities and other matters

incidental thereto."

(iv)

The given problem relates to section 2(h) of the Competition Act, 2002.

As per section 2(h), 'enterprise' means a person or a department of the Government, who or

which is, or has been, engaged in any activity, relating to the production, storage, supply,

distribution, acquisition or control of articles or goods, or the provision of services, of any kind,

or in investment, or in the business of acquiring, holding, underwriting or dealing with shares,

debentures or other securities of any other body corporate, either directly or through one or

more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is

located at the same place where the enterprise is located or at a different place or at

different places, but does not include any activity of the Government relatable to the

sovereign functions of the Government including all activities carried on by the departments

of the Central Government dealing with atomic energy, currency, defence and space.

Thus, a Government department supplying water for irrigation to the agriculturists after

levying charges for water supplied is an 'enterprise'.

Question 2(b)

(i) Indian citizens incorporated a company in U.K. for the purpose of carrying on business there.

Examine with reference to the relevant provisions of the Companies Act, 2013 whether it is a

"Foreign Company". What would be your answer in case the U.K. company was incorporated

by a company registered in India?

(ii) What are the provisions relating to placing of annual report in the House(s) of State

Legislature where the Central a Government is not a member in a Government company, as

per Companies Act, 2013.

(iii) Mohan Company Limited decided to terminate the services of Mr. Dharmesh who was

employed as Sales Manager. The Company, however, feels that the Sales Manager may not

vacate the company's flat at Delhi. What action can be taken by the company under the

Companies Act, 2013 to regain possession of the flat? Is it necessary to take such action

before terminating the services of Mr. Dharmesh? Will it make any difference, if the flat is not

owned by the company, but taken on lease?

[4+5+6 = 15]

Answer





(i) As per Section 2(42) of the Companies Act, 2013, 'foreign company' means any company or

body corporate incorporated outside India which -

(a) has a place of business in India whether by itself or through an agent, physically or

through electronic mode; and

(b) conducts any business activity in India in any other manner.

Thus, for deciding as to whether a company is a foreign company or not, the criterion is to

see as to whether the company has established a place of business in India or not, and

whether the company conducts any business activity in India in any other manner, and/not

the persons who have incorporated the company.

In this case, Indian citizens have formed a company outside India. Since, the company has

not established any place of business in India, and the company does not conduct any

business activity in India in any other manner, the company cannot be said to be a foreign



The answer would have remained same even if the U.K. Company had been incorporated

by a company registered in India for the same reason as stated above.

(ii) The provisions relating to preparation and placing of annual report in the House(s) of the

State Legislature are contained in section 395 of the Companies Act, 2013. These provisions

are explained as follows:

1. Duties of the State Government

(a) Where the Central Government is not a member of a Government company, every

State Government which is a member of that company, or where only one State

Government is a member of the company, that State Government shall cause to be

prepared an annual report on the working and affairs of that Government

Company.

(b) The annual report shall be prepared within 3 months of the AGM of that Government

company.

(c)

The State Government(s) shall lay before the House or both Houses of the State

Legislature –

(i) a copy of the annual report;

(ii) a copy of the audit report; and

(iii) comments upon or supplement to the audit report, made by CAG.

2. Applicability of Section 395





The provisions of section 395 shall, so far as may be, apply to a Government company in

liquidation as they apply to any other Government company.

(iii) An officer or employee of a company shall be punishable with fine which may extend to `

10,000 in the following cases:

(a) where he wrongfully obtains possession of any property of a company; or

(b) where he being in the possession of any property of the company, wrongfully withholds it

or knowingly applies it to purposes other than those expressed or directed in the articles

and authorised by this Act.

The Court may order him to deliver any such property within a time to be fixed by the Court.

The questions raised in the present case are answered as follows:

1. The Company can file a complaint under section 452 of the Companies Act, 2013

requesting the Court to make an order for delivering the possession of the property to the

company.

2. The Supreme Court has held that section 452 of the Companies Act, 2013 applies both to

'existing officers or employees' and 'past officers or employees' (Baldev Krishna Sahiv

Shipping Corporation of India Ltd. (1987) 3 Comp LJ 57]. Therefore, complaint under

section 452 of the Companies Act, 2013 can be filed even if the services of Mr. Dharmesh

have been terminated.

3. Section 452 of the Companies Act, 2013 does not concern the aspect of title, but it is

exclusively confined to the aspect of possession. Accordingly, section 452 of the

Companies Act, 2013 shall apply to a property, which does not belong to the company,

but in respect of which the company is in exclusive possession. Accordingly, the

company can make a complaint under section 452 of the Companies Act, 2013 even if

the company is not the owner of the property but only has a leasehold right [Kannankadi

Gopal Krishna Nair v Prakash Chunder Juneja (1994) 81 Comp Cas 104].

Question 2(c)

(i) Prithvi Limited is paying remuneration to its non-executive directors at the rate of one

percent of the net profits of the company distributed equally among all the non-executive

directors. Is it possible for the company to pay minimum remuneration to non-executive directors

besides sitting fees in the event of loss in a financial year? Answer with reference to






(ii) The Board of directors of a public company in the private sector having made an average

profit of 1 crore during the last 3 financial years propose to donate during the current year

40,000 to a general charitable fund.

Advise the Board of directors about their powers in respect of the above explaining the

relevant provisions of the Companies Act, 2013.

(iii) Advise the Board of directors of a public company about their powers in respect of the

following proposal explaining the relevant provisions of the Companies Act, 2013:

„Delegating to the managing director of the company the power to invest surplus funds of

the company in the shares of some companies.‟

(iv) Mr. Singh was appointed as the managing director of a public limited company for a period

of 5 years effective from 1.04.2007. It is noticed that he performed certain acts on behalf of

the company after the expiry of his term. Some of the aggrieved parties have questioned the

validity of the managing director's acts. Advise, with reference to Companies Act, 2013.

[3+3+5+4 = 15]

Answer

(i) As per second proviso to Sec 197(1) of Companies Act, 2013, the remuneration of non-

executive directors shall not exceed -

(a) 1% of net profits, if the company has employed a managing director or whole time

director or manager; or

(b) 3% of net profits, if the company has not employed any managing director, whole time

director and

Remuneration to a non-executive director may be paid only if the company has made

profits [sec 197(3) of Companies Act, 2013]. Schedule V does not empower a company to

pay remuneration to its non-executive directors where the company has suffered a loss.

There is no prohibition on payment of sitting fees even where the company has not earned

any profits or its profits are inadequate.

(ii) As per section 181 of the Companies Act, 2013, prior permission of the company in general

meeting shall be required, if the amount of charitable contribution exceeds 5% of average

net profits during preceding 3 financial years.

The donation of ` 40,000 to general charitable fund is not related to the business of the

company and is therefore subject to the restrictions imposed under section 181 of the

Companies Act, 2013. Accordingly, the donation shall not exceed 5% of average net profits

during immediately preceding 3 financial years, unless prior permission of the company in





general meeting is obtained. In the given case, donation upto ` 5,00,000 (being 5% of ` 1

crore) is permissible without obtaining prior permission of the company in general meeting.

Since, the Board has donated only ` 40,000, such donation is within the limits and does not

require the prior permission of the company in general meeting.

(iii) As per section 179(1) of the Companies Act, 2013, the Board is entitled to exercise all such

powers as the company is authorised to exercise. Similarly, the Board is authorised to do all

such acts and things as the company is authorised to do. However, the provisions of section

179(1) of the Companies Act, 2013 are subject to the other provisions of the Companies Act,

2013 (e.g. Sections 179(3), 180, 181 and 182 of the Companies Act, 2013).

As per section 179(3) of the Companies Act, 2013, the powers relating to investment of funds

of the company shall be exercised by the Board at a Board meeting only. However, such

power may be delegated by the Board, subject to the following:

(a)

The power to invest the funds of the company may be delegated to a committee of

directors, managing director, manager, a principal officer of the company or a principal

officer of the branch office.

(b) The delegation of power shall be made by passing a resolution at a Board meeting.

(c) The Board may delegate such power subject to such conditions as it may deem fit.

However, as per section 186 of the Companies Act, 2013, acquisition of securities of any

body corporate shall be made by passing a unanimous resolution at a Board meeting only.

Therefore, as per section 186, the power to invest the funds in the shares of other companies

cannot be delegated.

In the present case, the power to invest surplus funds of the company in the shares of some

companies is proposed to be delegated to the managing director of the company. Such

delegation is not permissible in view of provisions of section 186 of the Companies Act, 2013.

(iv) Section 176 of Companies Act, 2013 validates the acts of a director if it is subsequently

discovered that -

his appointment was invalid by reason of any defect or disqualification; or

his appointment was terminated by virtue of any provision contained in the Act or in the

articles.

However, the acts done by a director in his capacity as a managing director are not

validated under section 176, except the acts done in the capacity of a director.





Where a managing director ceased to hold his office, all his subsequent acts were held to

be invalid. It was not an irregular exercise of power, but exercise of power by a person who

had no authority at all [Varkey Souriar v Keraleeya Banking Co. Ltd. AIR 1957 Ker 97].

The facts in the present case are identical to the facts referred to in the above case. Thus,

the acts done by Mr. Singh, after the expiry of his term of office will not be valid.

Question 2(d)

(i) Seven Seas Company Ltd. in its annual general meeting appointed all its directors by

passing one single resolution. No objection was made to the resolution. Examine the validity

of appointment of directors explaining the relevant provisions of the Companies Act, 2013.

Will it make any difference, if Seven Seas Company was a private company?

(ii) Annual general meeting of Adarsh Ltd. has been scheduled in compliance with the

requirements of the Companies Act, 2013. In this connection, it has some directors who are

rotational and out of which some have been appointed long back, some have been

appointed on the same day,

Decide in this connection,

1. Which of the directors shall be retiring by rotation and be eligible for re-election?

2. In case two directors were appointed on the same day, how would you decide their

retirement by rotation?

3. In case the meeting could not decide how the vacancies caused by retirement to be

dealt with, what shall be consequences?

4.

What will be your answer, assuming that the matter could not be decided even at the

adjourned meeting?

(iii) Vriddhi Ltd, requires your advice in relation to applicability of appointment of woman

director. Kindly advice with reference to Companies Act, 2013.

[4 + (2 ×4) + 3 =15]

Answer

(i) At a general meeting, two or more persons cannot be appointed as directors by a single

resolution unless a resolution that appointment shall be so made has first been agreed to by

the meeting without any 'vote being cast against it. A resolution moved in contravention of

this provision shall be void, whether or not objection was raised at the time when such

resolution was passed (Section 162 of Companies Act, 2013).

In the present case, all the members passed a single resolution appointing all the directors.

The resolution is void since before moving the resolution for appointment of all the directors





by a single resolution, no resolution was passed to the effect that all the directors shall be

appointed by a single resolution. It is immaterial that no member objected to the

appointment of all the directors by a single resolution.

As per section 176, the acts of these directors shall not be invalid till the defect in their

appointment is noticed by the company.

Section 162 applies to all companies, whether public or private. Therefore, the answer would

remain same even if the company in the present case is a private company.

(ii) The provisions relating to rotational directors, retirement of directors, reappointment of

directors end automatic reappointment are contained in section 152(6) and (7) of the

Companies Act, 2013. Applying these provisions, the given problem is answered as under:

1. Not less than 2/3rd of total number of directors (any fraction contained in that 2/3rd shall

be rounded off as one) shall be rotational directors. Out of these rotational directors,

l/3rd (or nearest to l/3rd) shall retire from office at every annual general meeting. A

director retiring by rotation may be reappointed at the same annual general meeting.

However, the company may, instead of reappointing the retiring director, appoint some

other person.

2. The directors liable to retire by rotation shall be those who have been longest in the

office. In case, two or more directors were appointed on the same day, the names of

directors liable to retire shall be determined -

(a) as per any agreement between them; or

(b)

by lots, in the absence of any such agreement.

3. If the vacancy in the place of retiring director is not filled up and the meeting has not

resolved not to fill the vacancy, the annual general meeting shall adjourn to the next

week at the same time and place or if that day is a public holiday, then to next

succeeding day which is not a public holiday.

4. If at the adjourned meeting also, the vacancy in the place of retiring director is not filled

up and the meeting has not resolved not to fill the vacancy, the retiring director shall be

deemed to be reappointed. However, at an adjourned annual general meeting, a

retiring director shall not be deemed to be automatically reappointed in the following

cases:

■ Where a resolution for the reappointment of such director was put and lost.

■ Where the retiring director has, in writing, expressed his unwillingness to be

reappointed.

■ Where he is not qualified or is disqualified for appointment.





■ Where a resolution is required for his reappointment.

■ Where a resolution in contravention of section 162 is passed.

(iii) The provisions relating to appointment of woman director are contained in section 149 of the

Companies Act, 2013 read with Rule 3 of the Companies (Appointment and Qualification of

Directors) Rules, 2014. These provisions are explained as follows:

Applicability

Such class (es) of companies as may be prescribed, shall have at least 1 woman

director.

Following classes of companies have been prescribed for this purpose:

(i) Every listed company; and

(ii) Every public company having paid up share capital of ` 100 crore or more; and

(iii)

Every public company having turnover of ` 300 crore or more.

For this purpose, the paid up share capital or turnover, as the case may be, as on the last

date latest audited financial statements shall be taken into account.

Hence, if Vriddhi qualifies any of the above criterions it should appoint a woman director.

Question 2(e)

(i) The Board of directors of a company decides to revise the accounts which have already

been adopted by the shareholders in annual general meeting. Advise.

(ii) Explain the concept of 'CSR' (Corporate Social Responsibility) as introduced by the

Companies Act, 2013. Examining the provisions of the Act and state the applicability,

constitution of CSR committee and its duties.

(iii) The Annual General Meeting of Supreme Limited declared a dividend at the rate of 30

percent payable on paid up equity share capital of the Company as recommended by

Board of Directors on 30th April, 2013. But the Company was unable to post the dividend

warrant to Mr. Rudra, an equity shareholder of the company, up to 30th June, 2013. Mr. Rudra

filed a suit against the Company for the payment of dividend along with interest at the rate

of 20 percent per annum for default period. Decide in the light of provisions of the

Companies Act, 2013 whether Mr. Rudra would succeed? Also state the directors' liability in

this regard under the Act.

[5+6+4 = 15]

Answer





(i) There is no provision in the Companies Act, expressly permitting or prohibiting revision or

reopening of accounts after adoption. Generally, reopening or rectification of accounts is

not permitted if the accounts have already been adopted at the annual general meeting.

The Institute of Chartered Accountants of India is also of this opinion; accordingly, accounts

once adopted by the members cannot be reopened, revised or rectified under any

circumstances.

However, the Department of Company Affairs (now Ministry of Corporate Affairs) has

permitted revision/rectification of accounts provided that -

■ the revision is made for meeting the technical requirements of taxation laws or of any

other law;

■ such revision will result in true and fair view of state of affairs of the company;

■ the revised annual accounts shall be adopted in the subsequent annual general meeting

or extraordinary general meeting;

■ the revised annual accounts shall be filed with the registrar as per section 137 of the


(ii) The provisions relating to corporate social responsibility are contained in section 135 of the

Companies Act, 2013 read with the Companies (Corporate Social Responsibility Policy) Rules,

2014, as explained below:

1. Applicability

(a)

Section 135 applies to a company (including a foreign company) only if it satisfies

one or more of the following criterion during any financial year.

(i) The net worth of the company is ` 500 crore or more.

(ii) The turnover of the company is ` 1,000 crore or more.

(iii) The net profit of the company is ` 5 crore or more.

(b) Every company which ceases to fulfill the above criteria for 3 consecutive financial

years shall not be required to -

(i)

constitute CSR Committee; and

(ii) comply with the provisions contained in Section 135, till such time it meets the

criteria specified above.

2. Constitution of CSR Committee

(a) Every company to which section 135 is applicable, shall constitute a Corporate





Social Responsibility Committee of the Board (CSR Committee).

(b) The CSR Committee shall consist of 3 or more directors.

(c) Out of the 3 directors, at least 1 director shall be an independent director.

(d) An unlisted public company or a private company which is not required to appoint

an independent director (as per Section 149 of the Companies Act, 2013), shall have

its CSR Committee without any independent director.

(e) A private company having only 2 directors on its Board, shall constitute its CSR

Committee with 2 directors only.

(f) In case of a foreign company, the CSR Committee shall comprise of at 2 two persons

of which one person shall be a person resident in India authorised to accept on

behalf of the foreign company service of notices and other documents, and the

other person shall be nominated by the foreign company.

3. Duties of the CSR Committee

(a)

The CSR Committee shall formulate and recommend to the Board, a CSR Policy. CSR

Policy shall indicate the activities to be undertaken by the company as specified in

Schedule VII.

(b) CSR Committee shall recommend the amount of expenditure to be incurred on the

CSR activities to be undertaken by the company.

(c) CSR Committee shall monitor the CSR Policy of the company from time to time.

(d) The CSR Committee shall institute a transparent monitoring mechanism for

implementation of the CSR projects or programs or activities undertaken by the

company.

(iii)

As per section 127 of the Companies Act, 2013, the dividend shall be paid within 30 days

from the date of declaration of dividend. In case, the dividend warrant is posted by the

company within 30 days of declaration of dividend, it is considered to be a sufficient

compliance of section 127 of the Companies Act, 2013.

In the present case, the company has failed to post the dividend warrant within 30 days of

declaration of dividend, and so, this amounts to contravention of section 127 of the

Companies Act, 2013, attracting the penal provisions of section 127 of the Companies Act,

2013, Stated as under:

1.

Mr. Rudra has the right to sue the company for recovery of dividend along with interest.

However, the company shall be liable to pay simple interest @ 18% per annum, and not

20% per annum.

2. Every director who knowingly a party to the default, shall be liable for imprisonment upto

2 years and shall also be liable for fine of not less than ` 1,000 per day for each day of

default.






Question 3(a)

(i) “Corporate Social Responsibility is to be considered as an investment and not as a charity” –

Elaborate the statement.

(ii) What is Whole Life-Cycle Costing Risk Management? Why it is not widely embraced?

[5+5 = 10]

Answer

(i) The originally defined concept of CSR needs to be interpreted and dimensionalised in the

broader conceptual framework of how the corporate embed their corporate values as a

new strategic asset, to build a basis for trust and cooperation within the wider stakeholder

community.


strategy, yet the concept still is believed to be strongly linked to philanthropy. There is a need

to bring about an attitudinal change in people about the concept.

By having more coherent and ethically driven discourses on CSR, it has to be understood

that CSR is about how corporates place their business ethics and behaviors to balance

business growth and commercial success with a positive change in the stakeholder

community.




Being treated as a separate entity, there is always a flexibility and independence to carry

out the tasks.

But often these entities work in isolation without creating a synergy with the other

departments of the corporate. There is a need to understand that CSR is not only a pure

management directive but it is something that is central to the company and has to be

embedded in the core values and principles of the corporate.

Whatever corporates do within the purview of CSR has to be related to core business. It has

to utilise things at which corporates are good; it has to be something that takes advantage





of the core skills and competencies of the companies. It has to be a mandate of the entire


organisation.

Charity means the act of donating money, goods, time or effort to support a charitable

cause in regard to a defined objective. Charity can be equated with benevolence and

charity for the poor and needy. It can be any selfless giving towards any kind of social need

that is not served, underserved, or perceived as unserved or underserved. Charity can be by

any individual or by a corporate.

Corporate Social Responsibility is about how a company aligns their values to social causes

by including and collaborating with their investors, suppliers, employees, regulators and the

society as a whole. The investment in CSR may be on people centric issues and/or planet

issues. A CSR initiative of a corporate is not a selfless act of giving; companies derive long-

term benefits from the CSR initiatives and it is this enlightened self interest which is driving the

CSR initiatives in companies.

(ii) Whole life-cycle costing (WLCC) is rapidly becoming the standard method for the long-term

cost appraisal of buildings and civil infrastructure projects. With clients now demanding

buildings that demonstrate value for money over the long term, WLCC has become an

essential tool for those involved in the design, construction, operation and risk analysis of

construction projects.

WLCC risk management is one of the important issues facing building assets executives

today. As spending on building assets rises, asset owners become increasingly worried about

WLCC optimisation throughout the life span of facilities; consequently, they become highly

vulnerable to the risk of operational costs. Usually, when decision makers are faced with an

investment choice under uncertain conditions, their main concern is to avoid projects whose

actual economic outcome might be less favourable than what is acceptable, resulting in

the risk of missing out on potential investment opportunities.

Thus, the objective of WLCC risk management should be to assist decision makers in

evaluating whole life alternatives so that investment success is maximised. Usually traditional

methods are used to optimise this process. However, traditional approaches to risk

management have failed miserably because of their demand for mysterious statistical data

that the end user does not have (Koller 1999). The key to successful WLCC risk-process and

risk modelling is to build a WLCC framework that requires from the user nothing more than

they presently can provide. This can be a challenge that can be addressed through the use

of a variety of techniques. That is why it is important to use a combination of risk

management techniques (depending on the stage of assessment) for risk assessment in

WLCC, ranging from simple deterministic approaches to uncertainty assessment (e.g.

sensitivity and break even analysis methods which are easy to use and understand and





require no additional methods of computation beyond the ones used in LCC analysis), to

very sophisticated methods based on probabilities, artificial intelligence (AI) and a hybrid of

both techniques.

The reasons why it fails to embrace WLCC are:

The lack of universal methods and standard formats for calculating whole life costs.

The difficulty in integration of operating and maintenance strategies at the design

phase.

The scale of the data collection exercise, data inconsistency.

The requirement for an independently maintained database on performance and cost

of building components.

Question 3(b)

(i)

What is Corporate Governance? What is the need for Corporate Governance in India?

(ii) Write a note on CSR Policy, expenditure and reporting as per Companies Act, 2013.

[5+5 = 10]

Answer

(i) Corporate governance is:

The system by which companies are directed and controlled - The Cadbury Report, 1992.

The process of supervision and control intended to ensure that the company‟s

management acts in accordance with the interests of shareholders - Parkinson, 1994.

Corporate Governance is the acceptance by management of the inalienable rights of

shareholders as the true owners of the corporation and of their own role as trustees on

behalf of the shareholders. It is about commitment to values, about ethical business

conduct and about making a distinction between personal and corporate funds in the

management of a company – Report of N.R.Narayana Murthy Committee on Corporate

Governance constituted by SEBI (2003).








Corporate Performance: Improved governance structures and processes help ensure quality

decision-making, encourage effective succession planning for senior management and

enhance the long-term prosperity of companies, independent of the type of company and

its sources of finance.

Enhanced Investor Trust: Investors consider Corporate Governance as important as financial

performance when evaluating companies for investment.

Combating Corruption: Companies that are transparent, and have sound system that provide

full disclosure of accounting and auditing procedures, allow transparency in all business

transactions, provide environment where corruption will certainly fade out.

Better Access to Global Market: Good Corporate Governance systems attracts investment

from global investors, which subsequently leads to greater efficiencies in the financial sector.

Enhancing Enterprise Valuation: Improved management accountability and operational

transparency fulfill investors‟ expectations and confidence on management and

corporations, and return, increase the value of corporations.

Accountability: Investor relations‟ is essential part of good Corporate Governance. Investors

have directly/indirectly entrusted management of the company for creating enhanced

value for their investment.

Easy Finance from Institutions: Evidence indicates that well-governed companies receive

higher market valuations.

Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures

efficient risk mitigation system in place.

(ii)

CSR Policy-

(1) The CSR Policy of the company shall, inter-alia, include the following, namely :-

(a) a list of CSR projects or programs which a company plans to undertake falling within

the purview of the Schedule VII of the Act, specifying modalities of execution of such

project or programs and implementation schedules for the same; and

(b) monitoring process of such projects or programs:

Provided that the CSR activities does not include the activities undertaken in pursuance of

normal course of business of a company.





Provided further that the Board of Directors shall ensure that activities included by a

company in its Corporate Social Responsibility Policy are related to the activities included in

Schedule VII of the Act.

(2) The CSR Policy of the company shall specify that the surplus arising out of the CSR

projects or programs or activities shall not form part of the business profit of a company.

CSR Expenditure-

CSR expenditure shall include all expenditure including contribution to corpus, for projects or

programs relating to CSR activities approved by the Board on the recommendation of its

CSR Committee, but does not include any expenditure on an item not in conformity or not in

line with activities which fall within the purview of Schedule VII of the Act.

CSR Reporting-

(1) The Board‟s Report of a company covered under these rules pertaining to a financial

year commencing on or after the 1st day of April, 2014 shall include an annual report on CSR

containing particulars specified in Annexure.

(2) In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-

section (1) of section 381 shall contain an Annexure regarding report on CSR.

Question 3(c)


1. Corporate Governance in USA

2. Corporate Governance in Japan

(ii) “The concept of Memorandum of Understanding (MoU) has been designed to provide

flexibility and autonomy to CPSEs such that it facilitates them in pursuing the objectives and

purposes, for which the enterprises have been set up.”

In the light of the above statement, explain the concept of MoU in India.

[(2.5 × 2) + 5 =10]

Answer

(i)

1. Corporate Governance in USA





Corporate governance in the U.S. has changed dramatically since 1980. As a number of

business and finance scholars have pointed out, the corporate governance structures in

place before the 1980s gave the managers of large public U.S. corporations little reason to

make shareholder interests their primary focus. Before 1980, corporate managements

tended to think of themselves as representing not the shareholders, but rather “the

corporation.” In this view, the goal of the firm was not to maximize shareholder wealth, but to

ensure the growth (or at least the stability) of the enterprise by “balancing” the claims of all

important corporate “stakeholders”-- employees, suppliers, and local communities, as well as

shareholders.

The external governance mechanisms available to dissatisfied shareholders were seldom

used. Raiders and hostile takeovers were relatively uncommon. Proxy fights were rare and

didn‟t have much chance of succeeding. And corporate boards tended to be cozy with

and dominated by management, making board oversight weak.

Corporate Governance developments in USA:

1977 – The Foreign Corrupt Practices Act

1979 – US Securities Exchange Commission

1985 – Treadway Commission

1992 – COSO issued Internal Control – Integrated Framework

2002 – Sarbanes – Oxley Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010

Updates to its U.S. Corporate Governance Policy (the “2013 Updates”)

2.

Corporate Governance in Japan

Japan‟s economy developed very rapidly during the second half of the twentieth century.

Particularly during the period 1985-89, there was a „bubble economy‟, characterized by a sharp

increase in share prices and the value of land; the early 1990s saw the bubble burst as share

prices fell and land was devalued, as well as shareholders and landowners finding themselves

losing vast fortunes, banks found that they had severe problems too. The Japanese government

wished to restore confidence in the Japanese economy and in the stock market, and to attract

foreign direct investment to help regenerate growth in companies. Improved corporate

governance was seen as a very necessary step in this process.

Japan‟s Corporate Governance System is often likened to that of Germany because banks can

play an influential role in companies in both countries. However, there are fundamental

differences between the systems, driven partly by culture and partly by the Japanese

shareholding structure with the influence of the keiretsu (broadly, associations of companies).

Charkham (1994) sums up three main concepts that affect Japanese attitudes towards

Corporate Governance: obligation, family, and consensus.





The Japan Corporate Governance Committee published its revised Corporate Governance

Code in 2001. The code had six chapters, which contained a total of 14 principles.

Summary of key characteristics influencing Japanese Corporate Governance


Main business form

Predominant ownership structure

Legal system

Board structure

Important aspect

Public limited company

Keiretsu; but institutional investor ownership is increasing

Civil Law

Dual

Influence of keiretsu

In 2004, the Tokyo Stock Exchange issued the Principles of Corporate Governance for Listed

Companies. Charkham (2005) discusses the various changes that have taken place in the

context of Corporate Governance in Japan and states:

The important part the banks played has greatly diminished. In its place there are now better

structured boards, more effective company auditors, and occasionally more active

shareholders, an increase of interest, and, where appropriate, action on their part, might restore

the balance that the banks‟ withdrawal from the scene has impaired.

In 2008, the Asian Corporate Governance Association (ACGA) published its „White Paper on

Corporate Governance in Japan‟. It states, while a number of leading companies in Japan

have made strides in corporate governance in recent years, we submit that the system of

governance in most listed companies is not meeting the needs of stakeholders or the nation at

large in three ways:

By not providing for adequate supervision of corporate strategy;

By protecting management from the discipline of the market, thus rendering the

development of a healthy and efficient market in corporate control all but impossible;

By failing to provide the returns that are vitally necessary to protect Japan‟s social safety net-

its pension system.

It then advocates six areas for improvement: shareholders acting as owners; utilizing capital

efficiently; independent supervision of management; pre-emption rights; poison pills and

takeover defences; shareholder meetings and voting.

(ii) The Memorandum of Understanding (MoU) System in India was introduced in the year 1986,

after the recommendations of the Arjun Sengupta Committee Report (1984). Twenty six years

after its inception, the MoU system has evolved and is being strengthened, through regular

reviews, to become a management tool that helps in performance evaluation as well as

performance enhancement of CPSEs in the country.





The concept of Memorandum of Understanding (MoU) has been designed to provide

flexibility and autonomy to Central Public Sector Enterprises (CPSEs) such that it facilitates

them in pursuing the objectives and purposes, for which the enterprises have been set up.

Accountability has to be understood in a wider sense by associating it with answerability for

the performance of the tasks and the achievement of targets negotiated mutually between

the Government and the CPSE. The rationale for MoU could be derived from principal/agent

theory. The principal (administrative ministry on behalf of real owners - the people) can only

observe outcomes and cannot measure accurately the efforts expended by the agent

(CPSE managers). Also the Principal can only, to a limited extent, distinguish the effects of

influences from other factors, which affect the performance. Therefore extensive intervention

by administrators, who might not be too knowledgeable about the nature of problems

confronting the enterprises, not only impacts productivity and profitability but also makes it

impossible to fix accountability for non-achievement of targets.

A negotiated incentive contract (MoU), hence, is viewed as a device to reveal information

and motivate managers to exert effort. Notwithstanding the spectacular performance of

CPSEs in several areas, there has been a sense of disillusionment with some aspects of CPSE

performance such as low profitability and lack of competitiveness. The extensive regulation

of CPSEs by government had stifled the initiative and growth of public sector. The Economic

Administration Reforms Commission (Chairman: L. K. Jha) had dwelt on issue of autonomy

and accountability. The Commission had recommended a careful re-consideration of extant

concepts and instrumentalities relating to the accountability of public enterprises with a view

to ensuring (a) that they do not erode the autonomy of public enterprises and thus hampers

the very objectives and purposes for which these enterprises have been set up and given

corporate shape and for which they are to be accountable; and (b) accountability has to

be secured in the wider sense of answerability for the performance of tasks and

achievements of results. The adoption of MoU system in India could be seen as an attempt

to operationalize this very vital recommendation.

In the backdrop of the dynamic external environment, “world- wide competition” and

globalization, it is critical that the MoU system is strengthened such that it facilitates the CPSEs

in becoming economically viable through efficient management and control. Hence, the

MoU system aims at offering autonomy to CPSEs and is designed such that it can aid in the

assessment of the extent to which mutually agreed objectives (Mandal, 2012) are achieved.

This section of the report traces the evolution of the MoU system through various committee

reports and highlights the major observations, along with the actions taken thereafter. This

would act as an indicator of the developments that have happened in the MoU system in

India and, through the study of extant literature, would also highlight the areas of concern

raised after each study.








This paper contains 3 questions. All questions are compulsory, subject to instructions providedagainst each question. All workings must form part of your answer. Assumptions, if any, must be

clearly indicated.


(i) A public limited company has only seven shareholders, all the shares being fully paid-up.

All the shares of one such shareholder are sold by the court in an auction and purchased by

another shareholder. The company continues to carry on business thereafter. Discuss the

liabilities of the shareholders of the company under the Companies Act, 1956. [3]

(ii) Describe the following in light of the Companies Act, 2013.

A.

Global Depository ReceiptsB. Key Managerial Personnel

C. Sweat Equity Shares [3]

(iii) The Registrar of Companies issued a certificate of Incorporation actually on 8th January,

2014. However, by mistake, the certificate was dated '5th January, 2014'. An allotment of shares

was made on 7th January, 2014. Could the allotment be declared void on the ground that it was

made before the company was incorporated, as per Companies Act, 1956? [3]

(iv) The Memorandum of Association of a company was presented to the Registrar of

Companies for registration and the Registrar issued the certificate of incorporation. After

complying with all the legal formalities the company started a business according to the object

clause, which was clearly an illegal business. The company contends that the nature of thebusiness cannot be gone into as the certificate of incorporation is conclusive. Answer the

question whether company's contention is correct or not, as per Companies Act, 1956. [3]

(v) The Directors of a company registered and incorporated in the name ‘Dharti Textile Ltd;

desire to change the name of the company entitled 'National Textiles and Industries Ltd.'. Advise

as to what procedure is required to be followed under the Companies Act, 1956? [3]

(vi) ‘The institution of business exists only if it fulfills the society’s expectations’. Comment. [3]

(vii) ‘Business ethics helps to promote public reputation’. Comment. [2]

Answer:

(i) Out of the seven shareholders, the remaining six members would be personally liable for the

debts of the company since the number of members has reduced below statutory minimum, viz.

7; provided the company continues to carry on business for more than 6 months.

However, only such of the remaining 6 members shall be liable who were cognisant of the fact

of reduction in number of members; the members shall be liable only for such of the debts as

have been incurred by the company after a period of 6 months [Sec 45 of Companies Act,

1956].





(ii)

A. Global Depository Receipt - ‘Gobal Depository Receipt’ means any instrument in the

form of a depository receipt, by whatever name called, created by a foreign depository

outside India and authorized by a company making an issue of such depository receipts.

B. Key managerial personnel - 'Key managerial personnel', in relation to a company,

means:The Chief Executive Officer or the managing director or the manager;

The company secretary;

The whole – time director;

The Chief Financial Officer; and

Such other officer as may be prescribed.

C. Sweat Equity Shares - 'Sweat equity shares' means such equity shares as are issued by a

company to its directors or employees at a discount or for consideration, other than

cash, for providing their know-how or making available rights in the nature of intellectual

property rights or value additions, by whatever name called.

(iii) The date of incorporation of the company is 5 th January, 2014, since it is the date specified

in the certificate of incorporation. This date is to be considered even though the certificate of

incorporation was issued at a later date (Jubilee Cotton Mills Vs Lewis).

The date of allotment of the shares by the company is 7 th January, 2014. Hence the allotment of

the shares is valid since it has been made by the company after its incorporation.

(iv) The company’s contention is not correct since, as per Sec. 35 of Companies Act, 1956,

certificate of incorporation is conclusive, but not memorandum, and accordingly any illegal

object contained in the object clause of memorandum does not become a legal object

because of operation of Sec. 35.

Thus, if the business carried on by the company is an illegal one, the company, its directors,

officers shall be liable for penalties as per law, and it shall not be a defense for the company

that such business is contained in the memorandum of association.

(v) The steps that are to be followed by Dharti Textile Ltd. As per section 21 of Companies Act,

1956 for name change are enumerated below:

1. Confirm availability of proposed name by filing Form No. 1A with the Registrar along withprescribed fees of ` 500.

2. Pass a Special Resolution approving the change of name (if the proposed name is

available).

3. File a copy of Special Resolution with the Registrar within 30 days of passing Special

Resolution

4. Issue of fresh certificate of incorporation by the Registrar (on receipt of approval of

Central Government).

5. Change of name to be effective only when fresh certificate of incorporation is issued by

the Registrar.

(vi) According to Gandhiji, "a businessman has to act only as a trustee of the society for

whatever he has gained from the society. Everything finally belongs to the society." Society

bestows upon businesses the authority to own and use land and natural resources. In return,

society has the right to expect that business organisations will enhance the general interests of

consumers, employees and community.





Also, if a business organisation does not use its powers in a socially acceptable manner, that

power will be lost in the long run. This is called as 'Iron Law of Responsibility'. Thus, the statement

"The institution of business exists only if it fulfills the society's expectations" is correct.

(vii) It is in the long term interest of a business organisation to observe business ethics. Observing

business ethics serves as a strategic branding tool in differentiating from competitors. It helps an

entity to build trust with all its stakeholders. It also results in positive press coverage, thusenhancing its reputation with the public, customers and within the business community. Thus, the

statement "Business ethics helps to promote public reputation" is correct.


Question 2(a):

(i) Star bank wants to acquire the financial assets of Moon Ltd. Is the bank or financial institution

bound to give notice of acquisition of financial asset to the obligor? State the provisions in this

regard with reference to SARFAESI Act, 2002.

(ii) The Board of directors of M/s. Intelligent Consultants Limited, registered in Chandigarh,

proposes to hold the next Board meeting in the month of May, 2014. They seek your advice in

respect of the following matters:

A. Can the Board meeting be held in Delhi, when all the directors of the company reside at

Chandigarh?

B. Whether the Board meeting can be called on a public holiday and that too after business

hours as the majority of the directors of the company have gone to Delhi on vacation.

C. Is it necessary that the notice of the Board meeting should specify the nature of business to

be transacted?

Advise with reference to the relevant provisions of the Companies Act,1956.

[6+9 = 15]

Answer:

(i) The provisions relating to giving of notice of acquisition of financial asset by the bank or

financial institution are explained below:

1. Notice of acquisition of financial asset to obligor [(Section 6(1)] :

The bank or financial institution may, if it considers appropriate, give a notice of acquisition of

financial assets by any securitisation company or reconstruction company, to the concerned

obligor and any other concerned person and to the concerned registering authority (including

Registrar of Companies) in whose jurisdiction the mortgage, charge, hypothecation, assignment

or other interest created on the financial assets had been registered.

2.

Duty of obligor to make payments to the securitisation or reconstruction company [Section6(2)]

Where a notice of acquisition of financial asset under sub-section (1) is given by a bank or

financial institution, the obligor, on receipt of such notice, shall make payment to the concerned

securitisation company or reconstruction company, as the case may be, and payment made to

such company in discharge of any of the obligations in relation to the financial asset specified in

the notice shall be a full discharge to the obligor making the payment from all liability in respect

of such payment.





3. Money received by lender to be held in trust [Section 6(3)]

Where no notice of acquisition of financial asset under sub-section (1) is given by any bank or

financial institution, any money or other properties subsequently received by the bank or

financial institution, shall constitute monies or properties held in trust for the benefit of and on

behalf of the securitisation company or reconstruction company, as the case may be and such

bank or financial institution shall hold such payment or property which shall forthwith be made

over or delivered to such securitisation company or reconstruction company, as the case maybe, or its agent duly authorised in this behalf.

Hence the above procedures are required to be followed by Star Bank before acquisition of the

assets of Moon Ltd.

(ii) Unlike section 166, there is no provision which requires that a Board meeting shall be held -

(a) only on a day that is not a public holiday;

(b) only at the registered office of the company or at any other place within the city, town

or village in which the registered office of the company is situated;

(c) only during business hours.


A. Section 301 requires that the register of contracts shall be placed in each Board meeting.

However, the Department of Company Affairs (now Ministry of Corporate Affairs) has allowed

the companies to remove the register of contracts to any place provided adequate notice to

shareholders is given indicating the precise periods during which they can inspect the register of

contracts. Thus, in the instant case the Board meeting can be held in Delhi, even though all the

directors of the company reside in Chandigarh and the registered office is also situated at

Chandigarh provided adequate notice to shareholders is given and the inspection of register of

contracts is allowed to the shareholders.

B. As per section 288, if a Board meeting could not be held for want of quorum, then, unless the

articles otherwise provide, the meeting shall automatically stand adjourned to the same day,

time and place in the next week, or if that day is a public holiday, then to next succeeding day,which is not a public holiday. It means that an adjourned Board meeting can be held only on a

day which is not a public holiday. However, there is nothing in the Act which prohibits the

holding of an original Board meeting on a public holiday. Similarly, the Act does not require that

a Board meeting shall be held only during business hours. However, the articles of the company

may provide otherwise.

In the instant case, the directors intend to hold a Board meeting on a public holiday and after

business hours. Unless the articles of the company provide otherwise, holding a Board meeting

on a public holiday and after business hours is permissible.

C. No form or contents of notice has been specified by the Act. Agenda of a Board meeting is

not required to be sent along with the notice of a Board meeting unless the Act requires a

specific notice to move a resolution at a Board meeting.Therefore, the notice of Board meeting need not specify the nature of business to be

transacted, unless the articles otherwise require. However, the notice shall state the nature of

business to be transacted in the following cases:

a) Appointment of a person as a managing director if he is already a managing director or

manager in any other company (Section 316).

b) Appointment of a person as a manager if he is already a managing director or manager

in any other company (Section 386).





Question 2(b):

(i) The Board of Directors of Xee Ltd. has agreed in principle to grant loan worth ` 38 lakhs to

Mee Ltd. on the basis of the following information. Advise Xee Ltd. about the requirements to be

complied with under the Companies Act, 1956 for the proposed inter-corporate loan to Mee Ltd.

Sl. No. Particulars Amount ( ` )(i)

(ii)

(iii)

Authorised share capital

Issued, subscribed and paid up capital

Free reserves

1,00,00,000

50,00,000

10,00,000

(ii) What are the consequences if a company makes inter-corporate loans and investments in

contravention of the provisions of section 372A of Companies Act, 1956?

(iii) Super Limited, a banking company maintained the record of all transactions for a period of

5 years from the date of cessation of the transactions between the clients and the company.

Decide whether the Company has fulfilled its obligation under the provisions of the Prevention of

Money Laundering Act, 2002.

(iv) Examine the validity of appointment of Mr. Bonny, a minor, as a director of Max (Private)

Limited, with reference to Companies Act, 1956.

[6+4+3+2 = 15]

Answer:

(i) Inter-corporate loans, investments etc. are governed by the provisions of section 372A. Firstly

to determine whether a special resolution is required for making fresh investments. This can be

determined as follows:

Particulars Amount ( )

Paid up capital of the company (A)

Free reserves (B)Aggregate of paid up capital and free reserves (C)

60% of aggregate of paid up capital and free reserves (D)

Higher of (B) or (D), i .e. the ceiling limit for inter-corporate loans, investments

etc. without requiring a special resolution

Proposed Loan to Mee Ltd.

50,00,000

10,00,000

60,00,000

36,00,000

36,00,000

38,00,000

Since the proposed Loan exceeds the ceiling given under section 372A, a special resolution is

required. The company shall adopt the following procedure for making Loan to Mee Ltd.:

(a) Unanimous approval of the Board shall be obtained by passing a resolution at a Board

meeting.

(b)

A special resolution shall be passed in the general meeting. The notice of special resolution shall state the specific limits, particulars of the company

to which loan is proposed to be given, specific source of funding and other relevant

details.

The company shall file a copy of special resolution with the registrar within 30 days of

passing the special resolution.

(c) The company shall obtain the prior approval of the Public Financial Institution, if any, from

whom it has taken a term loan.

(d) The company can make such investments only if no default in respect of Public deposits





is subsisting.

(e) The rate of interest on loan must not be less than the prevailing bank rate.

The prescribed particulars shall be entered in the register maintained under section 372A(5).

(ii) The provisions relating to contravention of section 372 A can be discussed as under:

1.

Contravention of provisions relating to Register of loans etc. The company and every officer of the company who is in default shall be punishable withfine of ` 5,000 plus ` 500 for every day till the offence continues.

2. Contravention of other provisions

The company and every officer of the company who is in default shall be punishable with

imprisonment upto 2 years or with fine upto ` 50,000. However, if the loan is repaid in full, no

imprisonment shall be imposed, and where the loan is repaid in part, the imprisonment shall

be proportionately reduced. Further, any person who is knowingly a party to any

contravention shall be liable to indemnify the company for the repayment of the loan, or

the money which has become payable by the company.

(iii) As per section 12, the records of prescribed transactions shall be maintained for a period of

10 years from the date of such transaction (viz. the transaction between the clients and the

banking company).

In the given case, Super Limited has maintained the records of transactions only for a period of

5 years from the date of cessation of the transactions. Thus, Super Limited has failed to maintain

the records for the period of 10 years as prescribed under section 12. Therefore, Super Limited

has defaulted in compliance of section 12.

(iv) Section 274 disqualifies certain persons to act as a director. However, a minor is not covered

by this section. Also, there is no other provision in the Companies Act which disqualifies a minor

from acting as a director.

However, a person can be appointed as a director only if he has been allotted DIN. A minor is

not eligible to obtain DIN. Therefore, a minor cannot become a director in any company,whether public or private.

Question 2(c):

(i) Mr. Devesh was appointed as the managing director of Casual Industries Ltd. for a period offive years with effect from 1.4.2008 on a salary of ` 12 lakhs per annum with other perquisites. The

Board of Directors of the company, on coming to know of certain questionable transactions,

terminated the services of the managing director from 1.3.2011. Mr. Devesh termed his removal

as illegal and claimed compensation from the company. Meanwhile the company paid a sumof ` 5 lakhs on ad hoc basis to Mr. Devesh pending settlement of his dues. Discuss with reference

to Companies Act, 2013, whether:

A.

The company is bound to pay compensation to Mr. Devesh, and, if so, how much.B. The company can recover the amount of ` 5 lakhs paid on the ground that Mr. Devesh is not

entitled to any compensation, because he is guilty of corrupt practices.

(ii) The Board of directors of a beverage company producing several kinds of soft drinks,

namely Priya Limited having a paid up capital of ` 25 lakhs appointed Nishi Limited as sole

selling agent for all its products in India without prior approval of the company in general

meeting without any condition that the appointment is subject to the approval of the company

in general meeting. Nishi Limited, its directors and their relatives are not holding any shares in





Priya Limited. Discuss whether the appointment of Nishi Limited as sole selling agent is valid.

State with reasons and reference to Companies Act, 1956, whether your answer will be different

if:

A. Nishi Limited are appointed as sole selling agents only for the State of Maharashtra, or for

whole of India; and

B. For only some of the products manufactured by Priya Limited or for the entire range of

products.

(iii) Explain as per provisions of Companies Act, 1956, whether companies being amalgamated

must be Companies registered under Companies Act, 1956.

[6+6+3 = 15]

Answer:

(i) As per section 202 of the Companies Act, 2013 -

Compensation can be paid only to a managing director or whole time director or manager.

The compensation payable shall not exceed the remuneration which he would have earned

if he had been in office for the unexpired residue of his term or for 3 years, whichever is

shorter.

Where the director has been guilty of fraud or breach of trust or gross negligence in the

conduct of the affairs of the company, he shall not be paid any compensation.

The answers to the given problem are as under:

A. The company is not bound to pay compensation to Mr. Devesh if he has been found guilty

of any fraud or breach of trust. However, it is not proper for the company to withhold the

payment of compensation on the basis of allegations, unless there is a proper finding on the

involvement of Mr. Devesh in corrupt practices.

The compensation payable shall not exceed ` 25 lakhs, i.e. at the rate of ` 12 lakhs per annum

for unexpired period of 25 months.

B.

As per the decision in BeIl v Lever Bros [1932] AC 161 House of Lords, the compensation of ` 5 lakh already paid by the company to Mr. Devesh cannot be recovered back if the company

later comes to know that Mr. Devesh was guilty of serious breaches of duty and corrupt

practices which would have entitled the company to end the employment of Mr. Devesh

without any compensation. It was also held that the managing director was under no obligation

to disclose to the company the breach of duty so as to give an opportunity to the company to

remove him without paying any compensation.

(ii) The legal position of Priya and Nishi Ltd.:

A. Appointment of a sole selling agent must be made subject to the condition that his

appointment shall be approved by the company in the first general meeting held after his

appointment. The provisions regarding incorporation of this condition are mandatory. If thereis no such condition, the agreement will be void ab initio even if the appointment is

approved by the general meeting [Arantee Manufacturing Corporation v Bright Bolts Pvt.

Ltd. AIR (1967) 37 Comp Cos 758; Department Circular No. 12(11)-CL.- VI/68, dated

6.11.1968].

B. The provisions of section 294 shall apply irrespective of the fact that -

Appointment of sole selling agent is restricted to a particular area or extends to the

whole of India;





Sole selling agent is appointed in respect of some of the products or the entire range of

products of the company.

In the given case, Nishi Ltd. has been appointed by the Board without any condition regarding

approval of their appointment in the general meeting. Therefore, the appointment is invalid. It is

immaterial as to whether the appointment of sole selling agent is for the State of Maharashtra or

extends to the whole of India. Similarly, whether Nishi Ltd. is appointed for some of the productsor entire range of the products of the company is immaterial.

(iii) For effecting amalgamation of two or more companies, an application shall be made to

the Court under section 391 (Section 394). The benefit of section 394 is available only if the

transferee company (i.e. new company) is a company within the meaning of Companies Act,

1956. However, the transferor company may be any body corporate, whether a company

within the meaning of the Companies Act, 1956 or not. As such, a foreign company can be a

‘transferor company’ but not a ‘transferee company’. Therefore, a scheme of amalgamation

may provide for transfer of foreign companies to Indian Companies. Thus, it is not necessary that

the companies being amalgamated must be companies registered under Companies Act,

1956; it is sufficient if the amalgamated company is a company registered under Companies

Act, 1956.

Question 2(d):

(i) A Public Company secures residential accommodation for the use of its managing director

by entering into a license arrangement under which the company has to deposit a certain

amount with the landlord to secure compliance with the terms of the license agreement. Can it

be considered as a loan to a director? Discuss with reference to Companies Act, 2013.

(ii) What are Special Courts? What are the powers of Special Courts with respect to offence of

money laundering? Discuss with reference to prevention of Money Laundering Act, 2002.

(iii) Referring to the provisions of section 397, of Companies Act, 1956, examine whether the

following acts of the company would amount to oppression:A. Allotment of shares by directors of the company by which existing majority is reduced to

minority.

B. Allotment of shares by directors of the company by which existing minority are made to

majority

C. A share sale agreement was executed by Vansh, an NRI. The shares and transfer deed was

handed over to an escrow agent. The sale was subject to RBI permission. The shares were not

transferred for 6 years, since RBI permission was not received. Vansh, after waiting for a long

period of time raises the issue and complains of oppression in the capacity of a member. As per

the agreement the sale was unconditional. During the above period Vansh did not exercise any

right as shareholder, nor did the company treat him as a member.

[5+4+6 = 15]

Answer:

(i) As per section 185 of the Companies Act, 2013, no company shall, directly or indirectly,

make any loan to a director.

In the present case, the company has provided the managing director with a housing

accommodation. It does not amount to a loan because of the following reasons:

The company has not given any deposit or advance to the managing director. The amount

deposited with the landlord cannot be said to be an 'indirect loan' to the managing





director.

It is a usual practice to give a security deposit to the landlord with whom a rent or lease

agreement is entered into. Thus, the company has made the security deposit on account of

bonafide business considerations.

It is of no concern of the managing director as to the terms on which the company secures

residential accommodation for him.

It is the company and not the director who has entered into the lease agreement. Therefore,the company can at anytime use the accommodation for any other purpose and the

managing director will have to vacate it, as and when desired by the company.

(ii) The provisions relating to Special Courts are contained in section 43 of the Act, as explained

below:

A. Power of CG to designate Special Court(s) [Section 43(1)]:

The Central Government, in consultation with the Chief Justice of the High Court, shall, for

trial of offence punishable under section 4 by notification designate one or more Courts of

Session as Special Court or Special Courts for such area or areas or for such case or class or

group of cases as may be specified in the notification.

In this sub-section, 'High Court' means the High Court of the State in which a Sessions Court

designated as Special Court was functioning immediately before such designation.

B. Power of Special Court to try any other offence [Section 43(2)]:

While trying an offence under this Act, a Special Court shall also try an offence, other than

an offence referred to in sub-section (1), with which the accused may, under the Code of

Criminal Procedure, 1973, be charged at the same trial.

(iii) Issue of further shares amounts to oppression if it is proved that the idea of issuing further

shares was to benefit one group to the detriment of the other [Piercy v Mill(s) & Co. (1920) 1 Ch

77]. Further issue of shares must be made for the benefit of the company. If the directors use

their fiduciary power of issuing shares for an extraneous purpose like maintenance and

acquisition of control over affairs of the company, it would amount to oppression [Needle

Industries Case]. It is not open to directors to issue and allot shares in a manner by which anexisting majority of shareholders is reduced to minority. If the issue of shares disturbs the existing

majority of the shareholders and if it is not bonafide, it will amount to oppression [Re Gluco series

(P) Ltd.]

A. Thus allotment of shares by directors of the company by which the existing majority is

reduced to minority shall amount to oppression, if the directors acted malafide.

B. Allotment of shares by directors by which the existing minority shareholders are made

majority shall amount to oppression, if the directors acted malafide.

C. When a share sale agreement was executed by an NRI and the scrips and transfer deed

were handed over to an escrow agent as such sale was subject to RBI permission and fullconsideration money was received, then such a person after lapse of about 5 years, cannot

raise an issue of oppression in the capacity of a member, as the transfer remained in abeyance

awaiting RBI permission. On fact, the sale of shares was unconditional and unrestricted, and

there was no clause to render the sale agreement infructuous after lapse of any stipulated time.

Also, during the long intervening period neither the NRI exercised any right as a share holder nor

the company treated him as a member [Rajiv Mehta v Group 4 Securities Hindustan (P) Ltd

(1998), 18 SCL 89 CLB]. The facts are similar to the stated case and therefore, it can be said that

there is no oppression.





appeal is filed by the director against the order of the Court. The order becomes effectual only

when the appeal, as well as the second appeal, if any, is finally disposed off. However, no such

privilege has been given under section 267. As such, the order of conviction under section 267

becomes effective as soon as order is pronounced. Thus, filing of an appeal against the

conviction order would not save a whole time director or managing director from vacating the

office.

The operation of section 267 takes effect as soon as conviction for an offence involving moral

turpitude is recorded by a Court. The order of conviction does not on the mere filing of an

appeal disappear and it cannot be held that section 267 applies only to a final order of

conviction. As such, the managing director cannot continue pending the appeal. Further, he

shall be eligible to be again appointed as a managing director only if the appellate Court

suspends the order of conviction. As such, where the appellate Court suspends merely the

execution of the sentence, the managing director shall remain disqualified for appointment

[Rama Narang v Ramesh Narang (1995) 83 Comp Cos 194].

The facts of the present case are similar to the facts of the case discussed above. In the light of

the decision given in the above case, it appears that the managing director cannot continue

pending the disposal of appeal. However, if specific order is sought for removal of

disqualification, the appellate Court may suspend the order of conviction, in which case he

shall be eligible to be again appointed as a managing director.

(iv) The provisions of section 18of IRDA Act, 1999 may be explained as follows:

1. Nature of directions and their binding effect [Section 18(1)]

Without prejudice to the foregoing provisions of this Act, the Authority shall, in exercise of its

powers or the performance of its functions under this Act, be bound by such directions on

questions of policy, other than those relating to technical and administrative matters, as the

Central Government may give in writing to it from time to time:

Opportunity to Authority before giving directions [Proviso to Section 18(1)]. The Authority shall, as

far as practicable, be given an opportunity to express its views before any direction is given

under this sub-section.

2. 'Question of policy or not' to be decided by the Central Government [Section 18(2)]

The decision of the Central Government, whether a question is one of policy or not, shall be

final.


Question 3(a):

(i) ‘Corporate Governance is about promoting fairness’. Is it truly beneficial?

(ii) Write a short note on SA 8000. [6+4 = 10]

Answer:

(i) Corporate Governance deals with promoting corporate fairness, transparency and

accountability. It is concerned with structures and processes for decision-making,

accountability, control and behavior at the top level of the organizations. It influences how the





objectives of an organization are set and achieved, how risk is monitored and assessed and

how performance is optimized. It is truly beneficial and it has the following benefits:

1. Improved Financial Performance: Socially responsible business practices are linked to positive

financial performance.

2.

Operating Cost Reduction: CSR initiatives can help to reduce operating costs.

3. Brand Image and Reputation: CSR helps a company to increase its brand image and

reputation among the public, which in turn increase its ability to attract investors and trading

partners. Proactive CSR Practices would lead to a favourable public image resulting in various

positive outcomes like consumer and retailer loyalty, easier acceptance of new products and

services, market access and preferential allocation of investment funds.

4. Increased Sales & Customer Loyalty: Businesses must first satisfy customer's key buying criteria,

i.e., price, quality, safety and convenience.

5. Productivity and Quality: Improved working conditions, reduced environmental impacts or

increased employee involvement in decision-making, leads to (a) increased productivity, and

(b) reduced errors.

6. Ability to attract and retain employees: Companies perceived to have strong CSR

commitments find it easier to recruit and retain employees, resulting in reduction in turnover

and associated recruitment and training costs.

(ii) Social Accountability 8000:

SA 8000 is a comprehensive, global, verifiable performance standard for auditing and

certifying compliance with corporate responsibility.

The heart of the standard is the belief that all workplaces should be managed in such a

manner that basic human rights are supported and that management is prepared to accept

accountability for this. SA 8000 is an international standard for improving working conditions. This standard is based

on the principles of international human rights norms as described in International Labour

Organisation Conventions, the UN Convention on the Rights of the Child and the Universal

Declaration of Human Rights.

The requirements of this standard apply regardless of geographic location, industry sector, or

company size.

Question 3(b):

(i) Explain the importance of ‘Ethics’ for a finance and accounting professional.

(ii)

If you are an accounting professional in a large multinational corporation, what steps wouldyou undertake to create an ethical accounting environment? [5+5 = 10]

Answer:

(i) The importance of ‘Ethics’ for a finance and accounting professional may be discussed as

two-fold:

1. Public Responsibility:





Finance and Accounts is perhaps the only business function which accepts responsibility to

act in public interest. Finance and accounting professional's responsibility is not restricted to

satisfy the needs of any particular individual or organization. While acting in public interest, it

becomes imperative that the finance and accounting professional adheres to certain basic

ethics in order to achieve his objectives.

2.

To restore Public Confidence:Various accounting scandals witnessed during the past few years have put a serious

question mark on the role of the finance and accounting professional in providing the right

information for decision making both within and outside their respective organizations.

As these finance and accounting professionals are in public practice, they should take

reasonable steps to identify circumstances that could pose the conflict of interest and thus

leading to follow unethical behavior.

(ii) The factors that are to be considered for creating an ethical accounting environment are:

1. Employee Awareness:

Make the employees aware of their legal and ethical responsibilities.

Train and motivate employees towards ethical behaviour.

Encourage employees to report cases of violations, frauds, manipulations,

misappropriations, etc.

2. Reporting of Frauds: For reporting violations, manipulations, misappropriations, etc., -

without any fear of being reprimanded or fired,

provide facilities to employees.

3. Whistle Blowers:

A whistle blower is an employee /person who reports frauds, mismanagement or

creating good accounting environment in a business enterprise. Fair treatment and

appreciation of Whistle Blowers is necessary to check fraud.

Question 3(c):

(i) Write a short note on Memorandum of Understanding and Public Sector Enterprises.

(ii) Discuss the difficulties faced in Governance by state owned businesses. [5+5 = 10]

Answer:

(i) Memorandum of Understanding and Public Sector Enterprises:

After Independence, Public Sector Enterprises (PSEs) were set up in India with an objective to

promote rapid economic development through the creation and expansion of infrastructure by

the government. With different phases of development, the role of PSEs has changed and theiroperations have extended to a wide range of activities in manufacturing, engineering, steel,

heavy machinery, machine tools, fertilizers, drugs, textiles, pharmaceuticals, petro-chemicals,

extraction and refining of crude oil and services such as telecommunication, trading, tourism,

warehousing, etc. as well as a range of consultancy services. While there have been many PSEs

that have performed very well in competition with private sector enterprises, there are also

many PSEs that have performed very poorly. In an economic environment that has changed

considerably in the last two decades, the role of PSEs has changed and they have been

increasingly guided to reduce their dependence on the Government. They have been listed on





the stock exchange and few of them have been privatized. The Government has provided PSEs

the necessary flexibility and autonomy to operate effectively in a competitive environment.

However, there are a few issues with the operation and management of PSEs which still persist

and need to be attended to. There is a need to develop a mechanism on how government

can get an efficient Indian presence in the sectors where the private sector investments are not

forthcoming especially in strategic areas where developing capabilities is essential if India has to

play its rightful role among the among the nations of the world.

(ii) Difficulties Encountered in Governance in state owned businesses

Routine governance regulations become applicable for public sector companies formed under

the Companies Act, 1956 and come under the purview of SEBI regulations the moment they

mobilize funds from the public. The typical organizational structure of PSUs makes it difficult for the

implementation of corporate governance practices as applicable to other publicly-listed

private enterprises. The typical difficulties faced are:

The board of directors will comprise essentially bureaucrats drawn from various ministries

which are interested in the PSU In addition, there may be nominee directors from banks or

financial institutions who have loan or equity exposures to the unit. The effect will be to have

a board much beyond the required size, rendering decision-making a difficult process.

The chief executive or managing director (or chairman and managing director) and other

functional directors are likely to be bureaucrats and not necessarily professionals with the

required expertise. This can affect the efficient running of the enterprise.


may necessitate a percentage of independent components on the board; but many

professionals may not be enthused as there are serious limitations on the impact they can

make.

Due to their very nature, there are difficulties in implementing better governance practices.

Many public sector corporations are managed and governed according to the whims and

fancies of politicians and bureaucrats. Many of them view PSUs as a means to their ends. A

lot of them have turned sick due to overdoses of political interference, even when their

areas of operations offered enormous opportunities for advancement and growth. And

when the economy was opened up, many of them lacked the competitiveness to fight it outwith their counterparts from the private sector.




Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1

Roll No............ No. of Printed Pages...Corporate Laws & Compliance

Full Marks: 100 Time Allowed: 3 hoursThis paper contains 3 questions. All questions are compulsory, subject to

instruction provided against each question. All workings must form part of youranswer. Assumptions, if any, must be clearly indicated.

(1) Answer all questions: [20 marks]

(a) Explain the term ‘executive directors’ and non-executive directors. (3 Marks)

Answer:

The expressions 'executive director' and 'non-executive director' have not been used in the

Companies Act, 1956 or the Companies Act, 2013. Generally, these terms are used as follows:1. Executive directors

The directors who are in the employment of the company are called as executive directors orinside directors. A whole time director and managing director are covered in this category ofdirectors. The inside directors possess in-depth knowledge about the affairs of the company.They are generally connected with the policy formulation of the company and take activeinterest in the day-to-day affairs of the company. They have personal involvement with thecompany since their remuneration depends on the successful operations of the company.

2. Non-executive directors

Directors who are not in the employment of the company are called as non-executive directorsor part time directors or outside directors. This category includes professional directors andnominee directors. These directors have generally diverse experience and backgrounds. Theyprovide independent thinking, wider knowledge and perspective to the company. They areappointed not to work full time under a contract of service. They are not intimately connectedwith the company except through attending the Board meetings. They have an unbiased attitudetowards the working of the company.

(b) At an annual general meeting of your company, one of the directors being badly heckled byirate shareholders had tendered his resignation orally which was accepted by the majority ofmembers present at the meeting. Can the director continue in his office after the annual

general meeting? (3 Marks)

Answer:

The Company Act has not made any provision regarding resignation of a director. Thus, resignationby a director is controlled by the rules made by the articles, if any. Where the articles of acompany are silent, it has been held that a resignation shall be effective if it is addressed to thecompany and acceptance of resignation is not necessary.





Where a director tendered his resignation orally at a general meeting and it was accepted at thegeneral meeting, it was held that the resignation was effective even if it was not in writing. Assuch, the director who had tendered his resignation could not withdraw it except with the consentof the general meeting [Latchford Premier Cinema Ltd. v Ennion (1931) 2 Ch 409].

Thus, in the given case the director who had orally tendered the resignation at an annual general

meeting cannot continue in office.

(c) Mr. Bipin goes abroad for four months from 4.4.1999 and an alternate director has beenappointed in his place. Advice as to sending of notice as required under section 286. (3 Marks)

Answer:

Notice of every Board meeting shall be given in writing to every director for the time being in Indiaand to every other director at his usual address in India (Section 286). As can be seen, section 286does not specifically state that notice to an alternate director shall be served. However, analternate director is a director in his own right. He is not a proxy or representative of the original

director. The grounds of vacation of office also apply to him as these apply to the original director,e.g., an alternate director shall vacate office if he does not attend the Board meetings ascontemplated by section 283(1)(g). As such, it is implied that notice to an alternate director is tobe given. Thus, notice should be served to both, the alternate director as well as the originaldirector. Notice to Mr. Bipin Ram, who is outside of India, shall be served at his usual address inIndia.

(d) What are the provisions regarding preservation of accounts and records of a company which has been

amalgamated with any other company? (3 Marks)

Answer:

The object of section 396A is to prevent the practice of destroying incriminating accounts andrecords of the company which has been amalgamated with another company.

The books and papers of a company which has been amalgamated with, or whose shares have beenacquired by, another company shall not be disposed of without the prior permission of the CentralGovernment. Before granting such permission, the Central Government may appoint a person toexamine the books and papers for the purpose of ascertaining whether they contain any evidence ofthe commission of an offence in connection with the promotion, formation or management of theaffairs of the company or its amalgamation or the acquisition of its shares?

(e) What provision has been made under section 15A of the SEBI act, 1992 in connection with penaltyfor failure to furnish information or returns? (3 Marks)

Answer:

A person shall be liable to a fine of ` 1,00,000 per day or ` 1 crore, whichever is less, if he fails to-

(a) furnish any document, return or report to the SEBI, as required under the Act, rules orregulations made thereunder; or

(b)

file any return or furnish any information, books or other documents within the time





specified under the Act, rules or regulations made thereunder; or

(c) maintain the books of account or records as required under the Act, rules or regulationsmade thereunder.

(f) Explain the need for Social Responsibility. (2 Marks)

Answer:

Need for Social Responsibility

Today, businessmen are aware that society is the biggest force which controls the entire businessoperations, right from acquisition of land to final produce. They now feel that they cannot operatein societal isolation. Profit still being the major determinant for business houses, it is extremelydifficult to strike a balance between the conflicting needs of business this earning profit andsociety's need to take care of its many constituents. The success of a business depends on thegrowth of the society because the goods and services of business are ultimately consumed by thesociety. So, an organisation must initiate steps which will ultimately lead to economic upliftment of

the people. Although at the initial stage of investment for such welfare measures it may appear tobe a losing proposition, in the long run, it will have a twin positive effect—the image of theorganisation will be enhanced and there will be an economic resurgence of the people throughadoption of such welfare measures which will create a new set of consumers for their products.

Another contribution which society expects from the business community is qualitativeimprovement of the product. This necessitates huge investment in research and development, whichgovernment alone cannot afford. Accordingly, business organisations should come out with liberalcontribution for setting up research laboratories for product quality improvement. In addition,business houses should shun unethical practices such as price rigging of the product throughhoarding and creating scarcity, quality deterioration due to adulteration, and resorting to

advertisements which lead to formation of biased attitude. As business is now considered to be apart of social order, it itself will determine its ethical standards through cross-currentinteractions.

(g) What are the requirements to strengthen Corporate Governance? (2 Marks)

Answer:

Requirements to strengthen corporate governance

The following are some of the requirements meant for strengthening corporate governance:

1.

Enforcement of rights by minority shareholders: Shareholders activism have to be encouraged

so as to enhance the shareholders' value in the long run.

2. Quality of audit: There is an imperative need on the part of the Government to strengthen thequality of audit so as to make the Auditor accountable for the disclosure of information in theannual reports and to monitor the working of Audit Firms.

3. Ensuring the independence of directors: An appropriate and acceptable system has to bedesigned to ensure the independence of directors to discharge their duties as per therequirements of the law.





4. Awareness for adoption of corporate governance practices: Efforts have to be made forpropagation of corporate governance norms amongst entrepreneurs for better compliance.

5. Amendment to bankruptcy laws: There is a need to amend bankruptcy laws for promptimplementation of provisions.

6. Accountability of the board to stakeholders: The Board of Directors as well as the CEOs andCFOs are made accountable for the discharge of their duties with the proper use of theirrights within the powers.

7.

Upgrading the efficacy of systems: Adequate care has to be exercised to ensure the qualityand effectiveness of the legal, administrative and regulatory framework.

8. Report on corporate governance: To make a statutory compliance for the listed companies tocompulsorily obtain a report on Corporate Governance Rating (CGR) from a Credit Rating Agencyin India.

(2) Answer any four questions: [4 x 15 = 60 marks](a)(i) Your company has been approached by its foreign collaborators who have three U.S.based directors on your Board with the idea that they would appoint a single individual basedin India to act as an alternate for all the three U.S. based director. Advice by indicating thefeasibility of the idea, the voting rights to be enjoyed by the proposed alternate director,and the sitting fees payable to him. (5 Marks)

Answer:

An alternate director can be appointed only if any of the directors of the company is absent for notless than 3 months from the State in which Board meeting are ordinarily held (Section 313). But,section 313 does not contain any specific provision either prohibiting or authorising an individual to

be appointed as an alternate director for more than one director.The appointment of one person as an alternate director for three U. K. based directors would notbe in the interest of good corporate governance. Also, it would adversely affect the interests ofcompany, since this would limit the deliberations in the Board meeting. Moreover, only one personwould exercise three votes and this would probably result in giving of all the three votes either infavour of the resolution or against the resolution.

In the given case if one individual is appointed as an alternate director for the three foreigndirectors, he will have three votes. However, he shall be entitled to receive the sitting fees inrespect of one director only.

(ii) State the kind of approval required for the following transactions under the ForeignExchange Management Act, 1999:

(A) T wants to draw US $20,000 to make donation to a charitable trust situated in SouthKorea.

(B) Q requires US $ 5,000 to make payment related to ‘call back services’ of telephone. (5 Marks)





Answer:

Any person may sell or draw foreign exchange to or from an authorised person if such sale ordrawal is a current account transaction. However, the Central Government may in public interestand in consultation with the RBI, impose such reasonable restrictions for current accounttransactions as may be prescribed (Section 5). The Central Government has framed Foreign

Exchange Management (Current Account Transactions) Rules, 2000. The Rules stipulate someprohibitions and restrictions on drawal of foreign exchange for certain purposes. In the light ofprovisions of these rules, the answer to the given problem is as follows:

(A) As per Rule 5 read with Schedule III of Foreign Exchange Management (Current AccountTransactions) Rules, 2000, prior approval of Reserve Bank of India is required for drawal offoreign exchange, exceeding US$ 5,000 per financial year for donations.

Therefore, Mr. T can obtain $ 20,000 for making donation to a charitable trust situated inSouth Korea with the permission of Reserve Bank of India. However, prior approval of theReserve Bank of India shall not be required if drawal of additional US Dollar 15,000 is made outof funds held in Resident Foreign Currency (RFC) Account.

(B) Rule 3 read with Schedule I of Foreign Exchange Management (Current Account Transactions)Rules, 2000 prohibits drawal of foreign exchange for payments related to call back services oftelephones. Therefore, payment of US $ 5,000 for 'call back services' of telephone isprohibited.

(iii) Whether appointment of Controller of Insurance is compulsory? Explain. (5 Marks)

Answer:

The provisions relating to appointment of Controller of Insurance is explained as below:

1.

Appointment on supersession of IRDA [Section 2B(1)]If at any time, the Authority is superseded under sub-section (1) of section 19 of the InsuranceRegulatory and Development Authority Act, 1999, the Central Government may, by notificationin the Official Gazette, appoint a person to be the Controller of Insurance till such time theAuthority is reconstituted under section 19(3) of the said Act.

2.

Factors to be considered at the time of appointment of Controller of Insurance [Section 2B(2)]In making any appointment of Controller of Insurance, the Central Government shall have dueregard to the following considerations, namely, whether the person, to be appointed has hadexperience in industrial, commercial or insurance matters and whether such person has actuarialqualification.

(b)(i) In case of appointment of directors of a company, all the directors were not voted onindividually, but were appointed by one resolution and no shareholder objected to it. Discussthe position under the provision of the Companies Act. (5 Marks)

Answer:

At a general meeting, two or more persons cannot be appointed as directors by a single resolutionunless a resolution that appointment shall be so made has first been agreed to by the meeting





without any vote being cast against it. A resolution moved in contravention of this provision shall bevoid, whether or not objection was raised at the time when such resolution was passed (Section 162of the Companies Act, 2013). In the present case, all the members passed a single resolutionappointing all the directors. The resolution is void since before moving the resolution forappointment of all the directors by a single resolution, no resolution was passed to the effect that

all the directors shall be appointed by a single resolution. It is immaterial that no member objectedto the appointment of all the directors by a single resolution. As per section 176 of the CompaniesAct, 2013, the acts of these directors shall not be invalid till the defect in their appointment isnoticed by the company.

Section 162 of the Companies Act, 2013 applies to all companies, whether public or private.Therefore, the answer would remain same even if the company in the present case is a privatecompany.

(ii) What shall be the composition of the Insurance Regulatory and Development authority?

(5 Marks)

Answer:

The composition of the Authority may be explained as follows:

1. Chairperson and Members [Section 4(1)]

The Authority shall consist of the following members, namely:

(a) a Chairperson;

(b) not more than 5 whole time members;

(c)

not more than 4 part-time members,

to be appointed by the Central Government from amongst persons of ability, integrity andstanding who have knowledge or experience in life insurance, general insurance, actuarialscience, finance, economics, law, accountancy, administration or any other discipline which would,in the opinion of the Central Government, be useful to the Authority.

2. Requirement as to specialised areas [Section 4(2)]

The Central Government shall, while appointing the Chairperson and the whole-time members,ensure that at least one person each is a person having knowledge or experience in lifeinsurance, general insurance or actuarial science, respectively.

(iii) Examine the validity of the resolution passed at the Annual General Meeting of a publiccompany for payment of dividend at a rate higher than recommended by the board ofdirectors. (5 Marks)

Answer:

As per Regulation 85 contained in Table A of Schedule I to the Companies Act, 1956, the companyin general meeting may declare dividends, but no dividend shall exceed the amount recommended bythe Board. Following conclusions are worth noting:





(a) The power to declare dividend rests with the members, but the members can exercise suchpower only if the dividend is proposed by the Board.

(b) The rate of dividend proposed by the Board may be reduced by the members.

(c) The rate of dividend proposed by the Board cannot be increased by the members.

(d)

Any provision in the articles, which authorises the members to declare dividend higher than therate recommended by the Board, is void.

Therefore, in the given case, the resolution passed at the Annual General Meeting declaringdividend at a rate higher than that recommended by the Board of directors is not valid.

(c)(i) Examine whether the following companies can be considered as ‘Foreign Companies’ under

the Companies Act, 1956:

(A) A company which is incorporated outside India employs agents in India but has no place ofBusiness in India.

(B) A company incorporated outside Indian having shareholders who are all Indian citizens.

(C) A company incorporated in India but all the shares are held by foreigners. (5 Marks)

Answer:

As per section 591(1), a company shall be a foreign company if -

(a) it is incorporated outside India; and

(b) it has established a place of business in India.


(i)

Employing agents in India does not amount to establishment of a place of business in India.Thus, the company is hot a foreign company since it has not established any place of business inIndia.

(ii) A company incorporated outside India does not become a foreign company by the mere factthat all its shareholders are Indian citizens. Assuming that the company has not established anyplace of business in India, the company is not a foreign company.

(iii) A company incorporated in India is a 'company' within the meaning of section 2(20) of theCompanies Act, 2013. It cannot become a foreign company by the mere fact that all the sharesof the company are held by foreigners.

(ii) State whether a banking company is required to file with the registrar its accounts andbalance sheet. (5 Marks)

Answer:

As per section 32, where a banking company in any year furnishes its accounts and balance-sheet inaccordance with the provisions of section 31, it shall at the same time send to the registrar 3copies of such accounts and balance-sheet and of the auditor's report, and where such copies areso sent, it shall not be necessary to file with the registrar, in the case of a public company, copies





of the accounts and balance-sheet and of the auditor's report, and, in the case of a privatecompany, copies of the balance-sheet and of the auditor's report as required by sub-section (1) ofsection 220 of the Companies Act, 1956; and the copies so sent shall be chargeable with the samefee and shall be dealt with in all respects as if they were filed in accordance with that section.

(iii) Mr. Sandip is an Indian Citizen. He has been residing in India since his birth. He left

India on 25th February, 2011 for pursuing business management in America for 2 years. Hecomes back on 24th February, 2013. What is his residential status for the financial years2010-11, 2011-12, 2012-13 and 2013-14? (5 Marks)

Answer:

The given problem can be answered as follows:

(a) Financial year 2000-01. Mr. Sandip resided in India for the whole year in the preceding financial year, i.e., 1999-2000. His leaving India for pursuing business management for 2 years would notexclude him from the definition of 'Person resident in India' because he is not going outside

India for any of the following purposes:

(i) for or on taking up employment outside India, or

(ii) for carrying on outside India a business or vocation outside India, or

(iii) for any other purpose, in such circumstances as would indicate his intention to stay outsideIndia for an uncertain period. Therefore, Mr. Sandip is a person resident in India for thefinancial year 2000-01.

(b)

Financial year 2001-02. He resided in India for more than 182 days in the preceding financial year, i.e., 2000-01. Therefore, he is a 'Person resident in India' for the financial year 2001-02.It is immaterial that he is outside India for the whole financial year 2001-02.

(c)

Financial year 2002-03. Mr. Sandip did not reside in India at all in the preceding financial year,i.e., 2001-02. Therefore, he shall be a 'Person resident outside India' for the financial year2002-03.

(d)

Financial year 2003-04. Mr. Sandip resided for less than 183 days in the preceding financial year, i.e., 2002-03. Therefore, he shall be a 'Person resident outside India' for the financial year 2003-04.

(d)(i) M/s. Sahara Fertilizers Ltd. proposes to acquire equity shares of XYZ Ltd. worth 19lakhs. On the basis of the following information advise Sahara Fertilizers Ltd. about therequirements to be complied with under Companies Act, 1956 for the proposed investment inXYZ Ltd.:

Authorised Share Capital 50,00,000

Issued, subscribed and paid-up capital 25,00,000

Free Reserves 5,00,000. (5 Marks)





Answer:

Inter-corporate loans and investments are governed by the provisions of section 372A. Firstdetermine whether a special resolution is required for making fresh investments. This can bedetermined as follows:

ParticularsPaid up capital of the company (A) 25,00,000

Free reserves (B) 5,00,000

Aggregate of paid up capital and free reserves (C) 30,00,000

60% of aggregate of paid up capital and free reserves (D) 18,00,000

Higher of (B) or (D), i.e. the ceiling limit for inter-corporate loans, investmentsetc. without requiring a special resolution

18,00,000

Proposed investment in equity shares of XYZ Limited 19,00,000

Since the proposed investment exceeds the ceiling limit, a special resolution is required. Thecompany shall adopt the following procedure for making investments in XYZ Ltd.:

(a)

Unanimous approval of the Board shall be obtained by passing a resolution at a Board meeting.

(b) A special resolution shall be passed in the general meeting.

The notice of special resolution shall state the specific limits, particulars of the company towhich loan is proposed to be given, specific source of funding and other relevant details.

The company shall file a copy of special resolution with the registrar within 30 days ofpassing the special resolution.

(c) The company shall obtain the prior approval of the Public Financial Institution, if any, fromwhom it has taken a term loan.

(d)

The company can make such investments only if no default in respect of Public deposits issubsisting.

(e) The prescribed particulars shall be entered in the register maintained under section 372A(5).

(ii) Is a stock exchange compulsorily required to be corporatized and demutualised? (5 Marks)

Answer:

The provisions relating to section 4A are explained hereunder:

1. Requirement of Section 4A

Every recognised stock exchange shall be corporatised and demutualised before the appointeddate.

2. Consequences of non-compliance of Section 4A

(a) Applicability of Section 4B. Every recognised stock exchange shall be corporatised anddemutualised as per section 4B.

(b) Relaxation by SEBI. SEBI may specify another appointed date in respect of a recognisedstock exchange if it is satisfied that such recognised stock exchange was prevented by





sufficient cause from being corporatised and demutualised.

3. Meaning of 'appointed date'

(a)

'Appointed date' means the date appointed by SEBI by notification in the Official Gazette.

(b) Different 'appointed dates' may be appointed for different recognised stock exchanges.

(iii) What shall be the composition of Competition Commission of India? (5 Marks)

Answer:

The composition of Competition Commission of India may be explained as follows:

1. Chairperson and Members

The Commission shall consist of a Chairperson and not less than two and not more than 6 otherMembers to be appointed by the Central Government:

2. Qualifications and experience of the Chairperson and Members

The Chairperson and every other Member shall be a person of ability, integrity and standing andwho has special knowledge of, and such professional experience of not less than 15 years in,international trade, economics, business, commerce, law, finance, accountancy, management,industry, public affairs or competition matters, including competition law and policy, which inthe opinion of the Central Government, may be useful to the Commission.

3. Terms of employment

The Chairperson and other Members shall be whole-time Members.

(e)(i) State, with reason, whether the following are debts for the purpose of section 433(e)

of the Companies act, 1956:

(A) Contingent or conditional liability.

(B) Non-payment of dividend declared.

(C) Non-payment of salary to an employee.

(D) Non-payment to a creditor of a disputed liability. (5 Marks)

Answer:

The Court may order the winding up of a company under any of the circumstances mentioned undersection 433(a) to (f). Section 433(e) provides that a company may be wound up by the Court if it is

unable to pay its debts. Section 434 specifies the circumstances in which the company shall bedeemed to be unable to pay its debts.

(i) Contingent or conditional liability

A debt must be a definite sum of money payable immediately or at a future date. A contingentor conditional liability is not a debt, unless the contingency or condition has already happened[Registrar of Companies v Kavita Benefit Private Limited(1978) 48 Comp Cas 231].





(ii) Non-payment of dividend declared

On declaration, the dividend becomes a debt payable by the company. Non-payment of dividendentitles the shareholder to apply for winding up of the company [Hariprasad (C) v AmalgamatedCommercial Traders (Private) Ltd. (1964) 34 Comp Cas 209]. Therefore, non-payment ofdividend declared would amount to a debt for the purpose of winding up petition.

(iii) Non-payment of salary to an employee

Non-payment of salary to an employee of the company is not a debt for the purpose of section433(e) [Pawan Kumar Khullar v Kaushal Leather Board Ltd. AIR 1966 MP 85]. However, acontrary decision has been given by the A.P. High Court in which the Court construed the word'debt as a sum which is to be recovered from a person who is obliged to make the payment andaccordingly the Court held that unpaid salary is a debt [B.5. Damagry v VIF Airways Ltd.]. Itseems that A.P. High Court judgment is realistic and reflects the intention of the legislature.

(iv) Non-payment to a creditor of a disputed liability

Where a debt is bona fide disputed by the company and the Court is satisfied with the

company's defence, a winding up order will not be made [Piara Singh (S) v S.H.R. Properties Pvt.Ltd. (1993) 10 CLA 83]. If a debt is bona fide disputed there cannot be a neglect to pay. TheCourt shall consider the following principles'.

(a) Whether the defence of the company is in good faith and is of some substance.

(b) Whether the defence is likely to succeed in point of law.

(c) Whether the company has produced prima facie proof of the facts on which the defencedepends [Kirpal Singh v Sutlej Land Finance Pvt. Ltd. (1989) 66 Comp Cos 841].

(ii) What are the powers of the High Court to enforce its orders relating to compromise and

arrangement? (5 Marks)

Answer:

Section 392 has conferred wide powers on the Court to remove the obstacles and difficulties forthe proper working of the scheme. These powers are discussed as follows:

1. Power to give directions to the company

Where a compromise or arrangement is proposed, the Court may order that a meeting ofcreditors or members or any class of them be called, held and conducted in the manner directedby the Court (Section 391). If the Court gives such directions, then the provisions of theCompanies Act will not apply to that extent. However, Court has no power to dispense with the

holding of the meeting even though the shareholders unanimously approve the scheme [Re,Southern Automotive Corporation Pvt. Ltd. (1960) 30 Comp Cas 119].

2. Power to stay any suit or proceedings

The Court may stay the commencement or continuation of any suit or proceedings against thecompany until the application is finally disposed of (Section 391).





3. Power to order winding up

If, after sanctioning the scheme, the Court is satisfied that the sanctioned scheme has becomeunworkable even after an honest effort, the Court may wind up the company. The power can beexercised suo motu or on the application of the company or its creditors or any personinterested in the affairs of the company (Section 392).

4. Power to supervise and modify the scheme

After sanctioning a scheme of compromise or arrangement, the Court may exercise thefollowing powers:

(a) To supervise the carrying out of the scheme.

(b) To modify or vary the sanctioned scheme so that it becomes workable.

(c) To ask for a report on the working of the scheme. On consideration of such report, theCourt may give such directions as it thinks fit (Section 392).

(iii) What measures can a securitization or reconstruction company adopt for the purpose ofasset reconstruction? (5 Marks)

Answer:

The measures for asset reconstruction, as contained in Section 9 of the Act, are explained below:Without prejudice to the provisions contained in any other law for the time being in force, asecuritisation company or reconstruction company may, for the purposes of asset reconstruction,having regard to the guidelines framed by the Reserve Bank in this behalf, provide for any one ormore of the following measures, namely:

(a)

the proper management of the business of the borrower, by change in, or takeover of, the

management of the business of the borrower;(b) the sale or lease of a part or whole of the business of the borrower;

(c) rescheduling of payment of debts payable by the borrower;

(d)

enforcement of security interest in accordance with the provisions of this Act;

(e)

settlement of dues payable by the borrower;

(f) taking possession of secured assets in accordance with the provisions of this Act.





(3) Answer any two questions: [2 x 10 = 20 marks]

(a) Evaluate the concept of Social Responsibility of Business. (10 Marks)

Answer:

Evolution of the Concept of Social Responsibility of Business

The evolution of the concept of social responsibility of business is the result of different stages ofstruggle. Business began merely as an institution for the purpose of making money. Man wasconsidered successful so long as he made money and kept himself out of jail. He felt no particularobligation and acknowledged no responsibility to the public. As an owner of his business, he thoughtthat he had a perfect right to do what he pleased with the money he earned. Social norms andattitudes had very little influence on the practice of management. Even in USA, business ventureslike those of John D. Rockfeller, G.F. Swift, J.P. Morgan are noted for their flagrant disregard ofsociety, the individual worker, and competitive business firms.

But by 1920s, the position changed and the word 'service' became the slogan of innumerablebusiness clubs and associations. At the same time, business, leaders as a whole were becoming

increasingly conscious of the fact that the public was an integral part of the general businessscheme. The sense of service, thus, qualified and modified the greed for profit. Economic orderscame to recognise social order as their very foundation. It is now increasingly recognised that whatis not for the public good is not for the good of business.

The second element that helped the evolution process was the purchasing power of the public. Thedemand of the public meant nothing unless backed by purchasing power. Industry had come tounderstand that one of its proper functions was to manufacture and distribute purchasing power,besides manufacturing and distributing merchandise. The most important effect of this change inthe attitude was a new business policy which demanded a persistent tendency towards higher wagesand lower prices. Thus, the new social responsibilities of business came to be recognised.

Yet, one more element in this evolution process has been the rise of new relationship between thepublic and business. The era of purely private business for private profits has gone. Business has aduty to report to the public whose money it is constantly seeking, in order to conduct the businessitself. According to Nicholas N. Eberstadt (1973):

Today's corporate social responsibility movement is a historical swing to re-create social contractof power with responsibility, and as such...the most important reform of our time.

To Keith Davis (1973), "Social responsibility has become the hallmark of mature, global civilization.

(b) What are the important legislations that govern corporate governance in India? (10 Marks)

Answer:

The following are some of the important legislations that govern corporate governance:

The Companies Act, 1956

The Companies Act, 1956 is the principal legislation that governs the companies. Its objectives are:

Standard of business integrity





Conduct in the promotion and management of companies

Disclosure of all reasonable information relating to the affairs of the company

Effective participation

Shareholders and their protection of interest

Performance and management

Governance

The Competition Act, 2002

The objectives of the Competition Act, 2002 include:

•

Prohibition of anti-competitive agreements

• Prohibition of abuse of dominant position

• Regulation of combination.

The Securities and Exchange Board of India (SEBI) Act, 1992

SEBI has been instituted by the Securities and Exchange Board of India Act, 1992 with thefollowing objectives:

• Protect the interests of investors or securities

• Promote the development of the securities market

•

Regulate the securities market

•

Investors' education

• Regulation of intermediaries

•

Protect investors against unfair and fraudulent trade practices• Provide a grievance redressal mechanism

The Foreign Exchange Management Act (FEMA), 1999

The Foreign Exchange Management Act, 1999 came into effect on June 1, 2000 and it replaced theForeign Exchange Regulation Act (FERA), 1973. While the objective of FERA was to conserve theforeign exchange resources, FEMA facilitated external trade and payments and promoted orderlymaintenance of the foreign exchange market in India. The highlights of the new Act are givenbelow:

1.

FEMA is more transparent in its application. It has laid down the areas where specificpermission of the Reserve Bank/Government of India is required. A person can, thus, remit

funds, acquire assets, and incur liability in accordance with the specific provisions laid down inthe Act or the notifications issued by the Reserve Bank/Government of India under the Actwithout seeking approval of Reserve Bank/ Government of India.

2.

Application of FEMA may be seen broadly from two angles: (i) capital account transactions and(ii) current account transactions, capital account transactions will be regulated by the ReserveBank and they relate to movement of capital, e.g. transactions in property and investments, andlending and borrowing money. Current account transactions are those which do not fall in the





capital account category. They which are permitted freely subject to a few restrictions as givenbelow:

(a) RBI permission would be required when they exceed a certain ceiling.

(b) Need permission of Government of India appropriate authority irrespective of the amount.

(c)

There are seven types of current account transactions which are prohibited and notransaction can, therefore, be undertaken relating to them. These include transactionsrelating to lotteries, football pools, and banned magazines.

Significant features: The Foreign Exchange Management Act and Rules give full freedom to aperson resident in India who was earlier resident outside India to hold or own or transfer anyforeign security, shares or immovable property situated outside India and acquired when he/shewas resident there. Similar freedom is also given to a resident who inherits such security orimmovable property from a person resident outside India. The exchange drawn can also be usedfor purposes other than for which it is drawn provided drawal of exchange is otherwisepermitted for such purpose. Certain prescribed limits have been substantially enhanced. Forinstance, residents now going abroad for business purposes or for participating inconferences/seminars will not need Reserve Bank's permission to avail foreign exchange up toUS$ 25,000 per trip irrespective of the period of stay; basic travel quota has been increasedfrom the existing US$ 3000 to US$ 5000 per calendar year.

The Foreign Contribution (Regulation) Act, 1976

The foreign contribution (Regulation) Act, 1976 has been brought in to regulate the acceptance andutilisation of foreign contribution or foreign hospitality by certain persons or associations. Thepurpose of the regulation is to ensure that parliamentary institutions, political associations,academic and other voluntary organisations as well as individuals working in the important areas ofnational life function in a manner consistent with the values of the Sovereign Democratic Republic.The Act extends to the whole of India, in addition to the:

(a) citizens outside India, and

(b) associates, branches or subsidiaries outside India, of companies or bodies corporate,registered or incorporated in India.

The Consumer Protection Act, 1986

Consumer is a stakeholder of a company who deals with the company's product or services. It is theresponsibility of the government to protect their interest and rights. The basic objectives of theconsumer protection Act, 1986 are:

• The right to be protected against marketing of goods and services which are hazardous to life

and property•

The right to be informed about the quality, quantity, purity, standard, and price of goods orservices

• Protect the consumer against unfair trade practices

•

Consumer education

•

Consumer redressal





The Environment (Protection) Act, 1986

Environmental degradation has become a very serious issue in recent years. The need for coveringall aspects of the environment resulted in the enactment of the Environment (Protection) Act,1986. This need has been internationally recognised and a decision to protect and improveenvironment was taken at the United Nations Conference on Human Environment at Stockholm in

June 1972. The mankind has been exploiting, using and abusing earth for centuries. Rapidindustrialisation and population explosion are the key factors for environmental degradation. If theenvironmental pollution is not checked on controlled, the quality of life will deteriorate and earthwould become uninhabitable. Environmental legislation intends to control the environmentaldegradation to improve quality of life and health of the inhabitants.

(c)(i) List out the key features of the Kumar Mangalam Birla Committee’s Report on CorporateGovernance. (5 Marks)

Answer:

The Kumar Mangalam Birla Committee Report

Strengthening of disclosure norms for initial public offer

Providing information in Director's report for utilisation of funds

Declaration of quarterly results

Mandatory appointment of Compliance Officer

Disclosure of material and price-sensitive information

Disclosure of material events

Copy of abridged balance sheet to all shareholders

Guidelines for preferential allotment

Regulation for fair and transparent framework for takeovers and substantial acquisition

Audit committee

Frequency of meetings and quorum

Independent, and Nominee Directors in the Board

(ii) State the composition of board as per Clause 49 of Listing Agreement. (5 Marks)

Answer:

Composition of BoardIn the present competitive environment, corporates have to be extraordinary careful in choosingthe balanced composition of the board, particularly, age of the members of the board, professionalcompetencies of the members and experience as members of the board. To make the board trulyeffective, it must be balanced in several aspects. A good board always works as an interdisciplinary, jointly working consulting group where everybody has been given an opportunity to exhibit hisexpertise and professional competence. The test of a balanced group depends on whether the





requisite technical, legal, financial, and managerial skills are represented on the board.Representation of different age groups on the board will definitely strengthen the board as awhole. For the board, the better age range shall be from 40 to 75 years. Every board is expectedto have: Experienced members

Combination of young and senior members Men of integrity and sincerity People of proven performance capacity Willingness to work Well versed in duties and responsibilities pertaining to both statutory and non-statutory

compliances



Answer to PTP_Final_Syllabus 2012_Jun2014_Set 1


PAPER 13 – Corporate Laws and Compliance

Time Allowed: 3 Hours Full Marks: 100

The figures in the margin on the right side indicate full marks.

SECTION A[Answer to Q.No.1 is compulsory and attempt any 4 from the rest]

1. (a) 'X' was appointed as managing director for life by the articles of association of a

private company incorporated on 1st June, 1970. The articles also empowered 'X' to appoint a

successor. 'X' appointed, by will, 'S‟ to succeed him after his death. Can 'S' succeed 'X' as

managing director after the death of 'X'? [3]

(b) The issues, subscribed and paid-up share capital of XYZ Ltd. Is Rs. 10 lakhs consisting of

90,000 equity shares of Rs. 10 each fully paid up and 10,000 preference shares of Rs. 10 each

fully paid up. Out of members of company, 400 members holding one preference share eachand 50 members holding 500 equity shares applied for relief under sections 397 and 398 of the

Companies Act, 1956. As on the date of petition, the company had 600 equity shareholders and

5,000 preference shareholders.

Examine whether the above petition under sections 397 and 398 is maintainable. Will your

answer be different, if preference shareholders have subsequently withdrawn their consent ? [6]

(c) The subscribed share capital of ABC Company Ltd at the end of the financial year ending

31.3.2012 was Rs. 25 crores, out of which 2 Public Financial Institutions were holding share capital

amounting to Rs. 4 crores. During the financial year 2012-13 the company through public issue of

shares raised its subscribed capital by additional Rs. 70 crores. Out of Rs. 70 crores, the 2 Public

Financial Institutions were further allotted shares amounting to Rs. 22 crores, raising the total

contribution of these two institutions to Rs. 26 crores before the date of the company‟s closure of

books for AGM scheduled for 15.9.2013, where Auditors were to be appointed.

The company as usual, by getting an ordinary resolution passed appointed the Auditors. A group

of shareholders of the company allege that the appointment of Auditors is violative of certain

provisions of the Companies Act, 1956. They, however, did not raise any objection to the

appointment of auditors at the previous AGM held on 10.9.2012.

(i) Whether the contention of the shareholders is tenable?

(ii) If the contention of shareholders be tenable, what action should the company take for

the appointment of Auditors at the AGM scheduled for 15.9.2013 ? [6]

Answer 1 (a) :

No director shall assign his office to any other person. If he does, the assignment shall be void

(Section 312).

The articles of a company empowered its managing director to appoint a successor. The

managing director appointed, by his will, Mr. S to succeed him as a managing director after his

death. The Court observed that a director is prohibited from assigning his office. The word 'his'

used in section 312 indicates that the prohibition applies only when an office held by a director

is assigned to any other person. Where a director dies, the office held by him becomes vacant

and therefore such office cannot be assigned to any other person. Therefore, appointment of a

new person in such office does not amount to an assignment within the meaning of section 312.





[Oriental Metal Pressing Pvt. Ltd. v B.K. Thakoor (1961) 31 Comp Cas 143]. The facts of the given

case are identical to the facts discussed in the above case. Accordingly, it can be said that

appointment of 'S' is valid and it does not amount to an assignment of office by 'X'.

Answer 1 (b):

As per section 399, in the case of a company having a share capital, members eligible to applyfor oppression and mismanagement shall be lowest of the following :

(i) 100 members ; or

(ii) 1/10 th of the total number of members; or

(iii) Members holding not less than 1/10 th of the issued share capital of the company

It must be noted that the term member includes an equity shareholder as well as preference

shareholder.

The consent to be given by shareholder is reckoned at the beginning of the proceedings. The

withdrawal of consent by shareholder during the course of proceedings does not affect the

maintainability of the application [Rajahmundri electric Supply Corporation v Nageshwara Rao

AIR 1956 SC 213].

In the present case, the shareholding pattern of the company is as follows :

(i) Rs. 9,00,000 equity share capital held by 600 members

(ii)

Rs. 1,00,000 preference share capital held by 5,000 members

(iii) Rs. 10,00,000 total share capital held by 5,600 members

The application alleging oppression and mismanagement has been made by the members as

follows :

Number of members making the application:

Preference shareholders 400

Equity shareholders 50

Total members 450

Amount of share capital held by the members making the application :

Preference share capital 4,000 (400 preference shares of RS. 10 each)

Equity share capital 5,000 (500 equity shares of Rs. 10 each)

Total capital 9,000

The application shall be valid if it has been made by the lowest of the following :

(i) 100 members

(ii) 560 members (being 1/10th of 5,600)

(iii) Members holding Rs. 1,00,000 share capital (being 1/10th of Rs. 10,00,000)

As is evident, the application made by 450 members meets the eligibility criteria specified under

section 399, and therefore the application is maintainable.

Such application shall remain valid despite the fact that some of the applicants have

subsequently withdrawn their consents [Rajahmundri electric Supply Corporation v Nageshwara

Rao AIR 1956 SC 213].

It has been assumed that the members making the application have paid all the calls due on

their shares.

Answer 1 (c):

Section 224A of the Act, provides that in the case of a company in which twenty-five present or

more of the subscribed share capital is held, whether singly or in any combination, by :





(a) A public financial institution or a Government Company or Central Government or any

State Government, or

(b) Any financial or other institution established by any provincial or State Act in which a

State Government holds not less than fifty-one percent of the subscribed share capital,

or

(c) A nationalized bank or an insurance company carrying on general insurance business.

The appointment of an auditor or auditors shall be in the annual general meeting by a specialresolution only.

If the company fails to pass a special resolution, it shall be deemed that no auditor or auditors

had been appointed by the company at its annual general meeting and the Central

Government will be empowered to make the appointment.

(i) For AGM held on 10.9.2012 :

The holding of Public Financial Institution was Rs. 4 crores ÷ Rs. 25 crores = 16%.

Hence, Sec 224A is not attracted. Hence, appointment of Auditor(s) by an Ordinary Resolution is

valid.

For AGM held on 15.9.2013 :

The holding of Public Financial Institution will be Rs. 26 crores ÷ Rs. 95 crores = 27.37%.

Hence, special resolution is required to be passed for appointment of Auditor(s), in terms of Sec

224A. Appointment by way of Ordinary Resolution is not valid. Hence, the Shareholder‟s

contention is tenable.

(ii) Where a company is required to appoint an Auditor at an AGM by passing a special

resolution, but omits or fails to pass such resolution due to any reason, it shall be deemed that no

Auditor has been appointed by the company at its AGM and the provisions of Section 224 (3) of

the Act will be attracted. [Section 224A (2)]

Section 224(3) of the Act provides that where at an annual general meeting no auditor or

auditors are appointed or re-appointed, the Central Government may appoint a person to fill

the vacancy. For this purpose, the company is charged with the responsibility of intimating the

above fact to the Central Government within seven days from the date of such meeting. The

company and every officer of the company who is in default in this respect are punishable withfine which may extend to Rupees five thousand.

2. (a) The liability of members may become unlimited and several, even in the case of a

limited liability company – explain. [4]

(b) In relation to winding up of a Company incorporated under the Companies‟ Act 1956,

explain clearly the meaning of the term „Overriding Preferential Payments‟. Examine and decide

whether the following debts of a Company under the winding up shall be „Preferential Payments‟

and shall be paid in priority to the claim of Unsecured Creditors – Wages amounting to 30,000 only of an Employee for services rendered for a period of 8

Months within the preceding 12 Months next before the relevant date.1 Lakh due to an employee from Provident Fund and 50,000 towards Gratuity.

20,000 payable by the Company on account of expenses incurred in respect of

investigation held u/s 235. [6]

(c) The board meeting of MNO Ltd. was held on 10 th May, 2008 at Chennai at 11 a.m. At the time of

starting the board meeting the number of directors present were 7. The total number of directors

were 10. The board transacted ten items in the board meeting. At 12 noon after the completion of





four items in the agenda 4 directors left the meeting. Examine the validity of these transactions

explaining the relevant provisions of the Companies Act, 1956. [5]

Answer 2 (a) :

The liability of members may become unlimited and several, even in the case of a limited liability

company. If, at any time, the number of members of a company is reduced below the statutory

minimum (seven in the case of a public company and two in the case of a private company),and the company carries on business for more than six months while the number is so reduced,

every person who is a member of the company at the time the company so carries on business

after those six months and is aware of that fact shall be severally (individually) liable for the

payment of company‟s debts, contracted during that time. Thus, in this case, the priv ilege of

limited liability of shareholders is lost.

However, it may be noted that the personal liability of the members will arise only after the expiry

of six months from the date of reduction of membership below the statutory minimum. [Section

45].

Answer 2 (b):

Preferential Payments u/s 530

1) Wages and Salaries of Employees: All wages or Salary (whether by way of time or piece

work, or whether wholly or partly by way of commission) of any employee, in respect of

services rendered to the Company. The following conditions / restrictions apply in this regard

–

(i) The amount should be due for a period not exceeding 4 months within the 12 months

before the relevant date.

(ii) The amount should not exceed ` 20,000 in the case of any one claimant. [GSR 30(E)

dated 17-02-1997]

Note: Any remuneration in respect of a period of holiday or of absence from work through

sickness or other good cause shall be deemed to be wages in respect of services rendered to

the Company during that period.

2) Dues from Employee Welfare Funds: All sums due to any Employee from a Provident Fund,

Pension Fund, Gratuity Fund or any other Fund for the welfare of the employees, maintained

by the company.

3) Investigation Expenses: Expenses of any investigation held in pursuance of Sec. 235 or 237, so

far as they are payable by the Company.

In the given case,

Salary / Wage shall be restricted to least of the following –

(i) 4 Months Wages = ` 15,000 (i.e., ` 30,000 x 4/8 = ` 15,000)

(ii)

Notified Amount = `

20,000. Hence `

15,000 is preferential.

Entire amount due under PF and Gratuity is Preferential.

Entire Investigation expenses u/s 235 is preferential.





Answer 2 (c):

As per section 287(2), the quorum for a Board meeting shall be higher of-

(a) 1/3rd of total strength (any fraction contained in that one-third shall be rounded off as one);

or

(b) 2 directors.

Total strength' means the total strength of the Board of directors of a company, as reduced by

the number of directors whose places are vacant at that time.Quorum has to be present at the time of transacting each and every business. It is not enough

that a quorum was present at the commencement of the meeting. Therefore, where quorum is

present at the beginning of the meeting, but some of the directors leave the meeting, so that

remaining directors do not constitute quorum, any subsequent resolutions will be invalid.

In the given case, total strength is 10. Quorum for the Board meeting held on 10 th May, 2008 shall

be 1/3rd of 10 directors, i.e. 3.33, taken as 4 directors. Since 7 directors were present at the time

of commencement of the Board meeting, the Board meeting has been validly held.

However, after transacting 4 items on agenda, 4 directors left, because of which the number of

directors present has fallen below the quorum required. Since, quorum is required at the time of

transacting each and every business, the remaining 6 agenda items cannot be validly discussed

and voted upon. Therefore, resolutions passed in respect of these 6 agenda items are void, and

have no legal effect.

3. (a) A French manufacturing company desirous of setting up its branch office at Pune,

seeks your advice on the object for which the company may be allowed to set up the

desired branch office. Advise the company about the procedure as required under the

Foreign Exchange Management Act, 1999 to be followed in this regard. [7]

(b) Mr. MKS was a member of the Competition Commission of India. He ceased to be such

member on 31st May, 2013. Thereafter, he was offered the post of Executive Director with

appropriate remuneration and perquisites in the following organizations to join his duties on

and from 1st September, 2013:

(i) HIL Ltd, a private sector public limited company, whose case was disposed off by the

Competition Commission under the provisions of the Competition Act, 2002 in the

month of March, 2013.

(ii) Life Insurance Corporation of India. [3]

(c) The Balance Sheet of M/s. Quick Bucks Ltd. As at 31.3.2013 disclosed the following details :

(i) Share Capital Rs. 200 Crores

(ii) Reserves and Surplus Rs. 800 Crores

The company has issued in the year 2008, fully convertible debentures of Rs. 150 Crores,

which are due for conversion in the year 2013. The company proposes to issue bonus shares

in the ratio of 1:1. Explain briefly the SEBI guidelines to be followed by the company. [5]

Answer 3 (a):

As per section 6, the Reserve Bank may, by regulations, prohibit, restrict, or regulateestablishment in India of a branch, office or other place of business by a person resident outside

India, for carrying on any activity relating to such branch, office or other place of business. In

exercise of such power, the Reserve Bank of India has framed Foreign Exchange Management

(Establishment in India of Branch or Office or other Place of Business) Regulations, 2000.

The provisions of Foreign Exchange Management (Establishment in India of Branch or Office or

other Place of Business) Regulations, 2000 are explained below:





1. RBI may permit a company engaged in manufacturing and trading activities abroad to set

up Branch Office in India with the following objectives:

(a) To represent the parent company or other foreign companies in various matters in India,

e.g., acting as buying or selling agents in India.

(b) To conduct research work in the area in which the parent company is engaged.

(c) To undertake export and import trading activities.

(d) To promote possible technical and financial collaborations between the Indiancompanies and overseas companies.

(e) Rendering professional or consultancy services.

(f) Rendering services in information technology and development of software in India.

(g) Rendering technical support to the products supplied by the partner or group

companies.

2. Approval of the RBI is required for establishment in India of branch or office or other place of

business by a person resident outside India.

3. A person resident outside India desiring to establish a branch or liaison office in India shall

apply to the RBI in Form No. FNC 1.

4. A foreign company may open Branch Office in India if all the following conditions are

satisfied:

(a) The office can act as a channel of communication between the Head Office abroad

and parties in India. It is not allowed to undertake any business activity in India and

cannot earn any income in India.

(b) Expenses of the Branch Office are to be met entirely through inward remittances of

foreign exchange from the Head Office abroad.

(c) Permission to set up Branch Office is initially granted for a period of 3 years and this

period may be extended from time to time by the Regional Office in whose jurisdiction

the Branch Office is set up.

(d) The Branch Office shall file with the concerned Regional Office an Annual Activity

Certificate issued by a Chartered Accountant.

1. No approval of the RBI is necessary for a banking company if such company has obtained

necessary approvals under the provisions of the Banking Regulation Act, 1949.

2. No approval of the RBI is necessary for establishment of a branch or unit in Special Economic

Zones to undertake manufacturing and service activities, if the following conditions aresatisfied:

(a) Such units are functioning in those sectors in which 100% Foreign Direct Investment (FDI) is

permitted.

(b) Such units comply with Part IX of the Companies Act, 1956 (Sections 592 to 602).

(c) Such units function on a stand-alone basis, i.e., such unit will be isolated and restricted to

the Special Economic Zone alone and no business activity or transaction will be allowed

outside the Special Economic Zones in India.

(d) In the event of winding up of business and for remittance of winding up proceeds, the

branch shall approach an authorised dealer.

Answer 3 (b):As per Section 12, the Chairperson and other members shall not, for a period of two years,

accept any employment connected with the management or administration of any enterprise

which has been a party to any proceeding before the Commission under this Act. However, the

said restriction shall not apply where the Chairperson or any member is offered an employment

in a corporation established by or under any Central, State or Provincial Act.

In the present case, HIL Ltd. Is an enterprise which has been a party to any proceeding before

the Commission. Therefore, Mr. MKS cannot join HIL Ltd. Upto 31 st May, 2015 (i.e., upto 2 years of

cessation of his office of member). However, LIC is a corporation established by a Central Act,





and so the restriction on employment of Chaiman or a member shall not apply where

appointment is made in LIC. Therefore, Mr. MKS can join LIC.

Answer 3 (c):

Chapter IX consisting of Regulations 92 to 95 of Securities and Exchange Board of India (Issue of

Capital and Disclosure Requirements)Regulations, 2009 contains the Regulations for issue ofbonus shares.

Applying the provisions contained in these Regulations to the given problem, M/s. Quick Bucks

Ltd. can make a bonus issue in the ratio of 1:1 as follows :

(i) The articles of M/s. Quick Bucks Ltd. must authorize it to issue the bonus shares, if there is no

provision in the articles authorizing the company to issue bonus shares, firstly, the articles

shall be amended by passing a special resolution.

(ii) Steps for determining whether any increase in Authorised share capital is required.

(a) Paid up share capital as on 31st March, 2013 200 Crores

(b) Paid up capital (after conversion of Rs. 150 crores fully convertible

debentures, assuming that these debentures shall be converted into

share capital of Rs. 100 crores) 350 Crores

(c) Proposed bonus issue – 1 share for every share held

(d)

Post bonus issue capital 700 Crores

Assumed that authorized share capital of M/s. Quick Bucks Ltd. is Rs. 700 crores, or more, no

increase in authorized share capital is required.

(iii) Sources of issue of bonus shares

Reserve and surplus (since free reserves built out of the genuine profits can be used for

issue of bonus issue) 800 Crores

Since the sources for issue of bonus shares (Rs. 800 crores) is sufficient to issue bonus shares

(Rs. 350 crores), the proposed issue can be made.

(iv) Other legal requirements for issue of bonus shares are as under

(a) A resolution shall be passed by the Board in a duly convened Board meeting

(b) The bonus shall be issued within 6 months of passing the board resolution

(c) After the issue of bonus shares, the company shall file with SEBI a compliance

certificate duly signed by the statutory auditor of the company or a secretary in wholetime practice.

(v) The bonus issue can be made if there is o default in

(a) Payment of interest or principal in respect of fixed deposits and interest on existing

debentures or principal on redemption thereof; and

(b) Payment of statutory dues of the employees such as contribution to provident fund,

gratuity, bonus etc.

4. (a) Three persons X, Y and Z formed a scheme of developing barren land. Under the

scheme, X and Y were to incorporate a company and Z, a professional, was to provide loan

equivalent to the capital brought in by X and Y. The loan part was essential for giving shape to

the scheme. Can Z be regarded as one of the promoters of the company ? [4]

(b) A Public Company has been declaring dividend at the rate of 20% on equity shares during

the last 5 years. The company has not made adequate profits during the year ended 31, 2013,

but it has got adequate reserves which can be utilized for maintaining the rate of dividend at

20%. Advise the company as to how it should go about if it wants to declare dividend at the rate

of 20% for the year 2012-13. Would your answer be different if the company utilized only the

profits made in the previous years and retained in the profit and loss account for the purpose of

payment of dividend at the rate of 20% for the year 2012-13? [7]





(c) The Directors of Khalsa Electronics Ltd. allotted to themselves certain Rights Shares for which

no application was made by certain shareholders as required u/s 81. Discuss the validity of their

action specially in view of the fact that market price of shares of his company is 40% above par.

[4]

Answer 4 (a):The expression „promoter‟ has not been defined under the Companies Act. Section 62(6) (a)

defines the expression „promoter‟ to mean a promoter who was a party to the preparation of

the prospectus or of a portion thereof containing the untrue statement, but does not include

any person by reason of his acting in a profession capacity in procuring the formation of the

company.

To be a promoter one need not necessarily be associated with the initial formation of the

company, one who subsequently helps to arrange floating of its capital will equally be regarded

as a promoter. A person who does not take a prominent part may also have so acted in the

formation of a company as to bring himself under the term promoter.

However, the person assisting the promoters by acting in a professional capacity do not thereby

become promoters themselves. Thus, a solicitor who drafts the articles or the accountant who

values assets of a business to be purchased are merely giving professional assistance to the

promoter. However, where he goes further than this, for example, by introducing his clients to a

person who may be interested in purchasing shares in the proposed company, he would be

regarded as promoter.

In the given case, the scheme is such that it cannot be completed without the loan being

provided by Z to the company and Z has already agreed to provide loan to the company on

incorporation. Therefore, Z has necessarily participated in the formation of the company even

though not being in professional capacity. Hence, Z can be regarded as a Promoter of the

company.

Answer 4 (b):


only out of profits. In other words, the dividend can be paid only out of the following sources :

(i)

Profits of current financial year(ii) Undistributed profits of previous financial years, i.e., accumulated profits of previous years

(iii) Moneys provided by the Central Government or State Government in pursuance of a


Payment of dividend out of reserves :

Dividend can be declared out of the profits transferred to the reserves only if

(i) Previous approval of the Central Government is obtained; or

(ii) Such payment is made in accordance with such rules as may be prescribed by the Central

Government this behalf, i.e., The Companies (Declaration of Dividend out of Reserves)

Rules, 1975, which are detailed hereunder :

In the event of inadequacy of absence of profits in any year, a company may declare

dividend out of the accumulated profits earned by it is previous years and transferred by it to

the reserves, subject to the following conditions :(i) The rate of dividend must not exceed the lower of –

(a) Average of the rates of dividend declared by the company in immediately preceding 5

financial years; or

(b) 10%

(ii) The amount to be withdrawn from reserves must not exceed 1/10 th of aggregate of paid

up capital and free reserves. Further, the amount so withdrawn shall be first utilized to set off

the losses incurred in the financial year, and the balance amount can only be utilized for

the declaration of dividend.





(iii) The balance of reserves after such withdrawal, shall not fall below 15% of paid up share

capital.

In the present case, the company intends to distribute dividend at the rate of 20%. But as per the

provisions discussed in point (i) above, the rate of dividend declared cannot exceed 10%, i.e.,

the rate of dividend declared out of reserves can be a maximum of 10%. Thus, the company

cannot declare dividend @ 20% out of reserves.

Payment of dividend by utilizing credit balance of Profit and Loss Account

Carried forward profits which have not been transferred to the reserves (i.e., credit balance in

the Profit and Loss Account) can be utilized for payment of dividend without any restriction.

Such utilization would not amount to withdrawal of profits from reserves.

Thus, the company can declare dividend @ 20% for the year 2012-13 out of accumulated profits

retained in the Profit and Loss Account without any restriction.

Answer 4 (c):

“Right” refers to the entitlement of the existing shareholders to receive invitation of offer or

subscription to the shares of a company in case of further issue of capital by the company,

before being offered to others. This is called as the „Right of pre-emption‟.

If the shareholder does not inform the company of his decision within the stipulated time, he shall

be deemed to have declined the offer. If the shareholder declines or is deemed to have

declined or if the person in whose favour the renunciation is made declines to buy the shares,

the company‟s directors may dispose of those shares in such manner as they may think fit.

If a member did not respond to offers made by company, it has to be necessarily held that he

was not inclined to subscribe to additional shares, thereby impliedly consenting for allotment of

shares to others [R. Khemka v. Deccan Enterprises (P) Ltd. 1998 16 SCL 1 (AP)]

In the given case the Directors of Khalsa Electronics Ltd. allotted to themselves certain Rights

Shares for which no application was made by certain shareholders as required u/s 81. With the

reference to the above discussion it can be said that the allotment would be valid unless it is

proved that the shares were allotted to Directors on terms unfavourable to the company.

5. (a) Can an auditor be disqualified for indebtedness in the following cases?

(i) Where he is recovering his fees on a progressive basis even though the job is not complete.

(ii) Where the auditor's firm has purchased goods from the auditee company and not paid for

them for over six months. [4]

(b) A company wants to provide financial assistance to its employees to enable them to

subscribe for fully paid shares of the company. Does it amount to purchase of its own share? If,

the instant case, the company itself purchases to redeem its Preference Shares, does it amount to

acquisition of its own shares ? [4]

(c) Indian citizens incorporated a company in London for the purpose of carrying on business

there. Examine with reference to the relevant provisions of the Companies Act, 1956 whether it isa “Foreign Company”. What would be your answer in case the London com pany was

incorporated by a company registered in India ? [4]

(d) on 1st January 2013 the Board of Directors of Amir Co Ltd. Appointed Mr. J as sole selling agent

of the accompany for a period of 4 years. On 8th March 2013, Amir Co Ltd. In its general meeting

disapproved the appointment of Mr. J as sole selling agent of the company.

(i) What are the circumstances when compensation for loss of office is prohibited to a sole selling

agent ?





(ii) Is Mr. J entitled to payment of compensation for loss of office ? [3]

Answer 5 (a):

As per section 226(3), a person who is indebted to the company for an amount exceeding ` 1,000 shall be disqualified for appointment as an auditor.

The answer to the given problem is as under:(i) An auditor can receive the audit fees on a progressive basis in accordance with a resolution

passed by the general meeting even though the audit is not complete. In such a case, he

cannot be said to indebted to the company and thus he does not vacate his office.

(ii) Where an auditor purchases goods from the company on credit he will be said to be

indebted to the company in respect of such credit purchases, notwithstanding the fact that

such credit period is normally allowed to all the customers by the company [ICAI, Guidance

Note on Independent Auditors]. Where the firm is indebted to the company, each and

every partner of the firm is deemed to have been indebted. Thus, if the amount outstanding

exceeds ` 1,000 the auditor shall vacate his office.

Answer 5 (b):

Sub section (2) of Section 77 disallows a public company and a private subsidiary of a publiccompany to give loan or provide financial assistance (directly or indirectly) to any person to

enable him to purchase or subscribe company‟s own shares or shares of its holding company.

Thus, whereas companies have now been allowed to purchase their own shares, they are still

not permitted to finance the purchase of their shares, directly or indirectly.

However, the aforesaid provisions regarding the prohibition to buy its own shares or give loans or

provide financial assistance shall not affect the making by a company of loans to persons (other

than directors or managers) bona fide in the employment of the company or its holding

company to be held by themselves by way of beneficial ownership.

However, the loan made to any employee for this purpose shall not exceed his salary or wages

at that time for a period of six months [Sec 77 (3)].

In the given case, providing financial assistance to its employees to enable them to subscribe for

fully paid shares of the company will not amount to purchase of own shares.Section 77 applies both for Preference and Equity Shares. However, redemption of Preference

Shares is not in violation of Section 77.

Answer 5 (c):

As per Section 591, a company shall be a foreign company if –

(i) It is incorporated outside India; and

(ii) It has established a place of business in India

Thus, for deciding as to whether a company is a foreign company or not, the criterion is to see as

to whether the company has established a place of business in India or not, and not the persons

who have incorporated the company.

In this case, Indian citizens have formed a company outside India. Since, the company has not

established any place of business in India, the company cannot be said to be a foreign



The answer have remained same even if the London company had been incorporated by a

company registered in India for the same reason as stated above.





Answer 5 (d):

As per section 294A, a sole selling agent shall not be entitled to any compensation for

premature termination of the agency brought about in any of the following circumstances :

(i) Where the appointment of sole selling agent is not approved in the first general meeting

held after his appointment.

(ii) Where the sole selling agent resigns because of the reconstruction or amalgamation of the

company and is appointed as the sole selling agent of the reconstructed or amalgamatedcompany.

(iii) Where the sole selling agent resign voluntarily.

(iv) Where the sole selling agent is guilty of fraud or breach of trust or gross negligence in the

conduct of his duties.

(v) Where the sole selling agent has instigated or is directly or indirectly responsible for the

termination of the sole selling agency.

6. (a) After serious disagreement and difference of opinion among the shareholders of the

company in the last annual general meeting, some of the directors took the steps as noted

below. Discuss the validity and effect of the following:

(i) Mr. John, the managing director sends his notice of resignation.

(ii) Mr. Paul, an ordinary director verbally resigns and not in writing.

(iii) Mr. David, another ordinary director, had sent his resignation, but withdrew it before the

Board meeting was held for accepting his resignation. [6]

(b) M/s ABC Ltd. had power under its memorandum to sell its undertaking to another company

having similar objects. The Articles of the company contained a provision by which directors

were empowered to sell or otherwise deal with the property of the company. The Shareholders

passed an ordinary resolution for the sale of its assets on certain terms and required the directors

to carry out the sale. The Directors refused to comply with the wishes of the shareholders where

upon it was contended on behalf of the shareholders that they were the principal and directors

being their agents were bound to give effect to their decision. Based on the above facts, decide

the following issues, having regard to the provisions of the Companies Act, 1956 and case laws.

(i) Whether the contention of shareholders against the non-compliance of their wishes by the

directors is tenable.

(ii) Can shareholders usurp the powers which by the articles are vested in the directors by

passing a resolution in the general meeting? [6]

(c) All statements in a prospectus issued by ABC Co Ltd. were literally true, but it failed to

disclose that the dividends stated in it as paid were not paid out of trading profits, but out of

realized capital profits. An allottee of shares wanted to avoid the contract on the ground that the

prospectus did not disclose this fact which, in his opinion, was very material. Would he succeed?

[3]

Answer 6 (a):

The resignation takes effect immediately without any need for its acceptance where the articles

do not contain any provision relating to resignation of directors or where the articles allow the

director to resign at any time. However, a managing director cannot resign by merely sending a

resignation. His resignation becomes effective only when the company accepts the resignation

and relieves him from the office. This is because he occupies two positions, viz., one that of a

director and other that of an employee of the company. An employee cannot resign at his

pleasure by giving notice. Instead, his resignation is required to be approved and accepted by





the company to relieve him from his duties and responsibilities [Achutha Pai v ROC(1966) 36

Comp Cas 598].

Any form of resignation, whether oral or written, is sufficient, provided the intention to resign is

clear. However, it is advisable that the resignation is in writing and states the time from which it is

to take effect. A verbal resignation shall be effective, if it is made in the general meeting and is

accepted at the general meeting [Latchford Premier Cinema Ltd. v Ennion (1931) 2 Ch 409]. Aresignation once made cannot be withdrawn except with the consent of the shareholders or

the Board of directors even if such withdrawal is sought before the general meeting or the Board

considers the resignation [Glossop v Glossop (1907) 2 Ch 370].

Thus, in the given problem –

(i) The managing director, Mr. John, cannot resign merely by giving a notice. He shall continue

as managing director until his resignation is accepted.

(ii) Mr. Paul is an ordinary director and so a verbal notice of resignation is sufficient in his case.

The resignation shall be effective from the date of notice of resignation.

(iii) Mr. David cannot withdraw his resignation without the consent of the company even though

such withdrawal was sought before the Board considered his resignation.

Answer 6 (b):

The Board has the absolute power to do all things other than those that are expressly required to

be done by the company in general meeting (Section 291).

As per section 293, without the prior consent of the shareholders in general meeting, Board shall

not sell, lease or otherwise dispose of the whole, or substantially the whole, of one or more

undertakings of the company. The section has been framed negatively; it states that Board shall

not exercise such power without the concurrence of the shareholders in general meeting. It

does not imply that a consent or even a direction by the shareholders would make it obligatory

on the Board to exercise such power.

The power to sell the assets of the company is vested in the Board of directors. If in the opinion ofthe Board, it is not in the best interest of the company to sell its assets, the Board is not bound to

do so, notwithstanding the fact that the company in general meeting has resolved that the

assets should be sold [Pothen v Hindustan Trading Corpn. (P) Ltd. (1967) 37 Comp Cas 6 (Ker)].

The given problem is answered as follows:

(i) The Board is the supreme body having the management of the company. The Board has the

absolute power to do all things except those that are expressly required to be done by the

company in general meeting. The shareholders cannot interfere in the day to day

management of the company. The shareholders cannot supersede or usurp the Board's

powers, or instruct it as to how it shall exercise its powers.

Also, as per Sec. 293, the power to sell, lease or otherwise dispose of any undertaking of the

company is vested with the Board, though the Board can exercise such power only with the

consent of the shareholders in general meeting. Thus, it is evident that a direction by the

shareholders does not make it obligatory for the Board to exercise such power.

If in the opinion of the Board, it is not in the best interest of the company to sell its assets, the

Board is not bound to do so, notwithstanding the fact that the company in general meeting

has resolved that the assets should be sold [Pothen v Hindustan Trading Corpn. (P) Ltd.].





Thus, the contention of the shareholders is not tenable.

(ii) The powers of management are vested in the Board of directors; the Board alone can

exercise such powers. Even a unanimous resolution of the shareholders will not enable the

shareholders to exercise the powers of the Board. The shareholders cannot interfere in the

day to day management of the company. Thus, the shareholders cannot usurp the powersvested in directors.

Answer 6 (c):

According to section 65(1) of the Companies Act, 1956 where the omission from a prospectus of

any matter is calculated to mislead the prospectus shall be deemed in respect of such omission,

to be a prospectus in which an untrue statement is included.

The given problem is based on the facts of Rex v Kylsant [1932] 1 K.B. 42 where all the statements

included in the prospectus issued by the company were literally true. One of the statements

disclosed the rates of dividends paid for a number of years. But, dividends had been paid not

out of trading profits but out of realized capital profits. This material fact was not disclosed. Held,

that the prospectus was false in material particulars and Lord Kylsant, the managing director

and chairman, who knew that it was false, was held guilty of fraud.

So, in the given case, the allottee can avoid the contract on the same ground.

SECTION B[Answer any five questions from Q.No.7 (a) to (f)]

7. (a) Describe the role of stock exchange in Corporate Governance ? [5]

(b) What is the relationship between CSR and sustainability ? [5]

(c) Why Corporate Governance is required in Banks ? [5]

(d) What are the difficulties encountered in governance in state owned business ? [5]

(e) Corporate Social Responsibility is not charity – explain. [5]

(f) Write short note on Corporate Citizenship. [5]

Answer 7 (a):

Stock exchanges have established themselves as promoters of corporate governance

recommendations for listed companies. Demutualisation and the subsequent self-listing of

exchanges have spurred debate on the role of exchanges. The conversion of exchanges to

listed companies is thought to have intensified competition. And, the sharper competition has

forced the question of whether there is a risk of a regulatory ''race to the bottom".

Also exchanges are uneasy about the prospect of having to continue performing their

traditional regulatory and other corporate governance enhancing functions amid a shrinking

revenue base. Therefore extension of role and wider responsibility are always welcome.





Following points show relevance of role of Stock Exchanges‟ in the Corporate Governance:

1.Stock exchanges in the region developing rapidly; new exchanges being established

2. Stock exchanges remain government owned entities

3. CG codes proliferating, some no longer voluntary

4. Regulatory or enforcement powers of exchanges limited

5. Room for strengthening of listing rules6. Disclosure of listed companies requires further attention

7. No evidence of race to the bottom, need to align with industry peers

THE TRADITIONAL ROLE OF EXCHANGES IN CORPORATE GOVERNANCE

Historically, the main direct contribution of exchanges to corporate governance has been listing

and disclosure standards and monitoring compliance. The regulatory function of stock

exchanges was in the past mostly limited to issuing rules and clarifying aspects of existing

frameworks. The standard-setting role of stock exchanges was essentially exercised through the

issuance of listing, ongoing disclosure, maintenance and de-listing requirements. On the

enforcement side, stock exchanges have shared their regulatory function with capital market

supervisory agencies. In addition to overseeing their own rules, stock exchanges were assigned

the role of monitoring the compliance with legislation and subsidiary securities regulation. Since

the promulgation of the SEBI, stock exchanges have often enlarged their regulatory role to

embrace a wider palette of corporate governance concerns. They have contributed to the

development of corporate governance recommendations and encouraged their application to

listed companies. The objective of the following part of the article is to summarize these key

channels for exchanges‟ contributions to good corporate governance in listed companies.

THE EVOLVING ROLE OF EXCHANGES IN RESPECT OF CORPORATE GOVERNANCE

1. Exchanges act as a source of corporate governance related regulation

Exchanges provide complementary rationales for establishing themselves as a source of

corporate governance-related regulations. In essence, by raising transparency and

discouraging illegal or irregular practices, exchanges are act as regulatory authorities. The

regulatory function of exchanges is exercised in the context of an existing legal framework.Exchanges' ability to introduce and enforce regulations is obviously circumscribed by the

authority of the relevant market regulators. To the extent that the relevant laws or securities

regulation already address corporate governance of listed companies, the role of exchange

regulation can therefore only be complementary. For instance, rules on prospectus issuance

follow largely from SEBI Prospectus Directive which may have further limited the scope of

standards setting by exchanges. Even in jurisdictions where exchanges are empowered to issue

regulations, they may be subject to an approval by another regulatory authority, e.g., in the

India, proposed changes to exchange rules must be filed with the SEBI.

2. Exchanges played a central role in the effective implementation of national corporate

governance codes

“Corporate Governance is concerned with holding the balance between economic and socialgoals and between individual and communal goals. The corporate governance framework is

there to encourage the efficient use of resources and equally to require accountability for the

stewardship of those resources. The aim is to align as nearly as possible the interests of

individuals, corporations and society.” One of the first among such endeavors was the CII Code

for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. The

committee was formed in 1996 and submitted its code in April 1998. Later SEBI constituted two

committees to look into the issue of corporate governance – the first chaired by Kumar

Mangalam Birla that submitted its report in early 2000 and the second by Narayana Murthy three





years later. The SEBI committee recommendations have had the maximum impact on changing

the corporate governance situation in India. The Narayana Murthy committee worked on further

refining the rules. The Exchange has brought about unparalleled transparency, speed &

efficiency, safety and market integrity. It has set up facilities that serve as a model for the

securities industry in terms of systems, practices and procedures.

3. Compliance requirements Listed companies have to comply with rules and regulations of concerned stock exchange and

work under the vigilance (i.e. supervision) of stock exchange authorities. Clause 49 of the listing

agreement with stock exchanges provides the code of corporate governance prescribed by

SEBI for listed Indian companies. With the introduction of clause 49, compliance with its

requirements is mandatory for such companies. Exchanges have played a pioneering role in the

development of the Indian securities market.

4. Awareness raising efforts have also played a role

Some exchanges have been actively involved in increasing the awareness around the value of

good corporate governance. For instance, The National Stock Exchange (NSE) a leading stock

exchange covering various cities and towns across the country has established & organized

training sessions and other educational projects in order to increase the awareness of securities

market & good governance practices and the Code of Best Practice for Listed Companies.

Such programmes not only serve the general public but also require corporates to maintain

good governance in light of investor awareness. In the same way an equally important

accomplishment of BSE Limited is its nationwide investor awareness campaign - "Safe Investing in

the Stock Market" under which awareness campaigns and dissemination of information through

print and electronic medium is undertaken across the country. BSE Limited also actively

promotes the securities market awareness campaign of the Securities and Exchange Board of

India.

Answer 7 (b):

Relation between CSR & Sustainable Development

CSR is an integral part of sustainable development. Exactly where it fits in is vigorously debated,mainly because the concept of sustainable development also has many different

interpretations. This diagram, illuminates CSR„s relationship with sustainable development.

Corporate Responsibility

(Sustainable Development)

Corporate FinancialResponsibility

CorporateEnvironmentResponsibility

CorporateSocial

Responsibility





The basic idea to incorporate the sustainability aspect into business management should be

grounded in the ethical belief of give and take to maintain a successful company in the long-

term. As the company is embedded in a complex system of interdependences in- and outside

the firm, this maintaining character should be fulfilled due to the company„s commitment in

protecting the environment or reducing its ecological footprint and due to the general

acceptance of its corporate behaviour by society in- and outside of the firm.

It is recommended that CSR is to be used as social strand of the SD-concept which is mainly built

on a sound stakeholder approach. CSR focus especially on the corporate engagement realizing

its responsibilities as a member of society and meeting the expectations of all stakeholders.

The concept of SD on a corporate level is stated as Corporate Sustainability which is based on

the three pillars economic, ecological and social issues, therefore, the social dimension is named

CSR. The corporate orientation on sustainability is specially affected by external influences due

to the specific sustainability orientation on a macro-level:

Legal/Institutional: laws, human rights, etc.

Technological: new technologies

Market: suppliers, competitors, customers, trends

Societal: NGO„s, society

Cultural: attitudes, behavior

Environmental: nature, availability of resources

Answer 7 (c):

If we examine the need for improving corporate governance in banks, two reasons stand out: (i)

Banks exist because they are willing to take on and manage risks. Besides, with the rapid pace of

financial innovation and globalisation, the face of banking business is undergoing a sea-

change. Banking business is becoming more complex and diversified. Risk taking and

management in a less regulated competitive market will have to be done in such a way that

investors' confidence is not eroded, (ii) Even in a regulated set-up, as it was in India prior to 1991,

some big banks in the public sector and a few in the private sector had incurred substantiallosses. This, along with the massive failures of non-banking financial Companies (NBFCs), had

adversely impacted investors' confidence.

Moreover, protecting the interests of depositors becomes a matter of paramount importance to

banks. In other corporates, this is not and need not be so for two reasons: (i) The depositors

collectively entrust a very large sum of their hard-earned money to the care of banks. It is found

that in India, the depositor's contribution was well over 15.5 times the shareholders' stake in banks

as early as in March 2001. This is bound to be much more now. (ii) The depositors are very large in

number and are scattered and have little say in the administration of banks. In other corporates,

big lenders do exercise the right to direct the management. In any case, the lenders' stake in

them might not exceed 2 or 3 times the owners' stake.

Banks deal in people's funds and should, therefore, act as trustees of the depositors. Regulators

the world over have recognised the vulnerability of depositors to the whims of managerial

misadventures in banks and, therefore, have been regulating banks more tightly than other

corporates.

To sum up, the objective of governance in banks should first be protection of depositors' interests

and then be to "optimise" the sharehodlers' interests. All other considerations would fall in place

once these two are achieved.





As part of its ongoing efforts to address supervisory issues, the Basel Committee on Banking

Supervision (BCBS) has been active in drawing from the collective supervisory experience of its

members and other supervisors in issuing supervisory guidance to foster safe and sound banking

practices. The committee was set up to reinforce the importance for banks of the OECD

principles, to draw attention to corporate governance issues addressed by previous committees,

and to present some new topics related to corporate governance for banks and theirsupervisors to consider.

Banking supervision cannot function effectively if sound corporate governance is not in place

and, consequently, banking supervisors have a strong interest in ensuring that there is effective

corporate governance at every banking organisation. Supervisory experience underscores the

necessity of having the appropriate levels of accountability and checks and balances within

each bank. Put plainly, sound corporate governance makes the work of supervisors infinitely

easier. Sound corporate governance can contribute to a collaborative working relationship

between bank management and bank supervisors.

Answer 7 (d):

While routine governance regulations become applicable for public sector companies formed

under the Companies Act, 1956 and come under the purview of SEBI regulations the moment

they mobilize funds from the public, the typical organizational structure of PSUs makes it difficult for

the implementation of corporate governance practices as applicable to other publicly-listed


The board of directors will comprise essentially of bureaucrats drawn from various ministries

which are interested in the PSU In addition, there may be nominee directors from banks or






Difficult to attract expert professionals as independent directors. The laws and regulationsmay necessitate a percentage of independent component on the board; but many


make.






when the economy was opened up, many of them lacked the competitiveness to fight it

out with their counterparts from the private sector.

Answer 7 (e):




community.






strategy, yet the concept still is believed to be strongly linked to philanthropy. There is a need to

bring about an attitudinal change in people about the concept.








the tasks.

But often these entities work in isolation without creating a synergy with the other departments of

the corporate. There is a need to understand that CSR is not only a pure management directive

but it is something that is central to the company and has to be embedded in the core values

and principles of the corporate.

Whatever corporates do within the purview of CSR has to be related to core business. It has to

utilise things at which corporates are good; it has to be something that takes advantage of the

core skills and competencies of the companies. It has to be a mandate of the entire


organisation.

While conceptualisation and implementation seem firmly underway, evaluation is still taking a

back seat. There is a need to incorporate an evaluation plan, which along with presenting a

scope of improvement in terms of fund utilisation and methodology adopted for the project,

measures the short and long term impact of the practices.

While there have been success stories of short term interventions, their impact has been limited

and have faded over a period of time. It is essential for corporates to adopt a long termapproach rather than sticking to short term interventions, involving the companies and

employees in the long-term process of positive social transition.

A clearly defined mission and a vision statement combined with a sound implementation

strategy and a plan of action firmly rooted in ground realities and developed in close

collaboration with implementation partners, is what it takes for a successful execution of CSR.

An area that can be looked upon is the sharing of best practices by corporates. A plausible

framework for this could be bench-marking. While benchmarking will help corporates evaluate

their initiatives and rank them, it will also provide an impetus to others to develop similar kind of

practices. Credibility Alliance, a consortium of voluntary organisations follows a mechanism of

accreditation for voluntary sector. Efforts have to be directed towards building a similar kind of

mechanism for CSR as well.

Sustainable development, like building a successful business, requires taking the long-term view.

The KPMG International Survey of Corporate Responsibility Reporting 2005 showed that voluntary

reporting on sustainability is on the increase across all the countries. Sustainability Reporting is

emerging as a key vehicle to implement CSR and measure its progress in organisations.





As we move forward, increasing numbers of companies are expected to issue Sustainability

Reports, with the scope of issues broadening from purely environmental reporting to a more

comprehensive coverage of the environmental, social and economic dimensions.

There is a strong corporate initiative on joining the Global Compact Society in India, as well, with

43 Indian companies having already joined Global Compact as of January 2008.

Answer 7 (f):

A new terminology that has been gaining grounds in the business community today is Corporate

Citizenship. So what is corporate citizenship and is this fundamentally different from corporate

social responsibility? Corporate citizenship is defined by the Boston College Centre for Corporate

Citizenship, as the business strategy that shapes the values underpinning a company‟s mission

and the choices made each day by its executives, managers and employees as they engage

with society.


citizenship are: (i) Minimise harm (ii) Maximise benefit (iii) Be accountable and responsive to key

stakeholders (iv) Support strong financial results.











SECTION A[Answer to Q.No.1 is compulsory and attempt any 4 from the rest]

1. (a) Star Ltd. is authorized by its articles to accept the whole or any part of the amount of

remaining unpaid calls from any member although no part of that amount has been called

up. A shareholder deposits in advance the remaining amount due on his shares without any

calls made.

Referring to the provisions of the Companies Act, 1956, state the rights and liabilities of the

shareholder, which will arise on the payment of calls made in advance. [3]

(b) Bridge Ltd. Is an infrastructure company with paid up capital and free reserve of three

crores and one and half crores respectively. The Board of directors granted a loan of 1

crores to Satyam Ltd and also gave a guarantee to IFCI for giving a loan of 1.50 crores to

Nelson Ltd. Bridge Ltd. has not given any other loan or guarantee to anyone. A group of

shareholders of Bridge Ltd. objected to the above deals on the ground that they are violative

of the provisions of the Companies Act, 1956. Applying the provisions of the said enactmentrelating to inter-corporate loans and investments in the given case, decide:

(i) Whether the objection raised by the shareholders is tenable?(ii)

Would your answer be the same in case the amount of loan granted is 1.50 crores and

the guarantee given is for an amount of 2 crores?

(iii)

What would be your answer in case Bridge Ltd. is a private company not being the

subsidiary of any public limited company? [2+1+1=4]

(c) In the context of Court rulings in the matter of merger, answer the following :

(i) Whether exchange ratio approved by shareholders of merging companies can be

questioned by a small group of dissenting shareholders?

(ii)

Whether transferor company is justified in excluding assets held on lease and license

arrangement, from those transferred to the transferee company? [2+2=4]

(d) The Board of Directors of a public limited company borrowed in excess of the limits as

laid down by the Companies Act, 1956. The money was utilized for genuine purposes in the

interests of the company. Can the company repudiate the liability being ultra vires the

director ? [4]

Answer 1.

(a) The following rights and obligations will arise on the payments of calls made in advance :

No voting right shall be available in respect of such call in advance until such call

become presently payable.

The shareholder becomes an unsecured creditors in respect of amount so paid by him.

Interest on such amount can be paid only if it is authorized by Articles and that also at

a rate so mentioned therein.

Liability due from the shareholder in respect of any future call shall come to an end.

Member who has paid such call is entitled to recover the amount in event of winding

up prior to repayment of capital by company.

The member upon all or in part of the moneys so advanced, may receive interest at

such rate not exceeding, unless the company in general meeting shall otherwise





direct, 6% p.a., as may be agreed upon between the Board and the member paying

the sum in advance.

(b)

Intercorporate loans and investments are governed by the provisions of Section 372A. As

per section 372A(8), the provisions of section 372A do not apply to a company established

with the object of providing infrastructural facilities.

The answer to the given problem if given as under :(i) The company Bridge Ltd. Is an infrastructure company. The provisions of section 372A do

not apply to an infrastructure company. Accordingly, the provisions of section 372A are

not required to be complied with by Bridge Ltd. Therefore, the objection raised by the

shareholders that the company has violated the provisions of section 372A, is not

tenable.

(ii)

The answer shall remain the same even if the amount of loan granted is Rs. 1.50 crores

and guarantee given is Rs. 2 crores, since the provisions of section 372A are not

attracted at all to Bridge Ltd.

(iii) In case Bridge Ltd. Were a private company, then also there would be no contravention

of section 372A since section 372A does not apply to a private company.

(c)

i) No; Hindustan Lever Employees’ Union v. Hindustan Lever Ltd. [1994] 4 Comp. LJ 228 (Bom.),

the Bombay High Court held that where the exchange ratio has been approved by an

overwhelming majority of shareholders and there is no basis to doubt their judgment and the

valuation having been also confirmed to be fair by the firm of auditors, the objections of the

same cannot be sustained.

ii) Yes; the Supreme Court in Hindustan Lever Employees’ Union v. Hindustan Lever Ltd. [1995]

83 Comp. Cas. 30 held that the leasehold assets and properties held by a company were

neither transferable nor heritable; they are in the nature of a personal privilege. Accordingly,

the transferor – company was justified in excluding them.

(d)

Section 293(1)(d) restricts the power of the Board of Directors to borrow money upto theaggregate of paid-up capital of the company and its free reserves. Where this limit is

exceeded, the consent of the general meeting is required. As per section 293(5), if such limit

is exceeded but the consent of the general meeting is not obtained, then no debt incurred

by the company in excess of this limit shall be valid or effectual, unless the lender proves that

-

(i) He advanced the loan in good faith; and

(ii) He did not have any knowledge that such limit had been exceeded.

If the borrowing by the directors is ultra vires their power, the directors may be personally

liable in damages to the lender, on the ground of breach of warranty of authority. Where the

borrowing is unauthorized, the company will be liable to repay. If it is shown that the moneyhad gone in the hands of the company [Lakshmi Ratan Cotton Mills Co Ltd. V J.K. Jute Mills

Co. Ltd (1957) 27 Comp Cas 660, AIR 1957 All 311].

In the present case, the money has been used by the company for genuine business

purposes. Thus, the company cannot repudiate its liability to repay the money.

2. (a) XYZ Ltd., over years, enjoys high reputation and its General Reserve is many times more

than the paid up capital of the Company. There is apprehension of cornering the shares of





the company by some persons likely to result in change in the Board of Directors which may

be prejudicial to the public interest.

Advise, as to how can XYZ Ltd. block the transfer of shares of the company under the

provisions of the Companies Act, 1956. [8]

(b) In the general meeting of X Ltd., held on 02.05.2013, Mr. Adi was appointed as a director.

On that day, he was not holding any equity shares in X Ltd. As per the articles of associationof X Ltd., the share qualification is the holding of 500 equity shares. On 15.06.2013 Mr. Adi

applied for 1,000 equity shares in X Ltd. and the shares were allotted on 10.07.2013. Mr. Adi

claims that he was holding the qualification shares within the time specified in Companies

Act. Discuss the validity of the arguments of the director. [4]

(c) The auditor of the ACB Company resigned his office on 31 st Nov. 2011, while the financial

year of the company ends on the 31 st March 2012. Explain how the auditor will be

appointed? [3]

Answer 2.

(a) Section 250 confers wide powers on the Company Law Board to prevent any change in the

Board of Directors of a company if it is of the opinion that such change is prejudicial to

public interest. Broadly, section 250 seeks to prevent an undesirable takeover. The Company

Law Board in empowered to exercise its powers in the following two cases :

I.

Where the transfer of shares has already taken place

(i)

At whose instance can Company Law Board act ? – The Company Law Board has

the power to impose restrictions suo moto. No reference by the Central

Government or complaint by any other person is required.

(ii)

Conditions – The Company Law Board has the power to impose certain restrictions

if it is satisfied that –

A transfer of shares in a company has taken place

As a result of such transfer of shares, a change in the composition of the

Board of Directors is likely to take place; and

Any such change in the composition of Board would be prejudicial to thepublic interest.

(iii) Nature of restrictions – The Company Law Board may direct that –

The voting rights in respect of those shares shall not be exercisable for the

specified period not exceeding 3 years;

No resolution passed or action taken to effect a change in the composition

of the Board of directors before the date of the order shall have effect

unless confirmed by the Company Law Board.

(iv) Variation of order – The Company Law Board may, at any time, vary or rescind any

order made by it. An intimation shall be served on the company about the

variation of the order within 14 days.

II. Where transfer of shares is likely to take place

(i)

At whose instance can Company Law Board act ? – The Company Law Board hasthe power to impose restrictions suo moto. No reference by the Central

Government or complaint by any other person is required.

(ii) Conditions – The Company Law Board has the power to impose certain restrictions

if –

It has reasonable ground to believe that a transfer of shares in a company is

likely to take place;

As a result of such transfer of shares, a change in the composition of Board

would be prejudicial to the public interest.





(iii) Nature of restrictions – The Company Law Board may direct that any transfer of

shares in the company during such period not exceeding 3 years as may be

specified in the order, shall be void.

(iv)

Variation of order – The Company Law Board may, at any time, vary or rescind any

order made by it. An intimation shall be served on the company about the

variation of the order within 14 days.

(b)

There is no statutory requirement that a director must hold qualification shares. Share

qualification is to be obtained by a director only if the articles of the company so require. A

director shall obtain share qualification within 2 months of appointment. Nominal amount ofqualification shares shall not exceed ` 5,000 or nominal value of one share, where it exceeds

` 5,000 (Section 270). The office of a director shall become vacant where he fails to acquire

the qualification shares within 2 months of appointment (Section 283).

A person cannot be said to be qualified in respect of qualification shares until he is registeredas holder of the shares [Channel Collieries Trust Ltd. v Dover St. Margarets and Martin Mill

Light Rly. Co. (1914) 2 Ch 506; Ram Autar Jalan v Coal Products of India Ltd. (1970) 40 Comp

Cas 715 (SC)].

Accordingly, where the Board of directors approves the transfer of shares in the name of a

director but the shares are not registered in the name of the director within 2 months from

the date of his appointment, he cannot be said to have acquired the qualification shares in

the prescribed time.

In the given case, Mr. Adi was appointed as a director on 02.05.2013 and therefore he must

obtain the qualification shares on or before 02.07.2013. Mr. Adi applied for shares on

15.06.2013, but was registered as a shareholder only on 10.07.2013. As on 02.07.2013, he

cannot be said to be a holder of qualification shares. As per section 283, the office of a

director shall become vacant where he fails to acquire the qualification shares within 2

months of appointment. Accordingly, the argument of Mr. Adi is not correct and he shall

vacate the office of the director on 03.07.2013.

(c) A vacancy in the office of auditor, for any reason otherwise than retirement on expiry of

term, is referred as Casual Vacancy, if a casual vacancy arises in the office of auditor due to

death, insanity, disqualification or insolvency, etc., but not by resignation, section 224(6)

empowers the Board of directors to fill the same. Till the vacancy so caused, is filled, the

remaining auditor or auditors, if any, may act.

Where a casual vacancy results on account of resignation, the vacancy can be filled only in

the general meeting. The auditor appointed in a casual vacancy shall hold office until

conclusion of the next annual general meeting held after their appointment.

3.

(a) Shri Basu was appointed as a Member of the CCI by Central Government. He has a

professional experience in international business for a period of 11 years, which is not a

proper qualification for appointment of a person as Member. Pointing out this defect in the

constitution of CCI, Mr. Sen, against whom CCI gave a decision, wants to invalidate the

proceedings of CCI. Examine whether Mr. Send will succeed. [3]





(b) X Co. Ltd., a closely held company comprised of two groups of shareholders – one

foreign and the other Indian. The foreign group holds 60% and the Indian 40% of the shares of

the company. As per Articles of Association of the company both groups had equal

managerial powers. the relationship between the two groups soured and the operations of

the company reached a deadlock. The Indian group, therefore, approached the Company

Law Board for action against the foreign group for oppression. Referring to the provisions of

the Companies Act, 1956 and/or the decided case laws, discuss -(i)

Whether the contention of oppression against the foreign group by the India group is

tenable?

(ii) What are the powers of the Company Law Board in this regard? [2+3=5]

(c) Wealth Bank of India, a Nationalised Bank, acquired a building from Mr. Shyam on 1 st

Dec, 2008 in discharging a term loan advanced to him, who had mortgaged the said

building as security and failed to repay the loan. The building was given on rent to various

companies by Mr. Shyam. Now, the bank wants to keep the building as it is and earn the

rent. With the reference to the provisions of the Banking Regulation Act, 1949, state, whether

the bank can do so. [4]

(d) The Smart Traders Association was maintained by a joint Hindu Family consisting of 21

major and 4 minor members. The Association is carrying the business for earning profits and

they were not registered as a Company under the Companies Act, 1956 or other law. State

whether Smart Traders Association is having any legal status ? Will there be any change in

the status of the Association if the members of the Smart Traders Association subsequently

reduced to 15? Support your answer with the correct provision of law. [3]

Answer 3.

(a)

As per section 15 of the Competition Act, 2002, no act or proceeding of the CCI shall be

invalid merely by reason of

(i) Any vacancy in the CCI, or

(ii)

Any defect in the constitution of the CCI, or

(iii)

Any defect in the appointment of a person acting as a Chairperson or as a Member, or(iv) Any irregularity in the procedure of the CCI not affecting the merits of the case.

In the given case, Mr. Basu should have got atleast 15 years experience in the field of

international business. However, the defect in the appointment of Shri Basu acting as a

Member, shall not invalidate the proceedings of CCI. Hence, Mr., Sen will not be able to

succeed in his claim.

(b)

An application seeking relief from the Company Law Board must make out a prima facie

case that the degree of oppression is so severe that there is just and equitable ground for

winding up of the company. The answer to the given problem is as follows :

(i)

Both the India group and foreign groups are equally strong, and one is unable tooppress the other. As such, there may be a deadlock, but not oppression. It is not a

case for winding up of the company and so relief under section 397 is not available[Gnanasambandam (CP) v Tamiland Transports (Coimbatore) Pvt. Ltd. (1971) 41 Comp

Cas 26]. Thus, the contention of the Indian group that the foreign group is acting in a

manner oppressive to the Indian group is not tenable.

(ii)

The powers of the Company Law Board under section 397 are discretionary in

character. Company Law Board may order the foreign group to buy out the minority

group shareholding at the fair price with necessary permission as was held in





Yashovardhan Saboo v Groz Beckert Saboo Ltd. (1993) 1 Comp LJ 20. However, where

there was deadlock in the management of private limited company and both the

parties failed to buy the other group, the company was wound up under just andequitable clause [Kishan Lal Ahuja v Surech Kumar Ahuja]. Thus, in the given case, if

both the groups fail to exercise the option to buy the other group, Company Law Board

may order the company to be wound up.

(c)

As per section 9, no banking company shall hold any immovable property howsoever

acquired, except such as is required for its own use, for any period exceeding 7 years from

the acquisition thereof or any extension of such period as in this section provided, and such

property shall be disposed of within such period or extended period, as the case may be.

As per Proviso to Section 9, the Reserve Bank may in any particular case extend the

aforesaid period of 7 years by such period not exceeding 5 years where it is satisfied that

such extension would be in the interests of the depositors of the banking company.

In the given case, Wealth Bank proposes to keep the building for earning rent from tenants,

and not for its own use. In view of the provisions of section 9, Wealth Bank of India cannot

keep the building permanently with it for the purpose of earning rent from tenants. It shall

have to dispose of the building within 7 years from the date of its acquisitions, i.e., on or

before 31st December 2015.

However, if the approval of the Reserve Bank is obtained, it may continue to hold the

building till such extended period as is sanctioned by the Reserve Bank. The Reserve Bank

shall not permit the Wealth Bank to hold the property beyond 31 st December, 2020.

(d) As per Section 11 of the Companies Act, 1956, no company, association or partnership

consisting of more than 10 persons for the purpose of carrying on Banking Business and

more than 20 persons for carrying on any other business, can be formed unless it is

registered under the Companies Act or is formed in pursuance of some other Indian Law.

As an exception to the above mentioned provision a Joint Hindu Family carrying on any

business, for earning profits with any number of Members without being registered or formed

in pursuance of any Indian Law, will not be an illegal association.In the given case, section 11 will not apply and even if the association is not registered

under the Companies Act, 1956, will be considered as a legal association. There will be no

change in legal status in case of subsequently reduction in the number of members.

4.

(a) Tintin Ltd. issued convertible debentures during the financial year 2011-12 wants to alter

the terms of redemption. Is it permissible under the provision of SEBI (Securities and

Exchange Board of India) regulations? [2]

(b) The object clause of the Memorandum of a company empowers it to carry on distillery

business and any other business that is allied to it. The company wants to alter its

Memorandum so as to include the cinema business in its objects clause. Advise thecompany. [4]

(c) Section 14(2) of the Insurance Regulatory and Development Authority Act, 1999 specifies

the powers and functions of the Insurance Regulatory and Development Authority. List out

those powers and functions of the Authority. [7]

(d) At an Annual General Meeting held on 20.09.2012, an auditor was appointed to hold

office up to the conclusion of next Annual General Meeting. The next Annual General





Meeting was convened on 15.09.2013 but stood adjourned without transacting any

business. Does the retiring auditor continue in office? [2]

Answer 4.

(a)

No issuer shall alter the terms (including the terms of issue) of Specified Securities which mayadversely affect the interest of the holders of that specified securities. However alteration

permissible if —

Written consent is obtained from the Holders of not less than 3/4 th of the Specified

Securities of that class, or

With the sanction of a Special resolution passed at a meeting of the Holders of the

Specified Securities of that class.

(b) Section 17(1) of the Companies Act, 1956 permits alteration of Memorandum to carry on

some business which under existing circumstances may conveniently or advantageously be

combined with the business of the company. Thus, section 17(1) does not prohibit a

company to diversify in areas other than those specified in the Memorandum. But the

business sought to be added must be such which can conveniently or advantageously be

combined with the business of the company.

The Punjab high Court in Punjab Distilling Industries Ltd. v. Registrar of Companies, [1963] 33

Comp. Cas. 811 [where an alteration to the Memorandum of Association to carry on a new

business was not confirmed because it had nothing to do even remotely with the existing

business and it could not be said that the new business would be conducive to and

economical or efficient in doing the existing business] held that the cinema business could

not be either conveniently or advantageously combined with the distillery business, and

therefore change of objects. Accordingly, alteration shall not be allowed.

(c) The powers and functions of the Insurance Regulatory and Development Authority shall

include, —

(i)

issue to the applicant a certificate of registration, renew, modify, withdraw, suspend orcancel such registration;

(ii) protection of the interests of the policy-holders in matters concerning assigning of

policy, nomination by policy-holders, insurable interest, settlement of insurance

claim, surrender value of policy and other terms and conditions of contracts of

insurance;

(iii) specifying requisite qualifications, code of conduct and practical training for

intermediary or insurance intermediaries and agents;

(iv) specifying the code of conduct for surveyors and loss assessors;

(v)

promoting efficiency in the conduct of insurance business;

(vi)

levying fees and other charges for carrying out the purposes of this Act;

(vii) calling for information from, undertaking inspection of, conducting inquiries and

investigations including audit of the insurers, intermediaries, insurance intermediariesand other organisations connected with the insurance business;

(viii)

specifying the form and manner in which books of account shall be maintained and

statement of accounts shall be rendered by insurers and other insurance

intermediaries;

(ix)

regulating investment of funds by insurance companies;

(x)

regulating maintenance of margin of solvency;

(xi) adjudication of disputes between insurers and intermediaries of insurance

intermediaries;





(xii) supervising the functioning of the Tariff Advisory Committee

(xiii) specifying the percentage of life insurance business and general insurance business to

be undertaken by the insurer in the rural or social sector; and

(xiv)

exercising such other powers as may be prescribed.

(d)

According to section 224(1) of the Companies Act, 1956, an auditor appointed at an Annual

General Meeting holds office from the conclusion of that Annual General Meeting to theconclusion of the next Annual General Meeting. In the given case, the auditor was to hold

office up to the conclusion of the Annual General Meeting duly convened but which stood

adjourned. As the adjourned meeting is merely a continuation of the original meeting, the

Annual General Meeting remains unconcluded and the retiring auditor continues to hold the

office till the conclusion of the meeting.

5. (a) State whether there is any restriction under the Foreign Exchange Management Act, 1999

in respect of drawal of foreign exchange for payments due on account of amortization of

loans in the ordinary course of business. [2]

(b) Pigmi Ltd. Co. issued and published its prospectus to invite the investors to purchase itsshares. The said prospectus contained false statement. Mr. A purchased some partly paid

shares of the company in good faith on the Stock Exchange. Subsequently, the company

was wound up and the name of Mr. A was in the list of contributors. Decide:

(i) Whether Mr. A is liable to pay the unpaid amount?

(ii) Can Mr. A sue the directors of the company to recover damages? [3]

(c) M/s Naira Infotech Ltd. was incorporated on 01.04.2012. No General Meeting of the

company has been held so far. Explain the provisions of the Companies Act, 1956 regarding

the time limit for holding the first Annual General Meeting of the Company and the power of

the Registrar to grant extension of time for the First Annual General Meeting. [4]

(d) Mr. Lal has been arrested for a cognizable and non bailable offence punishable for a

term of imprisonment for more than three years under the Prevention of Money LaunderingAct, 2002. Advise, as to how can he be released on bail in this case? [3]

(e) A public limited company has only seven shareholders, all the shares being paid-up in

full. All the shares of one such shareholder are sold by the Court in an auction and

purchased by another shareholder. The company continues to carry on its business,

thereafter. Discuss the liabilities of the shareholders of the company. [3]

Answer 5.

(a)

As per section 6 of the Foreign Exchange Management Act, 1999, the Reserve Bank of India

(RBI) shall not impose any restriction on the drawal of foreign exchange for — (i) payments

due on account of amortisation of loans, or (ii) for depreciation of direct investments in theordinary course of business. Hence the transaction is permissible under the Foreign Exchange

Management Act.

(b)

(i) Yes, Mr. A is liable to pay the unpaid amount on the shares. As Mr. A has purchased

partly paid shares, so he is liable for the remaining part of the shares. At the time of winding

up he is liable to contribute as a contributory.





(ii) No, Mr. A cannot sue the directors to recover damages for the misstatement. The

shareholder must have relied on the statement in the prospectus in applying for shares.

In the present case, Mr. A purchased shares in good faith on the stock exchange. He had

not relied on the statement in prospectus. So he cannot sue.

(c)

According to Section 166 of the Companies Act, 1956, every company shall hold its firstAnnual General Meeting within a period of 18 months from the date of incorporation.

In given case, Naira Infotech Ltd. was incorporated on 01.04.2012, the first annual general

meeting of the company should be held on or before 30.09.2013.

Even though the Registrar of Companies is empowered to grant extension of time for a

period not exceeding 3 months for holding the Annual General Meeting, such a power is not

available to the Registrar in the case of the first Annual General Meeting.

Consequently, company and its directors will be liable for the default if the Annual General

Meeting was held after 30.09.2013.

(d)

A person accused of an offence punishable for a term of imprisonment of more than three

years under the Part A of the Schedule to the Prevention of Money Laundering Act shall not

be released on bail or on his own bond unless —

(i)

The public prosecutor has been given an opportunity to oppose the application for

such release, and

(ii)

Where the public prosecutor opposes the application, the Court is satisfied that there

are reasonable grounds for believing that —

He is not guilty of such offence, and

He is not likely to commit any offence while on bail.

However the following persons may be released on bail, if the Special Court so directs —

(i)

Person who is under 16 years of age, or(ii)

A woman, or

(iii)

Person who is sick or infirm.

(e) The problem in question relates to reduction of membership below the statutory minimum.

Section 12 of the Companies Act, 1956 requires a public company to have a minimum of

seven members. If at any time the membership of a public company falls below seven and it

continues its business for more than six months, then according to section 45 of the

Companies Act, 1956 every such member who was aware of this fact, would be individually

(personally) liable for all debts contracted after six months.

Thus, in the above problem, the remaining six members shall incur personal liability for the

debts contracted by the company:

(i) If they continued to carry on the business of the company with that reduced

membership (i.e., 6) beyond six months period;

(ii)

Only those members who knew of this fact of reduced membership shall be liable. For

instance, one of the members who were abroad and thus not aware of those facts, shall

not be liable.(iii)

The liability shall extend only to the debts contracted after six months from the date of

auction of that member's shares.





6.

(a) The Promoters of a Company to be registered under the Companies Act, 1956 having its

main object of carrying or the business as manufacturer and stockist of Iron and Steel,

proposes that the names of the Companies is to be "PQR Iron & Steel Bank Limited". You are

required to state with reference to the provisions of the Banking Regulation Act, 1949,

whether the said Company with the proposed name can be registered. [2]

(b) M/s. Alian Limited was wound up with effect from 15.04.2013 by an order of the Court. Mr.

X, who ceased to be a member of the company from 01.07.2012, has received a notice from

the liquidator that he should deposit a sum of 5,000 as his contribution towards the liability

on the shares previously held by him. In this context explain whether Mr. X can be called a

contributory and whether he can be made liable and whether there is any limitation on his

liability. [4]

(c) The working of Mega Stock Exchange Association Ltd. is not being carried on by its

Governing Board in public interest. On receipt of representations from various Investors and

investors' Association, the Central Government is thinking to withdraw the recognition

granted to the said Stock Exchange. You are required to state the circumstances and

procedure for withdrawal of such recognition as per the provisions of Securities Contracts(Regulation) Act, 1956 in this regard. [5]

(d) On scrutiny of the sole selling agency agreement of ABC Company Ltd., with P, the

Central Government finds that the agreement is prejudicial to the interests of the company

and cancels it. P consults you as the advisability of challenging the order of the Central

Government. Please advise P as to the chances of his successfully challenging the order of

the Central Government. [4]

Answer 6:

(a)

As per section 7(1) of the Banking Regulation Act, 1949, no company other than a banking

company shall use as part of its name or, in connection with its business any of the words"bank", "banker" or "banking".

In the given case, the main object of the proposed company is to carry on the business of

manufacturing and acting as stockist of iron and steel. The proposed company is not a

banking company as defined u/s 5(c) of the Act.

In view of the provisions of section 7(1), the name ' PQR Iron & Steel Bank Limited' is not

permissible.

(b)

The term 'contributory' means every person liable to contribute to the assets of a company in

the event of its being wound up. The liability of a past member is secondary and arises only

when it appears to the Court that the present members are unable to satisfy the

contributions required to be made by them.

In the present case, Mr. X ceased to be a member of the company from 01.07.2012 and the

winding up commences on 15.04.2013. As on the date of commencement of winding up,

one year has not elapsed since he ceased to be a member, and therefore he shall be

treated as a past member. However, Mr. X shall not be liable to contribute —

(i) in respect of any debt or liability of the company contracted after he ceased to be a

member;





(ii) unless it appears to the Court that the present members are unable to satisfy the

contributions required to be made by them;

(iii)

anything more than the amount remaining unpaid on the shares held by him, i.e., if his

shares are fully paid, he shall incur no liability.

(c)

Section 5 of the Securities Contracts (Regulation) Act, 1956 empowers the Central Government

to withdraw the recognition granted to a stock exchange. The procedure for withdrawal ofrecognition is as follows:

(i) If, considering the interest of the trade or the public interest, the Central Government is

of the opinion that the recognition granted to a stock exchange should be withdrawn, it

shall serve a written notice on the governing body of the stock exchange.

(ii)

The notice shall specify the reasons for the proposed withdrawal of recognition.

(iii) The Central Government shall give an opportunity of being heard to the governing

body of the stock exchange.

(iv) If the Central Government is satisfied that the recognition should be withdrawn, it may,

by notification in the Official Gazette, withdraw the recognition granted to the stock

exchange.

(v)

No withdrawal of recognition shall affect the validity of any contract entered into or

made before the date of the notification. In respect of any contract which is

outstanding as on the date of notification, the Central Government may, after

consultation with the stock exchange, make such provision as it deemed fit.

(d) Section 294(5) of the Companies Act, 1956 empowers the Central Government to enquire

into the terms and conditions of the appointment of a sole selling agent. It can make

variations in the terms and conditions if it is satisfied that these are prejudicial to the interest

of the company.

The proceeding undertaken by the Central Government must be guided by the principles of

natural justice. The Central Government must give the sole selling agent an opportunity of

being heard before making any order prejudicial to him.

Section 294 does not authorise the Central Government to cancel the appointment of a sole

selling agent.

In the given case, P is advised to challenge the order of the Central Government on the

following grounds:

(i)

No opportunity of being heard was given to P. Since, the order of the Central

Government violates the principles of natural justice, it is void.

(ii)

The order does not merely vary the terms but cancels the entire agreement. Since, theCentral Government has no power to cancel a sole selling agency, the action of the

Central Government is ultra-vires the Companies Act and is void.






7.

(a) State the benefits of Corporate Social Responsibility (CSR). [5]

(b) Define Corporate Governance. Write the core objectives of Corporate Governance. [5]

(c) Describe the core elements which should be covered by Corporate Social Responsibility(CSR) as per the Corporate Social Responsibility Voluntary Guidelines, 2009. [5]

(d) List the steps which must be applied to every aspects of the Whole Life-cycle Costing

(WLCC). [5]

(e) Clarify the following statements: [5]

(i)

Codification of Corporate Governance in India started with the recommendations of

Kumar Mangalam Birla Committee.

(ii) Corporate Social Responsibility is distinct from corporate philanthropy.

(f) Describe the factors responsible for increasing attention towards Corporate Social

Responsibility by the Corporates. [5]

Answer 7(a):

The benefits of Corporate Social Responsibility (CSR):

1. The Law of Responsibility: Society gives business its license to exist and this can be

amended or revoked at any time if it fails to live up to expectations.

2. Enhanced Brand Image and Reputation: Customers are drawn to brands and companies

with good reputations.

3. Checks Government regulation/ Controls: Regulation and control are costly to business,

both in terms of energy and money. Any failure of businessmen to assume social

responsibilities invites government to intervene and regulate or control their activities.

4. Reduced Operating Costs: Some CSR initiatives can reduce operating costs dramatically.

For example, many recycling initiatives cut waste-disposal costs and generate income by

selling recycled materials.

5.

Improved Financial Performance: Companies which are socially responsible carry a good

image in eyes of customers as well as business arena which ultimately end up in improving

the financial performance of companies.

Answer 7(b):

Corporate Governance: There is no single, accepted definition of Corporate Governance. There

are substantial differences in definition according to which country we are considering.

Corporate governance is about promoting corporate fairness, transparency and Accountability.

The term governance relates to a process of decision making and implementing the decisions in

the interest of all stakeholders. It basically relates to enhancement of corporate performanceand ensures proper accountability for management in the interest of all stakeholders.

The core objectives of Corporate Governance:

1.

Transparency — According to this objective, every step shall be taken to ensure that timely

and accurate information is imparted to all concerned.

2. Participation — Steps shall be taken to provide adequate information to shareholders and to





ensure their participation in policy matters.

3.

Legal Adherence — All legal policies and rules shall be duly complied.

4. Effectiveness — Entire management shall contribute and try to use fairness and honesty with

stakeholders so that Effective governance can be attained.

Answer 7(c): Each business entity should formulate a Corporate Social Responsibility (CSR) policy to guide its

strategic planning and provide a roadmap for its CSR initiatives, which should be an integral part

of overall business policy and aligned with its business goals. The policy should be framed with

the participation of various level executives and should be approved by the Board.

The CSR Policy should normally cover following core elements:

1. Care for all Stakeholders: The companies should respect the interests of, and be responsive

towards all stakeholders, including shareholders, employees, customers, suppliers, project

affected people, society at large etc. and create value for all of them. They should develop

mechanism to actively engage with all stakeholders, inform them of inherent risks andmitigate them where they occur.

2. Ethical functioning: The governance systems of companies should be underpinned by Ethics,

Transparency and Accountability. They should not engage in business practices that are

abusive, unfair, corrupt or anti-competitive.

3.

Respect for Workers’ Rights and Welfare: Companies should provide a workplace

environment that is safe, hygienic and which upholds the dignity of employees. They should

provide all employees with access to training and development of necessary skills for career

advancement, on an equal and non-discriminatory basis. They should uphold the freedom

of association and the effective recognition of the right to collective bargaining of labour,

have an effective grievance redressal system, should not employ child or forced labour and

provide and maintain equality of opportunities without any discrimination on any grounds in

recruitment and during employment.

4.

Respect for Human Rights: Companies should respect human rights for all and avoid

complicity with human rights abuses by them or by third party.

5.

Respect for Environment: Companies should take measures to check and prevent pollution;

recycle, manage and reduce waste, should manage natural resources in a sustainable

manner and ensure optimal use of resources like land and water, should proactively respond

to the challenges of climate change by adopting cleaner production methods, promoting

efficient use of energy and environment friendly technologies.

6.

Activities for Social and Inclusive Development: Depending upon their core competencyand business interest, companies should undertake activities for economic and social

development of communities and geographical areas, particularly in the vicinity of their

operations. These could include: education, skill building for livelihood of people, health,cultural and social welfare etc., particularly targeting at disadvantaged sections of society.

Answer 7(d):





The following steps must be applied to every aspect of the Whole Life-cycle Costing (WLCC)

with the help of Operational Research (OR) methods which consist of a number of well-defined

scientific steps:

(1)

Formulation of the problem, establishing the objectives and any constraints that may apply;

(2)

Building a model that represents the system under analysis;

(3)

Using the model in order to obtain a solution to the problem;(4)

Comparing a solution obtained by means of the model with that in current use;

(5)

Evaluating the results and monitoring the performance of the system through changing

conditions.

Answer 7(e):

(i) The Kumar Mangalam Birla Committee Report was the first formal and comprehensive

attempt to evolve a Code of Corporate Governance, in the context of prevailing conditions

of governance in Indian companies, as well as the state of capital markets at that time.

The recommendations of the Kumar Mangalam Birla Committee, led to inclusion of Clause

49 in the Listing Agreement in the year 2000. These recommendations, aimed at improving

the standards of Corporate Governance, are divided into mandatory and nonmandatory

recommendations.

(ii) Philanthropy means the act of donating money, goods, time or effort to support a charitable

cause in regard to a defined objective. Philanthropy can be equated with benevolence

and charity for the poor and needy. Philanthropy can be by an individual or by a corporate.

Corporate Social Responsibility (CSR) on the other hand is about how a company aligns their

values to social causes by including and collaborating with their investors, suppliers,

employees, regulators and the society as a whole. A CSR initiative of a corporate is not a

selfless act of giving; companies derive long-term benefits from the CSR initiatives and it is this

enlightened self interest which drives the CSR initiatives in companies.

Answer 7(f):

The following are the few factors and influences which have led to increasing attention being

devoted to Corporate Social Responsibility (CSR) by the Corporates:

(i)

Globalization – coupled with focus on cross-border trade, multinational enterprises and

global supply chains — is increasingly raising CSR concerns related to human resource

management practices, environmental protection, and health and safety, among other

things.

(ii)

Advances in communications technology, such as the Internet, cellular phones and

personal digital assistants, are making it easier to track corporate activities and

disseminate information about them. Non-governmental organizations now regularly

draw attention through their websites to business practices they view as problematic.

(iii) Consumers and investors are showing increasing interest in supporting responsible

business practices and are demanding more information on how companies are

addressing risks and opportunities related to social and environmental issues.





(iv) Citizens in many countries are making it clear that corporations should meet standards of

social and environmental care, no matter where they operate.

(v)

Businesses are recognizing that adopting an effective approach to CSR can reduce risk

of business disruptions, open up new opportunities, and enhance brand and company

reputation.






Time Allowed: 3 Hours Full Marks: 100

The figures in the margin on the right side indicate full marks.

SECTION A[Q.No.1 is compulsory and attempt any 4 from the rest]

Question 1:

Mr. Anand is an auditor and he has ventured newly into this area. He is having the following

issues in his mind. You are requested to guide him in resolving his issues, stating relevant sections

and laws.

a) He wishes to undertake audit work as well as work as employee with Firm ABC, an auditing

firm.

b) He wishes to join Firm ABC as a partner, what would be his ceiling limit.

c)

He wants to compute and understand which of the following companies shall be/ not be

taken into consideration for calculating specified number of audits.i) Audit of a Private Company

ii) Guarantee Companies not having Share Capital

iii)

Audit of a Non-Profit Company

iv) Special Audits

v) Audit of foreign companies

vi) Branch Audits

vii)

Company Audit where he is appointed as a Joint Auditor.

d) He wants to know, that as a member of ICAI, is there any other restrictions on him as a matter

of self regulation in matter of inclusion/exclusion of audit of Private Companies for

calculating the specified number of assignments.

e)

Would the rules be different from case (d) above had he joined a CA Firm.

f) He also wishes to accept an offer to become the first auditor of Xee Ltd. What are the

procedures that the Board of Directors and Mr. Anand need to undertake.[1+2+3+1+4+4]

Answer:

(a) Restriction on Appointment [Sec.224(lB)]: No Company or its Board of Directors shall appoint

or re-appoint any person or Firm as its Auditors if -,

(a) Such person is in full time employment elsewhere, or

(b) Such person or Firm holds the office of Auditor of the specified number of Companies or

more than the specified number of Companies.

In the case of a Firm of Auditors, 'Specified Number of Companies' means the number of

Companies specified for every Partner of the Firm who is not in full time employment elsewhere.

Hence, Mr. Anand cannot undertake the work of audit and be employed with Firm ABC at the

same time.

(b)

Ceiling Limit: The ceiling limit is 20 Company Audits per person. Of this 20, not more than 10shall be in respect of Companies having Paid-Up Capital of ` 25 Lakhs or more. Further, in

addition to this, Mr. Anand has to keep the following points in mind –





Situation Ceiling Limit

(i) If he works for Firm ABC, and

Firm ABC is a Partnership

Firm

Ceiling Limit shall be 20 Company Audits per Partner who is

not in full-time employment elsewhere.

(ii) When he is a Partner in a

number of Firms including

Firm ABC

Ceiling Limit shall be 20 Company Audits on his account in

all the Firms together in which he is Partner or Proprietor.

(iii) Where he is a Partner of Firm

ABC and also holds office in

his individual capacity

Ceiling Limit shall not exceed 20 Company Audits in his

individual capacity and all Firms taken together.

(c) Computation of Ceiling Limit:

Included Audits Excluded Audits

i)

Part Audit: When an Auditor is

appointed to audit even a part of a

Company's accounts, the part will be

considered as a unit of audit for the

purpose of calculation of the ceiling.ii) Joint Audit: When two or more

Auditors are appointed as Auditors,

each of the Joint Auditors is

considered a Part Auditor for the

purpose. Hence, any joint audit held

by an Auditor will be included as one

audit unit.iii)

Sec.25 Companies: Audit of Non-

Profit Companies would be included

for the purpose of ceiling.

i)

Branch Audit: Audit of a Branch of Company

is not included in the computation of the

ceiling.ii)

Audit of Corporations, which are not

Companies, shall not be included for ceilingpurpose.

iii) Audit of Foreign Companies shall not be

included.iv)

Guarantee Companies: Company Limited by

Guarantee and not having Share Capital will

not be included in the ceiling.v)

Private Companies: Audit of Private Limited

Companies will not be included for ceiling u/s

224(1B).vi) Special Audit u/s 233A or Investigation of

Companies will not be included for ceiling

purposes.Hence the following would not be included in computing the ceiling limit.

i) Audit of a Private Company

ii) Guarantee Companies not having Share Capital

iii)

Special Audits

iv)

Audit of foreign companies

v) Branch Audits

(d ) Restrictions as per ICAI Notification 53/ 2001: As per the ICAI Notification, a CA in practice will

be guilty of professional misconduct, if he holds at any time, the appointment of more than 30

audit assignments, including audit of Private Companies. This restriction is intended to uphold the

principles of fairness and to provide equitable opportunities to all practicing members. [Note:

This provision is an additional restriction under the CA Act and does not override the Companies

Act.]

(e) In case of a CA Firm:

1. In case of CA Firm, the ceiling limit is 30 Audits per Partner, including audit of Private

Companies.

2.

Where a member is a Partner in more than one CA Firm, all the Firms in which he is a Partner

will be together entitled to 30 Company audits in his account.

3. Where a Partner of a Firm also accepts audits in his individual capacity / Proprietary Firm, the

total number of Company audits should not exceed 30 in his individual capacity /





Proprietary Firm and all Partnership Firms taken together.

4. As specified in Sec. 224(1B), out of the above 30, the audits of Public Companies havingpaid up capital of ` 25 Lakhs or more, shall not exceed 10.

5. For this purpose, Joint Audits held will be construed as one audit unit for each of the Joint

Auditors.

6.

Audit of Head Office and Branches or one or more Branches of the same Company will be

construed as one audit only.7. The number of Partners of a firm on the date of acceptance of audit assignment shall be

taken into account for computing the ceiling for the Firm.

8. A CA in full time employment elsewhere shall not be taken into account while computing

the ceiling for the Firm.

(f) Becoming the First auditor of Xee ltd:

In case Mr. Anand wants to be the first auditor of Xee Ltd. the following points needs to be

complied with.

1. Appointment by Board: Sec. 224(5) specifies that the Board of Directors can appoint the First

Auditor(s) of a Company.2.

Time of Appointment: The appointment shall be made by the Directors, within 1 month from

the date of incorporation of the Company.3.

Tenure of Office: The First Auditor(s) shall hold office till the conclusion of the first AGM.

4. Failure: If the Board fails to appoint the First Auditor(s) within 1 month of registration, the

Company in General Meeting is empowered to make the appointment.5. Members' Power of Removal: The Company may, at a general meeting, remove such an

Auditor or all or any of them and appoint another or others in his or their place, on a

nomination being made by any member of the Company. For this purpose, notice should

be given to the members of the Company, not less than 14 days before the date of the

meeting.6. Provision in Articles: An Auditor cannot be appointed as First Auditor(s) simply because his

name has been stated in the Articles of Association.7.

Intimation: The Company need not send any statutory intimation to the First Auditor(s), of

their appointment within 7 days. Notice of appointment can be sent in the ordinary course

of business within reasonable time.8. Acceptance: The First Auditor(s) are themselves not required to inform the ROC about their

acceptance or refusal of such an appointment.

Question 2:

(a) Wee Ltd. has suffered a Net Loss for the year. The Directors however declared and paid an

Interim Dividend at 30% based on the half-yearly performance. Comment.

(b)

Board of Directors of M/s. ABee Ltd, in its meeting held on 29th May 2013, declared an

interim dividend payable on paid up Equity Share Capital of the Company. In the Board

Meeting Scheduled for 10th June 2013, the Board wants to revoke the said declaration. You

are required to state with reference to the provisions of the Companies Act, 1956 whether

the Board of Directors can do so.

(c)

ROC has received a complaint from a group of Creditors of a Company. The complaintalleges that the Directors of the Company, in order to prevent the unearthing of their

embezzlement of Company's funds, are engaged in falsification and destruction of original

accounting books and records. The Complainants urged the ROC to seize the accounting

books and records of the Company so that the Directors may not be able to tamper the

same. You are required to state the powers, if any, of the ROC and inspector in this respect.

(d)

Can Central Government investigate into the affairs of a company?

[4+4+6+1]





Answer:

(a)

In declaration of interim dividend, in case there is a net loss the following points needs to be

considered.i) Factors: In declaration and payment of Interim Dividend, the Management has to

consider whether - (a) there is a favorable trend of profits in the current year as that in the

past years, and (b) there is a reasonable anticipation that the year would close with asurplus at least as that in the previous year.

ii) Effect of Interim Dividend: The fact that the Company has suffered a Net Loss at the end

of the year indicates that the Directors have miscalculated the performance of the

Company about the second half of the year. Hence, the following possibilities arise in this

case -

Dividend out of Past

Accumulated Profits – where

sufficient balance is available in

the P&L A/c.

The amount of profits should be sufficient enough to cover -

(a) Transfer to Reserves as per Rules, and

(b) Payment of Interim Dividend of 30%.

The Auditor has to verify compliance with the Transfer to

Reserve Rules and procedure for payment of Interim

Dividend.

Dividend out of Reserves – where sufficient balance is not

available in the P&L A/c.

The balance in P&L Account could be sufficient to declaredividend but not for Transfer of Profits to Reserves.

In such case, Dividend can be declared out of Reserves,

subject to a maximum of 10% only.

Hence, the Auditor has to report non-compliance with the

Rules in this case, as the actual rate of dividend is 30%.

Dividend out of Capital - where

there is no balance in the P&L

A/c and Reserves

Where there is no balance in the P & L A/c and there are no

reserves available, the Interim Dividend constitutes a

payment out of Capital.

The Auditor should qualify his report mentioning the fact that

the Interim Dividend has been paid out of Capital.

(b)As per Sec. 2(14A), Dividend includes any Interim Dividend. Therefore, all the provisions

applicable to final dividend shall equally apply to interim dividend.

Principle: Interim Dividend, once declared, like Final Dividend, is a debt due from the Company.

Accordingly, once declared, Interim Dividend cannot be revoked except under the same

circumstances in which the final dividend can be revoked. The amount of Interim Dividend is to

be compulsorily deposited in a separate bank account, within 5 days of passing the Board

Resolution declaring the Interim Dividend [Sec. 205(1A)].

Conclusion: As per Sec.207, dividend must be paid within 30 days of its declaration. Thus, Interim

Dividend must also be paid within 30 days of its declaration, i.e. within 30 days of date of passing

the Board Resolution declaring the Interim Dividend. In the instant case, on declaration of

Interim Dividend by the Board in a Board Meeting held on 29th May 2013, the liability of the

Company to pay the Interim Dividend has become certain, and the payment of InterimDividend must be made within next 30 days, viz. on or before 28th June 2013. Therefore,

revocation of Interim Dividend in the Board Meeting held on 10th June is not possible.

(c)

Particulars Seizure by ROC u/s 234A Seizure by Inspector u/s 240A





1. Belief

ROC / Inspector can inspect, if it has reasonable ground to believe that books

and papers of, or relating to, any Company or other Body Corporate, Managing

Director or Manager of such Company or other Body Corporate, may be - (a)

destroyed, (b) mutilated, (c) altered, (d) falsified, or (e) secreted.

2.Basis of

belief

Upon information in ROC's

possession or otherwise.

In the course of investigation u/s

235/237/239/247.

3.

Application

to Magistrate

ROC / Inspector may make an application to the First Class Magistrate or

Presidency Magistrate having jurisdiction, for an order for the seizure of such

books and papers.

4. Order by

Magistrate

After considering the application and hearing the ROC/Inspector", if necessary,

the Magistrate may, by order, authorize the ROC / Inspector -

(a) to enter, with such assistance as may be required the place or places where

such books and papers are kept,

(b) to search that place of those places in the manner specified in the order,

and

(c) to seize such books and papers as ROC/Inspector considers necessary.

5. Period of

retentionof books

& papers

ROC shall return the books and

papers within 30 days of suchseizure, and inform the Magistrate

of such return.

Inspector shall retain the books and papers

for such period not later than the

conclusion of investigation, as he considersnecessary. Thereafter, he shall return the

same, and inform the Magistrate of such

return.

6.Taking

Copies, &

other

powers

Before returning books & papers,

ROC may -

(a) take copies of, or extracts

from them, or

(b) place identification marks on

them or any part thereof, or

(c) deal with the same in such

other manner as he considers

necessary.

Before returning books & papers, Inspector

may place identification marks on them or

any part thereof.

Note: Other provisions of Code of Criminal Procedure, 1898 relating to searches or seizures shall

also apply.

(d) The Central Government delegates its powers u/s 240(l)(a), u/s 240(1A), u/s 240(2)(b) and

u/s 240(3) of the Companies Act, 1956, to the Director, Serious Fraud Investigation Office only in

respect of those cases wherein the Central Government appoints officers of SFIO as Inspectors,

to investigate into the affairs of a company u/s 235 or u/s 237.

Question 3:

a)

M/s Bee Ltd. a company registered in the State of West Bengal desires to shift its registered

office. State the laws and the provisions to be followed if the change occurs under the

following conditions:

i)

Change from one place to another within the same city.

ii)

Change from one city to another within the same state.

iii) Change of jurisdiction of ROC.

iv) Change of state.

b) The Articles of Association of a Limited Company provided that 'X' shall be the Law Officer of

the company and he shall not be removed except on the ground of proved misconduct. The

company removed him even though he was not guilty of misconduct. Decide, whether

company's action is valid.





c) Article of a Public company clearly stated that Mr. L will be the life time solicitor of the

company. Company in its General Meeting of shareholders resolved unanimously to appoint

Mr. M in place of Mr. L as the solicitor of company by altering its AOA. State with reasons,

whether the company can do so? If L files a case against the company for removal as

solicitor, will he succeed?

d) The Secretary of a Company issued a share certificate to 'A under the Company's seal with his

own signature and the signature of a Director forged by him. ‘A’ Borrowed money from 'B' onthe strength of this certificate. 'B' wanted to realize the security and requested the company to

register him as a holder of the shares. Explain whether 'B' will succeed in getting the share

registered in his name. [9+1+3+2]

Answer:

a)

ALTERATION OF REGISTERED OFFICE CLAUSE [Section 17]

(i) Change within

the same city,

town or village

[Section 146]

1. A resolution of the Board of Directors is required to be passed.

2. Notice of new location must be given to the Registrar within 30 days of

the Change under form 18.

(ii) Change from

one City, town

or village to

another within

the same ROC

and same State

[Section 146]

1. Special resolution is required to be passed at a general meeting of theshareholders.

2. Filing of Copy of Special Resolution with ROC within 30 days

3. Notice of New Location Notice of the new location must be given to

the Registrar within 30 days of change under form 18.


(iii) Change from

the jurisdiction of

one ROC to the

jurisdiction ofanother ROC

within the same

State. [Section

146 &17A]

1. Special resolution is required to be passed at a general meeting of the

shareholders.

2. Confirmation of Regional Director to be obtained. The Regional

Director must convey his confirmation within 4 weeks from the date of

receipt of application for such change.3. Filing of Copy of Special Resolution with ROC within 30 days

4. Certified copy of the confirmation by Regional director together with

a printed copy of the altered memorandum of association to be filled

with ROC within 2 months of the date of confirmation.

5. Notice of the new location must be given to the Registrar within 30

days of change under form 18.


(iv) Change fromone state to

another

1. A special resolution is required to be passed by the company at its

general meeting. Copy thereof shall be filled with ROC within 30 days.

2. Such alteration must be confirmed by the Company Law Board

3. Copy of the order of the CLB must be filed by the company with theROC of both the States. Thereafter, the Registrar of each State shall

registered proposed alteration.

4. The Registrar of the State where the office was originally situated shall

send Registrar of the other State all records and documents relating to

company

5. When the registered office of the company is shifted to its new

location, the notice of same must be given to the Registrar of

Companies within 30 days of the shifting office under form 18.





6. A resolution of the Board of Directors is required to be passed

b)

According to the provisions of Section 36, 'X' cannot enforce the right conferred on him by

the articles against the company. Hence the action taken by the company (i.e. removal of

'X' even though he was not guilty of misconduct) is valid.

c)

According to Section 36 of Company Act 1956, upon registration, the Memorandum andArticles of Association bind the company and its members to the same extent as if they had

been signed by the company and each member respectively. -Consequences of this shall

be as follow:-i) Members bound to the Company-This view was also held in the case of Boreland's

Trustee v Steel Brothers and Co. Ltd.

ii) Company bound to the members- Company is also bound to its members in same

manner as members are bound to it

iii)

Company not liable to outsider-Section 36, only create a contract between a company

and members, thus company may alter its AOA for any term as concerned with a

contract along with an outsider

In given case Article of the Public company clearly stated that Mr. L will be the life time solicitor

of company. Company in its General Meeting of shareholders resolved unanimously to appointMr. M in place of Mr. L as the solicitor of company by altering its AOA.

Conclusion: Based upon the provisions of Sec 36, we can conclude that the Company is entitled

to remove Mr. L and he cannot succeed in bringing a suit against the company

This view was also taken in leading case of [Eley v Positive Government Life Assurance Co. Ltd]

d) Share certificate is not binding on company as it contained forged signatures. Thus no title

could be transferred to A even if he is a bona fide purchaser since as per the general rule

forgery is nullity (It means if any signatures are forged, it shall be taken as if no signatures are

there, thus no tile can be transfer to transferee). This view was also held in the case ofRubben v Great Fingal Consolidated. Hence B would not succeed in having the shares in his

name.

Question 4:

a)

Rajesh, who is a resident of New Delhi, sent a transfer deed, for registration of transfer of

shares to the company at the address of its Registered Office in Mumbai on 13.05.2013. He

did not receive the shares certificates till14.09.2013. He lodged a criminal complaint in the

Court at New Delhi. Decide, under the provisions of the Companies Act, 1956, whether the

Court at New Delhi is competent to take action in the said matter.

b) 'A' commits forgery and thereby obtains a certificate of transfer of shares from a company

and transfers the shares to 'B' for value acting in good faith. Company refuses to transfer the

shares to 'B'. Whether the company can refuse? Decide the liability of 'A' and of the

company towards 'B'. In the light of the above state the meaning and consequences of a

forged transfer.c)

ABC Company refuses to register transfer of shares made by Mr. A to Mr. B. The company

does not even send a notice of refusal within the prescribed time. Has the aggrieved party

any rights against the company for such refusal. Advice.

d) The Board of Directors of a company decided to pay 5% of issue price as underwriting

commission to the underwriters. On the other hand the Articles of Association of the

company permit only 3% commission. The Board of Directors further decides to pay the

commission out of the proceeds of share capital. Are the decisions taken by the Board of

Directors valid under the Companies Act, 1956?





e) When can a Public Company offer the new shares (further issue of shares) to persons other

than the existing shareholders of the Company? Can these shares be offered to Preference

Shareholders? [3+4+4+2+2]

Answer:

a)

According to section 113(1) every company shall within two months after the application for

the registration of transfer of any such shares, deliver the certificates to its shareholders.In the case of a listed company under the listing agreement this period has been reduced to 30

days. Hence legal steps can be taken by Rajesh.In the case of H.V. Jaya Ram v ICICI Ltd. It was held that cause of action for failure to deliver

share certificate arises where the registered office of the company is situated and not in the

jurisdiction of the Court located in the place where the complaint resides. Accordingly in the

present case also, the Court in New Delhi cannot entertain the complaint against a company

having its registered office in Mumbai.

b) Any forged transfer does not give the transferee concerned any title to the shares.

Although the innocent purchaser acting in good faith could validly and reasonably assume that

the person named in the certificate is the owner of the shares. Still the illegality cannot be

converted into legality.

Therefore, in this case company is right to refuse to do the transfer of the shares in the name of

the transferee B.

Forged Transfer

Meaning:

Forged Transfer means, transfer of shares made on the basis of forged transfer deed.

The instrument of transfer is said to be forged when transferor's signatures bearing on it are

forged.

Consequences of Forged Transfer:

1.

Restoration of name of: True owner can compel the company to restore his name to the

register.

2.

Claim to Dividend: True owner can also claim any dividend which may not have been paidto him during the intervening period.

3.

Right of Bona fide Purchaser:

If the company had issued a share certificate to the transferee on a forged transfer and he

further sold them to another buyer who has acted in good faith, then the purchaser will

have no right to be registered as shareholder.

However, he can claim damages from the company on the ground since he has acted on

the faith of the share certificate issued by the company.

Company in turn can claim damages from the person who has submitted said forged

transfer deed to it.

c)

Remedies available to aggrieved party against refusal to register the transfer of shares by

ABC Company:

1. In case ABC is a private company [Section 111]

Transferor or the transferee may prefer an appeal to Company Law Board. The appeal should

be in writing and should be filed within the prescribed time.

Meaning of Prescribe Time:

i)

Where the company gives a notice of refusal: Appeal should be filed within 2 months of

the receipt of such notice, and





ii)

Where the company does not give any notice of refusal: Appeal should be filed within 4

months from the date on which the instrument of transfer was delivered to the company.

2. In case ABC is a public company [Section 111A]:

In case a public company without any sufficient cause, refuses to register a transfer of shares

within 2 months from the date on which, the instrument of transfer was delivered to thecompany, the transferee may make an application to the Company Law Board to register such

transfer.

3. Right to Appeal where the transfer of security effected in contravention of certain law: Where

any transfer has been affected in contravention of provisions contained under SEBI Act, 1992 or

SICA or any other law for the time being in force. The Company, participants, investor or SEBI

may make an appeal to Company Law Board within a reasonable time to rectify the register or

records of the company or depository within.

4.

Power of Company Law Board:

Company Law Board may direct the company or the depository to rectify the register or

the Records of ownership.

Company Law Board may also suspend the voting rights in respect of the securities subject

to enquiry in case enquiry has not yet completed.

d)

According to the provisions of Section 76 of the Companies Act, 1956:

i)

The payment of commission should be authorized by the articles.

ii) The amount of commission should not exceed, in case of shares, 5% of the price at which

the shares have been issued or the amount or rate authorized by the articles whichever is

less, and in case of debentures, it should not exceed 2½%

Based upon the provisions of the above section, we can conclude that the Board of Director’s

decision to pay 5% is not valid, since the payment cannot exceed 3% as provided in the Articles

of the company.

Secondly, decision of the Board to pay the commission out of capital is valid since underwriting

commission can be paid both out of capital as well as out of profits. [Madan Lal Fakir Chand VsShree Changdeo Sugar Mills Ltd]

e)

From the wordings of Section 81, of Companies Act, 1956 it is quite clear that the further issue

of shares can be issued only to equity shareholders, unless a certain specific procedure as stated

in law has been adopted for issue of these shares to outsiders. This specific procedure would

essentially include passing a special resolution in the general meeting and obtaining more votes

for the agenda than against the agenda. Therefore, in general issue of these shares cannot be

offered to preference shareholders.

Question 5:

a)

K Ltd was in process of incorporation. Promoters of the company signed an agreement for

purchase of certain furniture for company and payment was to be made to the supplier ofthe furniture after incorporation of the company. The company was incorporated and the

furniture was received and used by it. Shortly after incorporation, company went into

liquidation and debt could not be paid. As a result supplier sued the promoters. Examine

whether the promoters can be held liable under following situations:-

i) Where company has adopted the contract after incorporation

ii) Where company entered into a fresh contract after incorporation

b)

A company was incorporated on 6th October, 2013. The certificate of incorporation of the

company was issued by the Registrar on 15th October, 2013. The company on 10th October,





2013 entered into a contract which created its contractual liability. The company denies from

the said liability on the ground that company is not bound by the contract entered into prior

to issuing of certificate of incorporation. Decide, under the provisions of the Companies Act,

1956, whether the company can be exempted from the said contractual liability.

c) The Memorandum of Association of a company was presented to the Registrar of Companies

for registration and the Registrar issued the certificate of incorporation. After complying with

all the legal formalities the company started a business according to the object clause,which was clearly an illegal business. The company contends that the nature of the business

cannot be gone into as the certificate of incorporation is conclusive. Answer the question

whether company's contention is correct or not.

d) The Central Government, without referring the matter to the Supreme Court of India for

inquiry, removed a member of the Competition Commission of India, on the ground that he

has become physically or mentally incapable of acting as a member. Decide under the

provisions of Competition Act, 2002 whether the removal of the member is valid.

[7+3+3+2]

Answer:

a) According to Company Act 1956, any contract which is entered into by the promoters for

and on behalf of the proposed company before its incorporation shall be regarded as Pre-

incorporation contract.

Provisions regarding these contracts can be discussed as follow:-

1. The Company is not bound by the Preliminary Contract: In case of [Re English and Colonial

Produce Ltd], it was held that Company cannot be held liable for the preliminary contracts,

A company is not bound by the preliminary contracts even if the company has taken the

benefit of the work on its behalf under the contract.2.

The Company cannot Enforce Preliminary Contracts: In the case of [Natal Land Co. v Pauline

Colliery Syndicate], it was held that other party is also not liable to company through pre-

incorporation contract, here in this stated case

The owner of a piece of land agreed to lease it to a company to be formed by

promoters.

The promoters later on formed a company.

Subsequently 'owner' refused to grant the lease to the company.It was held that the company cannot sue 'owner' and cannot claim specific

performance as it was not even in existence when the lease was signed.

Thus, preliminary contracts cannot be enforced by or against the company.3. Personal Liability of Promoters: In the case of (Kelner v Baxter), it was held that promoters

shall be personally liable with any such contract. This is because one cannot enter into any

contract on behalf of any person who is not in existence. Therefore, for any such contract;

promoters shall be personally liable for the performance.

However, liability of promoter shall come to an end where after incorporation company

adopt the contract according to Sec 15 and Sec 19 of Specific Relief Act 1963.Based upon above provision, we can conclude as follow:-

i) Since in the given case company has adopted the contract after incorporation, thus

company shall be liable for the contract so entered.ii)

Situation where company enter into a fresh contract-

Where a company enter into a fresh contract after incorporation, then liability of promoters

shall come to an end and company shall become liable with this contract.This view was also taken in case of [Howard v Patent Ivory Manufacturing Co.]

b)

Section 35 provides that a certificate of incorporation issued by the Registrar is conclusive as

to all administrative acts relating to the incorporation and as to the date of incorporation.Case of [Jubilee Cotton Mills v Lewis]





Thus based upon the above, we can conclude that even though Certificate of

incorporation was issued on 15th Oct, however it contained a date as 6th Oct. Therefore

company shall be considered as registered on 6th only and consequently contract so

entered was a valid contract

c)

Though a certificate of incorporation is a conclusive evidence of its registration, but, it does

not mean that all its objects are legal.In Bowman v Secular Society Ltd., the court held that the statute does not provide that all or

any of the objects specified in the memorandum, if otherwise illegal, would be rendered

legal by the certificate.

Therefore, the contention of the company that the nature of business cannot be gone into

after the certificate of incorporation has been obtained is not tenable.

d)

The order of removal made by Central Government is valid and lawful on the following

grounds:

i) Since CG has ordered removal under the ground, that he has become physically or

mentally incapable of acting as a member.

ii)

Since removal under such ground does not require CG to refer the matter to the Supreme

Court for inquiry.

Question 6:a)

Useful Ltd. had taken a loan of ` 2 crore from ABC Bank secured by some assets. The

company has defaulted in the matter of payment of some installments of loan as per terms of

the loan agreement. The bank has filed a petition in the High Court on the ground that the

company is unable to pay its debts.

The company opposes the petition for winding up on the ground that it has employed 1000

workers, paid their salaries regularly and that it has paid all the tax dues to the Government.

The company has further contended that if the company is compelled to repay the loan

immediately, it will cripple the company causing hardships to employees and other persons

having business dealings with the company. The company is also supported by some major

creditors.

Explain the circumstances under which the company may be ordered to be wound up bythe Court on the ground of inability to pay its debts and whether the bank will succeed in this

case.

b)

Young Bank is a newly formed bank. The constitution of its Board of Directors is mostly

graduates and under-graduates. Is the constitution as per The Banking Regulations Act,

1949? Discuss. Also the Bank wants to reconstitute its board and retire some of its directors.

What are the provisions as per law?

c)

Mr. A was a member of the Competition Commission of India. On the basis of information

that he had acquired such financial interest as was likely to affect prejudicially his functions

as a member of the Commission, the Central Government appointed an officer to hold an

inquiry. On the basis of report of the said officer the Central Government issued an order of

removal of Mr. A. Decide whether the action of the Central Government is in order under the

provisions of the Competition Act, 2002?d) Ajay Ltd. is being wound up by the court. All the assets of the company have been charged

to the company’s bankers to whom the company y owes 1 crore. The company owes the

following amounts to others:i) Dues to workers – ` 25 lakhs

ii) Taxes payable to Government – ` 5 lakh

iii) Unsecured creditors - ` 10 lakhs

You are required to compute with reference to the provisions of the Companies Act, 1956

the amount each kind of creditors is likely to get if the amount realized by the official





liquidators from the secured assets and available for distribution among the creditors is only `

80 lakhs. [3+6+3+3]

Answer:

a)

The company is unable to pay its debts, and it has defaulted in payment of the installments

of its Bank loan.

The court may not order winding-up in this case as:The power of the court to order winding up is discretionary.

Since the court shall consider the interest of 1000 employees, temporary cash crisis,

loss of taxes to the Government, loss of production, loss of business, probable

hardships on other creditors, and public policy.

If the court decides that it is not in the interest of justice to wind up the company.[Tata Iron and Steel Co. V Micro Forge (India) Ltd.]

b) BOARD OF DIRECTORS TO INCLUDE PERSONS WITH PROFESSIONAL OR OTHER EXPERIENCE (Sec.

10A), as per Banking Regulation Act, 1949:

51% or more directors to be specialized in certain specified areas [Sec. 10A (2)] i.e.

Not less than 51% of the total number of members of the Board of Directors of a bankingcompany shall consist of persons, who shall have special knowledge or practical

experience

in respect of one or more of the following matters, namely:

agriculture and rural economy,

co-operation,

small-scale industry,

accountancy,

banking,

economics,

finance,

law,

any other matter the special knowledge of, and practical experience, which would, in

the opinion of RBI, be useful to the banking company.

Minimum 2 directors to be specialised in certain specified areas [Proviso to Sec. 10A (2)]

It shall also be ensured that out of the aforesaid number of Directors, not less than 2 shall be

persons having special knowledge or practical experience in respect of agriculture and rural

economy, co-operation or small-scale industry.

Reconstitution of Board if requirements not fulfilled [Sec. 10A (3)]

If, in respect of any banking company, the requirements, as laid down in sub-section (2), are

not fulfilled at any time, the Board of Directors of such banking company shall re-constitute

such Board so as to ensure that the said requirements are fulfilled.

Retirement of directors by lots to ensure reconstitution [Sec. 10A (4)]If, for the purpose of re-constituting the Board under sub-section (3), it is necessary to retire

any Director or Directors, the Board may, by lots drawn in such manner as may be

prescribed, decides which Director or Directors shall cease to hold office and such decision

shall be binding on every Director of the Board.

c)

CG has the power to remove Mr. A:

Since Sec. 11 empowers CG to remove the Chairperson or any member of the Commission on

various grounds specified u/s 11 including the ground "where the Chairperson or the member





has acquired such financial or other interest as is likely to affect prejudicially his functions as a

Member or Chairperson."

Procedure for removal of Mr. A:

i) CG shall make a reference to the Supreme Court.

ii)

The Supreme Court shall order holding of an enquiry. The enquiry shall be held in

accordance with the procedure prescribed by the Supreme Court.iii) The Supreme Court may make an order for removal of Mr. A.

d) (i)

The amount overriding preferential payments ( ` 1 crore due to secured creditors and ` 25

lakhs due to workers), hence a total of ` 1.25 crore

(ii)

Since the amount realized is ` 80 lakhs and it is not sufficient to pay the overriding preferential

payments in full, the workmen’s dues and dues payable to secured creditors shall abate in

equal proportions, i.e., the payments to workmen and secured creditors should be in the

proportion of amount owed by the company to them ( i.e. 100:25). Therefore, workers shallbe paid ` 16 lakhs and secrured creditos should be paid ` 64 lakhs.

(iii) No payments shall be made to the Government authorities towards taxes payable or to

unsecured creditors.

SECTION B

[Answer any five questions from Q.No.7 (a) to (f)]

Question 7:

a) Discuss the difficulties faced in Governance by state owned businesses.

b)

Analyze CSR as a Corporate Brand

c)

State the reason for failure of construction industry to embrace Whole Life Cycle Costing

d)

Describe the core elements to be covered under CSR Policy

e) Write a short note on Memorandum of Understanding and Public Sector Enterprises.

f) Discuss the relevance of OECD Guidelines for Corporate Governance of State-owned

enterprises.[5×5]

Answer:

a)

Difficulties Encountered in Governance in state owned businesses

Routine governance regulations become applicable for public sector companies formed under

the Companies Act, 1956 and come under the purview of SEBI regulations the moment they

mobilize funds from the public. The typical organizational structure of PSUs makes it difficult for the

implementation of corporate governance practices as applicable to other publicly-listed


The board of directors will comprise essentially bureaucrats drawn from various ministrieswhich are interested in the PSU In addition, there may be nominee directors from banks or







may necessitate a percentage of independent components on the board; but many






make.





areas of operations offered enormous opportunities for advancement and growth. Andwhen the economy was opened up, many of them lacked the competitiveness to fight it out

with their counterparts from the private sector.

b) CSR as a Corporate Brand:


themselves from their competitors, CSR initiatives enable corporates to build a stronger

brand that resonates with key external stake-holders – customers, general public and the

government.


opportunities, and increasingly contribute to the corporates’ ability to attract passionate and


Corporate in India are also realising that their reputation is intrinsically connected with how well








acceptance.





serves as a soothing diversion from the mundane workplace routine and gives one a feeling ofsatisfaction and a meaning to their lives.

c) Reason for failure of construction industry to embrace WLCC

Currently, the application of Whole Life Cycle Costing (WLCC) in the construction industry is still

hindered significantly by the lack of standard method and the excuse of lack of sound data

upon which to arrive at accurate decisions. As a result, the output from WLCC models is looked

on as unreliable. A Government report issued by the Building Research Establishment on Whole

Life Costing identified several factors that presently act as barriers to applying WLCC:

The lack of universal methods and standard formats for calculating whole life costs

The difficulty in integration of operating and maintenance strategies at the design phase

The scale of the data collection exercise, data inconsistencyThe requirement for an independently maintained database on performance and cost of

building components.

These barriers might be directly related to the absence of adequate knowledge of WLCC

processes and mechanisms. There may also be a lack of willingness from stakeholders to set up

appropriate mechanisms to solve these problems. If, for example, all building occupiers were

required to submit annual running cost profiles, the risk associated with WLCC techniques could

be significantly reduced (Bird 1987). In fact, White (1991) argues the case for ‘performance

profiles’ and in particular, highlights again the requirements for a universal construction data





information system. One could argue that a plethora of WLCC models does exist but the

common denominator in practical application and development is lack of appropriate

information or know-how to use and develop models with existing information.

It seems to be worth noting how both the academic and practical ‘schools of thought’ in the

industry need to get their own houses in order if significant steps are to be taken in the wider

applications of WLCC. Newton (1991) in his work in cost modelling procedures highlights the

need for a methodological and organised framework for such research activities. The sheercomplexity of many models lends little to practical application and in many cases, if not the

majority, the lack of available good quality data prohibits further development. In terms of the

practitioners, they need to be willing to encourage clients and building occupiers into adopting

a more holistic approach to running cost control so that procedures can be put in place to aid

all those requiring WLCC cost profiles.

d) The core elements to be covered under CSR Policy

The core elements to be covered under CSR Policy is as follows:

1. Care for all Stakeholders - The companies should respect the interests of, and be responsive

towards all stakeholders, including shareholders, employees, customers, suppliers, project

affected people, society at large etc. and create value for all of them. They should develop

mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate

them where they occur.

2. Ethical functioning - Their governance systems should be underpinned by Ethics, Transparency

and Accountability. They should not engage in business practices that are abusive, unfair,

corrupt or anti-competitive.

3. Respect for Workers’ Rights and Welfare - Companies should provide a workplace

environment that is safe, hygienic and humane and which upholds the dignity of employees.

They should provide all employees with access to training and development of necessary skills

for career advancement, on an equal and non-discriminatory basis. They should uphold the

freedom of association and the effective recognition of the right to collective bargaining of

labour, have an effective grievance redressal system, should not employ child or forced labourand provide and maintain equality of opportunities without any discrimination on any grounds in

recruitment and during employment.

4. Respect for Human Rights - Companies should respect human rights for all and avoid

complicity with human rights abuses by them or by third party.

5. Respect for Environment - Companies should take measures to check and prevent pollution;

recycle, manage and reduce waste, should manage natural resources in a sustainable manner

and ensure optimal use of resources like land and water, should proactively respond to the

challenges of climate change by adopting cleaner production methods, promoting efficient

use of energy and environment friendly technologies.

6. Activities for Social and Inclusive Development - Depending upon their core competency

and business interest, companies should undertake activities for economic and social

development of communities and geographical areas, particularly in the vicinity of their

operations. These could include: education, skill building for livelihood of people, health, cultural

and social welfare etc., particularly targeting at disadvantaged sections of society.

e)

Memorandum of Understanding and Public Sector Enterprises:





After Independence, Public Sector Enterprises (PSEs) were set up in India with an objective to

promote rapid economic development through the creation and expansion of infrastructure by

the government. With different phases of development, the role of PSEs has changed and their

operations have extended to a wide range of activities in manufacturing, engineering, steel,

heavy machinery, machine tools, fertilizers, drugs, textiles, pharmaceuticals, petro-chemicals,

extraction and refining of crude oil and services such as telecommunication, trading, tourism,

warehousing, etc. as well as a range of consultancy services. While there have been many PSEsthat have performed very well in competition with private sector enterprises, there are also

many PSEs that have performed very poorly. In an economic environment that has changed

considerably in the last two decades, the role of PSEs has changed and they have been

increasingly guided to reduce their dependence on the Government. They have been listed on

the stock exchange and few of them have been privatized. The Government has provided PSEs

the necessary flexibility and autonomy to operate effectively in a competitive environment.

However, there are a few issues with the operation and management of PSEs which still persist

and need to be attended to. There is a need to develop a mechanism on how government can

get an efficient Indian presence in the sectors where the private sector investments are not

forthcoming especially in strategic areas where developing capabilities is essential if India has to

play its rightful role among the among the nations of the world.

f)

The relevance of OECD Guidelines for Corporate Governance of State-owned enterprises:

Many of the developing countries still continue to have a dominant presence of state-owned

enterprises. Hence, OECD thought it appropriate to evolve a set of governance guidelines for

the state-owned enterprises as it did for the private enterprises in member countries. According

to OECD, A major challenge is to find a balance between the state’s responsibility for actively

exercising its ownership functions, such as, the nomination and election of the board, while at

the same time refraining from imposing undue political interference in the management of the

company. Another important challenge is to ensure that there is a level playing field in markets where

private sector companies can compete with the state-owned enterprises, and that governments

do not distort competition in the way they use their regulatory or supervisory powers.’

According to OECD, the guidelines ‘suggest that the state should exercise its ownership functions

through a centralized ownership entity, or effectively co-ordinated entities, which should actindependently and in accordance with a publicly disclosed ownership policy. The guidelines

also suggest the strict separation of the state’s ownership and regulatory functions. If properly

implemented, these and other recommended reforms would go a long way to ensure that state

ownership is exercised in a professional and accountable manner, and that the state plays a

positive role in improving corporate governance across all sectors of our economies. The result

would be healthier, more competitive, and transparent enterprises’.



There should be a clear separation between the state’s ownership function and other state

functions that may influence the conditions for state-owned enterprises, particularly with

regard to market regulation.State-owned Enterprises should not be exempt from the application of general laws and

regulations. Stakeholders including competitors should have access to efficient redress and

an even-handed ruling when they believe that their rights have been violated.

State-owned Enterprises should face competitive conditions regarding access to finance.

Their relations with state-owned banks, state-owned financial institutions, and other state-

owned companies, should be based on purely commercial grounds.




Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 2

Answer 1(c):

In view of the opinion of Madras High Court & Tribunal Letter cited below, the appointment of

relatives of Amal & Vimal as Additional Directors is not valid.

The question is whether the appointment of Additional Director would come within the scope of

the word “contract or arrangement”, in order to consider the Director to be “interested”. TheCourt concluded that appointment as Director does not come within the scope of the

expression “contract” (because the position of a Director may be conferred on a person by any

method other than “contract”), but it would amount to “arrangement”. So, the attending

Directors became Interested Directors. Appointment of their relatives as Additional Directors was

null and void – Madras Tube Co. Ltd. Vs Harikrishna Somani 1 Comp LJ 195 (Mad).

It will be a clearly unsound Company practice if a Director, whose near relative is proposed to

be appointed to the Board, were to participate in the discussions at the Board Meeting and

vote on the proposal for such appointment – L.No. 8/46/(300) 64-PR dated 27-01-1965.

Note: Contrary opinion is taken by Bombay High Court

Appointment as an Additional Director of a person who is related to a Director does not violate

the requirements of Sec. 300(1), because such appointment does not constitute any “contractor arrangement” of the Company with the Sitting Director. The Sitting Director is entitled to

participate and vote – Shailesh Harilal Shah Vs. Matushree Textiles ltd. 82 CC 5 (Bom).

Answer 1(d):

Loans above the ceiling limit u/s 372A(1) can be made only with the previous approval by a

Special Resolution in the General meeting. So, the following steps are to be taken by the

Company:

1. According to Rule 4 of Companies (Passing of the Resolution by postal Ballot) Rules, 2001,

Postal Ballot is mandatory in case of a Listed Company for transacting a business relating to

giving loans in excess of the limits prescribed u/s 372A(1). As the above Company is a Listed

Company, it must take steps for passing a special resolution through postal ballot inaccordance with the aforesaid Rules. [Sec. 192A].

2. Notice of such resolution to be sent to members should indicate specific limits, particulars of

Company to which loan is to be given, specific sources of funding and such other details.

3. In addition to special resolution, prior approval of the Board of Directors is required u/s 372A.

All Directors present at the Board meeting must vote in favour of the resolution.

4. Prior approval should be obtained from Public Financial Institution from whom loans have

been taken.

5. Interest Rate to be charged by the Company shall not be less than the prevailing Bank Rate

specified by RBI u/s 49 of the RBI Act.

6. Prescribed particulars must be entered in the Register maintained u/s 372A(5), within

specified time limits.

7. A copy of the special resolution should be filed with the RoC.

2. (a) One of the members of AB Ltd. has proposed the name of Mr. Fern for appointment as a

director of the company in the Annual General Meeting and given a notice under section 257

of the Companies Act, 1956. Mr. Fern is one of the partners of Fern & Fern, Chartered

Accountants, who are the retiring auditors of the company. But the audit of the company is

being looked after by another partner of the firm. Examine whether Fern & Fern can be

reappointed as auditors, if Mr. Fern is appointed as director. [4]





(b) Unique Technologies Ltd. has been wound up and the Official Liquidator has been asked

to take charge of the Company. Briefly explain the relevant provisions regarding filing of

Statement of Affairs in relation to the Company in liquidation. [8]

(c) Examine the validity of the following appointment made by Board of Dhanavan Ltd.

Buddhiman Ltd. is a Subsidiary Company of Dhanavan Ltd. in which Mr. Pratik Sen is a

Director. Mr. Pratik Sen has been appointed as Manager – Research & Development inDhanavan Ltd. on a Monthly Salary 2.5 Lakhs per month with effect from 1st April 2013.

What would be your answer is case ABC Ltd. is a Subsidiary of Buddhiman Ltd. [3]

Answer 2(a):

The present problem relates to section 226 of the Companies Act, 1956.

The legal position

1. As per section 226, a person shall be disqualified to be appointed or reappointed as an

auditor of the company if he is an officer or employee of the company.

2. As per section 2(30), a director is an officer of the company.

3.

As per section 257, any member of a public company can give a notice proposing theappointment of any person (whether a member or not) as a director of the company.

The given case

1. Mr. Fern is a partner in the firm 'Fern & Fern', 'Fern & Fern' are the retiring auditors of the

company, and they are seeking reappointment in the forthcoming annual general meeting.

2. The name of Mr. Fern has been proposed as a director by a member by giving a notice under

section 257. Mr. Fern has been appointed as a director in the annual general meeting.

Conclusion

On appointment as a director, Mr. Fern becomes an officer of the company. Therefore, Mr. Fern

and any firm in which Mr. Fern is a partner, is disqualified to be re-appointed as auditors of the

company.

Answer 2(b):

Sec. 454 deals with Statement of Affairs to be made to Official Liquidator, in a compulsory

winding-up. The provisions are summarized as under:

1. Situations: A Statement of Affairs of the Company shall be made out and submitted to the

Official Liquidator, where the Court has:

(a) made a winding-up order, or

(b) appointed the Official Liquidator as Provisional Liquidator.

2. Contents: The Statement of Affairs shall be in the prescribed form, with the following

particulars:

(a) Assets of the Company [Cash balance in Hand and at Bank, and Negotiable Securities, if

any, held by the Company, should be separately stated]

(b) Debts and Liabilities of the Company,

(c) Names, Residences and Occupations of its Creditors, with break-up of Secured and

Unsecured Debts, [In case of Secured Debts, particulars of securities given, whether by

Company or an Officer thereof, their value and dates on which they were given, should





Answer 2(c):

It can be assumed Mr. Pratik sen is a Director either in Dhanavan Ltd. or Buddhiman Ltd., as the

same is not clear in the question. The effect of the appointment of Mr. Pratik Sen in Office or

place of Profit (OPP) in Dhanavan Ltd. u/s 314(1) is analyzed as follows:

Mr. Pratik sen is aDirector in: Case A: Dhanavan Ltd. – Holding,Buddhiman Ltd. - Subsidiary Case B: Buddhiman Ltd. – Holding,Dhanavan Ltd. - Subsidiary

Dhanavan Ltd. Appointment of Mr. Pratik Sen in

Dhanavan Ltd. in OPP is covered

u/s 314(1). Shareholders approval

required u/s 314(1).

Appointment of Mr. Pratik Sen in

Dhanavan Ltd. in OPP is covered u/s

314(1). Shareholders approval

required u/s 314(1).

Buddhiman Ltd. Appointment of Mr. Pratik Sen

(Director of Subsidiary) in

Dhanavan Ltd. (Holding) is not

covered by sec. 314(1). Hence,

OPP can be held in Holding

Company Dhanavan Ltd.

Appointment of Mr. Pratik Sen

(Director of Subsidiary) in Dhanavan

Ltd. (Holding) is covered by sec.

314(1). Hence, restriction applies.

However, restriction will not apply if

the remuneration received from the

Subsidiary in respect of such OPP

(held in the Subsidiary) is paid overto the Subsidiary or its Holding

Company.

3. (a) Union Bank of India, a National Bank, acquired on 1 st January 2002 a Building, fully

occupied by various tenants, from Mr. Rahul, the owner of the Building in discharging of a

Term Loan advanced to Mr. Rahul, who had mortgaged the said building as security with the

said Bank and failed to repay the Loan. The said Bank wants to keep the Building

permanently with it and earn the rent from tenants. You are required to state with reference

to the provisions of the Banking Regulation Act, 1949 whether the said Bank can do so. [4]

(b) “Life Policy cannot be questioned after the expiry of 2 years from the date on which it was

effected”. Explain with reference to Section 45 of the act. [4]

(c) A Public Company has been declaring dividend at the rate of 20% on equity shares

during the last 5 years. The company has not made adequate profits during the year ended

31st March, 2013, but it has got adequate reserves which can be utilised for maintaining the

rate of dividend at 20%.

Advise the Company as to how it should go about if it wants to declare dividend at the rate

of 20% for the year 2012-13.

Would your answer be different if the company utilised only the profits made in the previous

years and retained in the profit and loss account for the purpose of payment of dividend at

the rate of 20% for the year 2012-13? [7]

Answer 3(a):

As per section 9, no banking company shall hold any immovable property howsoever acquired,

except such as is required for its own use, for any period exceeding 7 years from the acquisition

thereof or any extension of such period as in this section provided, and such property shall be

disposed of within such period or extended period, as the case may be.





As per Proviso to Section 9, the Reserve Bank may in any particular case extend the aforesaid

period of 7 years by such period not exceeding 5 years where it is satisfied that such extension

would be in the interests of the depositors of the banking company.

In the given case, Union Bank proposes to keep the building for earning rent from tenants, and

not for its own use. In view of the provisions of section 9, Union Bank of India cannot keep the

building permanently with it for the purpose of earning rent from tenants. It shall have to disposeof the Building within 7 years from the date of its acquisition, i.e. on or before 31 st December,

2009.

However, if the approval of the Reserve Bank is obtained, it may continue to hold the Building till

such extended period as is sanctioned by the Reserve Bank. The Reserve Bank shall not permit the

Union Bank to hold the property beyond 31st December, 2014.

Answer 3(b):

Inaccurate or false particulars: An insurer shall not call in question a Life Insurance Policy after

the expiry of 2 years from the date on which it was effected on the ground that – (a) a

statement made in the proposal for insurance, or (b) in any report of a Medical Officer, or

Referee, or Friend of the insured, or in any other document leading to the issue of the policy, wasinaccurate or false. [Sec. 45]

Exception: The above provision does not apply if the Insurer shows that such statement was on-

(a) A material matter or suppressed facts which it was material to disclose, and

(b) That it was fraudulently made by the policy-holder, and

(c) That the policy-holder knew at the time of making it that the statement was false or that it

suppressed facts which it was material to disclose.

Only if all the 3 conditions are satisfied conjointly the insurer can repudiate after 2 years – LIC Vs.

G.M.Chennabasamma.

LIC challenged a policy after 2 years after its issue. It was in evidence that the assuredfraudulently suppressed facts. It was held that the LIC was not liable – Mithoolal Vs. LIC (SC 1962).

Held that “If a period of 2 years has expired from the date on which the policy of life insurance

was effected, that policy cannot be called in question by an insurer on the ground that a

statement made in the proposal for insurance or on any report of a medical officer or referee, or

a friend of the insured, or in any other document leading to the assure of the policy, was

inaccurate or false.” – LIC Vs. Janaki Ammal (Mad HC 1968).

Note:

(a) Policies issued in India shall be subject to law in force in India.

(b) The insurer can notify the Policyholder of the options available to him in case of non-

payment of premiums.(c) The Life Policy Holders have the right to seek for Medical Reports procured by the Insurer.

Answer 3(c):


only out of profits. In other words, the dividend can be paid only out of the following sources:

(a) Profits of current financial year

(b) Undistributed profits of previous financial years, i.e., accumulated profits of previous years





(c) Moneys provided by the Central Government or State Government in pursuance of


Payment of dividend out of reserves

Dividend can be declared out of the profits transferred to the reserves only if:

(a)

previous approval of the Central Government is obtained; or

(b) such payment is made in accordance with such rules as may be prescribed by the Central

Government in this behalf, i.e.. The Companies (Declaration of Dividend out of Reserves)

Rules, 1975, which are detailed hereunder:

In the event of inadequacy or absence of profits in any year, a company may declare

dividend out of the accumulated profits earned by it in previous years and transferred by it to

the reserves, subject to the following conditions:

(a) The rate of dividend must not exceed the lower of:

(i) average of the rates of dividend declared by the company in immediately preceding 5

financial years; or

(ii)

10%.(b) The amount to be withdrawn from reserves must not exceed 1/10 th of aggregate of paid up

capital & free reserves. Further, the amount so withdrawn shall be first utilised to set off the

losses incurred in the financial year, and the balance amount can only be utilised for the

declaration of dividend.

(c) The balance of reserves, after such withdrawal, shall not fall below 15% of paid up share

capital. In the present case, the company intends to distribute dividend at the rate of 20%.

But as per the provisions discussed in point (a) above, the rate of dividend declared cannot

exceed 10%, i.e. the rated dividend declared out of reserves can be a maximum of 10%.

Thus, the company cannot declare dividend @ 20% out of reserves.

4. (a) Mr. X is a director of M/s ABC Ltd. He has approached M/s Housing Finance Co. Ltd. for

the purpose of obtaining a loan of 50 lacs to be used for construction of building his

residential house. The loan was sanctioned subject to the condition that M/s ABC Ltd. shouldprovide the guarantee for repayment of loan installments by Mr. X. Advise Mr. X. [6]

(b) The Board of Directors of M Limited propose to donate 3,00,000 to a school established

exclusively for the benefit of the children of employees and also donate 50,000 to a political

party during the financial year ending 31st March 2010. The average net profit determined in

accordance with the provisions of section 349 and 350 of the Companies Act, 1956 during

the immediately preceding three financial years is 40,00,000. Examine with reference to the

provisions of the Companies Act, 1956 whether the proposed donations are within the powers

of the Board of Directors of the Company. [5]

(c) ABC Limited wants to appoint PQR Private Limited as its sole selling agent for Southern

India. Mr. Goodword, director of ABC Limited is also a director in PQR Private Limited. Advisethe company about the compliances required under the Companies Act. [4]

Answer 4(a):

As per section 295, a public company shall not, directly or indirectly, make any loan to a

director without obtaining the previous approval of the Central Government. Also, if a

company wishes to give a guarantee or provide any security in connection with a loan made

by any other person to a director, it requires the previous approval of the Central Government.





Moreover, where a company gives a guarantee to a body corporate, it shall comply with the

provisions of section 372A.

The following legal requirements must be complied with in the present case:

1. The Board shall consider the contract relating to giving of guarantee to M/s Housing Finance

Co. Ltd. Since Mr. X is interested, he shall disclose his interest, shall not be counted in quorum,and shall not vote (Sections 299 and 300). Necessary entries will be made in the register of

contracts (Section 301).

2. M/s ABC Ltd. shall make an application to the Central Government for approval under

section 295. Only on receipt of the approval of the Central Government, M/s ABC Limited

will give the guarantee to M/s Housing Finance Co. Ltd (Section 295).

3. Following requirements of section 372A shall also be fulfilled:

(a) A resolution shall be passed at a Board meeting with the consent of all the directors

present in the meeting.

(b) Approval of Public Financial Institution, if applicable, shall be obtained.

(c) The company shall ensure that no default in compliance with section 58A (relating to

pubic deposits) is subsisting.

(d) If the ceiling limit specified under section 372A (60% of aggregate of paid up capital and

free reserves or 100% of free reserves, whichever is higher) is exceeded, a special

resolution shall be passed in the general meeting.

Answer 4(b):

Charitable Contribution

A contribution by a company is said to be charitable contribution if it is made without any

object of availing any benefit for the company or for its employees and the object of

contribution does not have any direct relation with the business of the company. In the given

case contribution is to be made for the school which is exclusively for the benefit of the

employees‟ children. Therefore, it cannot be considered as charitable contribution within themeaning of section 293(1)(e). It is purely a business decision and the Board of Directors of the

company is empowered to take such a decision.

Political Contribution

Limit of political contribution

As per section 293A, an eligible company can make political contribution up to 5% of average

net profit of immediately preceding three financial years, in a financial year.

In the given case, average net profit of the company during preceding three financial years is ` 40,00,000. The Board is empowered to make political contribution to the tune of ` 2,00,000 being

5% of the average net profit of preceding three years. Since the political contribution proposedis only ` 50,000, it is well within the powers of the Board to make this contribution.

Procedure

Every political contribution is required to be approved only in a Board meeting by way of a

resolution and full disclosure of the name of political party and amount contributed shall be

made in the profit and loss account.





Answer 4(c):

In this case applicability of section 297, 299, 300 and 314 needs to be examined.

Section 297 is not attracted because it is applicable in relation to contracts or agreements for

sale or purchase of goods. When a person acts as an agent of another, as in the given case,

there is no sale/purchase between them.

In accordance with section 299, Mr. Goodword will have to make disclosure of his interest in the

Board meeting in which the proposed appointment is discussed and consequently provision of

section 300 will also be applicable.

As far as section 314 is concerned, depending upon the detailed terms and conditions, sub-

section (1B) may be applicable. If it is applicable, then appointment requires prior approval of

members by special resolution. Otherwise, the appointment shall be made in a board meeting

by a resolution subject to the approval of members in the next general meeting.

5. (a) M/s Ahana Private Limited was incorporated in the year 2001 under the Companies Act,

1956 by 3 brothers, namely, Amit, Anil and Akhlesh. All the three were Promoter-directors

named in the Articles of Association and subscribed for 100 shares each in the company

through Memorandum of Association. Thereafter, from time to time, further shares were

allotted in proportion of one-third to each of them and in due course, the company started

earning substantial profits. Due to greed of money, the two brothers, namely, Amit and Anil,

joined hands together to assume complete control of the company, leaving their brother,

Akhlesh in lurch. Both the brothers got further shares allotted to themselves, thereby their joint

shareholding increased from 662/3% to 90%, while the shareholding of Akhlesh got reduced

from the erstwhile 331/3% to 10%. No notice of any Board Meeting was sent to Akhlesh, who

was sidelined and was also removed as a Director.

Aggrieved by the decisions taken by his two brothers at his back, Akhlesh seeks your advice

for taking out appropriate proceedings before the court or judicial authority of competent

jurisdiction. Also suggest the nature of reliefs he may claim while filing his case. [6]

(b) Some of the Indian citizens in U.K. joined to commence a business by incorporating a

company in U.K. for the purpose of carrying on business there. Examine with reference to the

relevant provisions of the Companies Act, 1956 whether it is a "Foreign Company".

What would be your answer in case the U.K. Company was incorporated by a company

registered in India? [4]

(c) RBI receives a complaint that an authorized person has submitted incorrect statements

and information to the RBI in respect of receipt and utilization of Foreign Exchange. Explain

the powers of the RBI with regard to inspection of records of the above authorized person.

Also state the duties of the authorized person. [5]

Answer 5(a):

Issue of further shares amounts to oppression if it is proved that the idea of issuing further shares

was to benefit one group to the detriment of the other [Piercy v Mill(s) d Co. (1920) 1 Ch. 77].

Further issue of shares must be made for the benefit of the company. If the directors use their

fiduciary power of issuing shares for an extraneous purpose like maintenance or acquisition of

control over the affairs of the company, it would amount to oppression [Needle Industries Case].

It is not open to the directors to issue and allot shares in a manner by which an existing majority





of shareholders is reduced to a minority. If the issue of shares disturbs the existing majority of the

shareholders and if it is not bonafide, it will amount to oppression [Re, Glaco Series (P)Ltd.].

In the given case, further shares have been allotted to Amit and Anil without simultaneous offer

to other members (Akhlesh) on pro-rata basis. Such single act of issue of further shares shall have

a continuous effect, and so it amounts to oppression, especially if, the Board meeting at which

the further shares are allotted is held without complying with the requirements of section 286,and the member who was not offered further shares was also removed from directorship

[Bhagirath Agarwala v Tara properties P. Ltd.]. Therefore, Akhlesh should file an application with

the Company Law Board for claiming relief from oppression.

Answer 5(b):

As per section 591, a company shall be a foreign company if:

(a) it is incorporated outside India; and

(b) it has established a place of business in India.

Thus, for deciding as to whether a company is a foreign company or not, the criterion is to see

as to whether the company has established a place of business in India or not, and not the

persons who have incorporated the company.

In this case, Indian citizens have formed a company outside India. Since, the company has not

established any place of business in India, the company cannot be said to be a foreign



The answer would have remained same even if the U.K. Company had been incorporated by a

company registered in India for the same reason as stated above.

Answer 5(c):

RBI’s powers of inspection [Sec. 12]: RBI may, at any time, cause an inspection to be made, by

any of its officer specially authorized in writing in this behalf, of the business of any AuthorisedPerson as may appear to it to be necessary or expedient for the purpose of:

(a) verifying the correctness of any statement, information or particulars furnished to the RBI,

(b) obtaining any information or particulars which such Authorised Person has failed to furnish on

being called upon to do so,

(c) securing compliance with the provisions of this Act or Rules/Regulations/Direction/Order

made thereunder.

Duties of Authorised Person:

(a) To produce to any Officer/Inspector, such books, accounts and other documents as may be

specified, under the Act/Regulations.

(b)

To furnish any information/statement/particulars required by RBI/Authorised Officers underthe Act/Regulations.

6. (a) Discuss the powers and role of Audit Committee as per Clause 49 of the Listing

agreement. [8]

(b) Sunflower Ltd. decided to terminate the services of Mr. Dinesh, who was employed as

Sales Manager. However, the Company feels that the Sales Manager may not vacate the

Company’s flat at Mumbai. What action can be taken by the Company under the





Companies Act, to regain possession of the flat? Is it necessary to take such action under the

Act before terminating the services of Mr. Dinesh? Will it make any difference, if the flat is not

owned by the Company, but taken on lease? [7]

Answer 6(a):

As per clause 49 of the Listing Agreement,Powers of Audit Committee:

The audit committee shall have powers, which should include the following:

1. To investigate any activity within its terms of reference.

2. To seek information from any employee.

3. To obtain outside legal or other professional advice.

4. To secure attendance of outsiders with relevant expertise, if it considers necessary.

Role of Audit Committee:

The role of the audit committee shall include the following:

1. Oversight of the company‟s financial reporting process and the disclosure of its financialinformation to ensure that the financial statement is correct, sufficient and credible.

2. Recommending to the Board, the appointment, re-appointment and, if required, the

replacement or removal of the statutory auditor and the fixation of audit fees.

3. Approval of payment to statutory auditors for any other services rendered by the statutory

auditors.

4. Reviewing, with the management, the annual financial statements before submission to

the board for approval, with particular reference to:

a. Matters required to be included in the Director‟s Responsibility Statement to be

included in the Board‟s report in terms of clause (2AA) of section 217 of the

Companies Act, 1956b. Changes, if any, in accounting policies and practices and reasons for the same

c. Major accounting entries involving estimates based on the exercise of judgment by

management

d. Significant adjustments made in the financial statements arising out of audit findings

e. Compliance with listing and other legal requirements relating to financial statements

f. Disclosure of any related party transactions

g. Qualifications in the draft audit report.

5. Reviewing, with the management, the quarterly financial statements before submission to

the board for approval

5A. Reviewing, with the management, the statement of uses / application of funds raised

through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds

utilized for purposes other than those stated in the offer document/prospectus/notice and

the report submitted by the monitoring agency monitoring the utilisation of proceeds of a

public or rights issue, and making appropriate recommendations to the Board to take up

steps in this matter.

6. Reviewing, with the management, performance of statutory and internal auditors,

adequacy of the internal control systems.





7. Reviewing the adequacy of internal audit function, if any, including the structure of the

internal audit department, staffing and seniority of the official heading the department,

reporting structure coverage and frequency of internal audit.

8. Discussion with internal auditors any significant findings and follow up there on.

9. Reviewing the findings of any internal investigations by the internal auditors into matters

where there is suspected fraud or irregularity or a failure of internal control systems of amaterial nature and reporting the matter to the board.

10. Discussion with statutory auditors before the audit commences, about the nature and

scope of audit as well as post-audit discussion to ascertain any area of concern.

11. To look into the reasons for substantial defaults in the payment to the depositors,

debenture holders, shareholders (in case of non payment of declared dividends) and

creditors.

12. To review the functioning of the Whistle Blower mechanism, in case the same is existing.

12A. Approval of appointment of CFO (i.e., the whole-time Finance Director or any other person

heading the finance function or discharging that function) after assessing the

qualifications, experience & background, etc. of the candidate.

13. Carrying out any other function as is mentioned in the terms of reference of the Audit

Committee.

Explanation (i): The term “related party transactions” shall have the same meaning as

contained in the Accounting Standard 18, Related Party Transactions, issued by The

Institute of Chartered Accountants of India.

Explanation (ii): If the company has set up an audit committee pursuant to provision of the

Companies Act, the said audit committee shall have such additional functions / features

as is contained in this clause.

Answer 6(b):

The given problem relates to sec. 630 of the Companies Act.As per sec. 630, if any Officer or Employee of a Company:

(a) Wrongfully obtains possession of any property of a Company, or

(b) Having any such property in his possession, wrongfully withholds it or knowingly applies it to

purposes other than those expressed or directed in the AoA and authorized by the Act.

On the complaint of the Company or any Creditor/Contributory, he shall be punishable with fine

upto ` 10,000.

The court trying the offence may also order such Officer/Employee to deliver up or refund, within

a specified time, any such property wrongfully obtained or wrongfully withheld or knowingly

misapplied, or in default, to suffer imprisonment for a term upto 2 years. [Sec. 630(2)].

In the given case,

1. Right of Company: The Company or any Creditor/Contributory, can file a suit u/s 630 against

the Sales Manager, if he refuses to vacate the premises provided by the Company. The

Court trying the offence may also order such Officer/Employee to deliver up or refund, within

a specified time, any such property wrongfully obtained or wrongfully withheld or knowingly

misapplied, or in default, to suffer imprisonment for a term upto 2 years.

2. Employees include Past Employees also: In the above case, it is possible to initiate action

even after termination of services of Mr. Dinesh.





The term “Officer or Employee” in section 630 applies to both the existing and past Officers or

Employees if such Officers or Employees either: (a) wrongfully obtain possession of any

property of the Company, or (b) having obtained such property during the course of

employment, withhold the same after termination of employment. [Baldev Krishna Sahi Vs.

Shipping Corporation of India Ltd. (SC)].

3. Action permissible for Leasehold Property: It is not necessary that the property in question

should be owned by the company. Even if the Company exercises only a leasehold right,the provisions of Sec. 630 can be invoked. [P.V.George Vs. Jayems Engineering Co (P) Ltd.]


7. (a) “Corporate Social Responsibility is to be considered as an investment and not as a

charity” – Elaborate the statement. [5]

(b) What is Whole Life-Cycle Costing Risk Management? Why does it fails to embrace WLCC?

[5]

(c) What is Corporate Governance? What is the need for Corporate Governance in India? [5]

(d) Mention the core elements of CSR Policy as per the CSR Voluntary Guidelines 2009. [5]

(e) Write short notes on:

(i) Corporate Governance in USA

(ii) Corporate Governance in Japan [2.5*2=5]

(f) “The concept of Memorandum of Understanding (MoU) has been designed to provide

flexibility and autonomy to CPSEs such that it facilitates them in pursuing the objectives and

purposes, for which the enterprises have been set up.”

In the light of the above statement, explain the concept of MoU in India. [5]

Answer 7(a):




community.


strategy, yet the concept still is believed to be strongly linked to philanthropy. There is a need to

bring about an attitudinal change in people about the concept.








the tasks.





But often these entities work in isolation without creating a synergy with the other departments of

the corporate. There is a need to understand that CSR is not only a pure management directive

but it is something that is central to the company and has to be embedded in the core values

and principles of the corporate.

Whatever corporates do within the purview of CSR has to be related to core business. It has to

utilise things at which corporates are good; it has to be something that takes advantage of the

core skills and competencies of the companies. It has to be a mandate of the entire


organisation.

Charity means the act of donating money, goods, time or effort to support a charitable cause in

regard to a defined objective. Charity can be equated with benevolence and charity for the

poor and needy. It can be any selfless giving towards any kind of social need that is not served,

underserved, or perceived as unserved or underserved. Charity can be by any individual or by a

corporate.

Corporate Social Responsibility is about how a company aligns their values to social causes by

including and collaborating with their investors, suppliers, employees, regulators and the society

as a whole. The investment in CSR may be on people centric issues and/or planet issues. A CSR

initiative of a corporate is not a selfless act of giving; companies derive long-term benefits fromthe CSR initiatives and it is this enlightened self interest which is driving the CSR initiatives in

companies.

Answer 7(b):

Whole life-cycle costing (WLCC) is rapidly becoming the standard method for the long-term cost

appraisal of buildings and civil infrastructure projects. With clients now demanding buildings that

demonstrate value for money over the long term, WLCC has become an essential tool for those

involved in the design, construction, operation and risk analysis of construction projects.

WLCC risk management is one of the important issues facing building assets executives today.

As spending on building assets rises, asset owners become increasingly worried about WLCC

optimisation throughout the life span of facilities; consequently, they become highly vulnerableto the risk of operational costs. Usually, when decision makers are faced with an investment

choice under uncertain conditions, their main concern is to avoid projects whose actual

economic outcome might be less favourable than what is acceptable, resulting in the risk of

missing out on potential investment opportunities.

Thus, the objective of WLCC risk management should be to assist decision makers in evaluating

whole life alternatives so that investment success is maximised. Usually traditional methods are

used to optimise this process. However, traditional approaches to risk management have failed

miserably because of their demand for mysterious statistical data that the end user does not

have (Koller 1999). The key to successful WLCC risk-process and risk modelling is to build a WLCC

framework that requires from the user nothing more than they presently can provide. This can be

a challenge that can be addressed through the use of a variety of techniques. That is why it is

important to use a combination of risk management techniques (depending on the stage ofassessment) for risk assessment in WLCC, ranging from simple deterministic approaches to

uncertainty assessment (e.g. sensitivity and break even analysis methods which are easy to use

and understand and require no additional methods of computation beyond the ones used in

LCC analysis), to very sophisticated methods based on probabilities, artificial intelligence (AI)

and a hybrid of both techniques.

The reasons why it fails to embrace WLCC are:

The lack of universal methods and standard formats for calculating whole life costs.





The difficulty in integration of operating and maintenance strategies at the design phase. The scale of the data collection exercise, data inconsistency. The requirement for an independently maintained database on performance and cost of

building components.

Answer 7(c):

Corporate governance is:

The system by which companies are directed and controlled - The Cadbury Report, 1992.

The process of supervision and control intended to ensure that the company‟s management

acts in accordance with the interests of shareholders - Parkinson, 1994.

Corporate Governance is the acceptance by management of the inalienable rights of

shareholders as the true owners of the corporation and of their own role as trustees on behalf

of the shareholders. It is about commitment to values, about ethical business conduct and

about making a distinction between personal and corporate funds in the management of a

company – Report of N.R.Narayana Murthy Committee on Corporate Governance

constituted by SEBI (2003).




Corporate Performance: Improved governance structures and processes help ensure quality

decision-making, encourage effective succession planning for senior management and

enhance the long-term prosperity of companies, independent of the type of company and

its sources of finance.

Enhanced Investor Trust: Investors consider Corporate Governance as important as financial

performance when evaluating companies for investment.

Combating Corruption: Companies that are transparent, and have sound system that provide

full disclosure of accounting and auditing procedures, allow transparency in all business

transactions, provide environment where corruption will certainly fade out. Better Access to Global Market: Good Corporate Governance systems attracts investment

from global investors, which subsequently leads to greater efficiencies in the financial sector.

Enhancing Enterprise Valuation: Improved management accountability and operational

transparency fulfill investors‟ expectations and confidence on management and

corporations, and return, increase the value of corporations.

Accountability: Investor relations‟ is essential part of good Corporate Governance. Investors

have directly/indirectly entrusted management of the company for creating enhanced

value for their investment.

Easy Finance from Institutions: Evidence indicates that well-governed companies receive

higher market valuations.

Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures

efficient risk mitigation system in place.

Answer 7(d):

The CSR Policy should normally cover following core elements:

1. Care for all Stakeholders

The companies should respect the interests of, and be responsive towards all stakeholders,

including shareholders, employees, customers, suppliers, project affected people, society at

large etc. and create value for all of them. They should develop mechanism to actively





engage with all stakeholders, inform them of inherent risks and mitigate them where they

occur.

2. Ethical functioning

Their governance systems should be underpinned by Ethics, Transparency and

Accountability. They should not engage in business practices that are abusive, unfair,

corrupt or anti-competitive.

3. Respect for Workers’ Rights and Welfare

Companies should provide a workplace environment that is safe, hygienic and humane

and which upholds the dignity of employees. They should provide all employees with

access to training and development of necessary skills for career advancement, on an

equal and non-discriminatory basis. They should uphold the freedom of association and the

effective recognition of the right to collective bargaining of labour, have an effective

grievance redressal system, should not employ child or forced labour and provide and

maintain equality of opportunities without any discrimination on any grounds in recruitment

and during employment.

4. Respect for Human Rights

Companies should respect human rights for all and avoid complicity with human rightsabuses by them or by third party.

5. Respect for Environment

Companies should take measures to check and prevent pollution; recycle, manage and

reduce waste, should manage natural resources in a sustainable manner and ensure

optimal use of resources like land and water, should proactively respond to the challenges

of climate change by adopting cleaner production methods, promoting efficient use of

energy and environment friendly technologies.

6. Activities for Social and Inclusive Development

Depending upon their core competency and business interest, companies should

undertake activities for economic and social development of communities andgeographical areas, particularly in the vicinity of their operations. These could include:

education, skill building for livelihood of people, health, cultural and social welfare etc.,

particularly targeting at disadvantaged sections of society.

Answer 7(e):

(i) CORPORATE GOVERNANCE IN USA

Corporate governance in the U.S. has changed dramatically since 1980. As a number of

business and finance scholars have pointed out, the corporate governance structures in

place before the 1980s gave the managers of large public U.S. corporations little reason to

make shareholder interests their primary focus. Before 1980, corporate managements

tended to think of themselves as representing not the shareholders, but rather “the

corporation.” In this view, the goal of the firm was not to maximize shareholder wealth, but toensure the growth (or at least the stability) of the enterprise by “balancing” the claims of all

important corporate “stakeholders”-- employees, suppliers, and local communities, as well as

shareholders.

The external governance mechanisms available to dissatisfied shareholders were seldom

used. Raiders and hostile takeovers were relatively uncommon. Proxy fights were rare and

didn‟t have much chance of succeeding. And corporate boards tended to be cozy with

and dominated by management, making board oversight weak.





Corporate Governance developments in USA:

1977 – The Foreign Corrupt Practices Act

1979 – US Securities Exchange Commission

1985 – Treadway Commission

1992 – COSO issued Internal Control – Integrated Framework

2002 – Sarbanes – Oxley Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010 Updates to its U.S. Corporate Governance Policy (the “2013 Updates”)

(ii) CORPORATE GOVERNANCE IN JAPAN

Japan‟s economy developed very rapidly during the second half of the twentieth century.

Particularly during the period 1985-89, there was a „bubble economy‟, characterized by a sharp

increase in share prices and the value of land; the early 1990s saw the bubble burst as share

prices fell and land was devalued, as well as shareholders and landowners finding themselves

losing vast fortunes, banks found that they had severe problems too. The Japanese government

wished to restore confidence in the Japanese economy and in the stock market, and to attract

foreign direct investment to help regenerate growth in companies. Improved corporate

governance was seen as a very necessary step in this process.

Japan‟s Corporate Governance System is often likened to that of Germany because banks can

play an influential role in companies in both countries. However, there are fundamental

differences between the systems, driven partly by culture and partly by the Japanese

shareholding structure with the influence of the keiretsu (broadly, associations of companies).

Charkham (1994) sums up three main concepts that affect Japanese attitudes towards

Corporate Governance: obligation, family, and consensus.

The Japan Corporate Governance Committee published its revised Corporate Governance

Code in 2001. The code had six chapters, which contained a total of 14 principles.

Summary of key characteristics influencing Japanese Corporate Governance


Main business form

Predominant ownership structure

Legal system

Board structure

Important aspect

Public limited company

Keiretsu; but institutional investor ownership is increasing

Civil Law

Dual

Influence of keiretsu

In 2004, the Tokyo Stock Exchange issued the Principles of Corporate Governance for Listed

Companies. Charkham (2005) discusses the various changes that have taken place in the

context of Corporate Governance in Japan and states:

The important part the banks played has greatly diminished. In its place there are now betterstructured boards, more effective company auditors, and occasionally more active

shareholders, an increase of interest, and, where appropriate, action on their part, might restore

the balance that the banks‟ withdrawal from the scene has impaired.

In 2008, the Asian Corporate Governance Association (ACGA) published its „White Paper on

Corporate Governance in Japan‟. It states, while a number of leading companies in Japan

have made strides in corporate governance in recent years, we submit that the system of

governance in most listed companies is not meeting the needs of stakeholders or the nation at

large in three ways:





By not providing for adequate supervision of corporate strategy;

By protecting management from the discipline of the market, thus rendering the

development of a healthy and efficient market in corporate control all but impossible;

By failing to provide the returns that are vitally necessary to protect Japan‟s social safety net-

its pension system.

It then advocates six areas for improvement: shareholders acting as owners; utilizing capital

efficiently; independent supervision of management; pre-emption rights; poison pills and

takeover defences; shareholder meetings and voting.

Answer 7(f):

The Memorandum of Understanding (MoU) System in India was introduced in the year 1986, after

the recommendations of the Arjun Sengupta Committee Report (1984). Twenty six years after its

inception, the MoU system has evolved and is being strengthened, through regular reviews, to

become a management tool that helps in performance evaluation as well as performance

enhancement of CPSEs in the country.

The concept of Memorandum of Understanding (MoU) has been designed to provide flexibility

and autonomy to Central Public Sector Enterprises (CPSEs) such that it facilitates them inpursuing the objectives and purposes, for which the enterprises have been set up.

Accountability has to be understood in a wider sense by associating it with answerability for the

performance of the tasks and the achievement of targets negotiated mutually between the

Government and the CPSE. The rationale for MoU could be derived from principal/agent theory.

The principal (administrative ministry on behalf of real owners - the people) can only observe

outcomes and cannot measure accurately the efforts expended by the agent (CPSE

managers). Also the Principal can only, to a limited extent, distinguish the effects of influences

from other factors, which affect the performance. Therefore extensive intervention by

administrators, who might not be too knowledgeable about the nature of problems confronting

the enterprises, not only impacts productivity and profitability but also makes it impossible to fix

accountability for non-achievement of targets.

A negotiated incentive contract (MoU), hence, is viewed as a device to reveal information andmotivate managers to exert effort. Notwithstanding the spectacular performance of CPSEs in

several areas, there has been a sense of disillusionment with some aspects of CPSE performance

such as low profitability and lack of competitiveness. The extensive regulation of CPSEs by

government had stifled the initiative and growth of public sector. The Economic Administration

Reforms Commission (Chairman: L. K. Jha) had dwelt on issue of autonomy and accountability.

The Commission had recommended a careful re-consideration of extant concepts and

instrumentalities relating to the accountability of public enterprises with a view to ensuring (a)

that they do not erode the autonomy of public enterprises and thus hampers the very objectives

and purposes for which these enterprises have been set up and given corporate shape and for

which they are to be accountable; and (b) accountability has to be secured in the wider sense

of answerability for the performance of tasks and achievements of results. The adoption of MoU

system in India could be seen as an attempt to operationalize this very vital recommendation.

In the backdrop of the dynamic external environment, “world- wide competition” and

globalization, it is critical that the MoU system is strengthened such that it facilitates the CPSEs in

becoming economically viable through efficient management and control. Hence, the MoU

system aims at offering autonomy to CPSEs and is designed such that it can aid in the

assessment of the extent to which mutually agreed objectives (Mandal, 2012) are achieved. This

section of the report traces the evolution of the MoU system through various committee reports

and highlights the major observations, along with the actions taken thereafter. This would act as





an indicator of the developments that have happened in the MoU system in India and, through

the study of extant literature, would also highlight the areas of concern raised after each study.











PAPER 13 – Corporate Laws & Compliance

SECTION A

[Answer to Q.No.1 is compulsory and attempt any 4 from the rest]

1. (a) A government company holds 49% of the subscribed share capital in Smart & Co. Ltd. Mr.

R has been appointed as the auditor at the Annual General Meeting of Smart & Co. Ltd.

through an ordinary resolution. Certain members of the company object to this appointment

on the ground that the appointment of auditors is violative of the provisions of the Companies

Act, 1956. Examine the legal position with reference to the relevant provisions of the

Companies Act, 1956. [5]

(b) ABC Company Ltd. in its first general meeting appointed 6 directors whose period of

office is liable to be determined by rotation. Briefly explain the procedure and rules

regarding retirement of these directors. Will it make any difference, if ABC Company Ltd.

does not carry on business for profit? [5]

(c) Amar Textiles Ltd. is a company engaged in manufacture of fabrics. The Company has

investments in shares of other bodies corporate including shares in Amar Cotton Co. Ltd. and

it has also advanced loans to other bodies corporate. The aggregate of all the investments

made and loans granted by Amar Textiles Ltd. exceeds 60% of its paid up share capital and

free reserves and also exceeds 100% of its free reserves. In course of its business

requirements, Amar textiles Ltd. has obtained a term loan from Industrial Development Bank

of India (a Public Financial Institution within the meaning of section 4A of the companies Act,

1956) and the same is still subsisting. Now the company wants to increase its holding from

70% to 80% of the equity share capital in Amar Cotton Co. Ltd. by purchase of additional 10%

shares from other existing shareholders.

State the legal requirements to be complied with by Amar Textiles Ltd. under the provisions ofthe companies Act, 1956 to give effect to the above proposal.

Will your answer be different if Amar Textiles Ltd. would have defaulted in payment of

matured fixed deposits accepted by it from the public? [5]

Answer 1(a):

The given problem relates to Section 224A of the Companies Act, 1956.

The legal position

1. Requirement of special resolution for appointment or reappointment of auditors

The appointment or reappointment of an auditor shall be made by a special resolution if not less

than 25% of the subscribed share capital, whether singly or in any combination is held, by:

(i) A Public Financial Institution;

(ii) A Government Company;

(iii) The Central Government;

(iv) Any State Government;





(v) Any financial or other institution established by any Provincial or State Act in which a State

Government holds not less than 51% of the subscribed share capital;

(vi) A nationalised bank;

(vii) An insurance company carrying on general insurance business.

2. Consequences of failure to pass the special resolution

Where a company to which this section applies omits or fails to pass a special resolution it shall

be deemed that no auditor or auditors had been appointed by the company and thereupon

the company shall, within 7 days, give notice of that fact to the Central Government and the

Central Government may appoint a person to fill the vacancy.

The given case

A Government Company holds 49% of the subscribed share capital in Smart & Co. Ltd.

Therefore, the provisions of section 224A must be complied with for appointing the auditors.

However, Mr. R has been appointed as the auditor at the Annual General Meeting by passing

an ordinary resolution.

Conclusion

The appointment of Mr. R as an auditor in the annual general meeting is violative of the

provisions of section 224A. This is so because a Government Company holds more than 25% of

the subscribed share capital of Smart & Co. Ltd., and therefore, the appointment of auditors

requires a special resolution. Accordingly, the contention of the shareholders that appointment

of auditors is violative of the certain provisions of the Companies Act, 1956 (viz. Section 224A) is

correct, and so it shall be deemed that no auditors were appointed by Smart & Co. Ltd.

In this case, Smart & Co. Ltd. is required to intimate to the Central Government the fact that no

auditors were appointed in the Annual General Meeting. Such intimation shall be given within 7days of conclusion of the Annual General Meeting. Thereafter, the Central Government shall fill

the vacancy.

Answer 1(b):

Not less than 2/3rd of total number of directors shall be the directors whose period of office is

liable to determination by retirement by rotation (any fraction contained in that 2/3rd shall be

rounded off as 1). Such directors are referred to as rotational directors. However, the articles of a

company may provide for greater number of rotational directors. Articles may even provide that

all the directors shall be rotational directors (Section 255).

As per section 256, at the first annual general meeting and every subsequent annual general

meeting, 1/3rd [or nearest to 1/3rd) of directors liable to retire by rotation (determined as per

section 255) shall retire from the office. The directors liable to retire by rotation shall be those who

have been longest in the office. In case, two or more directors were appointed on the same

day, the directors liable to retire shall be determined by an agreement between them. In the

absence of any such agreement, their names shall be determined by lots.





In the given case, it is given that the first general meeting has appointed 6 directors whose

period of office is liable to be determined by rotation. It means that all the 6 directors appointed

in the first general meeting shall be the rotational directors. Therefore, 2 directors (1/3 rd of 6) shall

retire at the ensuing annual general meeting. These directors shall be eligible for reappointment.

A separate resolution shall be moved for reappointment of both the directors (Section 263).

In case ABC Company Limited does not carry on business for profit, section 263A will get

attracted. As per section 263A, nothing contained in sections 177, 255, 256 and 263 shall affect

any provision in the articles of a company for the election by ballot of all its directors at each

annual general meeting if such company does not carry on business for profit or prohibits the

payment of a dividend to its members. Accordingly, ABC Company Limited may elect its

directors by ballot.

Answer 1(c):

As per section 372A (8), any loans, investments etc. made by a holding company in its wholly

owned subsidiary are outside the preview of Section 372A. However, Amar Cotton Co. Ltd. is not

a wholly owned subsidiary of Amar Textiles Ltd. and hence investment in Amar Cotton Co. Ltd. isnot covered by the exemption under section 372 (8).

The aggregate of loans and investments already made by Amar Textiles Ltd. exceeds the two

limits of 60% and 100% specified under section 372A. Therefore, the company can make new

inter-corporate investments only by passing a special resolution.

The proposed investment can be made as follows:

(a) A resolution shall be passed at a Board meeting with the consent of all the directors present.

(b) A special resolution shall be passed in the general meeting. The notice of special resolution

must indicate clearly the specific limits, the particulars of the body corporate in which the

investment is proposed to be made, the purpose of the investment, specific source of

funding and other similar details.

(c) IDBI is a Public Financial Institution within the meaning of section 4A. Since, the aggregate

investments exceed the limit of 60%, prior approval of IDBI shall be obtained.

(d) The company shall enter the prescribed particulars of the investment in the register

maintained for this purpose within 7 days of making the investment.

(e) The company shall ensure that no default in compliance with section 58A (relating to public

deposits) is subsisting.

If the company has defaulted in repayment of public deposits, the company cannot make any

investments even if special resolution and resolution of Board is passed. The investments can be

made only after the default has been made good.

2. (a) Mr. Raj, a director of PQR Ltd., submitted his resignation from the post of director to the

Board of directors on 30th June, 2010 and obtained a receipt therefore on the same day. The

Board of directors of PQR Ltd. neither accepted the resignation nor did it file Form No. 32 with

the registrar of companies. You are required to state whether Mr. Raj ceases to be the director

of PQR Ltd. and if yes, since when? [5]





(b) The Directors of Infotech Consultants Ltd, registered in Calcutta, propose to hold the next

Board Meeting in May 2008. They seek your advice in respect of the following matters –

(i) Can the Board Meeting be held in Chennai, when all the Directors of the Company reside

at Calcutta?

(ii) Can the Board meeting be called on a Public Holiday and that too after business hours asmajority of the Directors of the Company have gone to Chennai on vacation?

(iii) Is it necessary that the notice of the Board meeting should specify the nature of business

to be transacted? [3]

(c) Modern Technologies Limited, an Unlisted Company, proposed to finance its expansion

programme by issuing Equity Shares to public. The company has been making good profits

every year from the commencement of business on 1st April 2003, but it has not declared

dividend so far. The Company was started with initial Equity Share Capital of 3 Crores in Jan

2003. The Paid-up Equity Share Capital and Free Reserves as per the latest Audited Balance

Sheet as at 31st March, 2010 amounted to 5 Crores and 10 Crores respectively.

State the conditions which are required to be fulfilled by an Unlisted Company under the SEBI

(ICDR) Regulations, 2009 in order to be eligible to make an IPO and also examine whether

Modern Technologies Limited is eligible to make the proposed Public issue. [4]

(d) Tomato Ltd., a vehicles manufacturing company in India has received an order from a

transport company in Italy for supply of 100 Trucks on lease. You are required to state, how

the said Tomato Ltd. can accept such an order. [3]

Answer 2(a):

The resignation takes effect immediately without any need for its acceptance where the articlesdo not contain any provision relating to resignation of directors or where the articles allow the

director to resign at any time. However, a managing director cannot resign by merely sending a

resignation. His resignation becomes effective only when the company accepts the resignation

and relieves him from the office.

The given case is discussed as follows:

It is the duty of the company to file with the registrar a statement of changes made in the

particulars of directors, manager and secretary; a director is not required to submit his

resignation to the registrar.

Further, filing of Form No. 32 is only a consequential act; it is not an act to be complied with in

order to make a resignation valid. Therefore, the resignation of a director shall be validnotwithstanding the fact that it has not been filed with the registrar by the company and the

director so resigning.

The resignation of Mr. Raj shall take effect immediately (i.e., w.e.f. 30.06.2010), without requiring

any acceptance by the Board in the following cases:

(a) If the articles of PQR Ltd. do not contain any provision relating to resignation of directors.

(b) If the articles of PQR Ltd. give a right to the directors to resign at any time.





However, in the following cases, the resignation of Mr. Raj shall take effect only on acceptance

(and then Mr. Raj shall cease to be a director):

(a) If Mr. Raj is managing director or whole time director of the company.

(b) If the articles of the company state that the resignation of a director shall be effective only

when accepted by the Board.(c) If the letter of resignation submitted by Mr. Raj requires acceptance.

Answer 2(b):

1. Place: Board Meeting need not be held only at the “Registered Office”. It can be held at

any convenient place, different from the Registered Office also. Also Directors can hold a

Board Meeting in a foreign Country, if circumstances justify it.

2. Time: Sec. 166 requires that AGM shall be held during business hours, and on a day this is not

a Public Holiday. There is no similar provision for Board Meetings, and hence Board Meetings

may also be held on Public Holidays or after business hours. So, Board Meeting can also be

held on a Public holidays unless AOA provides otherwise.

3. Agenda: Law does not require an agenda for a Board Meeting, and any business

whatsoever can be transacted at the Board Meeting. The Board can transact business even

without a formal agenda.

Answer 2(c):

Conditions:

1. Net Tangible Assets of at least ` 3 Crores in each of the preceding 3 full years (of 12 months

each), of which not more than 50% is held in monetary assets.2. Track record of Distributable Profits for at least 3 out of immediately preceding 5 years.

3. Net Worth of atleast ` 1 Crore in each of the preceding 3 full years.

4. Where the Company has changed its name within the last one year, at least 50% of the

revenue for the preceding 1 full year is earned by the Company from the activity suggested

by the new name.

5. Aggregate of the proposed issue and all previous issues made in the same financial year in

terms of size (i.e., offer through offer document + Firm Allotment + Promoters Contribution

through the Offer Document), does not exceed 5 times its Pre-Issue Net Worth as per the

audited Balance Sheet of the last financial year.

Conclusion:Since all the conditions are satisfied, the Company is eligible to make a public Issue of Shares to

a maximum of 5 times of its pre-issue Net worth as per latest audited balance sheet. i.e., ` 5 x [ ` 5

Crores Capital + ` 10 Crores Reserves] = ` 75 Crores.

Answer 2(d):

Taking any goods out of India to a place outside India amounts to 'export' [Section 2(I)]. As per

Regulation 14 of Foreign Exchange Management (Export of Goods and Services) Regulations,





In view of the above discussion, it can be concluded since the Board of RP Ltd. has already

declared interim dividend, it cannot be revoked.

Answer 3(b):

1. Eligibility condition: The following Members shall have the right to apply to Tribunal u/s 397 &

398:

COMPANY ELIGIBLE MEMBERS

(a) Having Share Capital Least of the following:

Not less than 100 Members of the Company, or

Not less than 1/10th of the total number of its

Members, or

Any Member(s) holding not less than 1/10th of

the Issued Share Capital.

Note: Members are eligible to apply only if all

moneys / calls due on their Shares have been paid.

(b)

Not having Share Capital Not less than 1/5th of the total number of its

Members.

2. Analysis: Preference Shareholders are also “Members”. In the above case, the eligible

applicant(s) are least of the following –

(a) Minimum Number of Members = 100 Members.

(b) Total Number of Members = 600 + 5,000 = 5,600.

1/10th thereon = 560 Members.

(c) Total Issued Capital = ` 10,00,000.

Value of shares held by the Applicants = (500 Equity Shares x ` 10) + (400 Members x 1

Preference Share x ` 10) = ` 90,000.(Minimum required = ` 1,00,000)

3. Conclusion: Since the application has been made by 450 Members, least of the above (not

less than 100 Members) condition is satisfied. Hence, the application is valid and

maintainable. Subsequent withdrawal of consent does not affect the maintainability of the

petition.

Answer 3(c):

Section 529A(1) provides that in the winding-up of a company, the following dues shall be paid

in priority to all other debts irrespective of anything contained in any other provision of this Act or

any other law for the time being in force:

(a) Workmen‟s dues; and

(b) Debts due to secured creditors to the extent such debts rank under clause (c) of the proviso

to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other

debts.





The debts listed under section 529A shall be paid in full unless the assets are insufficient to meet

them, in which case they shall abate in equal proportions.

The order of payment of liabilities adopted by the liquidator shall be as under:

1. Overriding preferential payments under section 529A (i.e., workmen's dues and debts due to

secured creditors).

2. Costs and expenses of winding up.

3. Preferential payments under section 530.

4. Creditors secured by a floating charge.

5. Unsecured creditors.

In the present case, ` 80 lakhs have been realised by the sale of all the assets of the company.

The amount due to secured creditors is ` 75 lakhs and the workmen's dues are ` 25 lakhs.

Overriding preferential payments (workmen's dues and secured creditors) amount to ` 100 lakhs.

Therefore, the workmen's dues and dues payable to secured creditors shall abate in equal

proportions, i.e., payments to workmen and secured creditors shall be made in the proportion ofamount owed by the company to them (i.e., in the ratio of 75:25). Accordingly, the workers shall

be paid ` 20 lakhs and the secured creditors shall be paid ` 50 lakhs. No payment shall be made

to the Government authorities for income tax dues, sales tax dues, unsecured loans payable to

directors or to trade creditors who supplied raw material.

4. (a) Joe Ltd. was incorporated in London with a paid up capital of 20 million pounds. Mr. Y an

Indian Citizen holds 25% of the Paid Up Capital. X Ltd., a Company registered in India holds

30% of the Paid Up Capital of Joe Ltd. Joe Ltd. has recently established a Share Transfer

Office at New Delhi. The Company seeks your advice as to what formalities it should observe

as a Foreign Company. State briefly the requirements relating to filing of accounts with the

ROC by the Foreign Company in respect of its global business as well as Indian business. [7]

(b) The promoters of a Company to be registered under the Companies Act, 1956 having its

main object of carrying on the business as manufacture and stockiest of Iron and Steel,

proposes that the name of the Company is to be „Abha Steel Bank Limited‟. You are required

to state whether the said company with the proposed name can be registered. [3]

(c) On 24th January 2010, the Board of Directors of M/s. Bold Limited appointed Mr. A as the

company's Sole Selling Agent for a period of 5 years. At the first general meeting of the

company, held after the Board Meeting, on 29 th September 2010, the above appointment

was disapproved. Referring to the provisions of the Companies Act, 1956:

(i) State the date from which the above appointment comes to an end.(ii) What would be your answer in case a clause in the above appointment that "the

appointment must be made by the company in General Meeting" was not inserted as a

condition? [5]





Answer 4(b):

Section 7 of the Banking Regulation Act, 1949 states that:

1. Use of words Bank, Banker or Banking: No Company other than a banking Company shall

use as part of its name or in connection with its business any of the words “Bank”, “Banker” or

“Banking” and no Company shall carry on the business of banking in India unless it uses as

part of its name at least one of such words.

2. No firm, individual or group of individuals shall, for the purpose of carrying on any business,

use as part of its or his name any of the words “bank”, “banking” or “banking Company”.

3. Not Applicable: Section 7 not applicable under the following circumstances:

(a) A Subsidiary of a banking Company formed for one or more of the purposes mentioned

in u/s 19(1), whose name indicates that it is a subsidiary of that banking Company;

(b) Any association of Banks formed formed for the protection of their mutual interests and

registered u/s 25 of the Companies Act.

Therefore, Company cannot have the name “ABC Steel Bank”.

Answer 4(c):

The legal position

(a) Where the Board of directors of a company appoints a Sole Selling Agent, such appointment

shall be subject to the condition that the appointment shall cease to be valid if it is not

approved by the shareholders in the first general meeting held after the date of the

appointment.

(b) If the shareholders in the general meeting disapprove the appointment, the appointment

shall cease to be valid with effect from the date of that general meeting.

(c) The provisions regarding incorporation of this condition are mandatory. If there is no such

condition, the agreement will be void ab initio even if the appointment is approved by the

general meeting [Arantee Manufacturing Corporation v Bright Bolts Pvt. Ltd. AIR (1967) 37

Comp Cas 758; Department Circular No. 12(11)-CL- VI/68, dated 6.11.1968].

The given case

(i) Mr. A has been appointed by the Board of Directors on 24th January, 2010. At the first general

meeting held after the date of appointment of Mr. A, the appointment of Mr. A has been

disapproved. Therefore, the appointment of Mr. A comes to an end with effect from the

date of the first general meeting, viz. 29 th September, 2010.

(ii) In case the appointment of Mr. A had been made without any condition regarding

approval of his appointment in the first general meeting, the appointment of Mr. A would

have been void ab initio. In such a case, the question of cessation of office does not arise at

all, since the appointment is altogether void.

5. (a) A company made a profit of 500 lakh during the financial year 2012 – 13. The Board of

directors passed a resolution making a donation of 100 lakh to Gandhi National Memorial

Fund. Discuss the validity of the decision of the directors. [4]





(b) What are the qualifications to be appointed as members of Central Commission as per

The Indian Electricity Act, 2003? Also state the functions of the Central Commission.[3+4=7]

(c) The association of Truck Operators of India by agreement insisted that members of the

association shall not deal with non-members in transportation of goods. The association

claims that this agreement is entered for the welfare of trade and not for any other purpose.Would this agreement be under the purview of the Act? Will the answer be different if the

association attempts to control the provisioning of services rendered by its members? [4]

Answer 5(a):

As per section 293B, a company is empowered to contribute such amount as it thinks fit to:

the National Defence Fund; or

any other fund approved by the Central Government for the purpose of National Defence.

Gandhi National Memorial Fund is not an approved fund for the purpose of National Defence.

Therefore, donation to this fund can be made only in accordance with the requirements ofsection 293(1)(e).

As per section 293(1)(e), prior consent of the shareholders in general meeting is required for

making a charitable contribution if the amount contributed in a financial year exceeds:

(a) ` 50,000; or

(b) 5% of average net profits (as determined under sections 349 and 350) during 3 immediately

preceding financial years, whichever is greater.

In the given case, figures of net profit for only one year have been given. Therefore, it has been

assumed that company made a profit of ` 500 lakhs in each of the 3 financial years immediately

preceding the date of contribution, and so the average profits comes to ` 500 lakhs. Since, thecontribution to Gandhi National Memorial Fund of ` 100 lakhs exceeds the limits specified in the

section (i.e. ` 50,000 or ` 25 lakhs, being 5% of 500 lakhs, whichever is higher), the contribution

requires the consent of shareholders in the general meeting. Since, the Board has passed a

resolution without the consent of general meeting, such resolution is not valid.

Answer 5(b):

Qualification for appointment of Members of Central Commission [Section 77]:

1. The Chairperson and the Members of the Central Commission shall be persons having

adequate knowledge of, or experience in, or shown capacity in, dealing with, problems

relating to engineering, law, economics, commerce, finance or, management and shall beappointed in the following manner, namely:

(a) one person having qualifications and experience in the field of engineering with

specialisation in generation, transmission or distribution of electricity;

(b) one person having qualifications and experience in the field of finance;

(c) two persons having qualifications and experience in the field of economics, commerce,

law or management:





Provided that not more than one Member shall be appointed under the same category

under clause (c).

2. Notwithstanding anything contained in sub-section (1), the Central Government may

appoint any person as the Chairperson from amongst persons who is, or has been, a Judge

of the Supreme Court or the Chief Justice of a High Court:Provided that no appointment under this sub-section shall be made except after

consultation with the Chief Justice of India.

3. The Chairperson or any other Member of the Central Commission shall not hold any other

office.

4. The Chairperson shall be the Chief Executive of the Central Commission.

Functions of Central Commission [Section 79]:

1. The Central Commission shall discharge the following functions, namely:

(a)

to regulate the tariff of generating companies owned or controlled by the Central

Government;

(b) to regulate the tariff of generating companies other than those owned or controlled by

the Central Government specified in clause (a), if such generating companies enter into

or otherwise have a composite scheme for generation and sale of electricity in more

than one State;

(c) to regulate the inter-State transmission of electricity;

(d) to determine tariff for inter-State transmission of electricity;

(e) to issue licenses to persons to function as transmission licensee and electricity trader with

respect to their inter-State operations;

(f) to adjudicate upon disputes involving generating companies or transmission licensee in

regard to matters connected with clauses (a) to (d) above and to refer any dispute for

arbitration;

(g) to levy fees for the purposes of this Act;

(h) to specify Grid Code having regard to Grid Standards;

(i) to specify and enforce the standards with respect to quality, continuity and reliability of

service by licensees;

(j) to fix the trading margin in the inter-State trading of electricity, if considered, necessary;

(k) to discharge such other functions as may be assigned under this Act.

2. The Central Commission shall advise the Central Government on all or any of the following

matters, namely:(a) formulation of National electricity Policy and tariff policy;

(b) promotion of competition, efficiency and economy in activities of the electricity industry;

(c) promotion of investment in electricity industry;

(d) any other matter referred to the Central Commission by that Government.

3. The Central Commission shall ensure transparency while exercising its powers and

discharging its functions.





4. In discharge of its functions, the Central Commission shall be guided by the National

Electricity Policy, National Electricity Plan and Tariff Policy published under section 3.

Answer 5(c):

Horizontal Anti-Competitive Agreements [Sec. 3(3)]:

Any agreement entered into between Enterprises or Association of Enterprises, or Person or

Association of Persons, or between any Person and Enterprise or practice carried on, or decision

taken by, any Association of Enterprises or Association of Persons, including Cartels, engaged in

identical or similar trade of goods or provision of services which:

(a) directly or indirectly determines purchase or sale prices,

(b) limits or controls production, supply, markets, technical development, investment or provision

of services,

(c) shares the market or source of production or provision of services by way of allocation of

geographical area of market, or type of goods or services, or number of customers in themarket or any other similar way,

(d) directly or indirectly results in bid rigging or collusive bidding,

shall be presumed to have an appreciable adverse effect on competition.

Note:

Exception: An agreement entered into by way of Joint Ventures and which increases the

efficiency in production, supply, distribution, storage, acquisition, or control of goods or

provision of services, shall not be presumed anti-competitive.

“Bid Rigging” means any agreement, between enterprises or persons engaged in identical

or similar production or trading of goods or provision of services, which has the effect of

eliminating or reducing competition for bids or adversely affecting or manipulating theprocess of bidding.

Therefore, in the given case,

Agreement is horizontal anti-competitive, hence void and control or provisioning of services

is also void, sec. 3(3)(b).

6. (a) Gayatri, a resident in India is likely to inherit an immovable property in USA from her

father, who is a resident outside India. Advise Gayatri about the restrictions, if any, in this

regard. Will your answer be different if she is likely to inherit foreign securities? [4]

(b) XYZ Automobiles Limited intends to make a public issue of 2,00,00,000 equity shares of

10 each through the 100% book building process indicating a price band.

You are required to answer the following with reference to the SEBI (Disclosure and Investor

Protection) guidelines:

(i) What is the price band that can be indicated in the red herring prospectus, if the floor

price is proposed to be fixed at 300 per equity share?

(ii) What are the restrictions, if the company wants to revise the price band during the

bidding period?





(iii) How the shares are to be allocated to different categories of investors like Qualified

Institutional Buyers, Retail Individual Investors, etc.? [8]

(c) ABC Producer Company Limited was incorporated on 1 st April, 2008. At present it has got

200 members and its Board consists of 10 directors. The Board of directors of the company

seeks your advice on the following proposals:Appointment of one expert director and one additional director by the Board for a period of

four years. Advise the Board of directors explaining the relevant provisions of the Companies

Act, 1956. [3]

Answer 6(a):

Holding etc. of Currency, Security and Property [Sec. 6(4) & 6(5)]:

(a) A person resident in India may hold, own, transfer or invest in foreign currency, foreign

security or any immovable property situated outside India, if such currency, security or

property was:

Acquired, held or owned by such person when he was resident outside India, or Inherited from a person who was resident outside India.

(b) A person resident outside India may hold, own, transfer or invest in Indian currency, security

or any immovable property situated in India, if such currency, security or property was:

Acquired, held or owned by such person when he was resident in India, or

Inherited from a person who was resident in India.

Note: However, Current Income on such assets like rent, dividend, interest etc. have to be

repatriated to India within the prescribed time limit as specified in Regulation 5(i) of FEM

(Realisation, Repatriation and Surrender of Foreign Exchange), 2000.

There are no restrictions with regard to inheritance of either immovable property situated outsideIndia or of foreign security, from a person resident outside India. Further, such inheritance does

not require approval of RBI. Hence, Gayatri can hold the immovable property/foreign security,

after such inheritance.

Answer 6(b):

The provisions relating to book building are contained in Part A of Schedule XI to the Securities

and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.

The relevant Clauses of Schedule XI are discussed below:

As per Sub-Clause (b) of Clause (8), where the issuer decides to opt for price band instead of

floor price, the issuer shall also ensure compliance with the following conditions:

(i) The cap of the price band should not be more than 20%, of the floor of the band; i.e. cap of

the price band shall be less than or equal to 120% of the floor of the price band;

(ii) The price band can be revised during the bidding period in which case the maximum

revision on either side shall not exceed 20% i.e. floor of price band can move up or down to

the extent of 20% of floor of the price band disclosed in the red herring prospectus and the

cap of the revised price band will be fixed in accordance with clause (i) above;





(iii) Any revision in the price band shall be widely disseminated by informing the stock

exchanges, by issuing press release and also indicating the change on the relevant website

and the terminals of the syndicate members.

(iv) In case the price band is revised, the bidding period shall be extended as per provisions of

sub-regulation (2) of regulation 46.

Applying the provisions of the said Clause to the given case:

(i) The price band that can be indicated in the red herring prospectus, shall be ` 300 to ` 360.

(ii) The price band can be revised during the bidding period. However, the maximum revision

on either side shall not exceed 20% of the floor price. Thus, floor of the price band can move

up or down to the extent of 20% of the floor price disclosed in the red herring prospectus,

and the cap of the price band shall not be more than 20% of the revised floor price.

Accordingly, in the given case, the revised price band can be ` 240 to ` 288 on the lower

side, or ` 360 to ` 432 on the upper side.

Any revision in the price band shall be widely disseminated by informing the stock exchange,

by issuing press release and also indicating the change on the relevant website and

terminals of the syndicate members. Also, the bidding period shall be extended for a further

period of 3 days, subject to the total bidding period not exceeding 13 days.

(iii) As per Regulation 43 of Securities and Exchange Board of India (Issue of Capital and

Disclosure Requirements) Regulations, 2009, in an issue made through the book building

process, the allocation in the net offer to public category shall be made as follows:

(a) not less than 35% to retail individual investors;

(b) not less than 15% to non-institutional investors;

(c) not more than 50% to qualified institutional buyers, 5% of which shall be allocated to

mutual funds.

Answer 6(c):

As per section 581P, the Board may co-opt one or more expert directors or an additional

director not exceeding 1/5th of the total number of directors. Further, every person shall hold the

office of a director for a period not less than 1 year but not exceeding 5 years, as may be

specified in the articles. The total number of directors in the present case is 10. The number of

expert directors and additional directors shall not exceed 2. Therefore, it is permissible for the

Board to appoint one expert director and one additional director for a period of four years.


7. (a) What is Corporate Citizenship? Is this fundamentally different from Corporate Social

Responsibility? [5]

(b) Discuss the OECD Guidelines for Corporate Governance of State-owned Enterprises.[5]





(c) “The development of Corporate Governance in the UK was initially the findings of a trilogy

of codes.” Explain the same in brief. [5]

(d) “Family ownership of firms is the prevalent form of ownership in many countries around

the globe.”

In view of the above statement, explain the concept and need of Ownership structures.[5]


(i) Whole Life Cycle Costing

(ii) Golden Parachute Proposals [2.5*2=5]

(f) What are the pros and cons in adopting Corporate Social Responsibility? [5]

Answer 7(a):

A new terminology that has been gaining grounds in the business community today is Corporate

Citizenship. Corporate citizenship is defined by the Boston College Centre for Corporate

Citizenship, as the business strategy that shapes the values underpinning a company‟s mission

and the choices made each day by its executives, managers and employees as they engage

with society.


citizenship are:

(i) Minimise harm,

(ii) Maximise benefit,

(iii) Be accountable and responsive to key stakeholders and

(iv)

Support strong financial results.

Corporate citizenship, sometimes called corporate responsibility, can be defined as the ways in

which a company‟s strategies and operating practices affect its stakeholders, the natural


citizenship encompasses the concept of corporate social responsibility (CSR), which involves

companies‟ explicit and mainly discretionary efforts to improve society in some way, but is also

directly linked to the company‟s business model in that it requires companies to pay attention to

all their impacts on stakeholders, nature, and society. Corporate citizenship is, in this definition,

integrally linked to the social, ecological, political, and economic impacts that derive from the

company‟s business model; how the company actually does business in the societies where it

operates; and how it handles its responsibilities to stakeholders and the natural environment.










Corporate Social Responsibility is not a fad or a passing trend, it is a business imperative that

many Indian companies are either beginning to think about or are engaging with in one way or

another.

While some of these initiatives may be labeled as corporate citizenship by some organisations,

there basic message and purpose is the same.

Answer 7(b):

According to OECD, a major challenge is to find a balance between the state‟s responsibility for

actively exercising its ownership functions, such as, the nomination and election of the board,

while at the same time refraining from imposing undue political interference in the

management of the company. Another important challenge is to ensure that there is a level playing

field in markets where private sector companies can compete with the state-owned enterprises,

and that governments do not distort competition in the way they use their regulatory or

supervisory powers.‟

According to OECD, the guidelines suggest that the state should exercise its ownership functions

through a centralized ownership entity, or effectively co-ordinated entities, which should act

independently and in accordance with a publicly disclosed ownership policy. The guidelines

also suggest the strict separation of the state‟s ownership and regulatory functions.



There should be a clear separation between the state's ownership function and other



SOEs should not be exempt from the application of general laws and regulations.Stakeholders including competitors, should have access to efficient redress.

SOEs should face competitive conditions regarding access to finance. Their relations with

state-owned banks, state-owned financial institutions, and other state-owned

companies, should be based on purely commercial grounds.

State acting as an owner

The state should act as an informed and active owner, and establish a clear and consistent

ownership policy, ensuring that governance of state-owned enterprises is carried out in a

transparent and accountable manner with the necessary degree of professionalism and

effectiveness.

The government should develop and issue an ownership policy that defines the overall

objectives of state ownership, the state's role in corporate governance of SOEs, and how

it will implement its ownership policy.

The government should not be involved in the day-to-day management of SOEs and

allow them full operational autonomy to achieve their defined objectives.

The state should let SOE boards exercise their responsibilities and respect their





guidance, subject to the objectives set by the government and the ownership entity.

They should have the power to appoint and remove the CEO.

The boards of SOEs should be so composed that they can exercise objective and

independent judgement. Good practice calls for the chair to be separate from the

CEO.

SOE boards should carry out an annual evaluation to appraise their performance.

Answer 7(c):

As in other countries, the development of Corporate Governance in the UK was initially the

findings of a trilogy of codes: the Cadbury Report (1992), the Greenbury Report (1995), and the

Hampel Report (1998). These are explained as under:

Cadbury Report (1992)

Following various financial scandals and collapses (Coloroll and Polly Peck, to name but two)

and a perceived general lack of confidence in the financial reporting of many UK companies,the Financial Reporting Council, the London Stock Exchange, and the accountancy profession

established the Committee on the Financial Aspects of Corporate Governance in May 1991.

After the Committee was set up, the scandals at BCCI and Maxwell happened, and as a result,

the committee interpreted its remit more widely and looked beyond the financial aspects to

Corporate Governance as a whole. The Committee was chaired by Sir Adrian Cadbury and,

when the Committee reported in December 1992, the report became widely known as „the

Cadbury Report‟.

The recommendations covered: the operation of the main board; the establishment,

composition, and operation of key board committees; the importance of, and contribution that

can be made by, non-executive directors; the reporting and control mechanisms of a business.The Cadbury Report recommended a code of Best Practice with which the boards of all listed

companies registered in the UK should comply, and utilized a „comply or explain‟ mechanism.

This mechanism means that a company should comply with the code but, if it cannot comply

with any particular aspect of it, then it should explain why it is unable to do so. This disclosure

gives investors detailed information about any instances of non-compliance and enables them

to decide whether the company‟s non-compliance is justified.

Greenbury Report (1995)

The Greenbury committee was set up in response to concern at both the size of directors‟

remuneration packages and their inconsistent and incomplete disclosure in companies‟ annual

reports. It made, in 1995, comprehensive recommendations regarding disclosure of directors‟

remuneration packages. There has been much discussion about how much disclosure there

should be of directors‟ remuneration and how useful detailed disclosures might be. Whilst the

work of the Greenbury Committee focused on the directors of public limited companies, it

hoped that both smaller listed companies and unlisted companies would find its

recommendations useful.





Central to the Greenbury report recommendations were strengthening accountability and

enhancing the performance of directors. These two aims were to be achieved by (i) the

presence of a remuneration committee comprised of independent non-executive directors who

would report fully to the shareholders each year about the company‟s executive remuneration

policy, including full disclosure of the elements in the remuneration of individual directors; and (ii)

the adoption of performance measures linking rewards to the performance of both thecompany and individual directors, so that the interests of directors and shareholders were more

closely aligned.

Since that time (1995), disclosure of directors‟ remuneration has become quite prolific in UK

company accounts.

Hampel Report (1998)

The Hampel Committee was set up in 1995 to review the implementation of the Cadbury and

Greenbury Committee recommendations. The Hampel Committee reported in 1998. The

Hampel Report said: „We endorse the overwhelming majority of the findings of the two earlier

committees‟. There has been much discussion about the exten t to which a company shouldconsider the interests of various stakeholders, such as employees, customers, suppliers, providers

of credit, the local community, etc., as well as the interests of its shareholders. The Hampel report

stated that the directors as a board are responsible for relations with stakeholders; but they are

accountable to the shareholders‟. However, the report does also state that directors can meet

their legal duties to shareholders, and can pursue the objective of long-term shareholder value

successfully, only by developing and sustaining these stakeholder relationships‟.

The Hampel Report, like its precursors, also emphasized the important role that institutional

investors have to play in the companies in which they invest (investee companies). It is highly

desirable that companies and institutional investors engage in dialogue and that institutional

investors make considered use of their shares, in other words, institutional investors shouldconsider carefully the resolutions on which they have a right to vote and reach a decision based

on careful thought, rather than engage in „box ticking‟.

Answer 7(d):

In many countries, family-owned firms are prevalent. Corporate governance is of relevance to

family-owned firms, which can encompass a number of business forms including private and

publicly quoted companies, for a number of reasons. Family-owned firms may face difficulties in

initially finding appropriate independent non-executive directors but the benefits that such

directors can bring is worth the time and financial investment that the family-owned firm will

need to make.

One advantage of a family-owned firm is that there should be less chance of the type of

agency problems. This is because ownership and control rather than being split are still one and

the same, and so the problems of information asymmetry and opportunistic behaviour should (in

theory, at least) be lessened. As a result of this overlap of ownership and control, one would

hope for higher levels of trust and hence less monitoring of management activity should be

necessary. However, problems may still occur and especially in terms of potential for minority

shareholder oppression, which may be more acute in family-owned firms.





In family business group firms, the concern is that managers may act for the controlling family,

but not for shareholders in general. These agency issues are: the use of pyramidal groups to

separate ownership from control, the entrenchment of controlling families, and non-arm‟s-length

transactions (aka „tunneling‟) between related companies that are detrimental to public

investors.

Possible stages in a family firm‟s governance

The advantages of a formal governance structure are several. First of all, there is a defined

structure with defined channels for decision-making and clear lines of responsibility. Secondly,

the board can tackle areas that may be sensitive from a family viewpoint but which nonetheless

need to be dealt with - succession planning is a case in point (deciding who would be best to fill

key roles in the business should the existing incumbents move on, retire, or die). Succession

planning is important too in the context of raising external equity because, once a family

business starts to seek external equity investment, then shareholders will usually want to know

that succession planning is in place. The third advantage of a formal governance structure is

also one in which external shareholders would take a keen interest: the appointment of non-

executive directors. It may be that the family firm, depending on its size, appoints just one, or

maybe two, non-executive directors. The key point about the non-executive director

appointments is that the persons appointed should be independent; it is this trait that will make

their contribution to the family firm a significant one. Of course, the independent non-executive

directors should be appointed on the basis of the knowledge and experience that they can

bring to the family firm: their business experience, or a particular knowledge or functional

specialism of relevance to the f irm, which will enable them to „add value‟ and contribute to the

strategic development of the family firm. Another advantage of family-owned firms may be their

ability to be less driven by the short-term demands of the market. Of course, they still ultimately

need to be able to make a profit but they may have more flexibility as to when and how they

do so.

Cadbury (2000) sums up the three requisites for family firms to manage successfully the impacts

of growth: „They need to be able to recruit and retain the very best people for the business, they

need to be able to develop a culture of trust and transparency, and they need to define logical

and efficient organisational structures‟. A good governance system will help family firms toachieve these requisites.

Family Assembly Family Council Advisory BoardBoard Of Directors(Including Outside

Directors)





Answer 7(e):

(i) Whole Life Cycle Costing (WLCC):

Towards the late 1990s, the concepts of „whole life costing‟ (WLC) and „whole life -cycle costing‟

(WLCC) emerged. The terms whole life costing and whole life-cycle costing are

interchangeable. WLCC is a new term that appears to have been adopted by many building

economists involved in the preparation of forecasts for the long-term cost assessments of capital

projects.


stochastic assessment of the performance of constructed facilities from feasibility to disposal. The

WLCC assessment process takes into account the characteristics of the constructed facility,

reusability, sustainability, maintainability and obsolescence as well as the capital, maintenance,

operational, finance, residual and disposal costs. The result of this stochastic assessment forms

the basis for a series of economic and noneconomic performance indicators relating to the

various stakeholders‟ interests and objectives throughout the life-cycle of a project.‟

Currently, the application of WLCC in the construction industry is still hindered significantly by

the lack of standard methods and the excuse of lack of sound data upon which to arrive at

accurate decisions. As a result, the output from WLCC models is looked on as unreliable.

Combined with WLCC, risk assessment should form a major element in the strategic decision

making process during project procurement and also in value analysis, especially in today‟s

highly uncertain business environment. WLCC decisions are complex and usually comprise an

array of significant factors affecting the ultimate cost decisions. WLCC decisions generally have

multiple objectives and alternatives, long-term impacts, multiple constituencies in the

procurement of construction projects, generally involve multiple disciplines and numerous

decision makers, and always involve various degrees of risk and uncertainty. Project cost, design

and operational decision parameters are often established very early in the life of a given

building project. The existing methods do not adequately quantify the true economic impacts ofmany quantitative and qualitative parameters.

(ii) Golden Parachute Proposals:

The Securities and Exchange Commission‟s (the “SEC”) new disclosure and advisory vote

requirements for compensation based on or relating to merger and similar transactions, often

referred to as golden parachute arrangements, became effective for proxy statements and

other acquisition related filings initially filed on or after April 25, 2011 for Corporate Governance

in USA. The SEC adopted the rules to implement Section 951 of the Dodd-Frank Wall Street

Reform and Consumer Protection Act (the “Dodd-Frank Act”).

The Dodd-Frank Act requires companies to hold separate shareholder votes on potential

“golden parachute” payments when they seek approval for mergers, sales and certain other

transactions. In determining the recommendation with respect to a golden parachute proposal,

the 2013 Updates include the consideration of any existing change-in-control arrangements

maintained with named executive officers, rather than focusing only on the new or extended

arrangements. The list of features considered problematic has been refined. Recent

amendments that incorporate problematic features will tend to carry more weight in the overall





analysis. However, close scrutiny will also be given if multiple legacy problematic features are

present.

Answer 7(f):

Pros & Cons of adopting Corporate Social Responsibility:

Corporate social responsibility refers to a method of running a company that seeks to address

not only profitability, but also the environmental and social consequences of the business. While

most corporate social responsibility concerns are directed at very large businesses, even small

and medium-sized businesses that employ a large number of local residents or participate in

environmentally problematic industries can face pressure to adopt corporate social

responsibility.

Costs

Cost represents one of the biggest arguments against adopting corporate social responsibility as

a policy. Programs to reduce environmental impact often require expensive changes in

equipment or ongoing costs without any clear way to recoup those losses. The decision to

maintain domestic production facilities or call centers or to buy from domestic producers rather

than outsource or move production overseas can drive up costs for a business. Additionally,

there is no clear evidence that adhering to a policy of corporate social responsibility generates

a significant increase in sales or profit.

Improved Company Reputation

Embracing a policy of corporate social responsibility, paired with genuine action, can serve to

build or improve the reputation of a business. If a company‟s behavior creates a negative

backlash that leads to lost profitability -- over environmental issues, for example -- corporate

social responsibility becomes a method to repair reputation damage and restore profitability. Inother cases, adopting such a policy works as part of a business‟ essential brand, and consumers

often demonstrate more loyalty to brands that can demonstrate a commitment to

environmental concerns.

Shareholder Resistance

Some investors do look to acquire stock in socially responsible corporations, but, on the whole,

investors purchase stock on the expectations of turning a profit. While some companies, such as

Toyota and GE, have profited from corporate social responsibility, companies that adopt such

policies often prove as likely to lose money. Given the spotty track record of corporate social

responsibility in demonstrating profit increase, investors may resist attempts by executives to

move a company in that direction.Better Customer Relations

One of the hallmarks of corporate social responsibility is staying involved in the communities

where the business operates. This community involvement goes a long way toward building trust

between customers and the business. If a business builds trust with its customers, they tend to

give the business the benefit of the doubt if something goes wrong, rather than assuming

malicious intent or raw negligence. Customers also tend to stick with businesses they trust, rather

than actively seeking out new companies, which helps keep a business profitable over the long

haul.





PAPER 13 – Corporate Laws & Compliance

SECTION A

[Answer to Q.No.1 is compulsory and attempt any 4 from the rest]

1. (a) Mr. Sanchay was appointed as an Additional Director of Conservative Finance Ltd. w.e.f.

1st October 2011 in a casual vacancy by way of a circular resolution passed by the Board of

Directors. The next AGM of the Company was due on 31 st March 2012 but the same was not

held due to delay in the finalization of the accounts. Some of the Shareholders of the

Company have questioned the validity of the appointment of Mr. Sanchay and his

continuation as Additional Director beyond 31st March 2012. Advise the Company on the

complaints made by the Shareholders. [4]

(b) Examine with reference to the provisions of the Companies Act, 1956 the validity of the

following:

(i) A scheme provides for Amalgamation of a 'Foreign Company' with a Company

registered under the Companies Act, 1956.(ii) The statement forwarded with the notice convening a meeting of its members pursuant to

Court's Direction under Section 391 contains only 'Exchange Ratio' without details of its

calculation.

(iii) At the time of filing of the petition for Amalgamation, the object clause of both the

Transferor and Transferee Companies does not contain power to Amalgamate. [3]

(c) Mr. Shyam goes abroad for four months from 04.01.2012 and an alternate director has

been appointed in his place. Therefore, advice as to sending of notice as required under

section 286 of the Companies Act, 1956. [2]

(d) ABC Company Limited, a closely held company comprised two groups of shareholders -one foreign and the other Indian. The foreign group held 55% and the Indian 45% of the

shares of the company. The Articles of Association of the company provided all the matters

of the mutual understanding of both the groups. The Articles also contained the provisions

enabling the two groups to enjoy equal amount of managerial power. The relationship

between the two groups could not last for a long time and differences arose between them.

The two groups could not operate, leading to a deadlock. The Indian group, therefore,

complained to the Company Law Board for action against the foreign group for oppression.

Referring the provisions of the Companies Act, 1956, decide:

(i) Whether the contention of the Indian group that the foreign group is acting in a manner

oppressive to the Indian group will sustain?

(ii)

What relief can the Company Law Board grant to the petitioners in this case? [4]

(e) ABC Banking Company Limited has advanced a sum of 25.00 lacs to Mr. Reliable, a

director of the company, to meet his personal liabilities but due to some adverse conditions,

Mr. Reliable is not in a position to repay the loan. The Board of directors of the company is

considering to remit a sum of 10.00 lacs. The Board of Directors seeks your advice. [2]





Answer 1(d):

Reference may be made to the provisions of Sec. 397. Thus, the CLB (now Tribunal) has

substantial powers to provide relief to the company. But it should be seen whether there is

oppression in this case. The two groups enjoy equal amount of managerial power under the

Articles. Due to misunderstanding there is a dead lock. In a situation like this where the rival

groups are equal in strength there may be no oppression at all. This view is supported by the

decision in Gnanasambandam (CP) Vs. Tamilnadu Transports (Coimbatore) Pvt. Ltd. (1971).

Further, cases of deadlock may not be a case for winding up. At best, the CLB may direct either

group to buy out the shares of the other and failing which the company may be wound up on

the grounds that it is Just and Equitable so to do.

Conclusion:

(i)

As the two groups are equal in strength and there is a deadlock, there is no oppression.

(ii) If at all the CLB decides to grant relief it may order the foreign group, which holds 55% of the

share capital to buy out the minority Indian group. (Yasovardhan Saboo Vs. Groz Beckert

Saboo Ltd. (1993).

Answer 1(e):

Section 20A of the Banking Regulation Act, 1949 provides that except with the prior approval of

RBI, a banking company shall not remit in whole or in part any debt due to it by:

(a) Any of its Directors, or

(b)

Any firm or company in which any of its Directors is interested as Director, Partner, Managing

Agent or Guarantor, or

(c)

Any individual, if any of its Directors, is his Partner or Guarantor.

Sub-section (2) further provides that any remission of debt in contravention of the aforesaid shall

be void and of no effect.

2. (a) Mr. Vivaan, a chartered accountant is a director in PQR Limited. The company proposes to

appoint or engage the firm Vivaan and Co. in which Mr. Vivaan is a partner in one or more of

the following capacities:

(i) Consultants on regular retainer basis.

(ii)

Authorised representative to appear before tribunals.

Discuss whether the provisions of section 314 of the Companies Act are attracted in the above

situations. [4]

(b) M/s XYZ Ltd. was incorporated on 1st January, 2010. On 1st November, 2012 a political

party approaches the company for a contribution of 10 lakhs for political purpose. Advise in

respect of the following:

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

(ii)

Will it make any difference, if the company was in existence on 1 st October, 2009?

(iii)

Can the company be penalised for defiance of rules in this regard? [6]





(c) Printed Computer is a Singapore based company having several business units all over

the world. It has a unit for manufacturing computer printers with its headquarters in Pune. It

has a branch in Dubai which is controlled by the headquarters in Pune. What would be the

residential status under FEMA, 1999 of printer units in Pune and that of Dubai branch? [5]

Answer 2(a):

The restrictions on holding of an office or place of profit under section 314 do not extend to

rendering of professional services, such as services rendered by doctor, engineer, architect,

chartered accountant, advocate or solicitor [Re, Harper Ticket Issuing and Recording Machines

Ltd. (1912) WN 263]. It is considered that an advocate or solicitor appears in a Court of law as an

officer of the Court. Such appearance and receiving fees on that account cannot lead to an

inference of an office or place of profit, However, if the advocate or solicitor is appointed on a

regular retainership basis, section 314 shall apply [Department Circular No. 14/75

98/12/314(1B)/75-CL-V), dated 05.06.1975].

(i) In the given case, the appointment of Vivaan and Co. is made on regular retainership basis

and so it amounts to holding of an office or place of profit. Section 314(1) would apply to

such appointment if Vivaan and Co., draws remuneration of ` 50,000 or more. If Vivaan and

Co. draws remuneration exceeding ` 2,50,000 per month, section 314(1B) will apply.

(ii)

Where a chartered accountant undertakes a particular case and professional fees is paid to

him, he renders the services in a professional capacity. Consequently, it does not amount to

an office or place of profit and therefore section 314 is not attracted. Engaging a person in a

particular case or for undertaking a particular assignment of consultancy, or rendering

advice on a specific matter, shall not by itself constitute appointment to an office or place

of profit.

However, if the terms of engagement are that he should attend to all the cases or act as adviser

in the connected matters, whether generally or in a particular city or town, then, even though

he may be paid on a case to case basis, it shall amount to appointment to an 'office or place of

profit' under the company.

Answer 2(b):

As per section 293A, the following companies shall not make a political contribution:

(a) A Government company.

(b) A company which has been in existence for less than 3 financial years.

In the given case:

(i) M/s XYZ Ltd. cannot make any political contribution because the company is not in

existence for a period of 3 financial years.

(ii) If XYZ were incorporated on 01.10.2009, it may make a political contribution as on 01.11.2012

because in such a case, it would have been in existence for 3 financial years. However, it

shall comply with the following conditions:

(a)

The amount of contribution shall not exceed 5% of average net profits (as determined

under sections 349 and 350) during 3 immediately preceding financial years.





(b) The Board shall make a political contribution only by passing a resolution at a Board

meeting.

(c)

The company shall disclose in its profit and loss account the amount of political

contribution and the name of the political party or the person to whom such amount has

been contributed.

(iii)

If a company makes a political contribution in contravention of section 293A, followingconsequences shall follow:

(a) The company shall be punishable with fine which may extend to 3 times the amount so

contributed.

(b) Every officer of the company who is in default shall be punishable with imprisonment up

to 3 years and shall also be liable to fine.

Answer 2(c):

Section 2(u) defines a 'person'. As per this definition, the following shall be covered in the

definition of a 'person':

(a)A company.(b)Any agency, office or branch owned by a 'person'.

Section 2(v) defines a 'person resident in India'. As per this definition, the following shall be

covered in the definition of a 'person resident in India':

(a)An office, branch or agency in India owned or controlled by a person resident outside India.

(b)An office, branch or agency outside India owned or controlled by a person resident in India.

In the given case, Printed Computers (Singapore), its headquarters in Pune as well as Dubai

Branch is a 'person'. Therefore, residential status under FEMA shall be determined for each of

them separately.

Printed Computers (Singapore) does not fall under any of the clauses of the definition of a'person resident in India'. Therefore, Printed Computers (Singapore) is a person resident

outside India.

The Pune Headquarters of Printed Computers is a 'person resident in India' since it falls under

the clause 'an office, branch or agency in India owned or controlled by a person resident

outside India'.

The Dubai branch of Printed Computers (Singapore), though not owned, is controlled by the

Pune headquarters. The Dubai branch is a 'person resident in India' since it falls under the

clause 'an office, branch or agency outside India owned or controlled by a person resident

in India'.

3.

(a) Mr. Naman holding 3% Shares in OPQ Ltd., became a Director of this Company on01.05.2011. The Company prior to his appointment as Director, had commenced transactions

with A Ltd. in the next Board Meeting to be held on 10.05.2011, the Board proposes to discuss

about price revisions sought for by A Ltd. Briefly explain –

(i) Whether Mr. Naman should make a disclosure of his interest in A Ltd, assuming that the

Company is going to have transactions with A Ltd. on a continuous basis, if yes, when

and how? When should it be renewed?

(ii)

Can he vote in the price revision resolution in the Board Meeting?





(iii) You are informed that Mr. Naman holds 1.5% of the Share Capital of A Ltd and that his

wife holds another 3% of the Share Capital of A Ltd. [3]

(b) Mr. Zen was appointed as a Member of the Competition Commission of India by Central

government. He has a professional experience in international business for a period of 12

years, which is not a proper qualification for appointment of a person as member. Pointingout this defect in the Constitution of Commission, Mr. Yen, against whom the commission

gave a decision, wants to invalidate the proceedings of the commission. Examine with

reference to the provisions of the Competition Act, 2002 whether Mr. Yen will succeed. [6]

(c) The Official Liquidator of Arya Ltd (in liquidation) instituted misfeasance proceedings u/s

543 against „A‟, a Director of the Company in liquidation. During the pendency of

misfeasance proceedings, „A‟ died. What is meant by Misfeasance? Is it possible for the

Official Liquidator to implead the legal representatives of „A‟ and continue the proceeding

against them? [2+4=6]

Answer 3(a):

1.

Disclosure of Interest: Mr. Naman should disclose his interest as required u/s 299.

The words „becomes concerned or interested‟ occurring in the provision denotes a

present state of thing.

In case of a person who was actually concerned or interested in the contract or

arrangement, the liability for disclosure arises the moment he accepts office as Director.

If a Director acquired interest in a running transaction of the Company, he should

disclose this fact at the next Board Meeting held after he becomes so interested.

2.

Voting at Board Meeting:

(a)

U/s 300, an Interested Director shall not vote on the resolution in respect of the contract

in which he is interested.

(b) However, provisions of Sec. 300 are not applicable if the interest of the Director consists

solely of his holding only Qualification Shares, or less than 2% of the Paid-Up Capital in the

other Company.

(c) In the given case, Mr. Naman holds 1.5% of the Share Capital of A Ltd, and his wife holds

another 3% in the Share Capital of A Ltd, and therefore it cannot be said that he is

interested only to the extent of less than 2% of the Paid-Up Share Capital of A Ltd.

(d)

Hence, Mr. Naman should not participate and vote in the Board Meeting to be held on

10.05.2011, in the matter pertaining to A Ltd.

Answer 3(b):

The given problem relates to section 15 of the Competition Act, 2002. As per section 15, no act

or proceeding of the Commission shall be invalid merely by reason of:

(a)

any vacancy in the Commission; or

(b)

any defect in the constitution of the Commission; or

(c) any defect in the appointment of a person acting as a Chairperson or as a Member; or





(d) any irregularity in the procedure of the Commission not affecting the merits of the case.

Applying the provisions of section 15, the mere fact that one of the members of the Commission

was not qualified for appointment, does not affects the merits of the case. It is a mere defect in

the constitution of the Commission. Therefore, the contention of Mr. Yen that the proceedings of

the Commission are not valid, is incorrect.

Answer 3(c):

The term „Misconduct‟ covers any breach of duty resulting in misapplication of assets or property

of the Company. “Misfeasance” covers those cases where:

(a) there is dishonesty or fraud or culpable negligence, or

(b) there is an improper exercise of lawful authority.

Situations of „Misfeasance‟: Sec. 543 is applicable, if in the course of winding-up of a Company, it

appears that -

Person liable Act/omission covered u/s 543(a)

any person who has taken part in the

promotion or formation of the Company,

or

(b)

any past or present Director, Manager,

Liquidator or Officer of the Company.

Has misapplied, or retained, or become

liable or accountable for, any money or

property of the Company, or

Has been guilty of any misfeasance or

breach of trust in relation to the

Company.

For creation of liability u/s 543, it must be shown that there has been dishonesty or fraud, or

atleast gross and culpable negligence. An honest mistake not amounting to culpable

negligence or breach of duty, should not be considered as “misfeasance”. – Ayyangar vs

Official Assignee

The proceedings commenced against the Delinquent Director of a Company in liquidation

u/s 542 and 543 can be continued after his death against his legal representatives.

The amount declared to be due in such misfeasance proceedings can be realized from the

estate of the deceased in the hand of his legal representatives.

However, the legal representative would not be liable for any sum beyond the value of the

estate of the deceased in their hands. [Official Liquidator vs Parthasarathy Sinha 53 CC 163

(SC) Official Liquidator, Supreme Bank Ltd vs PA Tendolkar 43 CC 382 (SC)]

The cause of action in a misfeasance proceeding against the Director or other Delinquent

Officer initiated u/s 543, survives and can be continued against the legal representatives.

4. (a) Mr. BPK was appointed as the sole selling agent of M/s KMP Ltd. w.e.f 1 st January 2010 for

a period of 5 years. Mr. BPK earned his remuneration as following during the years 2010 to

2012:

Year Amount of remuneration

2010

2011

4,41,000

6,32,000





2012 7,45,000

On and from 1st January 2013, the sole selling agency agreement was terminated by M/s

KMP Ltd. You are required to calculate the amount of compensation payable by the said

company to Mr. BPK under the provisions of the Companies Act, 1956.

What would be your answer in a case where the said M/s KMP Ltd. was amalgamated with

another company with effect from 1st January 2013 and Mr. BPK refused to act as the sole

selling agent of the amalgamated company after amalgamation. [3+2=5]

(b) The Central Govt. acquired a Banking Company. The scheme of acquisition, apart from

other matters, provided for the quantum of compensation payable to the shareholders of the

acquired Bank. Some Shareholders are not satisfied with the amount of compensation fixed

under the scheme of acquisition.

Is there any remedy available to the shareholders under the provisions of the Banking

Regulation Act, 1949? [3]

(c) Mr. Lalit, a member of a Producer Company, wants to transfer his shares. State as to how

he can transfer his shares under the provisions of the Companies Act, 1956. [5]

(d) Distinguish between Insolvency and Winding-up. [2]

Answer 4(a):

(i)

According to section 294A, where the office of a sole selling agent is vacated for any reason

other than those specified under that section then the company shall be liable to pay

compensation and the amount of compensation shall not exceed the remuneration which

he would have earned if he would have been in office for the unexpired residue of his term,or for three years, whichever is shorter, calculated on the basis of the average remuneration

actually earned by him during a period of three years immediately preceding the date on

which his office ceased or was terminated, or where he held his office for a period lesser

than three years, then average remuneration actually earned by him during such lesser

period.

In the given case, based on the above provision of the Companies Act, 1956 Mr. BPK is

entitled to compensation for the remaining term of his office i.e., 2 years. The amount if

compensation is to be calculated on the basis of average of preceding three years‟

remuneration i.e., ( ` 4,41,000 + ` 6,32,000 + ` 7,45,000)/3 = ` 6,06,000. Thus, the amount of

compensation shall not exceed ` 12,12,000 i.e. ` 6,06,000 x 2.

(ii)

According to section 294A, the company shall not be liable to pay compensation to the sole

selling agent for loss of office where the sole selling agent vacates office for facilitating any

scheme of compromise or arrangement and he is reappointed in the new company. Since

the question Mr. BPK refuses to act as sole selling agent in the amalgamated company, he is

not entitled for any compensation. He would have been entitled for compensation had he

not been offered to be appointed in the amalgamated company.





Answer 4(b):

Compensation to Shareholders of the Acquired Bank [Sec. 36AG]:

1. Recipient: The Central Govt. / Transferee Bank shall give the compensation determined in

the prescribed manner, to:

(a)

Registered Shareholder of the acquired Bank, or

(b)

Where the acquired Bank is a Banking Company incorporated outside India, the

acquired Bank

2. Reference to Tribunal:

(a)

Request: If the amount of compensation offered is not acceptable to any person to

whom the compensation is payable, the aggrieved person may request the Central

Govt. in writing to have the matter referred to the Tribunal. Such a request shall be made

before the date notified by the Central Govt.

(b) Eligible Persons: The Central Govt. shall have the matter referred to the Tribunal for

decision, if it receives requests from:

Not less than 1/4th in number of the Shareholders holding not less than 1/4 th in value of

the Paid up Share Capital of the acquired Bank, or

Where the acquired Bank is a Banking Company incorporated outside India, from the

acquired Bank.

3. Finality of compensation: If before the notified date, the Central Govt. does not receive

requests as required, the amount of compensation offered, and where a reference has

been made to the Tribunal, the amount determined by it, shall be the compensation

payable and shall be final and binding on all parties concerned.

Answer 4(c):

Shares of a Member of a Producer Company shall be transferable only as per the following

principles:

1.

Transfer to Active Member only: A Member of a Producer Company may after obtaining the

previous approval of the Board, transfer the whole or part of his shares along with any

special rights, to an Active Member, at par value.

2.

Transmission on Death of Member:

(a) Every Member shall, within 3 months of his becoming a Member in the Producer

Company, nominate a person to whom his shares in the Producer Company shall vest in

the event of his death. The nomination shall be made in the manner specified in the

Articles.

(b)

On the death of the Member, the Nominee shall become entitled to all the rights in the

Shares of the Producer Company. The BOD shall transfer the shares of the deceasedMember to his Nominee.

(c) If the Nominee is not a Producer, the Board shall direct the surrender of shares, together

with Special Rights, if any, to the Producer Company, at par value or such other value as

may be determined by the Board.

3.

Surrender of Shares:

(a) Situation: Where the BOD of a Producer Company is satisfied that:

Any member has ceased to be a Primary Producer, or





Any member has failed to retain his qualifications to be a Member as

specified in the Articles.

(b) BOD‟s Power: BOD shall direct the surrender of shares together with special rights, if any,

to the Producer Company, at par value or such other value as the BOD may determine.

(c) Procedure: The Member must be served with a prior written notice and given an

opportunity of being heard, before the direction for surrender of shares is given by BOD.

Note: Surrender is also applicable if the Nominee of a deceased Member is not a Producer.

However, no prior notice/hearing opportunity need be given in such case.

Answer 4(d):

Particulars Insolvency Winding-up

Individual

Only an individual can be adjudged as

an insolvent. An individual cannot be

“wound-up” or “dissolved”.

A Company can only be wound-

up. It cannot be “adjudged

insolvent”, even if it is unable to pay

its debts.*

DebtsA person can be adjudged insolvent,only when he is unable to pay his

debts/liabilities.

A Company can be wound-upeven when it is financially sound,

e.g., voluntary winding-up.

Vesting of

Assets

In insolvency proceedings, the

assets/property of the person is vested in

the Official Assignee/Receiver.

The property remains vested in the

Company, but its administration is

taken over by the Liquidator.

Status at

end

After completion of insolvency

proceedings, the insolvent is discharged

from all his debts, and becomes a legal

person.

After completion of winding-up, the

Company will be dissolved. Its legal

status comes to an end.

Note: It is common to use the term “Insolvent Company”, where a Company is unable to pay its

debts.

5. (a) Following is the latest audited Balance Sheet of ABC Ltd.

Capital and liabilities Assets

Equity Share Capital (10000

shares of 100 each)

10,00,000 Goodwill 1,00,000

Less: Calls unpaid 10,000 Land and Buildings 10,50,000

9,90,000 Plant and machinery 20,25,000

Preference Share Capital 1,50,000 Equity shares in A Ltd. 1,25,000

Securities Premium A/c 1,50,000 Preference shares in B Ltd. 50,000

Capital Redemption Reserve 2,25,000 Debentures in C Ltd. 1,00,000

General Reserve 5,00,000 Shares in P Ltd. 2,25,000Profit & Loss A/c 2,20,000 Capital in Z & Co. 1,00,000

Sinking Fund Reserve 1,10,000 Current Assets 55,000

Dividend Equalisation

Reserve

60,000

Loan from TIIC 10,00,000

Deposits from S Ltd. 2,00,000

Current Liabilities 1,25,000





Provision for Taxation 1,00,000

38,30,000 38,30,000

The following is the additional relevant information:

1. Of the equity shares capital, 3,000 shares have been issued as rights shares and 2,000

shares as bonus shares.2.

B Ltd. is subsidiary of ABC Ltd. with 90% shareholding, whereas A Ltd. is wholly owned

subsidiary of ABC Ltd.

3.

Z & Co. is a partnership firm. The directors seek advice as to whether the following

additional investments can be made by a decision taken in a Board Meeting:

(i)

Loan to A Ltd. 10,00,000

(ii) Debentures in B Ltd 2,25,000

(iii)

Purchase of shares of Shree Ltd. in the open market 95,000

State reasons. [8]

(b) MAR Ltd wants to issue certain shares on preferential basis and has sought your advice in

respect of pricing the shares for such issue. State the guidelines issued by SEBI in respect of

pricing of the issue of shares on a preferential basis. [7]

Answer 5(a):

Step 1: Calculation of paid up capital and free reserves:

Paid Up Capital: Equity Share Capital 10,00,000

Less: Calls Unpaid 10,000

9,90,000

Preference Share Capital 1,50,000

Total 11,40,000NOTE: Preference Share Capital is to be included for calculating paid up capital.

Free Reserves: Securities Premium 1,50,000

General Reserve 5,00,000

Profit & Loss Account 2,20,000

Dividend Equalisation Reserve 60,000

Total 9,30,000

NOTE: Capital Redemption Reserve and Sinking Profit Reserve are not available for

distribution as dividend and therefore shall not be considered for computing free reserves.

Step 2: Calculation of the limits:

(A) 60% of Paid up Capital and free reserves

= 60% of (11,40,000 + 9,30,000)

= 60% of (20,70,000)

= 12,42,000

(B) 100% of Free Reserves as computed above ` 9,30,000





(A) or (B) whichever is higher ` 12,42,000

Step 3: Computation of Value of transactions as per Balance Sheet:

Preference Shares in B Ltd 50,000

Debentures In C Ltd 1,00,000

Shares in P Ltd 2,25,000

3,75,000

NOTE:

1. Equity Shares in A Ltd is not considered as acquisition of shares by a holding

company in its wholly owned subsidiary is exempted from the provisions of 372 A. The

shares are not to be considered while computing Limits.

2.

As Z & Co., is a partnership firm the capital therein is not considered.

Step 4: Computation of Proposed Investments:

Debentures in B Ltd 2,25,000

Purchase of shares in Shree Ltd 95,000

3,20,000

The aggregate of the investments already made ` (3,75,000) together with the proposed

investments of ` (3,20,000) amounts to ` 6,95,000.

This is well within the ceiling limit of ` 12,42,000 computed in step 2 above.

Therefore there is no requirement as to previous approval by way of special resolution.

The Board of directors should approve the proposed transactions at a meeting of the

board by passing a resolution agreed to by all the directors present at the meeting.

Previous approval of M/s. TIIC a PFI is not required as:(a) There is no default towards TIIC and

(b) The aggregate of the value of the transactions ( ` 6,95,000) does not exceed 60% paid

up capital and free reserves i.e. ` 12,42,000.

Answer 5(b):

1.

Pricing of Shares: The minimum issue price for the Preferential Issue is determined as under –

Where Equity Shares of a

Company have been listed on

a Stock Exchange

Minimum Issue Price = Higher of the following

A. For a period of 6 months or

more as on the relevantdate

Average of the weekly high and low of the closing prices

of the related Shares quoted on the Stock Exchange:

(a) During the 26 weeks preceding the relevant date, or

(b)

During the 2 weeks preceding the relevant date.

B.

For a period of less than 26

weeks as on the relevant

date

(a)

Price at which Shares were issued by the Company in

its IPO, or

(b)

Value per share arrived at in a scheme of

arrangement u/s 391 to 394 of the Companies Act,





pursuant to which the Shares of the Company were

listed,

(c) Average of the weekly high and low of the closing

prices of the related Shares quoted on the Stock

Exchange:

During the period Shares have been listedpreceding the relevant date, or

During the 2 weeks preceding the relevant date.

Note: On completing a period of 26 weeks of listing, the

Company shall re-compute the price as per (A) above,

and the difference shall be paid by the Allottees to the

Company, if such re-computed price is less than the

earlier Issue Price.

Note:

“Relevant Date” means the date 30 days prior to the date on which the meeting of

General Body of Shareholders is held, u/s 81(1A) of the Companies Act, to consider the

proposed issue.

Where Shares are issued on preferential basis, pursuant to a scheme approved under the

Corporate Debt Restructuring framework of RBI, the date of approval of the Corporate

Debt Restructuring package shall be the relevant date. [R – 71]

In case of preferential issue of convertible securities, either the relevant date referred to in

clause (a) of this regulation or a date 30 days prior to the date on which the holders of the

convertible securities become entitled to apply for the Equity Shares.

Any preferential issue of specified securities, to QIBs not exceeding 5 in number, shall be

made at a price not less than the average of the weekly high and low of the closing

prices of the related equity shares quoted on a recognized stock exchange during the 2

weeks preceding the relevant date.

„Stock Exchange‟ means any of the Recognised Stock Exchanges in which the equity

shares are listed and in which the highest trading volume in respect of the equity shares of

the issuer has been recorded during the preceding 26 weeks prior to the relevant date.

2. Payment of Consideration:

(a)

Full consideration of specified securities other than warrants issued under this Chapter shall

be paid by the allotted at the time of allotment of such specified securities. However, that

in case of a preferential issue of specified securities pursuant to a scheme of corporate

debt restructuring as per the corporate debt restructuring framework specified by the

Reserve Bank of India, the allottee may pay the consideration in terms of such scheme.

(b) An amount equivalent to at least 25% of the consideration as determined above shall be

paid against each warrant on the date of allotment of warrants.

(c)

The balance 75% of the consideration shall be paid at the time of allotment of equity

shares pursuant to exercise of option against each such warrant by the warrant holder.

(d)

In case the warrant holder does not exercise the option to take equity shares against any

of the warrants held by him, the consideration paid in respect of such warrant shall be

forfeited by the Issuer.





3. Pricing of Shares on conversion: Where PCDs / FCDs / other convertible instruments are issued

on a preferential basis, providing for the Issuer to allot Shares at a future date, the Issuer shall

determine the price at which the Shares could be allotted, in the same manner as specified

for pricing of Shares allotted in lieu of warrants as indicated above.

4.

Exclusions: the provisions relating to Pricing of Preferential Allotment and Lock in periodrequirements shall not apply to Shares allotted to any financial institution within the meaning

Sec. 2(h)(ia) and 2(h)(ii) of the Recovery of Debts due to Banks and Financial Institutions Act,

1993.

6.

(a) What are the powers of the Central Govt. under IRDA Act, 1999? Can Central Govt.

supersede the IRDA? [6]

(b) The promoters of ABC Ltd., an Unlisted Company, decide to go for a public issue. They

seek your advice in respect of the following matters:

(i) Can equity shares be reserved in Firm Allotment Category for Promoters, at a price

different from the price at which shares are offered to Public?(ii) Circumstances in which equity shares can be issued in denomination of 2 per share.

(iii) Need for past track record of distributable profits.

(iv)

Requirement of Net Tangible Assets in previous years. [4]

(c) A Ltd. and B Ltd. both dealing in Chemicals and Fertilizers have entered into an

agreement to jointly promote the sale of their products. A complaint has been received by

the CCI stating that the agreement between the two is Anti-Competitive and against the

interest of other in the trade. Examine what are the factors the CCI will take into account to

determine whether the agreement in question will have any appreciable adverse effect on

competition in the market. [5]

Answer 6(a):

1.

Power of Central Government to issue directions [Section 18]

(1)

Without prejudice to the foregoing provisions of this Act, the Authority shall, in exercise of

its powers or the performance of its functions under this Act, be bound by such directions

on questions of policy, other than those relating to technical and administrative matters,

as the Central Government may give in writing to it from time to time:

Provided that the Authority shall, as far as practicable, be given an opportunity to

express its views before any direction is given under this sub-section.

(2)

The decision of the Central Government, whether a question is one of policy or not, shall

be final.

2. Power of Central Government to supersede Authority [Section 19]

(1) if, at any time, the Central Government is of the opinion:

(a)

that, on account of circumstances beyond the control of the Authority, it is unable to

discharge the functions or perform the duties imposed on it by or under the provisions

of this Act; or





(b) that the Authority has persistently defaulted in complying with any direction given by

the Central Government under this Act or in the discharge of the functions or

performance of the duties imposed on it by or under the provisions of this Act and as

a result of such default the financial position of the Authority or the administration of

the Authority has suffered; or

(c)

that circumstances exist which render it necessary in the public interest so to do, theCentral Government may, by notification and for reasons to be specified therein,

supersede the Authority for such period, not exceeding six months, as may be

specified in the notification and appoint a person to be the Controller of Insurance

under section 2-B of the Insurance Act, 1938 (4 of 1938), if not already done:

Provided that before issuing any such notification, the Central Government shall give

a reasonable opportunity to the Authority to make representations against the

proposed supersession and shall consider the representations, if any, of the Authority.

(2)

Upon the publication of a notification under sub-section (1) superseding the Authority:

(a) the Chairperson and other members shall, as from the date of supersession, vacate

their offices as such;

(b) all the powers, functions and duties which may, by or under the provisions of this Act,

be exercised or discharged by or on behalf of the Authority shall, until the Authority is

reconstituted under sub-section (3), be exercised and discharged by the Controller of

Insurance; and

(c)

all properties owned or controlled by the Authority shall, until the Authority is

reconstituted under sub-section (3), vest in the Central Government.

(3)

On or before the expiration of the period of supersession specified in the notification

issued under sub-section (1), the Central Government shall reconstitute the Authority by a

fresh appointment of its Chairperson and other members and in such case any person

who had vacated his office under clause (a) of sub-section (2) shall not be deemed

disqualified for re-appointment.

(4) The Central Government cause a copy of the notification issued under sub-section (1)

and a full report of any action taken under this section and the circumstances leading to

such action to be laid before each House of Parliament at the earliest.

3. Power to make rules [Section 24]

(1) The Central Government may, by notification, make rules for carrying out the provisions

of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such rules

may provide for all or any of the following matters, namely:

(a)

the salary and allowances payable to, and other terms and conditions of service of,the members other than part-time members under sub-section (1) of section 7;

(b) the allowances to be paid to the part-time members under sub-section (2) of section

7;

(c) such other powers that may be exercised by the Authority under clause (q) of sub-

section (2) of section 14;

(d)

the form of annual statement of accounts to be maintained by the Authority under

sub-section (1) of section 17;





(e) the form and the manner in which and the time within which returns and statements

and particulars are to be furnished to the Central Government under sub-section (I)

of section 20;

(f) the matters under sub-section (5) of section 25 on which the Insurance Advisory

Committee shall advise the Authority;

(g)

any other matter which is required to be, or may be, prescribed, or in respect ofwhich provision is to be or may be made by rules.

4. Power to remove difficulties [Section 29]

(1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government

may, by order published in the Official Gazette, make such provisions not inconsistentwith the provisions of this Act as may appear to be necessary for removing the difficulty:

Provided that no order shall be made under this section after the expiry of two years fromthe appointed day.

(2) Every order made under this section shall be laid, as soon as may be after it is made,

before each House of Parliament.

Note:

(a)

Rules and regulations to be laid before Parliament [Section 27]

Every rule and every regulation made under this Act shall be laid, as soon as may be after it is

made, before each House of Parliament, while it is in session, for a total period of 30 days which

may be comprised in one session or in 2 or more successive sessions, and if, before the expiry of

the session immediately following the session or the successive sessions aforesaid, both Houses

agree in making any modification in the rule or regulation or both Houses agree that the rule or

regulation should not be made, the rule or regulation shall thereafter have effect only in such

modified form or be of no effect, as the case may be; so, however, that any such modification

or annulment shall be without prejudice to the validity of anything previously done under thatrule or regulation.

(b) Application of other laws not barred [Section 28]

The provisions of this Act shall be in addition to, and not in derogation of, the provisions of any

other law for the time being in force.

Answer 6(b):

(i)

Differential Pricing is a process by which the Shares of the Company are issued at two

different prices depending on the type of the allottees.

Such differential pricing shall be allowed in respect of – (a) Higher Price for Firm Allotment

Category Applicants, (b) Issue to Retail Individual Investors, (c) Composite Public and rights

Issue and (d) Employees in case the issuer opts for the alternate method of book-building in

terms of Part D of Schedule XI.

(ii) An issuer making IPO shall determine the face value of shares as follows:

Issue Price Face Value

Less than ` 500 ` 10 per share.

` 500 or more Can be below ` 10 per share, but shall not be less than ` 1 per





share.

(iii)

Earlier it was required to maintain a track record of distributable profits in terms of section 205

of the Companies Act, 1956, on both standalone as well as consolidated basis for at least 3

out of the immediately preceding 5 years, but now it has been substituted by SEBI (Issue of

Capital and Disclosure Requirements) (Second Amendment) Regulations, 2012, w.e.f.12.10.2012 as:

“It has a minimum average pre-tax operating profit of rupees fifteen crore, calculated on a

restated and consolidated basis, during the three most profitable years out of the

immediately preceding five years.”

(iv) Requirement of Net Tangible Assets:

“It should have net tangible assets of at least three crore rupees in each of the preceding

three full years (of twelve months each), of which not more than fifty per cent are held in

monetary assets:

Provided that if more than fifty per cent of the net tangible assets are held in monetary

assets, the issuer has made firm commitments to utilize such excess monetary assets in its

business or project:Provided further that the limit of fifty per cent on monetary assets shall not be applicable in

case the public offer is made entirely through an offer for sale.”

Answer 6(c):

For determining whether a Combination would have the effect of or is likely to have an

appreciable adverse effect on competition in the relevant market, the CCI shall have due

regard to all or any of the following factors:

1. Actual and potential level of competition through imports in the market,

2. Extent of barriers to entry into the market,

3.

Level of combination in the market,

4.

Degree of countervailing power in the market,

5. Likelihood that the combination would result in the parties to the combination being able to

significantly and sustainably increase prices or profit margins,

6. Extent of effective competition likely to sustain in a market,

7.

Extent to which substitutes are available or are likely to be available in the market,

8. Market share, in the relevant market, of the persons or enterprise in a combination

individually and as a combination,

9.

Likelihood that the combination would result in the removal of a vigorous and effective

competitor(s) in the market,

10. Nature and extent of vertical integration in the market,

11.

Possibility of a failing business,

12.

Nature and extent of innovation,

13. Relative advantage, by way of the contribution to the economic development, by any

combination having or likely to have appreciable adverse effect on competition,

14. Whether the benefits of the combination outweigh the adverse impact of the combination,

if any.





SECTION B

[Answer any five questions from Q.No.7 (a) to (f)]

7.

(a) “The German Corporate Governance system is based around a dual board system”.

Elucidate the statement. [5]

(b) Discuss the various reasons for Corporate Social Responsibility (CSR). [5]

(c) Briefly discuss the various issues regarding the MoU System in Indian CPSEs. [5]

(d) “The typical organizational structure of PSUs makes it difficult for the implementation of

corporate governance practices as applicable to other publicly-listed private enterprises.”

In view of the above, list the difficulties encountered in governance. [5]


(i) Corporate Governance in Germany

(ii) Risk and uncertainty in Whole Life Cycle Costing [2.5*2=5]

(f) According to “Altered Images: The 2001 State of Corporate Responsibility in India Poll”‟ a


followed a chronological evolution of 4 thinking approaches. Explain the same. [5]

Answer 7(a):


and is usually referred to as the Cromme Report or Cromme Code. The code harmonizes a widevariety of laws and regulations and contains recommendations and also suggestions for

complying with international best practice on Corporate Governance. The Cromme Code was

published in 2002 and was amended in 2005.

The German Corporate Governance system is based around a dual board system, and

essentially, the dual board system comprises a management board (Vorstand) and a supervisory

board (Aufsichtsrat).


accountable for the management of the enterprise and the chairman of the management

board co-ordinates the work of the management board. On the other hand, the supervisory

board appoints, supervises, and advises the members of the management board and is directly

involved in decisions of fundamental importance to the enterprise. The chairman of the

supervisory board co-ordinates the work of the supervisory board. The members of the

supervisory board are elected by the shareholders in general meetings. The co-determination

principle provides for compulsory employees representation. So, for firms or companies which

have more than five hundred or two thousand employees in Germany, employees are also

represented in the supervisory board which then comprises one-third employee representative

or one-half employee representative respectively. The representatives elected by the





shareholders and representatives of the employees are equally obliged to act in the enterprise‟s

best interests.

The idea of employee representation on boards is not always seen as a good thing because

the employee representatives on the supervisory board may hold back decisions being made

that are in the best interests of the company as a whole but not necessarily in the best interests

of the employees as a group. An example, would be where a company wishes to rationalize itsoperations and close a factory but the practicalities of trying to get such a decision approved

by employee representatives on the supervisory board, and the repercussions of such a decision

on labour relations, prove too great for the strategy to be made a reality.

Answer 7(b):

The rationale for CSR has been articulated in a number of ways. In essence, it is about building

sustainable businesses, which need healthy economies, markets and communities. The major

reasons for CSR can be outlined as:

1.

Globalisation

As a consequence of cross-border trade, multinational enterprises and global supply chains,

there is an increased awareness on CSR concerns related to human resource management

practices, environmental protection, and health and safety, among other things. Reporting on

the CSR activities by corporates is therefore increasingly becoming mandatory.

In an increasingly fast-paced global economy, CSR initiatives enable corporates to engage in

more meaningful and regular stakeholder dialogue and thus be in a better position to anticipate

and respond to regulatory, economic, social and environmental changes that may occur.

There is a drive to create a sustainable global economy where markets, labour and communities

are able to function well together and companies have better access to capital and newmarkets.

Financial investors are increasingly incorporating social and environmental criteria when making

decisions about where to place their money, and are looking to maximise the social impact of

the investment at local or regional levels.

2. International Legal Instruments and Guidelines

In the recent past, certain indicators and guidelines such as the SA 8000, a social performance

standard based on International Labour Organization Conventions have been developed.

International agencies such as United Nations and the Organization for Economic Co-operation

and Development have developed compacts, declarations, guidelines, principles and otherinstruments that set the tone for social norms for organisations, though these are advisory for

organisations and not mandatory.

One of the United Nations Millennium Development Goals calls for increased contribution of

assistance from country states to help alleviate poverty and hunger, and states in turn are

advising corporates to be more aware of their impact on society. In order to catalyze actions in





support of the MDGs, initiatives such as Global Compact are being put in place to

instrumentalise CSR across all countries.

As the world‟s largest, global corporate citizenship initiative by the UN, the Global Compact, a

voluntary initiative is concerned with building the social legitimacy of business.

The Global Compact is a framework for businesses that are committed to aligning their business

operations and strategies with ten universally accepted principles that postulate that companies

should embrace, support and enact, a set of core values in the areas of human rights, labour

standards, the environment, and anti-corruption.

3. Changing Public Expectations of Business

Globally companies are expected to do more than merely provide jobs and contribute to the

economy through taxes and employment. Consumers and society in general expect more from

the companies whose products they buy. This is coherent with believing the idea that whatever

profit is generated is because of society, and hence mandates contributing a part of business to

the less privileged.

Further, separately in the light of recent corporate scandals, which reduced public trust of

corporations, and reduced public confidence in the ability of regulatory bodies and

organisations to control corporate excess. This has led to an increasing expectation that

companies will be more open, more accountable and be prepared to report publicly on their

performance in social and environmental arenas.

4.

Corporate Brand


themselves from their competitors, CSR initiatives enable corporates to build a stronger brand

that resonates with key external stakeholders, customers, general public and the government.


opportunities, and increasingly contribute to the corporates‟ ability to attract passionate and


Corporates in India are also realising that their reputation is intrinsically connected with how well








acceptance.











Answer 7(c):

The Memorandum of Understanding (MoU) is a negotiated document between the

Government, acting as the owner of Centre Public Sector Enterprise (CPSE) and the Corporate

Management of the CPSE. It contains the intentions, obligations and mutual responsibilities of the

Government and the CPSE and is directed towards strengthening CPSE management by results

and objectives rather than management by controls and procedures.

The beginnings of the introduction of the MoU system in India can be traced to the

recommendation of the Arjun Sengupta Committee on Public Enterprises in 1984. The first set of

Memorandum of Undertaking (MoU) was signed by four Central Public Sector Enterprises for the

year 1987-88. Over a period of time, an increasing number of CPSEs was brought within the MoU

system. Further impetus to extend the MoU system was provided by the Industrial Policy

Resolution of 1991 which observed that CPSEs will be provided a much greater degree ofmanagement autonomy through the system of Memorandum of Undertaking.

Broadly speaking, the obligations undertaken by CPSEs under the MoU are reflected by three

types of parameters i.e., (a) financial (b) physical and (c) dynamic.

The Figure below clearly brings out the several challenges which the MoU system in India,

currently faces.

Issues regarding the MoU System in Indian CPSEs

Impact of

External

Environment

Lacks the ability to

foster Good GovernanceScientific

Setting of the

Base Target

Existing Balance ScoreCard

approach might not be

suitable in a dynamic

environment

Pressured functioning

amongst CPSEs due to

repetitions in the

financial parameters

Concept of

Benchmarkingneeds more

emphasis

PSUs lacking in

appropriate CSR

initiatives

Lack of MoU as

a Business

Review Tool

Making theinclusion of

Offsetting

Parameters

Objective

MoU instrument lacks

the ability to propel

New Product/ Service

Development





Dark Lines Connect Broad Themes (Issues)

Dotted lines connect Sub-Themes (Issues)

Despite the overwhelming success of the MOU system, there is a need to strengthen the exercise

further to make it more value added. Some of the suggestions in this regard are as follows:

CPSEs may detract themselves from soft targeting. This could be seen from the fact that your

MOU goals set by most of the CPSEs are achieved in the third quarter of a financial year

itself.

The internal systems need to be revamped to contribute to MOU effectiveness. This may

mean making the internal budgeting, pricing, materials control, MIS, performance appraisal,

recruitment systems to be brought in line with the goals set in MOU.

There is a need to percolate MOU system down the line.

The wage negotiations should go beyond the managerial cadre in the same split and form

as in the case of the process followed relating to executives.

Balance scorecard concept should be stressed further to yield a composite MOU index.

The basic targets need to be fixed very carefully and questioning the very logic of taking the

previous year ‟s accomplishments as good.

Answer 7(d):

While routine governance regulations become applicable for public sector companies formed

under the Companies Act, 1956 and come under the purview of SEBI regulations the moment

they mobilize funds from the public, the typical organizational structure of PSUs makes i t difficult

for the implementation of corporate governance practices as applicable to other publicly-listed


The board of directors will comprise essentially of bureaucrats drawn from various ministries

which are interested in the PSU. In addition, there may be nominee directors from banks or







may necessitate a percentage of independent component on the board; but many


make.










when the economy was opened up, many of them lacked the competitiveness to fight it out

with their counterparts from the private sector.

Answer 7(e):

(i) Corporate Governance in Germany:

The German corporate governance system could be termed an „insider‟ system. The German

Corporate Governance system is based around a dual board system, and essentially, the dual

board system comprises a management board (Vorstand) and a supervisory board (Aufsichtsrat).


accountable for the management of the enterprise and the chairman of the management board

co-ordinates the work of the management board. On the other hand, the supervisory board

appoints, supervises, and advises the members of the management board and is directly involved

in decisions of fundamental importance to the enterprise. The chairman of the supervisory board

co-ordinates the work of the supervisory board. The members of the Supervisory board are elected

by the shareholders in general meetings. The co-determination principle provides for compulsory

employees representation. So, for firms or companies which have more than five hundred or two

thousand employees in Germany, employees are also represented in the supervisory board which

then comprises one-third employee representative or one-half employee representative

respectively. The representatives elected by the shareholders and representatives of the

employees are equally obliged to act in the enterprise‟s best interests.


and is usually referred to as the Cromme Report or Cromme Code. The code harmonizes a wide

variety of laws and regulations and contains recommendations and also suggestions for

complying with international best practice on Corporate Governance.

The Cromme Code was published in 2002 and is split into a number of sections, starting with a

section on shareholders and the general meeting. The Cromme Code also reflects some of the

latest developments in technology. The Cromme Code was amended in 2005.

Table: Key characteristics influencing German corporate governance


Main business form Public or private companies limited by shares

Predominant ownership structure Financial and non-financial companies

Legal system Civil law

Board structure Dual

Important aspect Compulsory employee representation on supervisory

board.





(ii)

Risk and uncertainty in Whole Life Cycle Costing:


stochastic assessment of the performance of constructed facilities from feasibility to disposal.

WLCC decisions are complex and usually comprise an array of significant factors affecting the

ultimate cost decisions. WLCC decisions generally have multiple objectives and alternatives,

long-term impacts, multiple constituencies in the procurement of construction projects, generally

involve multiple disciplines and numerous decision makers, and always involve various degrees

of risk and uncertainty. Project cost, design and operational decision parameters are often

established very early in the life of a given building project. Often, these parameters are chosen

based on owner‟s and project team‟s personal experiences or on an ad hoc static economic

analysis of the anticipated project costs. While these approaches are common, they do not

provide a robust framework for dealing with the risks and decisions that are taken in the

evaluation process. Nor do they allow for a systematic evaluation of all the parameters that are

considered important in the examination of the WLCC aspects of a project. The existing

methods also do not adequately quantify the true economic impacts of many quantitative and

qualitative parameters.

Decisions about building-related investments typically involve a great deal of uncertainty about

their costs and potential savings. Performing a WLCCA greatly increases the likelihood of

choosing a project that saves money in the long run. Yet, there may still be some uncertainty

associated with the WLCC results. WLCCAs are usually performed early in the design process

when only estimates of costs and savings are available, rather than certain dollar amounts.

Uncertainty in input values means that actual outcomes may differ from estimated outcomes.

There are techniques for estimating the cost of choosing the "wrong" project alternative.

Deterministic techniques, such as sensitivity analysis or breakeven analysis, are easily done

without requiring additional resources or information. They produce a single-point estimate ofhow uncertain input data affect the analysis outcome. Probabilistic techniques, on the other

hand, quantify risk exposure by deriving probabilities of achieving different values of economic

worth from probability distributions for input values that are uncertain. However, they have

greater informational and technical requirements than do deterministic techniques. Whether

one or the other technique is chosen depends on factors such as the size of the project, its

importance, and the resources available. Since sensitivity analysis and break-even analysis are

two approaches that are simple to perform, they should be part of every WLCCA.

Answer 7(f):

According to “Altered Images: the 2001 State of Corporate Responsibility in India Poll”, a surveyconducted by Tata Energy Research Institute (TERI), the evolution of CSR in India has followed a

chronological evolution of 4 thinking approaches:

Ethical Model (1930 – 1950): One significant aspect of this model is the promotion of “trusteeship”

that was revived and reinterpreted by Gandhiji. Under this notion the businesses were motivated

to manage their business entity as a trust held in the interest of the community. The idea

prompted many family run businesses to contribute towards socioeconomic development. The




efforts of Tata group directed towards the well being of the society are also worth mentioning in

this model.

Statist Model (1950 – 1970s): Under the aegis of Jawahar Lal Nehru, this model came into being in

th t i d d Th d i b i d d i li t ki d f Th

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