COMPANY SECRETARIAL PRACTICE Time allowed: 3 hours Maximum marks: 100 NOTE: 1. Answer SIX questions including Question No.1 which is COMPULSORY. 2.All references to sections relate to the Companies Act, 1956 unless stated otherwise. 1.Draft any four of the following. In case of resolution, give reasons for passing the requisite resolution stating the authority who can pass it and also the type of resolution referring to the relevant section(s) of the Companies Act, 1956 : (i)Agreement with Vivek as the Managing Director of Grow Fast Ltd. for a period of 3 years at a remuneration of Rs.20 lakh per month with perquisites allowable under Schedule XIII to the Companies Act, 1956, but with no commission. The company is consistently earning profits and the remuneration will be subject to the provisions of sections 198 and 309. (Only main body of the resolution is to be drafted containing the duties, responsibilities and powers of the appointee.) (ii)Appropriate resolution to make investment of Rs.15 crore in preference shares of Sona Tractors Ltd., a company in trade dealing relationship with the investing company. The investing company has a paid-up equity capital of Rs.20 crore, a paid-up preference capital of Rs.5 crore and general reserve of Rs.4 crore. The company has no other investment or recoverable loan. (iii)Resolution recommending declaration of dividend to shareholders without providing for depreciation. (iv)Notice for book closure prior to payment of final dividend. (v)A compliance certificate without any qualification for a private limited company having a paid-up capital of Rs.2 crore in respect of the year ended on 31st March, 2009 embodying the substantive part of the report (i.e., the task carried on and scope of the work) including only certification of maintenance of books and registers and filing of required returns/documents with appropriate authorities. (5 marks each) Answer 1(i) Authority : Shareholders Type of Resolution : Ordinary resolution Resolved that pursuant to Schedule XIII to the Companies Act, 1956 and subject to the provisions of section 198 and 309 of the Companies Act, 1956, the company be and is hereby appoint Sri M L Annadurai, resident of……….and aged 54 years as its managing director for a period of 3 years commencing from………….and Sri M L Annadurai agrees to act as the managing director (M.D.) of the company for the said duration on the following terms and conditions: (a)The MD shall work under the superintendence, control and direction of the Company’s Board, shall have the powers of general conduct and management of business and affairs of the company in relation to the following function, namely (a) ………….(b)…………..(c) ………….except in the matters which may be specifically required to be done by the Board either by the governing law or by the articles of the company. (b)The MD will exercise and perform such acts and duties as the Board may from time to time delegate to him. He will also do and perform all other acts, deeds and things which in the ordinary course of business, he may consider necessary, proper and in the interest of the company. (c)Without restricting the general powers and authority as mentioned above, the MD will have following powers to be exercised on behalf of the company− (i)………………. (ii) (iii) (d)The MD shall hold office for 3 years commencing from…………. (e)The company shall pay to the MD the remuneration specified below in consideration of services as MD: (i)salary at Rs.20 lakh per month inclusive of DA; (ii)Perquisites as allowable under Part II, Section II of Sch.XIII. (f)In the event of the company failing to earn adequate profits or incurring loss during the tenure of the agreement, this agreement will automatically come under section II of Part II of the aforesaid schedule and the remuneration per month will be worked out based on effective capital of the company. Note: The board of directors of a company can appoint a managing director if authorized by the articles in accordance with Schedule XIII to the Companies Act, 1956. However, according to part III of Schedule XIII, where a managing director is appointed as per Schedule XIII, the appointment shall be subject to approval by a resolution of the shareholders in general meeting. Further, as the question specifically mentions that perquisites are allowable under Schedule XIII, Central Government’s approval is not required in the present case. Answer 1(ii) Authority : Board of Directors Type of resolution : Board Resolution The resolution will be a Board resolution as the proposed investment is within the limit allowed to the Board to make investments, loans etc under section 372A of the Companies Act, 1956. The paid-up share capital is Rs.20 crore+Rs.5 crore = Rs.25 crore The free reserves = Rs.04 crore Total paid-up share capital and free reserves = Rs.29 crore

60% of Rs.29 crore = 17.4 crore 100% of free reserve = 4 crore Rs.17.4 crore is accordingly the upper limit in the case and the proposed investment is Rs.15 crore.

Accordingly, the following is the draft of the Board Resolution: Resolved unanimously that an Investment of Rs. 15 crore in Preference Shares of Sona Tractors Ltd. as a trade investment to help that company expand its capacity to meet the company’s growing demands for tractors and their components be and is hereby approved. Sri………………..,the Executive Director (Finance) is authorized to sign the application form and do all such acts as are necessary or incidental thereto. Answer 1(iii) Authority Board of Directors with approval of the Central Government. Type of resolution Board Resolution subject to approval of the Central Government. RESOLVED THAT – (i)an application be made to the Central Government under clause (c) of the proviso to Sub-section (1) of Section 205 of the Companies Act, 1956 to allow the company to declare and pay dividend for the financial year ending on ...... 2008 out of the profits of the company for that year without providing for depreciation at the rate specified in Schedule XIV, which requires the depreciation on the gas cylinders including valves and regulators, to be provided at ...... per cent. (ii)the Company Secretary, Shri ...... be and is hereby authorised to make the required application to the Central Government for seeking Central Government’s approval to the company declaring and paying dividend for the financial year ending ...... 2008 out of the profits of the company for that year without providing for depreciation at the specified rate. Answer 1(iv) NOTICE FOR BOOK CLOSURE Name of Company: ...... Registered Office: ...... Notice Pursuant to Section 154 of the Companies Act, 1956 and the applicable clauses of the Listing Agreement, notice is hereby given that the register of members and the share transfer register of the company will remain closed, for the purpose of payment of final dividend, from the ...... th day of ...... (month), ...... 2009 to the ...... th day of ...... 2009 (both days inclusive). Members of the company are requested to intimate to the company at its registered office above, their latest postal addresses, where the final dividend warrants may be sent by the company.

Place:...... For ...... Limited Date:...... (...... ) Company Secretary Answer 1(v) SPECIMEN COMPLIANCE CERTIFICATE Registration No. of the Company______Nominal Capital: Rs. ______To, The Members XYZ Limited, 163 Back Bay Reclamation Nariman Point Mumbai I/We have examined the registers, records, books and papers of XYZ Limited (the Company) as required to be maintained under the Companies Act, 1956, (the Act) and the rules made thereunder and also the provisions contained in the Memorandum and Articles of Association of the Company for the financial year ended on 31st December 2009 (financial year). In my/our opinion and to the best of my/our information and according to the examinations carried out by me/us and explanations furnished to me/us by the company, its officers and agents, I/we certify that in respect of the aforesaid financial year: 1.The company has kept and maintained all registers as stated in Annexure ‘A’ to this certificate, as per the provisions of the Act and the rules made thereunder and all entries therein have been duly recorded. 2.The company has duly filed the forms and returns as stated in Annexure ‘B’ to this certificate, with the Registrar of Companies, Regional Director, Central Government, Company Law Board or other authorities within the time prescribed under the Act and the rules made thereunder. Signature Date:…….. Place:…….. […..name……] Practising Company Secretary Membership No. ______Certificate of Practice No. ______Question 2 (a)State, with reasons in brief, whether the following statements are correct or incorrect: (i)A listed company cannot issue sweat equity shares to its promoters. (ii)Since a producer company is an innovation, it does not need the words ‘limited’ at the end of its name. (iii)E-Form 10 relates to registration of charges. (iv)A company declared defunct under section 560 can never be included again in the register of companies maintained by the Registrar of Companies. (v)The Insider Trading Regulations promulgated by SEBI excludes the auditor of the company from the scope of the regulations. (vi)Under the UK Companies Act, 2006, a director of a public company can be removed before expiry of his term only by a special resolution. (2 marks each) (b)Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i)______is the conclusive evidence in case of a company that the statutory requirements have been complied with. (ii)In case the minimum subscription is not received and refund is delayed, ______% interest is to be paid by a company. (iii)______is a new form of legal entity recognised in India recently. (iv)Buy-back securities should be physically destroyed within ______days. (1 mark each) Answer 2(a) (i)Incorrect Reason: As per section 79A (1) (d) of the Companies Act, 1956, the sweat equity shares of a company whose equity shares are listed on a recognized stock exchange, are to be issued in accordance with the regulations made by the Securities and Exchange Board of India in this behalf. Under regulation 6 of SEBI (Issue of Sweat Equity) Regulations, 2002, a listed company can issue sweat equity shares to its promoters. (ii)Incorrect Reason: Section 581C of the Companies Act, 1956 mandates the use of the word ‘limited’ after the name of a producer company. (iii)Correct Reason: E-form 10 relates to registration of charges arising out of issue of debentures. (iv) Incorrect Reason: According to section 560(6) of the Companies Act, 1956, a company, or any member or creditors by way of an application to the Court can request for the restoration of the company’s name in the register of companies before the expiry of twenty years from the date the company has been declared defunct in the Official Gazette. The Court may order for the company’s name to be included again in the register of companies maintained by the Registrar of Companies. (v)Incorrect Reason: As per regulation 2(g) of the SEBI ([Prohibition of] Insider Trading) Regulations, 1992, an ‘auditor’ is included within the definition of ‘officer of a company’.

(vi)Incorrect Reason: Section 168 of the U.K. Companies Act, 2006 allows removal of a director of any company before the expiry of his term by passing an ordinary resolution. Answer 2(b) (i)Certificate of Incorporation (ii)6% (iii)Limited Liability Partnership (iv)Seven days Question 3 (a)Choose the most appropriate answer from the given options in respect of the following: (i)A notice of disclosure of interest at the Board meeting is the requirement of section — (a) 295 (b) 269 (c) 297 (d) 299. (ii)A director appointed by the Board to hold the office until the conclusion of next annual general meeting is known as –– (a)Additional director (b)Nominee director (c)Alternate director (d)Director retiring by rotation. (iii)As per the provisions of the Companies Act, 1956, the form of proxy must be deposited with the company at least — (a)24 Hours before the time of annual general meeting (b)36 Hours before the time of annual general meeting (c)48 Hours before the time of annual general meeting (d)72 Hours before the time of annual general meeting. (iv)The applicant for availability of name of the proposed company can have option to give maximum — (a)3 Alternative names (b)4 Alternative names (c)5 Alternative names (d)6 Alternative names. (v)A person who is a Company Secretary and director of a company is–– (a)Employee director (b)Non-executive director (c)Executive director (d)Independent director. (vi)A company in which 50.25% of shares are held by one State government while the rest of the shares are held by private sector companies and by retail shareholders, i.e., members of public, is a— (a)Government company (b)Public company (c)Corporation (d)Private sector company. (1 mark each) (b)“Postal ballot system is an unmixed blessing.” Comment. (6 marks) (c)Briefly outline the provisions of the Companies Act, 1956 in regard to postal ballot.(4 marks) Answer 3(a) (i)(c) 299 (ii)(a) Additional director (iii)(c) 48 hours (iv)(c) 5 alternative names (v)(c) Executive Director (vi)(b) Public company. Answer 3(b) Postal Ballot System is indeed a blessing as it enables members spread throughout geographically dispersed areas to cast their votes on matters of crucial interest to them e.g. issue of shares with differential voting rights, alteration of object clause of the Memorandum of Association, buy-back of shares etc. The concept of Postal Ballot is a unique provision which gives shareholders the right to vote on items of business of a corporate body without actually attending its general meetings either personally or through their proxies/representatives. However, the postal ballot system cannot be said to be an unmixed blessing as the shareholders have no right to express their views and participate in the discussion. They can only express their assent or dissent to the proposed resolution. Answer 3(c) Section 192A of the Companies Act, 1956 provides for passing of resolution by postal ballot. Some of the provisions are as under: (i)This facility is available only to listed companies; (ii)Notice of the proposed resolution is to be sent to every shareholder by registered post acknowledgement due or such other mode as may be prescribed by the Central Government; (iii)A postage prepaid envelope shall accompany the notice to enable the shareholder to send their reply; (iv)A shareholder is required to send his assent or dissent to the resolution within a period of thirty days from the date of posting of letter; (v)Upon receiving the replies (within the stated time), the assents and dissents are counted. If the total of assents reaches the required majority, the resolution shall be deemed to be duly passed. Question 4 (a)A charge for Rs.3 crore was created and registered by Dada Films Ltd. in favour of State Bank of India. The same was fully repaid on 31st August, 2009, but the relevant ‘E-Form’ for registering the satisfaction of the charge was filed on 10th October, 2009. The company then realised that it has unintentionally delayed the filing and has attracted penal provision of the Companies Act, 1956 in this regard. The company has approached Chetan, a Practising Company Secretary for his advice as regards the possibility of any condonation of the offence. What would be the advice ? (4 marks) (b)Discuss the various aspects of ‘responsibility and accountability’ of the Board in corporate culture. (4 marks) (c)Explain the impact of speculative reports in media with price sensitive information quoting case law. (4 marks) (d)What is ‘management discussion and analysis report’ (MDAR) ? State its contents. (4 marks) Answer 4(a) The situation given in the present case refers to satisfaction of charge. Section 138 of the Companies Act, 1956 requires that a company which has repaid its dues against which charge was created and registered with the Registrar of companies must file Form No.17 within 30 days from the date of satisfaction of charge. There is no provision for extension of time for filing of Form No.17. Any Form No.17 filed after 30 days from the date of satisfaction of charge requires order from the Company Law Board (CLB) for condoning the delay under section 141 of the Act. In the present case, the dues were repaid on 31st August 2009. So, the company was required to file form No.l7 on or before 30th September 2009. However, the company filed form No.17 on 10th October, 2009 i.e. delayed by 10 days. Therefore, the company shall have to file petition under section 141 of the Act to the CLB for condonation of delay of 10 days with relevant reasons. If the CLB passes an order for condonation of delay, the same shall be filed with the Registrar of Companies in form No.21. After approving form 21, form 17 will be approved by the ROC and then, the charge will be satisfied. Answer 4(b) Board of Directors is responsible for the governance of their companies and accountable for the resources entrusted to it by the shareholders. A system of good corporate governance promotes relationships of accountability between the board, the management and the auditor. It holds the management accountable to the board and the board accountable to the shareholders. The board is accountable towards the shareholders in maximizing shareholders' wealth. The Directors should not abuse their powers and further ensure that they act in the best interests of the Company in its broad sense. The responsibilities of the board include setting of company's aims, providing the leadership to put them into effect, supervising the management of the business and reporting to the shareholders on their stewardship. The board's actions are subject to laws, regulations and resolutions of the shareholders in general meetings. The shareholders' role in governance is to appoint the directors and the auditors to satisfy themselves that an appropriate governance structure is in place. Answer 4(c) It was held by Appellate Authority in the case of Hindustan Lever Ltd. vs. SEBI (1998) 3 Comp LJ 473 (A.P.) that if leading financial newspapers had reported the possibility of a merger, it cannot be alleged later that the information about the merger was a price sensitive information. The reason is that the possibility of a merger would be presumed to be known to the public after the publication of the news of merger. As a fall out of this case, SEBI amended its Regulations in 2002 to specifically provide that speculative reports in print and electronic media shall not be considered as published information (i.e. they will be considered as unpublished price sensitive information), as provided in definition 2(k) of the amended regulations. Answer 4(d) A Management Discussion and Analysis Report (MDAR) is a report made by the Board of directors of a company. The MDAR should either form a part of the Board’s Report or be given as an addition thereto in the annual report to the shareholders. The MDAR should include discussions on the following matters within the limits set by the company’s competitive position: −Industry structure and developments. −Opportunities and threats (SWOT analysis). −Segment wise or product wise performance. −Risks and areas of concern. −Internal control systems and their adequacy. −Discussion on financial performance with respect to operational performance. −Material developments in human resources /industrial relations front, including number of people employed. MDAR should be considered and approved by the Board in a meeting of the Board and not through resolution passed by circulation. It is desirable that MDAR is signed in the same manner as in the case of Board's report. Question 5 As a Company Secretary of Smart Enterprises Ltd., how would you tackle the following situations: (i)Quorum was present at the beginning of a Board meeting. However, after one hour, one director had to leave for certain emergency and the presence of directors in the meeting fell below the minimum required for quorum. There were two matters remaining to be considered as per the agenda. (ii)A director of the company remained absent, without notice, for 6 meetings during first quarter of 2009. (iii)The Union Bank of India has given a loan of Rs.25 crore for the company’s new project and as per one of the terms of sanction it wants to nominate its Chief Manager, Vijay on the Board. (iv)A person informs you in writing that he is not a member of your company, yet he has received a notice for the annual general meeting as a member. (4 marks each) Answer 5(i) As per section 287 of the Companies Act, 1956 quorum for the meeting of the Board of directors of a company shall be one-third of its total strength or two directors, which ever is higher. Also, it is necessary that the minimum quorum at the meeting should be present at all time and not only at the beginning of the meeting. It was held in the case of Balakrishna v. Balu Subudhi AIR 1949 Pat 184 that the quorum of the Board is required at every stage of the meeting and unless a quorum is present at every stage, the business transacted is void. Therefore, the board is advised that the remaining businesses should not be taken up and meeting must be adjourned or terminated. The remaining subjects could be taken up in adjourned meeting or in a fresh meeting. If the remaining items are not covered by section 292, the same may also be taken up by way of resolution by circulation. Answer 5(ii) As per section 283(1) (g) of the Companies Act, 1956, the office of a director shall become vacant if he absents himself from three consecutive meetings of the board of directors, or from all meeting of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board. In the present case, the director remained absent from all meetings held in the first quarter of 2009, without notice i.e. without obtaining leave of absence. Therefore, he should vacate the office in terms of section 283 of the Act. Also, the company will be required to file form No.32 after his vacation from the office of the director. Answer 5(iii) One of the modes of appointment of a director on the board of a company is by "third party". A person so appointed is known as Nominee Director. He is not liable to retire by rotation and considered as permanent director till the pleasure of their nominating agencies. He will vacate the office automatically on liquidation of the loan or other credit facilities. However, the Articles of Association of a company must contain an Article enabling such appointment of Nominee Director. In the given case, Union Bank could nominate its representative on the Board. However, it must be ensured that the Articles of Association of the Company contain provision for the appointment of a nominee director. Otherwise, the Articles have to be altered by passing a special resolution in the general meeting. Further, the appointment of nominee director should fall within the maximum number of directors stipulated in the Articles. Answer 5(iv) According to section 111(4) of the Companies Act, 1956, if the name of any person is, without sufficient cause, entered in the register of members of a company, the aggrieved person may apply to the Company Law Board for rectification of the Register. Any entry made in the register of members, if required to be altered or removed requires approval of the Company Law Board, except any apparent clerical mistake. In the present case, a person has informed the company that he is not a member of the company. Therefore, first of all, it should be verified whether the mistake was a clerical one that would be rectified by intimating to the company. If the mistake was not a clerical one, an application to the Company Law Board is required. Question 6 (a)There are two executive directors in your company who are technocrats. The company is a public limited company. The company has incurred huge losses in the last two years. The company wants to enhance their remuneration to Rs.6 lakh per month from existing Rs.4 lakh. The data from the balance sheet of the last year indicates that the paid-up capital of the company is Rs.10 crore and accumulated losses of Rs.10.67 crore, term loan and other long-term borrowings are Rs.5 crore. Besides, the company holds a long-term investment of Rs.7 crore. The company’s remuneration committee has recommended the proposal and the company is regular in repayment of its debts. As the Company Secretary, how would you deal with the matter? (8 marks) (b)Bring out the salient aspects of the Companies (Director Identification Number) Rules, 2006 leading to the issue of Director Identification Number (DIN). (8 marks) Answer 6(a) The present case deals with the payment of managerial remuneration to the whole time directors of the company. Section 198 of the Companies Act, 1956 deals with the overall remuneration payable to the managerial persons at 11% of the net profit subject to the maximum of 10% for all the directors together but not more than 5% to each such director as allowed by section 309 of the Act. However, schedule XIII to the Companies Act, 1956 deals with situations where there are no profits or inadequate profits. It takes into consideration the concept of effective capital and fixes the maximum limit of remuneration for each director. However, there are certain conditions imposed by the said Schedule and Parts thereof. If such terms and conditions are fulfilled, the company may pay remuneration according to the provisions of Schedule XIII. In the given case the effective capital works out as under. Paid up capital Rs.10 crore Secured loans Rs.05 crore Gross capital employed Rs.15 crore Reduced by accumulated losses Rs.10.67 crores 4.33 Further reduced by investment 7.00 Effective capital (-)2.67 crore Since, the effective capital is negative, as per the provisions given in Schedule XIII; the remuneration payable to each director shall be maximum Rs. 1,50,000 per month. Further, the company is required to apply to the Central Govt. for getting prior approval for the proposed remuneration. Also, approval of members by special resolution and of the remuneration Committee is required. Answer 6(b) Salient aspects of the Companies (Director Identification Number) Rules, 2006 leading to the issue of Director Identification Number (DIN) are given as below: (1)Application by concerned person by electronic mode for DIN to the Central Government through designated portal of the Ministry of Corporate Affairs. (2)The applicant shall access form DIN No.1 from the portal, fill in the required particulars and use ‘submit’ function. Thereafter, the system will electronically generate and indicate in the space provided a provisional DIN. (3)The provisional DIN shall be valid for a period of 60 days from the data on which it was generated. (4)After getting provisional DIN, the applicant shall, submit a formal application to the Central Government within 60 days from the date of generation of provisional DIN. (5)The applicant shall take a print out of form No.DIN-1, affix his photograph in specified place in the form, and enclose true copies of proof of identity and proof of residence. He shall then physically sign the form at the specified place. The photograph and the proof of identity and residence shall be Pre-certified by any one of the following – (i) Gazetted Officer of the Central Government or any State Government; (ii) Notary Public; (iii) a practicing Company Secretary or Chartered Accountant or a Cost and Work Accountant; (iv) Company Secretary in full time employment of the company. (6)The Central Government shall communicate within one month of receipt of application, its approval or disapproval of the application, in writing by a letter or by electronic mode. (7)If DIN is allotted, it is valid for life time of the recipient. (8)The applicant, within one month of receipt of DIN, shall intimate to the company or companies concerned in which he is a director, the DIN in Form DIN-2. (9)The company/companies, in turn, shall intimate the DIN communicated to it within one week of receiving the DIN, to the concerned ROC in DIN-3. (10)Every director, in the event of any change in his particulars as stated in Form No. DIN-1, who has been allotted a Director Identification Number under these rules, shall intimate such change(s) to the Central Government within a period of 30 days of such change(s) in particulars by using Form No. DIN-4 made available by the Ministry on its website. The concerned director will also intimate such changes to the company or companies on which he is a director. Question 7 . (a)Answer the following with reference to Secretarial Standard–7 on passing of Board resolution by circulation process : (i)Who is authorised to decide that certain resolutions (other than those specified in section 292) are to be taken up for consideration by circulation as against in a meeting ? (ii)What procedure is to be followed for passing a resolution by circulation ? Are interested directors eligible to receive the proposed resolution and related papers ? (iii)How is a proposed (circulated) resolution considered approved or not ? (iv)A notice accompanying the proposed resolution provides for 7 days to intimate directors’ assent or dissent. On which date the resolution shall be deemed to be approved when assents from required majority have been received within 3 days of the circulation? (2 marks each) (b)State the matter along with relevant section(s) of the Companies Act, 1956 for which the following E-Forms are required to be filed : (i)E-Form 1B (ii)E-Form 20B (iii)E-Form 23B (iv)E-Form 25C. (1 mark each) (c)State the requirement for audit of the financial accounting statements under the UK Companies Act, 2006. (4 marks) Answer 7(a) (i)Secretarial Standard (SS-7) authorizes the Chairman of the Board or Managing Director and in their absence any other director to decide whether the approval of the Board for a particular matter is to be obtained by means of resolution by circulation. Where is there is no Chairman or managing director, any other director should decide whether the approval of the Board for a particular business should be obtained by means of a resolution by circulation. (ii)Procedure for passing a resolution by circulation− A resolution proposed to be passed by circulation should be sent in draft form, together with the necessary papers, individually to all the directors or, in the case of a Committee to all the members of the Committee, at the same time. Each business proposed to be passed by way of resolution by circulation should be explained by a note setting out the details of the proposal and the draft of the resolution proposed. The draft of the resolution to be passed and the necessary papers should be circulated by hand, or by post, or by facsimile, or by email or by any other electronic mode. Further, interested directors are eligible to get the draft resolution and accompanying papers. (iii)The resolution is passed, when it is approved by a majority of directors entitled to vote on the resolution other than interested directors. The resolution is deemed to have been passed on the date on which it is approved by the majority of the Directors. If any special majority or the affirmative vote of any particular director or directors is specified in the Articles, the resolution should be passed only with the assent of such special majority or such affirmative vote. (iv)The proposed resolution shall be deemed to be passed when assent of required majority is received ignoring the interested director(s). Accordingly, the proposed resolution shall be deemed to be passed on the 3rd day of circulation. Answer 7(b) (i)E-Form 1B – Application for approval of the Central Government for change of name (section 21) or conversion of a public company into a private company (section 31). (ii)E-Form 20B – Form for filing Annual Return by a company having a share capital with ROC (Section 159). (iii)E-Form 23B – Information by auditor to Registrar intimating about his appointment [Section 224(1A)]. (iv)E-Form 25C – Return of appointment of Managing Director or whole-time Director or Manager [Section 269(2) and Schedule XIII.] Answer 7(c) Requirement for audited accounts (Section 475 of the UK Companies Act, 2006) A company’s annual accounts for a financial year must be audited in accordance with this Part unless the company— (a)is exempt from audit under section 477 (small companies), or section 480 (dormant companies); or (b)is exempt from the requirements of this Part under section 482 (nonprofit-making companies subject to public sector audit). A company is not entitled to any such exemption unless its balance sheet contains a statement by the directors to that effect. A company is not entitled to exemption under any of the provisions mentioned in subsection (1)(a) unless its balance sheet contains a statement by the directors to the effect that— (a)the members have not required the company to obtain an audit of its accounts for the year in question in accordance with section 476, and (b)the directors acknowledge their responsibilities for complying with the requirements of this Act with respect to accounting records and the preparation of accounts. Question 8 Distinguish between any four of the following with reference to the provisions of the Companies Act, 1956: (i)‘Debenture’ and ‘deposit’. (ii)‘Reduction of share capital’ and ‘buy-back of shares’. (iii)‘Director’ and ‘deemed director’. (iv)‘Dividend’ and ‘bonus shares’. (v)Legal basis of ‘issue of shares at a discount’ and ‘issue of shares at a premium’. (4 marks each) Answer 8 (i)Distinction between Debenture and deposit Debenture Section 2(12) of the Companies Act, 1956 defines debenture as follows: Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. Debenture is a document evidencing a debt or acknowledging it and any document which fulfills either of these conditions is a debenture. The important features of a debenture are: 1.It is issued by a company as a certificate of indebtedness. 2.It usually indicates the date of redemption and also provides for the repayment of principal and payment of interest at specified date or dates. 3.It usually creates a charge on the undertaking or the assets of the company. In such a case the lenders of money to the company enjoy better protection. Deposit Any money received by a non-banking company from any person or any money borrowed in any form from any person is a deposit under Companies Act and the Deposit Rules, unless it qualifies for exemption under rule 2 (b). Therefore, the company must ensure that any money borrowed by the company, regardless of whether it is called deposit or not, is a deposit within the meaning of the Deposit Rules. (ii)Distinction between Reduction of share capital and buy-back of shares Reduction of Share Capital (paid up) is governed by the provisions of section 100 of the Companies Act, 1956 whereas the Buy Back of Share is permitted under section 77A of the said Act. Reduction of capital requires passing of special resolution, obtaining consent of all the creditors of the company. Further, High Court's confirmation is required which is a cumbersome and time taking procedure. Power to enforce buyback is vested in the Board of Directors subject to maximum of 10% of the paid up capital. If the buyback exceeds this limit then approval of the Members by special resolution is required. In buyback, shares bought back has to be extinguished and the share certificates are required to be destroyed whereas in case of the Reduction, there is no such requirement, though the company has to add the words ‘and reduced’ at the end of its name for a period specified in the court order confirming reduction. In reduction of capital, every shareholder whose shares are subject to reduction is to adhere to the court order but in buyback, each shareholder has the option not to sell back his shares to the company. (iii)Distinction between Director and deemed director Section 2(13) of the Companies Act, 1956 defines the term ‘director’ in an inclusive manner. It states that a director is a person occupying the position of a director by whatever name he is called. The Act does not contain any definition of ‘deemed director’. The definition of director places reliance on functions that a person is discharging in a company rather than a particular position held by him. The meaning of director in the Act has to be understood in a generic sense as a person having the power to direct. Besides, the Act has specified in many places the duties and functions of directors e.g. section 292, section 217 etc. As regards deemed directors, one has to refer to section 5 and 7 of the Act. Under these sections, even though one does not carry the designation of director or does not perform as a director in a company but he can be treated as a director for certain purposes of the Act. Generally, if he is a person whose directions determine the performance of the directors, he will be treated as a director. Such a person wields actual powers without coming to the surface. However, he is not entitled to exercise any statutory right and power of a director. A deemed director need not necessarily be an individual whereas a director will have to be an individual. (iv)Distinction between Dividend and bonus shares Dividend is the return on the share capital subscribed for and paid to a company by its shareholders. The term “dividend” has been defined under Section 2(14A) of the Companies Act, 1956 (the Act) as “dividend” includes any interim dividend. The dictionary meaning of the term ‘dividend’ is sum payable as interest on loan or as profit of a company to the creditors of an insolvent’s estate or an individual’s share of it. In commercial parlance, however, dividend is the share of the company’s profit distributed among the members. When a company has accumulated free reserves and is desirous of bridging the gap between the capital and fixed assets, it issues bonus shares to its equity shareholders. Such an issue would not place any fresh funds in the hands of the company. On the contrary, after a bonus issue it would become necessary for the company to earn more to effectively service the increased capital. The shareholder will, however, be benefited by way of higher return on investment and more number of shares in their hands. A dividend requires an outflow of cash, whereas in the case of issue of bonus shares, no cash flows are involved. (v)Distinction between Legal basis of issue of shares at a discount and issue of shares at a premium In simple terms, issue of shares at a discount means a company issuing such shares receiving a predetermined consideration which is lower than the nominal value of such shares. As against this, the issue of shares at a premium means the company receiving a predetermined consideration which is higher than the nominal value of the shares issued. Issue of shares at discount is regulated by section 79 of the Companies Act, 1956. On the other hand, provisions regarding issue of shares at a premium are contained in section 78 of the Act. As per section 79, shares can be issued at a discount on fulfillment of the following conditions: 1.The issue has to be authorized by a special resolution of the company. 2.The issue has to be sanctioned by the CLB. 3.The resolution has to specify the maximum rate of discount which at present is 10%. The rate of discount can be fixed at a higher rate provided the CLB is satisfied that a higher rate may be allowed under special circumstances. 4.The shares to be issued at a discount should be of a class which has already been issued. 5.One year has elapsed since the date the company was entitled to commence business. 6.The issue must be made within 2 months of the sanction by the CLB. However, CLB has the power to extend the period. A company is free to issue shares at a premium as Section 78 does not impose any condition for such issues. However, the section regulates the maintenance and utilization of the amount of premium realized on the issue. It requires the premium to be credited to ‘Securities Premium Account’ and can only be used for- 1.Issue of bonus shares (fully paid). 2.Writing off preliminary expenses. 3.Writing off the expenses and discount on issue of shares/debentures. 4.Providing premium on redemption of preference shares/debentures of the company. DRAFTING, APPEARANCES AND PLEADINGS Time allowed: 3 hours Maximum marks: 100 NOTE : Answer SIX questions including Question No. 1 which is COMPULSORY. Question 1 (a)Hurry Burry Ltd. went into liquidation and its assets were put to sale by the court. The terms and conditions of the sale stated that the sale would be of the assets on ‘as is where is and whatever there is’ basis and the bidders had to satisfy themselves as to any encumbrance on the property. On 15th September, 2006, the company judge confirmed the sale of an immovable property in an auction in favour of Ravi. Later on, Ravi received a notice from the municipal corporation authorities claiming the payment of arrears of property tax for the period prior to 15th September, 2006 with interest. The municipal corporation had not filed its claim before the official liquidator. It was argued by the municipal corporation authorities that the sale was made on ‘as is where is and whatever there is’ basis and the buyer was deemed to have full knowledge as to the defects in the description, quality and quantity of the assets sold. Decide whether Ravi is liable to pay the arrears of property tax with interest. Support your answer with decided case law. (5 marks) (b)What are the do’s and don’ts which should be considered while drafting documents? (5 marks) (c)Explain the following: (i)Deed pool (ii)Deed poll (iii)Indenture (iv)Cyrographum (v)Deed escrow. (2 marks each) Answer 1(a) The facts of the case given are similar to the case Al Champdany Industries Ltd., v.Official Liquidator & Anr [(2009)148 Comp Cas.641(SC)] The above Case was decided by the Supreme Court and it was held that the purchaser was not liable to pay the taxes prior to the date 15th September, 2006. The Supreme Court held: (i)Under Section 55(1(g) of the Transfer of Property Act, 1882, the seller is bound to pay all Public Charges due in respect of the property up to the date of sale, when the property is sold in an auction. (ii)The fact that the company went into liquidation was given due publicity, the advertisement did not specify that all public changes have to be paid. The municipal authorities did not file their claims before the official liquidator. (iii)Neither the company not any other law imposed any additional obligation upon the purchaser to make any enquiry with regard to the liabilities of the company other than those which would impede its value. An encumbrance must be capable of being found out either on inspection of 18property or at the Registrar’s office or a statutory authority. In the light of the above decision, Mr. Ravi is not liable to pay the taxes prior to 15th September, 2006. Answer 1(b) Do's and Don'ts while drafting the documents Some Do's 1.Reduce the group of words to single word; 2.Use simple verb for a group of words; 3.Avoid round-about construction; 4.Avoid unnecessary repetition; 5.Write shorter sentences; 6.Express the ideas in fewer words; 7.Prefer the active to the passive voice sentences; 8.Choose the right word; 9.Know exactly the meaning of the words and sentences you are writing; and 10.Put yourself in the place of reader, read the document and satisfy yourself about the content, interpretation and the sense it carries. Some Don'ts The following things should be avoided while drafting the documents: (a)Avoid the use of words of same sound. For example, the words "Employer" and "Employee"; (b)When the clause in the document is numbered it is convenient to refer to any one clause by using single number for it. For example, "in clause 2 above" and so on. (c)Negative in successive phrases would be very carefully employed. (d)Draftsman should avoid the use of words "less than" or "more than", instead, he must use "not exceeding". (e)If the draftsman has provided for each of the two positions to happen without each other and also happen without, "either" will not be sufficient; he should write "either or both" or express the meaning of the two in other clauses. In writing and typing the following mistakes always occur which should be avoided: 1."And" and "or"; 2."Any" and "my"; 3."Know" and "now"; 4."Appointed" and "Applied"; 5."Present" and "Past" tense.

Answer 1(c) (i) Deed Pool A deed between two or more parties where as many copies are made as there are parties, so that each may be in a possession of a copy. This arrangement is known as deed pool. (ii) Deed Poll A deed made and executed by a single party e.g. power of attorney, is called a deed poll, because in olden times, it was polled or cut level at the top. It had a polled or clean cut edge. It is generally used for the purpose of granting powers of attorney and for exercising powers of appointment or setting out an arbitrator's award. It is drawn in first person usually. (iii) Indenture Indenture are those deeds in which there are two or more parties. It was written in duplicate upon one piece of parchment and two parts were severed so as to leave an indented or vary edge, forging being then, rendered very difficult. Indentures were so called as at one time they are indented or cut with uneven edge at the top. In olden times, the practice was to make as many copies or parts as they were called, of the instruments as they were parties to it, which parts taken together formed the deed and to engross all of them of the same skin of parchment. (iv) Cyrographum This was another type of indenture in olden times. The word "Cyrographum" was written between two or more copies of the document and the parchment was cut in a jugged line through this word. The idea was that the difficulty of so cutting another piece of parchment that it would fit exactly into this cutting and writing constituted a safeguard against the fraudulent substitution of a different writing for one of the parts of the original. This practice of indenting deeds also has ceased long ago and indentures are really now obsolete but the practice of calling a deed executed by more than one party as an "indenture" still continues in England. (v) Deed Escrow A deed signed by one party and delivered to another as an "escrow" for it is not a perfect deed. It is only a mere writing (Scriptum) unless signed by all the parties and dated when the last party signs it. The deed operates from the date it is last signed. Escrow means a simple writing not to become the deed of the expressed to be bound thereby, until some condition should have been performed. (Halsbury Laws of England, 3rd Edn., Vol. II, p. 348). Question 2 (a)Mention important aspects which should be kept in mind while drafting a sale deed of an immovable property by a limited company. (5 marks) (b)Alpha Industries Ltd. wishes to appoint Ram Avtar & Co., Advocates as their legal consultant on an annual retainership basis. Draft a suitable agreement assuming facts, wherever necessary. (5 marks) (c)Explain the following types of guarantee: (i)Contract of guarantee (ii)Continuing guarantee (iii)Bank guarantee. (2 marks each) Answer 2(a) Before drafting the sale deed for the immovable property, it is necessary that the title of the property be investigated and it should be ensured that the title to the property is proved as good and marketable. Investigation of title should be done by an experienced person, solicitor or advocate or professional consultant who should certify having carried out searches in the concerned office that the property is free from any encumbrance i.e. charges, etc. A company can validly acquire or dispose of an immovable property if its Memorandum and Articles of Association so provide and its Board of Directors pass the requisite resolution in conformity with the provisions of the Companies Act, 1956. A company may acquire any immovable property by having it sold out by any other person in its favour under a document known as 'Sale Deed' executed by the vendor in its favour. A Sale Deed must be properly drafted adhering to all the principal conditions prescribed under the Transfer of Property Act to acquire a perfect title to the property being purchased by the company. The important aspects to be kept in mind while drafting a sale deed of an immovable property are:- −Lawful consideration and objects: The property must be purchased as a part of legal transaction having paid the consideration as required under the provisions of the Indian Contract Act, 1872 for a valid contract. Besides, the objectives for which property is being purchased by the company should be lawful. −Competence of person to transfer: For a company the test of competence to enter into a transaction of sale or purchase is that its Board of Directors should authorize a person under the resolution passed in their meeting held in conformity with the Articles of Association and having objects clause to sell or purchase immovable property under Memorandum of Association. −Transfer of all interest in the property: All interests which a transferor is capable of passing should be explained in the document. For example, if it is transfer of lands, the easement annexed thereto, the rents of profits thereof, things attached thereto etc. −Absolute transfers – The transfer should be free of any conditions or limitations which may inhibit the other party to make full use of the property in exercise of legal rights. −Justification: Cogent reasons for transfer should be given so as to establish bonafide base for the transaction. −Property should be free from any rights or obligations which a third party can enforce legally against transferee for enjoying any benefit. −Protection for defective title: Section 51 of the transfer of property Act, provides protection to the bonafide transferees acquiring properties in good faith. −Precautions: The property is free from any encumbrances and no litigation questioning such property or rights or Interest connected therewith is pending in any Court. Answer 2(b) This agreement is made on 1st day of April 1999, between Alpha Industries Limited having its Registered Office at 707, Ram Mandir Lane, Prakask Deep Chambers, Shivaji Lane, Aurangabad of the one part (herein after called the “Company”) and Ram Avatar & Co. carrying on the profession of Advocates in partnership in the town of Bhopal of the other part (hereinafter called the “firm”) and witnesses as under: (i)That the company hereby appoints the firm as its legal adviser and the firm agrees to render legal services to the company on the terms and conditions mentioned hereunder for a period of one year, which shall deemed to continue unless terminated by a notice. (ii)During the currency of this agreement and unless attested by mutual consent, the company shall pay Rs.1,00,000/- (Rupee one lac only) per annum in two half yearly installments each year as remuneration for legal services rendered. (iii)That the firm engages to attend all the legal works of the said company, to send notices of demand or otherwise for recovery of outstanding dues, correspondences and to defend such matters in the courts or before other authority in this behalf in the town of Aurangabad and to give opinion in writing on the facts stated to the said firm in writing. (iv)That on termination of this agreement, the firm engages to return all papers, documents or other proceedings belonging to and which are expected to be returned by the company on severance of the connection with the company. (v)The firm shall have lien on all the papers and other documents of the company in respect of arrear of remuneration and other expenditure legitimately incurred on behalf of the company by the firm. Answer 2(c) (i) Contract of guarantee A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety"; the person in respect of whose default the guarantee is given is called the "principal debtor"; and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written. (Section 126 of the Indian Contract Act, 1872) (ii) Continuing guarantee A guarantee which extends to a series of transactions is called a "continuing guarantee". (iii) Bank guarantee A "bank guarantee" is a guarantee given by a bank on behalf of its client or account-holder to another person with whom the client has entered into a contract to perform some job or to do and call upon the bank to pay the guaranteed amount in the event of the contingency, mentioned in the guarantee, happening or not happening, as the case may be. Question 3 (a)What are the statutory provisions for appeals to the Securities Appellate Tribunal (SAT) under the Securities and Exchange Board of India Act, 1992? (4 marks) (b)Distinguish between ‘lease agreement’ and ‘licence agreement’. (4 marks) (c)Draft a specimen arbitration agreement to refer a dispute to two arbitrators. (8 marks) Answer 3(a) Section 15 T of the SEBI Act lays down that any person aggrieved by an order of SEBI made under this Act or the Rules or Regulations made thereunder or by an order made by an adjudicating officer under this Act, may prefer an appeal to the Securities Appellate Tribunal having jurisdiction in the matter. No appeal shall lie to the SAT from an order made by SEBI; by an Adjudicating Officer, with the Consent of the parties. Every appeal to SAT shall be filed within a period of 45 days from the date on which a copy of the order made by SEBI or the Adjudicating Officer is received by him and it shall be in such form and be accompanied by such fees as may be prescribed. Provided SAT may condone the delay if satisfied that there was sufficient cause. On receipt of an appeal, the SAT, may after giving the parties to appeal, an opportunity of being heard, pass such orders thereon as thinks fit, confirming, modifying or setting aside the order appealed against. The SAT shall send a copy of every order made by it to SEBI and the parties to appeal and the concerned adjudicating officer. The appeal filed before the SAT shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal. Answer 3(b) Lease: A lease of immovable property is a transfer of a right to enjoy the property for a certain time in consideration for a price paid or promised. The price paid is called “rent”. Licence: Licence has been defined in Section 52 of the Indian Easements Act, 1882 as under: “where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful and such right does not amount to an easement or an interest in the property, the right is called a licence”.

Distinction between Licence and Lease A licence and a lease is distinguished inter se with following characteristics:

Licence Lease 1. A personal non-heritable right. An heritable right in rem. 2. Creates no interest in the Interest created in the lessee. guarantee. 3. Non assignable ...... Usually assignable. 4. Always permissive and Permissive but not normally normally revocable. revocable. 5. Not exclusive user ...... Exclusive user...... 6. A positive right. A positive right. 7. Denial of grantor’s title does not Denial of lessor’s title results in necessarily result in forfeiture. forfeiture. 8. Remedy for breach is Specially enforceable. damages. 9. No notice necessary to Notice necessary to terminate terminate relationship. relationship. 10. Instrument granting right does Instrument creating right not require registration. requires registration. 11. Does not entitle licensee to sue Can sue in his own name. strangers in his own name. 12. A licensee does not qualify for a May qualify for a vote. vote. 13. Not liable for rents ...... Liable. 14. User not liable for public Liable. nuisance.

Answer 3(c) This agreement made and entered into between Mr…………..….…………. and Mr…………..….…………. on this…………..….…………. day of (month) and (year) witnesseth as follows: WHEREAS differences and disputes have arisen between the parties above-mentioned regarding the matter of…………..….…………. and the parties could not mutually settle the matter. Now the parties agree that the matter as under be referred to arbitration to obtain an award: 1.For the purpose of final determination of the dispute, the matter will be referred to Mr…………..….…………...….…………. nominated by one party and Mr………….. ………..….………….……. nominated by the other party as arbitrators and their award shall be final and binding on both the parties. 2.If differences should arise between the said two arbitrators on the questions referred to them, the said arbitrators shall select an umpire and the award to be given by the umpire shall be final and both the parties hereby agree that the award so given by the umpire or arbitrators shall be binding on both the parties. 3.A reasonable time-limit may be fixed after consulting the arbitrators for the grant of the award by them and umpire if appointed and the said time may be extended in consultation with the arbitrators or umpire if need be. 4.The provisions of the Arbitration and Conciliation Act, 1996 so far as applicable and as are not inconsistent or repugnant to the purposes of this reference shall apply to this reference to arbitration. 5.Both the parties agree that they would co-operate and lead evidence etc. with the arbitrators so appointed as expeditiously as possible and it is an express condition of this agreement, that if any of the parties non-co-operates or is absent at the reference, the arbitrators would be at liberty to proceed with the reference ex parte. 6.The parties hereto agree that this reference to arbitration would not be revoked either by death of either party or any other cause. 7.If the arbitrators or anyone of them as chosen under this agreement become incapacitated either by death or sickness or other disability, the parties retain the right of nominating substitutes and no fresh agreement therefor would be necessary. 8.It is an express stipulation that any award passed by the said arbitrators shall be binding on the parties, their heirs, executors and legal representatives. Having agreed to the above by both the parties, the said parties affix their signatures to this agreement this…………..….…………. day of (month and year) at (place). Signature I Signature II Question 4 . (a)“Articles of association of a company are public documents and have evidentiary value in matters which involve dealings of a company with its own members or third parties.” Discuss the statement and also state the important aspects to be kept in view while drafting the articles of association of a company. (8 marks) (b)Write notes on the following : (i)Rule of adverse inference (ii)Representative suit. (4 marks each) Answer 4(a) Article of Association is another equally important document for incorporation of a limited company. Articles are rules and regulations for management of internal affairs of the company. It constitutes a contract between the company and its members and members inter se. It is framed with the object of carrying out aims and objects of the company as contained in Memorandum and if necessary it may clarify anything contained in Memorandum. Articles should be in conformity with the provisions of Memorandum and the Companies Act. Utmost care is required to be taken to draft the Articles. It should contain strictly only relevant and necessary matters. Any person outsider, has constructive notice of the contents of Articles and expected to inspect before entering into any transaction with the company. Articles must be signed by the subscribers of the Memorandum and be registered along with the Memorandum. A private company must have its own Articles, but for public limited company it is optional. In case of drafting the articles for a public limited company limited by shares, the draftsman can follow the following alternatives: (i)Adopt Table A in full; or (ii)Exclude Table A wholly and register own Articles suiting its requirements; or (iii)Register own articles and in addition thereto allow Table A to apply so far as it is not modified or excluded by the articles. Articles shall be divided into paragraphs numbered consecutively. This will help the company to alter the articles conveniently. Some important points which a draftsman should bear in mind while drafting the Articles are as follows: 1.Share capital, its kinds, rights attached to different kinds of shares or any special privileges attached thereto should be considered and incorporated in Articles. 2.Directors – appointment of directors, their noting rights, resignations, termination etc. should be given due consideration and their rights, powers and privileges should be incorporated in Articles. Proportional representations may also be looked into. 3.In Government Companies, Joint Sector Companies, Joint Ventures with foreign companies, joint venture with Government Companies, the main terms of their partnership in Share Capital as well as the management of the affairs of the company with power and authority delegation be relevantly discussed in the Articles with scope and limitations thereto to avoid any misinterpretation. 4.As far as possible, regulation given in Table A may be borrowed, even if it is not made applicable so that Article may conform to the intent and spirit of law. 5.Efforts should be made to make each article self explanatory and self interpretative to avoid misleading conclusions. Coherence and sequence of the contents should be maintained at any costs. 6.Any items which are already mentioned in Memorandum and is to be mentioned in Articles, it is better that it is put in words such as "as mentioned in Memorandum of Association" which will skip the requirement of altering Articles when Memorandum is altered. 7.No provision which a company cannot do either as per Memorandum or Companies Act or any other law, should find a place in articles: e.g. expulsion of members. This is opposed to Company Jurisprudence and is ultra vires of the Act. 8.Where the company would require assistance from financial Institutions, provisions be made for appointment of nominee directors, conversion of loans from financial institutions into equity etc. 9.Sections 3(2)(iii), 274(3) among other sections specifies some prohibitions, limitations and restrictions in case of Pvt. Ltd. Companies should be taken care of in drafting articles. 10.After drafting a proper balancing should be done with Memorandum's contents, as to coverage, inconsistencies with it, contradictions occurred etc. to enable proper modification in time. It is better to have an Article of an existing company in the same field of activity, either to modify it or at least to know the relevant matters which can be included in the Draft. Before printing it is better be shown to ROC and seek his informal approval. Answer 4(b) (i) Rule of Adverse inference: Its incumbent upon a party in possession of best evidence on the issue involved to produce such evidence and if such party fails to produce the same, an adverse inference is liable to be drawn against such party. In the case of Ms. Shefali Bhargava v. Indraprastha Appollo Hospital & Anr.2003 NCJ 787 (NC), the court had held that drawing an adverse inference against a party the court would be justified in its action. Again, it could be equally incumbent upon a party to produce evidence of some expert where the issue involved is complex or difficult one, as for instance matters pertaining to Engineering, Medical Technology etc. Since the Court cannot constitute itself into an Expert body and contradict the claim/proposition on record unless there is something contrary on record by way of expert opinion or there is any significantly acclaimed publication on which reliance could be based by the Court. (ii) Representative suit: Representative suits are an exception to the general principle that all persons interested in a suit shall be parties thereto. Representative suits are the suits in which parties represent (a) others or (b) themselves and also other suits by executors, trustees, or benamis etc fall under the category of others. Examples of suits falling under the category other than the first category are suit by or against the manager of a Joint Hindu family; suit by members of the public in respect of a public charity u/s 92 of Code of Civil procedure and suits under order 1, Rule 8 of the Code of Civil procedure. The following essential conditions must be fulfilled in a representative suit: −The parties must be numerous −The parties mostly have same interest in the suit −The suit must be brought or prosecuted with the permission or under the director of the Court. −Notice must be given to the parties to be represented in the suit. Question 5 (a)“It is incumbent upon the defendant to file his defence in writing, else the court may pronounce judgment against him or make such order as it deems fit.” Examine the statement and enumerate important points while drafting the reply or a written statement. (6 marks) (b)Discuss the contents of a trust deed. (6 marks) (c)Explain any two types of mortgage. (4 marks) Answer 5(a) The defendant’s written defence or pleading is called a “Written statement”. The provision in this regard are found in order 8 of Code of Civil Procedure. It is not obligatory for the defendant to file written statement because in its absence, it cannot be said that the defendant admits the claim of the plaintiff. If however, the court passes an order for filing a written statement, the defendant is bound to file it, otherwise the court may pronounce judgment against him. While filing written statement, it is necessary to exercise highest degree of discretion. All possible defences must be taken and if the defendant does not take any plea, he may not be allowed to take it afterwards. At the time of drafting the reply or written statement, one has to keep the following points in mind: −The written statement should begin with the admission or denial of each fact alleged in the plaint. Each fact should be taken in the same order in which it is alleged in the plaint. One has to deny the averment of the plaint/petition which are incorrect, perverse or false. The denial has to be specific. −One has to submit the facts which are in the nature of defence and to be presented in a concise manner. −Attach relevant correspondence, invoice, challan, documents, extracts of relevant papers as annexures while reply is drafted to a particular para of the plaint. −The pleadings are foundations of a case as such, no para of the plaint is to be left unattended. −After reply, the same is to be signed by the constituted attorney of the opposite party or individual. In case of partnership, the partner authorized. In case of body corporate the Director, Vice President, Company Secretary etc duly authorized by the Board of Directors of the Company. −The reply written statement is to be supported by an Affidavit of the opposite, party and duly notarized by an Oath Commissioner. −The reply alongwith all annexures should be duly page numbered and be filed with the authority letter if not previously filed. −Attach all the supporting papers, documents, documentary evidence, invoices, extracts of registers and other relevant papers. −If any important point is omitted from being given in the reply, it would be suicidal as there is limited provision for amendment of pleadings. −If the party is alleging a fraud, undue Influence or mis-representation, general allegations are insufficient even to amount to an averment of fraud of which any court ought to take note, however strong the language in which they are couched may be and the same applies to undue Influence or coorcision. −It is well settled that neither party need in any pleadings allege any matter of fact which the law presumes in his favour or as to which the burden of proof lies upon the otherside unless the same has been first specifically denied. −One must state specifically the relief which the party is claiming from the court or tribunal or forum. One should claim all possible relief as would be permissible under the pleadings and the law. Answer 5(b) A trust is defined in the Indian Trusts Act, 1882 on an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him for the benefit of another or of another and the owner. The purpose of the Trust will be considered lawful, unless it is (i) forbidden by law (ii) of such a nature that, if permitted, it would defeat the provisions of any law or (iii) is fraudulent or (iv) involves or implies injury to the person or property of another or (v) the court regards it as immoral or opposed to public policy. The Trust deed will contain the following:- (a)An intention to create a trust (b)The purpose of the Trust (c)The beneficiaries (d)Names of the Trustees (e)Trust Property (f)Unless the author is himself a trustee, transfer of the legal ownership of the property to the trustee and (g)Duties, rights and liability of the settler, trustee and beneficiary. Answer 5(c) (a) Simple Mortgage In a simple mortgage, the mortgagor without delivering possession of the mortgaged property binds himself personally to pay the mortgage money and agrees expressly or impliedly that if he fails to pay the debt and interest in terms of the mortgage deed, the property will be sold and the proceeds applied in payment of the mortgaged money. (b) Mortgage by Conditional Sale In a mortgage by conditional sale, the property is sold subject to the condition that on default in payment of the mortgaged money on a certain date the sale shall become absolute or that on such payment the sale shall become void or on such payment the buyer shall transfer the property to the seller. Possession of the property shall be with the mortgagee. (c) Usufructuary Mortgage In this mortgage, the mortgagor delivers possession of the mortgaged property to the mortgagee who retains the possession until the satisfaction of the debt. The mortgagee will take the usufruct in lieu of the interest or part payment of the principal or partly in payment of interest or partly in part payment of the principal. The mortgagor is not personally liable to pay the debt and the mortgagee is not entitled during the term of the mortgage to demand his mortgage money. (d) English Mortgage In an English mortgage, a mortgagor binds himself to repay the mortgaged money on certain date and transfers the mortgaged property absolutely to the mortgagee subject to the proviso that he will re-transfer it to the mortgagor upon payment of the mortgaged money as agreed. (e) Mortgage by Deposit of Title Deeds Mortgage by deposit of title deeds is called in English law as equitable mortgage. It is an oral transaction and no documents like Deed of Mortgage is required to be executed. No written acknowledgement is required for creating this mortgage. It is however, prudent to have a record of transaction to avoid difficulties to establish the creation of the mortgage. In this case, a Memorandum of Mortgage by deposit of title deeds is prepared by the mortgagee to secure the specific mortgage money. (f) Anomalous Mortgage Anomalous Mortgage is a combination of any of the above forms of mortgage or any mortgage other than those set out above. [Students may write any two types] Question 6 (a)Ultra Vision Textiles Ltd. is entering into a foreign collaboration with Omega Inc., USA for technical know-how and assistance for the proposed textile machinery manufacturing project. Draft a suitable foreign collaboration agreement. (10 marks) (b)A contract existed between Rahul and Sahil. Sahil went to the court of law for non- performance of the contract by Rahul. During the pendency of the suit, Rahul and Sahil arrived at certain compromise and reduced the terms of compromise by signing a ‘memorandum of understanding’ (MOU). Whether such an MOU amounts to novation of the contract? (6 marks) Answer 6(a) Foreign Collaboration Agreement This Agreement is made this ______day of ______20___ between Omega Inc., a Company incorporated in the United States of America (hereinafter called “Omega”), which expressions shall include its permitted assigns and successors) of the one part. And Mr. S.K. Sareen, Director, Ultra Vision Textiles Ltd., having its Registered office at Bhiwadi, Rajasthan (hereinafter called Ultra Vision) including its permitted assigns and successors, of the other part. Whereas as per an Memorandum of Understanding dated _____ executed between Omega and Ultra Vision, Omega agreed to set up a joint venture private Limited Company in India for a textile machinery manufacturing project and other incidental services. AND; whereas, Omega, who is engaged in the manufacture of textiles is willing to provide Ultra Vision such know-how and assistance for the manufacture of aforesaid project.

Now it is hereby mutually agreed and declared as follows: (1) In consideration of the remuneration paid by the Ultra Vision to the Omega as described hereinafter the Omega shall supply to the Ultra Vision: (a)technical advice and know-how for the purpose of improving or adding to the existing factories and installing additional plant and machineries if necessary for the manufacture of…………..….………….; (b)further the necessary plans, factory-design and layouts, charts and drawings, documentation and other forms of technical know-how for the said purpose; (c)render advice in the matter of purchase of the further plant and machinery suitable and necessary for the factory; (d)lend the services of their technicians to assist the Ultra Vision in carrying out the improvement to the factories and for installing additional plants and machinery; (e)provide technicians from their own staff to attend at the Ultra Vision's factory in India whenever necessary; (f)impart technical training to selected Indian personnel at their works in USA and or in their associated companies, to enable them to operate the machinery and plant to be installed and to exploit the imported technical know-how to the best advantage; (g)advise the Ultra Vision , promptly and to the best of their ability, in connection with any technical or manufacturing problems or difficulties which may be referred to it by the Ultra Vision during the continuance of this agreement. (2) For technical know-how and data supplied by the Omega to the Ultra Vision as above, the Ultra Vision shall make a lump sum payment of Rs…………..….…………. to the Omega phased as follows: (a)one-third on approval of the agreement by the Central Government; (b)one-third, on the Omega supplying the Ultra Vision necessary charts, plans, engineering drawings, documentation and other technical data and know-how, which shall be done within 15 days from the date of approval, of this agreement by the Central Government; (c)the balance one-third in three equal annual instalments thereafter after commencement of production. (3) This Agreement shall be in force for a period of 5 years at the first instance, subject to extension for a further period of 5 years by mutual agreement and subject to approval by the Central Government. (4) Technicians who may be deputed by the Omega to the Ultra Vision to advise and assist the Ultra Vision under this agreement shall be paid their salary, travelling expenses and boarding and lodging by the Ultra Vision . (5) The Ultra Vision shall likewise bear all the expenses of the persons sent by them to the Omega for training in their works. (6) The parties hereto mutually agree that they will each inform the other of any new development in methods of manufacture which they respectively may discover during the continuance of this Agreement in so far as such new developments are applicable to the products manufactured by the Ultra Vision . (7) The Ultra Vision shall maintain the utmost secrecy in connection with any technical data supplied by the Omega under this Agreement, and in particular shall keep all data concerned with the manufacturing processes under lock and key. (8) The Ultra Vision shall not during the continuance of the Agreement refer any technical or manufacturing problems or difficulties to any one other than the Omega but shall regard and use the Omega as its sole technical consultant. (9) On the expiry of the period prescribed herein or of extended period provided in clause 3 (supra) or upon the termination of this agreement for any reason the Ultra Vision shall return to the Omega all copies of information data or material sent to it by Omega under this Agreement and then in its possession and shall expressly refrain from communicating any such information, technical data or material received by it hereunder to any person, firm or company whatsoever. IN WITNESS WHEREOF the parties hereto have signed this Agreement this…………..…. ……………………..….. day of…………..….…………. 20 in the presence of the following: WITNESSES: 1. 2. Answer 6(b) In the given problem it amounts to novation of the contract. As per the decision of the Bombay High Court in Lloyds Steel Industries Ltd. v. ONGC, AIR 1997 Bom 337, MOU puts an end to the original contract. As the contract is a outcome of the agreement between the parties, it is equally open to the parties thereto to agree to bring it to an end or to treat it as if it never existed. It may also be open to the parties to terminate the previous contract and substitute in its place a new contract or alter the original contract in such a way that it can not subsist. In all these cases, the entire contract is put to an end. [Damodar Valley Corp.v. K.K.Kar AIR1974SC158] Section 62 of the Indian Contact Act provides if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. Question 7 (a)What is meant by ‘compromise’ and ‘arrangement’? What is the procedure to be followed for carrying through a compromise or arrangement under the Companies Act, 1956? (6 marks) (b)Mention the important considerations while drafting an affidavit in evidence. (5 marks) (c)What is meant by ‘etiquette’ ? What are the invitation etiquettes to be observed by a Company Secretary? (5 marks) Answer 7(a) Sections 390 to 396 of the Companies Act provide various methods of company reorganization or reconstruction. The various terms used for reorganization are arrangement, reconstruction, amalgamation, merger, take-over etc. They are distinct terms but they have common feature and to a great extent they overlap. Compromise means an amicable settlement of differences by mutual concessions by the parties to dispute or difference by agreeing not to try it out. In Sneath v. Valley Gold Ltd., (1893), compromise was described as an agreement terminating a dispute between parties as to the rights of one or more of them or modifying the undoubted rights of a party which he has difficulty in enforcing. “Arrangement has been defined in Section 390(b) of the Companies Act as including a reorganization of share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or by both of these methods. Procedure The following procedure shall be followed for carrying through a compromise or arrangement under Section 391 of the Companies Act: 1.To prepare a scheme of compromise or arrangement with the concerned parties. 2.To apply to court by summons in Form No. 33 appended to the Companies (Court) Rules, 1959 for an order to convene a meeting of the creditors and or members or any class of them, supported by an affidavit in Form No. 34 of the Rules. The court may give such directions as it may think fit in respect of holding and conducting the meeting or meetings. 3.To hold the meeting or meetings and let the result be reported to the court. The court appoints a chairman for the meeting and where there are separate meetings, for each such separate meeting. The chairman of the meeting, or of each meeting, must report the result thereof to the court within the time fixed by the court, or where no time has been fixed within seven days after the conclusion of the meeting. 4.When the proposed compromise or arrangement is agreed to, with or without modification, as provided by Section 391(2) to apply to the court for confirmation of the compromise or arrangement. The petition must be made by the company (if the company is in liquidation; by its liquidator) within seven days of the filing of the report by the chairman. The petition shall be made in Form No. 40 of the said Rules. Where a compromise or arrangement is proposed for the purposes of or in connection with a scheme for the reconstruction of any company or companies, or for the amalgamation of any two or more companies, the petition must pray for appropriate orders and directions under Section 394 for facilitating the reconstruction or amalgamation of the company or companies. The application under Section 391 is normally made by the company but any creditor or member also may make the application. It would, therefore, seem that a scheme could be started even if the company did not wish it, but the court will, it seems, refuse to convene the meetings if the company, either through its Board or simple majority of its members in a general meeting, has not approved the proposed scheme. This would be an exercise of the court's discretion and not a limit on its powers. Before an application is made by a company under Section 391, it is usual for the Chairman of the Board of the company which is to be reconstructed or where an amalgamation between two or more companies is proposed, for the Chairman of the Board of each of these companies, to send a circular letter to the members of the company or companies and when the creditors are affected, to them also, explaining the scheme of reconstruction or amalgamation, as the case may be, and the reasons which prompted the preparation of the scheme. The circular letter should specify how the scheme will affect the shareholdings of the members, and when applicable, the claims of the creditors, including debenture holders. Answer 7(b) Drafting of affidavit in evidence The provisions of Sections 101, 102, 103, 106, 109, 110 and 111 of the Indian Evidence Act must be carefully gone through before one proceeds to draft the affidavit-in-evidence. It is well settled that evidence should be tailored strictly according to the pleadings. No extraneous evidence can be looked into in absence of specific pleadings (Habib Khan v. Valasula Devi, AIR 1997 A.P 52). The following must be kept in mind while preparing the affidavit-in-evidence by the parties - (i)The best evidence is that of a person who was personally involved in the whole transaction. In case, that person is not available for any reason, then any other person who has joined in his place to make deposition by way of his affidavit. (ii)In case, the petitioner himself was involved in the execution of a contract, he should file affidavit-in-evidence. (iii)The allegations or charges or grounds relating to facts should be re-produced duly supported by documentary evidence. It may be noted that in the affidavit in evidence, the position of law or legal provisions or principle of law are not reproduced because the position of law or settled principles of law are not required to be proved by any party and they are deemed to exist and any party can argue and take help of those settled position of law while arguing their case before the Court or Tribunal or Forum and need to be proved by filing an evidence. [Section 5, Indian Evidence Act.] (iv)In case, the point or issue pertains to engineering, medical, technology, science or other complex or difficult issues, then the evidence of expert is to be filed in the form of his Affidavit. If necessary, the said witness has to appear before the Forum for the purpose of cross-examination by the counsel for the other party. For example, hand- writing or finger print experts etc. (v)Besides the leading evidence on the points raised by the petitioner or by the opposite party in his written statement/reply, if possible, the party who is filing the affidavit-in-evidence should also file documents, papers or books or registers to demolish the defence or case set up by the opposite party. (vi)It is also permissible for any party to bring any outside witness (other than the expert witness) in support of his case if the facts and circumstances of the case so warrant and permitted by the Court/Tribunal. (vii)At the time of tendering affidavit-in-evidence, the party must bring alongwith it either the original of papers, documents, books, registers relied upon by it or bring with it the carbon copy of the same. It may be noted that only photocopy of any paper or document (in the absence of its reply, original or carbon copy) can not be relied upon and tendered as an evidence. Answer 7(c) Etiquette is the fine art of behaving in front of others. It is a set of practices and forms which are followed in a wide variety of situations; many people consider it to be a branch of decorum, or general social behavior. Each society has its own distinct etiquette, and various cultures within a society also have their own rules and social norms. Invitation Etiquettes: How you respond to an invitation says volumes about your social skills. It reflects negatively on your manners if your response (or lack of response) to an invitation costs time or money for your host. —Reply by the date given in the invitation, so that the host or hostess knows what kind of arrangements to make for the event, food is not wasted, and unnecessary expense is eliminated. —If an RSVP card is not included, respond by calling or sending a brief note. —If you cancel after initially accepting an invitation, phone your regrets as soon as possible. Send a note of regret following the phone conversation. —Don’t ask for permission to bring a guest unless the invitation states. —Arrive at the event promptly, but not too early. —Mingle and converse with the other guests. —Don’t overstay your welcome. —Extend your thanks as you leave. Question 8 (a)Explain the following : (i)Habeas corpus (ii)Mandamus. (3 marks each) (b)What are the advocacy tips to be borne in mind by a Practising Company Secretary while appearing before a tribunal? (5 marks) (c)What is the meaning of the term ‘compounding’? What factors are to be taken into consideration for the purpose of compounding of offences under the respective statutes? (5 marks) Answer 8(a) (i) Habeas Corpus: Habeas Corpus: The writ of habeas corpus is a remedy available to a person who is confined without legal justification. The words "habeas corpus" literally mean "to have a body". This is an order to let the court know on what ground he has been confined and to set him free if there is no legal justification for his detention. This writ has to be obeyed by the detaining authority by production of the person before the Court. Under Articles 32 and 226 of the Constitution, any person may move the Supreme Court and the High Court of competent jurisdiction respectively, for the issue of this writ. (ii) Mandamus: The expression "mandamus" means a command. The writ of mandamus is, thus, a command issued to direct any person, corporation, inferior court or Government authority requiring him to do a particular thing therein specified which pertains to his or their office and is further in the nature of a public duty. This writ is used when the inferior tribunal has declined to exercise jurisdiction. Mandamus can be issued against any public authority. The applicant must have a legal right to the performance of a legal duty by the person against whom the writ is prayed. Mandamus is not issued if the public authority has a discretion. Mandamus can be issued by the Supreme Court and all the High Courts to all authorities. Answer 8(b) Advocacy Tips Company Secretaries act as an authorized representative before various Tribunals/quasi judicial bodies. It is necessary for them to learn art of advocacy for effective delivery of results to their clients when they act as an authorized representative before any tribunal or quasi judicial body. Though technical and legal knowledge about the area in which Company Secretaries are acting is essential, they should also bear in mind some of the tips given by legal experts while appearing before Tribunals or other quasi-judicial bodies. These tips are given herein below. They say while pleading, a judge in your pleadings looks for: (i)Clarity: The judge’s time is limited, so make the most of it. (ii)Credibility: The judge needs to believe that what you are saying is true and that you are on the right side. (iii)Demeanour: We don’t have a phrase “hearing is believing”. The human animal which includes the human judge, is far more video than audio. The way we collect most of our information is through our eyesight. (iv)Eye contact: While pleading, maintain eye contact with your judge. (v)Voice modulation: Voice modulation is equally important. Modulating your voice allows you to emphasize the points you want to emphasize. Be very careful about raising your voice. Use your anger strategically. But use is rarely. Always be in control of it. (vi)Psychology: Understand judge’s psychology as your job is to make the judge prefer your version of the truth. (vii)Be likeable. At least be more likeable than your opponent. If you can convert an unfamiliar Bench into a group of people who are sympathetic to you personally, you perform a wonderful service to your client. (viii)Learn to listen. (ix)Entertain your judge. Humour will often bail you out of a tough spot. Answer 8(c) `Compounding’ means that the accused and the complainant have come to terms and the dispute between the parties has been settled amicably or adjusted by agreement and the complainant agrees not to prosecute the accused. The accused and the complainant then make a joint application to the Court that the parties have come to terms and the case may not be proceeded with. Following factors, which are only indicative, may be taken into consideration for the purpose of compounding of offences under the respective statute: —Whether violation is intentional. —Party’s conduct in the investigation and disclosure of full facts. —Gravity of charge i.e. charge like fraud, market manipulation or insider trading —History of non-compliance. Good track record of the violator i.e. it had not been found guilty of similar or serious violations in the past. —Whether there were circumstances beyond the control of the party —Violation is technical and/or minor in nature and whether violation warrants penalty. —Consideration of the amount of investors’ harm or party’s gain. —Processes which have been introduced since the violation to minimize future violations/lapses. —Compliance schedule proposed by the party —Economic benefits accruing to a party from delayed or avoided compliance. —Conditions where necessary to deter future non-compliance by the same or another party. —Satisfaction of claim of investors regarding payment of money due to them or delivery of securities to them. —Compliance of the civil enforcement action by the accused. —Party has undergone any other regulatory enforcement action for the same violation. —Any other factors necessary in the facts and circumstances of the case. PROFESSIONAL PROGRAMME EXAMINATION JUNE 2010 FINANCIAL, TREASURY AND FOREX MANAGEMENT Time allowed : 3 hours Maximum marks : 100 NOTE: 1. Answer FIVE questions including Question No.1 which is COMPULSORY. All working notes should be shown distinctly. 2. Tables showing the present value of Re. 1 and the present value of an annuity of Re.1 for 15 years are annexed.

Question 1 Comment on any four of the following : (i) While deciding upon the capital structure, the firm has to consider the different life cycle stages. (ii) Financial services industry encompasses a considerable range and depth of activities. (iii) Tools and techniques of treasury manager are very specific. (iv) Traditional approach of business finance considers efficient utilisation of resources. (v) Playing with float is a risky proposition. (5 marks each) Answer 1(i) The firm has to consider the following life cycle stages while deciding upon the capital structure : (a) The Pioneering Stage: It is the starting stage when there is rapid increase in demand for the product/services of company. At this stage only efficient companies survive. Due to risk perception about the company the cost of borrowing is high. To survive in this stage, capital structure is more oriented towards equity and avail more soft loans. (b) Expansion Stage: In this stage strong companies having survived the competition struggle successfully expand their market share and volumes. For this requirement of funds is high. Therefore, the company in this stage resorts to financial leverage. (c) Stabilization/Stagnation Stage: In this stage, management looks out for expansion and diversification into new projects. Takeovers, mergers, acquisition and strategic alliances are main activities. In this stage, capital structure depends on these activities. Answer 1(ii) Now-a-days financial services industry has assumed great significance. It encompasses a considerable range and depth of activities. These includes traditional financial intermediaries such as commercial banks, insurance companies, mutual funds and unit trust etc. and modern services such as acceptances, brokerages, credit information, credit rating, deposit, insurance, discounting, re-discounting, factoring, guarantees, funds transfer, hire purchase, leasing, loan syndication, underwriting. Answer 1(iii) The tools and techniques of treasury manager are very specific. These are as follows : (a) Analytical and planning tools: In treasury function planning and budgeting are essential to achieve targets and keep effective control on costs. For achieving this, techniques of performance budgeting and responsibility accounting are used. Each department is made profit centre and is accountable for its targets. (b) Zero Base Budgeting: Each manager establishes objectives for his function. He has to justify level of activity, cost and benefits for his function. The management assesses this and the least cost alternative is selected. (c) Financial Statement Analysis: It helps the treasury manager to decide whether to invest in the company. The soundness and intrinsic worth of company, is decided by such analysis. It helps in internal control also. Answer 1(iv) The traditional approach of finance was concerned with raising of funds used in an enterprise. The approach encompasses instruments selection, institutions through which funds are raised and legal and accounting practices and their relationship with the enterprise. The traditional approach played very negligible role in financial planning and direction. Efficient utilization of resources along with financing decisions requires financial planning and proper direction. The top managements in corporate sector are more concerned with planning the sources and uses of funds and measuring performance. Answer 1(v) Playing with the float results into maximization of cash availability. The float is the difference between the total amount of cheques drawn and the actual amount shown in the bank account. The float is caused by transit and processing delays. If the float is estimated accurately, then excess amount can be invested elsewhere, and to earn return. However, it is a risky practice and has to be followed quite consciously. Question 2 (a) Priyanka Ltd. has the following capital structure as on 31st March, 2009 : Rs. Equity shares : 20,000 Shares of Rs.100 each 20,00,000 10% Preference Shares (of Rs.100 each) 8,00,000 12% Debentures (of Rs.1,000 each) 12,00,000 40,00,000 The company’s shares are sold in the market at Rs.110 each and it is expected that a dividend of Rs.10 per share would be declared for the year 2009. The dividend growth rate is likely to remain at 6%. (i) You are required to calculate the weighted average cost of capital, if the company comes in the tax bracket of 30%. (ii) The company is planning to diversify its production activities and intends to borrow a sum of Rs.20 lakh at the rate of 15% per annum. This financing decision is expected to increase dividend from Rs.10 to Rs.12 per share, however, the market price of the equity share is likely to decrease from Rs.110 to Rs.105. What will be the company’s revised weighted average cost of capital ? (iii) Priyanka Ltd. has the following investment opportunities that are typical average risk projects for the company : Projects Cost (Rs. in Lakhs) Rate of Return (t=0) (%) A 10 17.4 B 20 16.0 C 10 14.2 D 20 13.7 E 10 10.0 Which project(s) should Priyanka Ltd. accept ? Why ? (4+3+3=10 marks) (b) Ratan Enterprises requires 1,80,000 units of a certain item annually. The cost per unit and the cost per purchase order are Rs.6 and Rs.600 respectively. The inventory carrying cost is Rs.6 per unit per year. (i) What is the economic order quantity? (ii) What should the firm do if the supplier offers discount as below : Order Quantity Discount (%) 9000–11999 2 12,000 and above 3 (6 marks) (c) On 1st October, Deepak is retiring from service and he will get an amount of Rs.16,32,000 as retirement benefits. He is planning to invest this money in the following three scripts, which he considers grossly under-valued stocks in the market: Stock No. of Shares Price (Rs.) Beta X 2,000 300 0.42 Y 3,000 416 0.65 Z 4,600 330 1.72 It is September now and he plans to take advantage of this mispricing in the stock market by using futures market. How many October contracts will you be trading if the spot index is 3,990 and October futures are quoted at 4,062? (4 marks) Answer 2(a)(i) Calculation of Weighted average cost of Capital Source of Capital Amount Proportion After tax WACC (Rs. Lakhs) Cost (1-30%) Equity Share Capital 20 50% 15.09 50%x15.09=7.55 10% Preference Share Capital 08 20% 10% 20%x10=2.00 12% Debentures 12 30% 12%(1-0.3) = 30%x8.4 =2.52 8.4 40 100% 12.07% Working Note :

D1 Ke = + g = 10/110 + 0.06 = 0.1509 or 15.09% P0

Answer 2(a)(ii) With the borrowing of Rs.20 lakhs at 15% the capital structure would be Rs.60 lakhs. Statement of Revised WACC Source of Capital Amount Proportion After tax cost WACC (Rs. lakhs) (1—30%) Equity Shares 20 20/60 17.43% 20/60 x 17.43 = 5.81% 10% Preference Shares 08 8/60 10% 8/60 x 10 = 1.33 12% Debentures 12 12/60 12%(1-.30) = 8.4 12/60 x 8.4 = 1.68 15% Loan 20 20/60 15 (1-.30) = 10.5 20/60 x 10.5 = 3.50 Total 60 60/60 12.32

Revised WACC = 12.32% Working Note: Ke = 12/105 + 0.06 = 0.1743 or 17.43% Answer 2(a)(iii) Prinyaka Ltd’s marginal cost of capital is 12.32% as shown in 2(a)(ii). Hence it can accept A, B, C and D projects. It should reject the project E because its rate of return is less than marginal cost of funds needed to finance. Answer 2(b) Annual Requirement = 1,80,000 units Cost per purchase order = Rs. 600 Cost per unit = Rs. 6 Inventory Carrying Cost per unit = Rs. 6 2AO (i) EOQ = C A = Annual Requirement O = Cost of per purchase order C = Inventory Carrying cost per unit per annum 2 × 1,80,000 × 600 = = 6000 units 6 (ii) Calculation of optimum order size if different rates of discount offered :

Unit Order Average No. of Unit price Purchase Cost of Total Total Cost require- Quantity Stock Orders after 2% Price carry- Cost of Rs. ment p.a. & 3% Rs. ing @ Ordering discount Rs.6 (D x (B÷ 2) (A÷ B) (CxRs. Rs.600) x (F + G + H) (A) (E) (AxE) = (F) 6) (G) (H) (B) =(C) =(D) (I) 1,80,000 6,000 3,000 30 6 10,80,000 18,000 18,000 11,16,000

1,80,000 9,000 4,500 20 5.88 10,58,400 27,000 12,000 10,97,400

1,80,000 12,000 6,000 15 5.82 10,47,600 36,000 9,000 10,92,600

The total cost is lowest for order quantity of 12,000 units with 3% discount and should be selected. Answer 2(c) The portfolio beta is equal to :

2,000 × 300 3,000 × 416 4,600 × 330 × .042 + × 0.65 + × 1.72 16,32,000 16,32,000 16,32,000

= 0.1544 + 0.4970 + 1.5998 = 2.25 Value of Portfolio Number of contracts (n) = × β Value of future contract

16,32,000 × 2.25 = 4,062 × 200

36,72,000 = = 4.5 contracts 8,12,400

The investor has to buy 4 contracts Note : Nifty Contract multiplier 200 is taken for calculation. Question 3 (a) An Indian importer has to settle an import bill for $1,30,000. The exporter has given the Indian exporter two options : (i) Pay immediately without any interest charges. (ii) Pay after three months with interest @ 5% per annum. The importer’s bank charges 15% per annum on overdrafts. The exchange rates in the market are as follows : Spot rate (Rs./$) : 48.35/48.36 3-Month forward rate (Rs./$): 48.81/48.83 The importer seeks your advice. Give your advice. (8 marks) (b) Zebra Ltd. was started a year back with paid-up equity capital of Rs.40 lakh. Other details are as under : Earnings of the year : Rs.4,00,000 Dividend paid : Rs.3,20,000 Price-earnings ratio : 12.5 Number of shares : 40,000 You are required to find out whether company’s dividend payout ratio is optimal using Walter’s Model, giving reasons. (6 marks) (c) A futures contract is available on a company that pays an annual dividend of Rs.5 and whose stock is currently priced at Rs.200. Each futures contract calls for delivery of 1,000 shares of stock in one year, daily marking to market, an initial margin of 10% and a maintenance margin of 5%. The corporate treasury bill rate is 8%. (i) Given the above information, what should the price of one futures contract be? (ii) If the company stock price decreases by 7%, what will be the change, if any, in futures price ? (iii) As a result of the company stock price decrease, will an investor that has a long position in one futures contract of this company realises a gain or loss? Why ? What will be the amount of this gain or loss ? (6 marks) Answer 3(a) Evaluation of two options offered by exporter for settlement of payment Option I: Pay immediately without any interest charges (a) Bill value converted to Indian rupees ($ 1,30,000 x Rs. 48.36) = Rs. 62,86,800 (b) Interest on the borrowing from bank (o/d) @ 15% p.a. For three months Rs. 62,86,800 x 15/100 x 3/12 = Rs. 2,35,755 Total : Rs. 65,22,555 Option II: Pay after 3 months with interest @ 5% p.a. (a) Bill value $ 1,30,000 (b) Interest @ 5% p.a. for 3 months = $ 1,30,000 x 0.05 x 0.25 $ 1,625 $ 1,31,625

(c) Forward Rs./$ rate ($ 1,31,625 x Rs. 48.83) = Rs. 64,27,249 Difference in outflows in Option I and Option II = Rs. 65,22,555 – Rs. 64,27,249 = Rs. 95,306. Advice: it is advisable to settle bill payable after three months since rupee outflow is less by Rs. 95,306. Answer 3(b) Paid-up equity Capital = Rs.40,00,000 Earnings of the year = Rs.4,00,000 Dividend Paid = Rs.3,20,000 P/E Ratio = 12.5 No. of Shares = 40,000 Rs.4,00,000 EPS or r = = Rs.10 40,000 Dividend per share or (k) = 3,20,000/40,000 = Rs.8 Walter’s Model :

DPS + (r/k)(EPS − DPS) P = k If DPS = Rs. 8, then 8 + (.10/.08)(10 − 8) P = 0.08 8 + (1.25)(2) = .08 8 + 2.5 = .08 = Rs. 131.25 To get optimal, the DPS = 0 0 + (0.10)(10 − 0) P = (.08) 1.25 × 10 = .08 If DPS = 0 then P = 156.26 So, value of share is optimal if Dividend is nil. Answer 3(c) (i) Annual dividend (D) = Rs.5 Current Stock Price(S) = Rs.200 Initial Margin = 10% Maintenance Margin = 5% Corporate Treasury bill rate (C) = 8% Price of One Future Contract F = S + (S x C) – D = 200 + (200 x 0.08) – 5 = Rs. 211 (ii) If the company stock prices decrease by 7%, then price of futures contract F = [200 x (1 – 0.07)] + [200 x (1- 0.07) x 0.08] - 5 = 186 + 14.88 - 5 = Rs. 195.88 (iii) An investor with a long position in one future contract agrees to buy 1,000 shares of the company in one year at Rs.211. Therefore, this investor will benefit only if the future prices increase. In this case, the future prices has decreased and the investor will therefore realize a loss of (Rs. 195.88 – Rs. 211) x 1,000 = (–) Rs. 15,120. Question 4 Distinguish between any four of the following : (i) ‘Deep discount bonds’ and ‘disaster bonds’. (ii) ‘Financial aspects of project appraisal’ and ‘economic aspects of project appraisal’. (iii) ‘Index futures’ and ‘index options’. (iv) ‘Initial margin’ and ‘maintenance margin’. (v) ‘Corporate finance’ and ‘business finance’. (5 marks each) Answer 4(i) Deep Discount Bonds The deep discount bond is considered a safe, solid and liquid instrument. In the past, IDBI, ICICI and SIDBI had issued this instrument. For a deep discount price of Rs.2,700/- in IDBI the investor got a bond with the face value of Rs.1,00,000. The bond appreciates to its face value over the maturity period of 25 years. Alternatively, the investor can withdraw from the investment periodically after 5 years. The capital appreciation is charged to tax at capital gains rate which is lower than normal income tax rate.

Disaster Bonds

These are issued by companies and institutions to share the risk and expand the capital to link investors return with the size of insurer losses. The bigger the losses, the smaller the return and vice-versa. The coupon rate and the principal of the bonds are decided by the occurrence of the casualty of disaster and by the possibility of borrowers defaults.

Answer 4(ii)

The Financial Aspects of Project Appraisal

The financial aspects of the project are analysed under the following heads: (I) Amount of resources required to bring the project into operation and the sources from which finance will be obtained. (II) Equity-Debt ratio. (III) Profitability and cash flow. (IV) Security.

Economic Aspects of Project Appraisal

An economic analysis of industrial projects is made on the basis of the following techniques of economic appraisal.

There are three measures commonly used for economic appraisal: (1) Economic Rate of Return (ERR) (2) Domestic Resources Cost (DRC) (3) Effective Rate of Protection (ERP)

Answer 4(iii)

Index futures

Index futures are the future contracts for which the underlying is the cash market index. In India, futures on both BSE Sensex and NSE Nifty are traded.

By trading in index futures, the investors are betting on the state of the economy or collectively on the future market values of the shares of leading companies from major industrial groups. In a normal contract for purchase of equity shares, physical quantity of shares is delivered but in a futures contract, there is nothing to be delivered. Index options A call or put option is possible on a financial index. Investors trading index options are essentially betting on the overall movement of the stock market as represented by a basket of stocks in the form of index such as BSE Sensex and NSE Nifty. Answer 4(iv) Initial Margin It represents the amount deposited by both buyer and seller. The amount of money which a customer must deposit in his account whenever he establishes a future position. It is set by the exchange and are usually about 10% to 20% of the total value of the contract. It is large enough to cover a one-day loss. Maintenance Margin it is the minimum margin required to hold a position. It should be sufficient to support the daily settlement process called “mark-to-market”, whereby losses that have already occurred are collected. It provides safeguard against potential losses on outstanding position. Answer 4(v)

Corporate Finance Business Finance It deals with the finance of business of It deals with the financial practices of all corporate bodies. types of business enterprises. It is a sepcialised branch of business It is broader term. It includes corporate finance. and non-corporate finance. Sources of funds are generally from Sources of funds are private agencies or public and government. others.

Question 5 (a) The spot exchange rate is Rs.15/€ and the three months forward exchange rate is Rs.15.20/€. The three month interest rate is 8% per annum in India and 5.8% per annum in Germany. Assume that you can borrow as much as Rs.15 lakh or € 10 lakh. (i) Determine whether the interest rate parity is currently holding. (ii) How would you carry out covered interest arbitrage ? Show all steps and determine the arbitrage profit. (4 marks) (b) Silver Coin Ltd. is a manufacturing company. It has received an export order of 1,80,000 units. The finance manager of the company is estimating working capital requirements for the production to meet export order. Following information is given for the year 2009-10 : (i) Production in 2008-09 was 1,80,000 units and it is estimated that in 2009- 10 the level will be maintained. (ii) Each unit will remain in process for one month. Raw material being channelised into the pipelines immediately and the labour and overhead costs accruing evenly during the month. (iii) Final production will be stored in warehouse awaiting despatch for 3 months. (iv) Credit allowed by creditors is 1.5 months from the date of delivery of raw materials. (v) Credit permitted to debtors is 2.5 months from the date of despatch. (vi) Selling price per unit is Rs.15. (vii) The expected ratios of cost to the selling price are raw material 50%, direct wages 15% and overheads 20%. (viii) Raw materials are expected to remain in store for an average of 1.5 months before issue to production. (ix) There is regular production and sales cycle. (x) The company maintains Rs.60,000 as cash in hand. (xi) Wages and overheads are paid on the first of each month for the previous month. You are required to submit the working capital requirement to the finance manager of Silver Coin Ltd. (16 marks) Answer 5(a) (i) Spot Exchange Rate = Rs.15/€ 3 months forward exchange = 15.20/€ 3 months interest rate = 8% p.a. (India) 3 months interest rate = 5.8% p.a. (Germany) For interest rate parity to hold true (1 + rh) = F/S (1 + rf)

rh = rate of interest in home currency

rf = rate of interest in foreign currency LHS = (1 + 0.02)

RHS = (1 + rf) (F/S) = (1.0145) (1.52/1.50) = 1.0280 (€ return) Since LHS #RHS, Interest Rate Parity does not hold exactly. (ii) Step 1 Borrow Rs.15 lakh, repayment will be Rs.15,30,000. Step 2 buy € 10,00,000 using spot rate Step 3 invest €10 lakh at the Germany interest rate, maturity value will be € 10,14,500 Step 4 sell €10,14,500 forward for Rs.15,42,040 Arbitrage Profit = Rs.12,040. Answer 5(b) June 16,2010 To Finance Manager Silver Coin Ltd. As desired, statement showing Working Capital Requirement of Silver Coin Ltd. is as under : Statement showing Working Capital requirement Particulars Basis of Calculation Amount (Rs. lakhs) Raw material in store 13,50,000 x 1.5/12 1,68,750 Work in progress 15000 units of one month Raw Materials 15,000 x 7.50 = 1,12,500 Wages 15,000 x 2.25 x 50% = 16,875 Overheads 15,000 x 3.00 x 50% = 22,500 1,51,875

Stock of finished goods 15,000 x 3 x 12.75 = 5,73,750 Inventory 8,94,375 Debtors 2.5 x 15,000 x 15 = 5,62,500 Cash in Hand 60,000 Current Asset (A) 15,16,875 Creditors 1.5/12 x 13,50,000 = 1,68,750 Wages and Overheads 1/12 x 9,45,000 78,750 Current Liabilities (B) 2,47,500 Working Capital requirement Current Assets– Current Liabilities (A-B) 12,69,375 Working Notes : (i) Production during 2009-10 is 1,80,000 units. Production and sales are regular so sales is 1,80,000 units i.e., 15,000 units per month (ii) Statement of Cost and Profit of Silver Coin Ltd. Particulars Rs. per unit Amount in a Year (Rs. Lakhs) Raw material 50% of Rs.15 7.50 13,50,000 Direct Wages 15% of Rs.15 2.25 4,05,000 Overheads 20% of Rs.15 3.00 5,40,000 Cost of Sales 12.75 22,95,000 Sales 15.00 27,00,000 Profit 2.25 4,05,000 Thanking You Yours faithfully XYZ Note: Wages and overheads for WIP has been charged 50% Question 6 Surya Manufacturers is planning to start a new manufacturing process. Following are the estimated net cash flows and probabilities of the new manufacturing process : Year Net Cash Flows (Rs.) P=0.2 P=0.6 P=0.2 0 (–) 2,00,000 (–) 2,00,000 (–) 2,00,000 1 40,000 60,000 80,000 2 40,000 60,000 80,000 3 40,000 60,000 80,000 4 40,000 60,000 80,000 5 40,000 60,000 80,000 5 (Salvage) 0 40,000 60,000

Surya Manufacturers cost of capital for an average risk project is 10%. (a) The project has average risk. Find the project’s NPV. (b) Find the best case and worst case NPVs. What is the probability of occurrence of the worst case if the cash flows are perfectly dependent (perfectly positively correlated) over time and if they are independent over time ? (c) Assume that all the cash flows are perfectly positively correlated, that is, there are only three possible cash flow streams over time : (i) the worst case; (ii) the most likely or base case; and (iii) the best case with probabilities 0.2, 0.6 and 0.2 respectively. These cases are represented by each of the columns in the given table. Find the expected NPV, the standard deviation and co-efficient of variation. (20 marks) Answer 6(a) Table showing expected cash flows : 0.2 0.6 0.2 Year (P x Cash (P x Cash (P x Cash Expected Cash Flow) Flow) Flow) Flow Rs. Rs. Rs. Rs. (A) (B) (C) (A + B + C) 0 0.2 (-2,00,000) 0.6 (-2,00,000) 0.2 (-2,00,000) = 2,00,000 1 0.2 (40,000) 0.6 ( 60,000) 0.2 (80,000) = 60,000 2 0.2 (40,000) 0.6 (60,000) 0.2 (80,000) = 60,000 3 0.2 (40,000) 0.6 (60,000) 0.2 (80,000) = 60,000 4 0.2 (40,000) 0.6 (60,000) 0.2 (80,000) = 60,000 5 0.2 (40,000) 0.6 (60,000) 0.2 (80,000) = 60,000 5* 0.2 (0) 0.6 (40,000) 0.2 (60,000) = 36000

NPV of expected Cash Flows at 10% 60,000 60,000 60,000 60,000 96,000 - 2,00,000 + + + + + NPV = 1 2 3 4 5 (1.10) (1.10) (1.10) (1.10) (1.10) = -2,00,000 + 60,000 x .9091 + 60,000 x 0.8264 + 60,000 x 0.7513 + 60,000 x 0.6830 + 96,000 x .6209 = -2,00,000 + 54,546 + 49,584 + 45,078 + 40,980 + 59,606 = -2,00,000 + 2,49,794 = Rs.49,794

Answer 6(b) NPV of Worst Case at 10% = - Rs.2,00,000 40,000 40,000 40,000 40,000 40,000 + Zero Salvage Value 40,000 40,000 40,000 40,000 40,000 - 2,00,000 + + + + + NPV = 1 2 3 4 5 (1.10) (1.10) (1.10) (1.10) (1.10) = - 2,00,000 + 1,51,632 = -Rs.48,368 NPV of base Case at 10% - Rs.2,00,000 60,000 60,000 60,000 60,000 60,000 + Salvage Value of 40,000 = -Rs.2,00,000 + 2,27,448 + 24,836 = Rs.52,284 NPV of Best Case - Rs.2,00,000 80,000 80,000 80,000 80,000 80,000+ Salvage Value of 60,000 = - Rs.2,00,000 + 30,32,264 + 37,254 = Rs.1,40,158

If the cash flows are perfectly dependent, then the low cash flows in the first year will mean a low cash flows in every year. Thus the probability of the worst case occurring is the probability of getting Rs.40,000 net cash flow in year 1 or 20%. If the cash flows are independent, the cash flows in each can be low, high or average and probability of getting all low cash flow will be : 0.2(0.2)(0.2)(0.2)(0.2) – 0.25 = .00032 or 32% Answer 6(c) The base case NPV is found using the most likely cash flows and is equal to Rs.52,284. This value differs from the expected NPV of Rs.49,800, because the year 5 cash flows are not symmetric. Under these conditions NPV distribution is as follows: Case P NPV (Rs.) Worst Case 0.2 - 48,368 Base Case 0.6 52,284 Best Case 0.2 1,40,518 The expected NPV = 0.2 (-48,368) + 0.6 (52,284) + 0.2 (1,40,518) = - 9,673.6 + 31,370.4 + 28,103.6 = 49,800.4 or Rs.49,800 As is generally the case the expected NPV is the same as the NPV of the expected cash flows in part (a). The standard deviation is :

σ2 NPV = 0.2 (-48,368 – 49,800)2 + 0.6 (52,284 – 49,800)2 + 0.2 (140,518 – 49,800)2 σ2 NPV = 1927391244.8 + 3702153.6 + 1645951104.8 = 3577044503 σ NPV = 3577044503 = 59808 Co-efficient of variation = 59808 / 49800 = 1.2 Question 7 Write notes on any four of the following : (i) Types of swaps (ii) Capital rationing (iii) Technical aspects of feasibility report (iv) Trade credit as source of finance (v) ABC analysis. (5 marks each) Answer 7(i) Types of Swaps A swap can be defined as the exchange of one stream of future cash flows with another stream of cash flows with different characteristics. An interest swap is a contract to exchange cash flow streams that might be associated with some fixed income obligations—say swapping the cash flows of a fixed rate loan for those of a floating rate loan. A currency swap is exactly the same thing as with an interest rate swap. However, in later the cash flow streams are in the same currency while in currency swap, cash flows are in different currencies. Answer 7(ii) Capital Rationing Capital Rationing decision is not confronted with those firms where fund is not the constraint, but in majority of the cases, firms have fixed capital budget. So a large number of projects compete for these limited fixed capital budget. So the firm rations these funds in a manner so as to maximize the long run returns. Thus, capital rationing refers to the situations where the firms have more acceptable investments requiring greater amount of finance than is available with the firm, it is concerned with the selection of a group of investment out of many investment proposals ranked in the descending order of the rate of return.

Answer 7(iii) Technical aspects of feasibility report Technical examination of a project involves consideration of the following factors: (a) Feasibility of the selected technical process and its suitability under Indian conditions (b) Scale of operations (c) Location (d) Plant and Equipment and their specifications (e) Plant Layout (f) Facilities for the supply of water, power and fuel (g) Facilities for disposal of effluents and also of the by-products, if any (i) Availability and economies of the means of transport in the region be examined and ensured (j) Arrangements for securing the technical know-how and training of personnel and labour who have to operate in the shop-floor be certified and ensured (k) Construction Schedule (l) Cost Estimates. Answer 7(iv) Trade credit as source of finance Trade credit provides an instant source of financing variable working capital for the period falling between the point, goods are purchased and the point when payment is made. The longer this period, the more advantageous it becomes for the firm to avoid efforts of seeking finance for holding inventories or receivables. Trade credit received on purchases reduces working capital funds requirements and has to be taken into account for correct assessment of funds. Answer 7(v) ABC Analysis This system is based on the assumption that in view of the scarcity of managerial time and efforts, more attention should be paid to those items which account for a larger chunk of the value of consumption rather than the quantity of consumption. Let us take an example of a firm having three major components of raw material : Comp Units % to total Value per Total Value % onent Consumed quantity unit (Lacs) X 5000 45.45 1000 50.00 22.93 Y 4000 36.36 1200 48.00 22.00 Z 2000 18.18 6000 120.00 55.05 11000 100.00 218.00 100.00 Thus the cost of raw material Z which accounts for 55% of the total consumption value should be given priority over item X although the number of units consumed of the letter is much more than former. CORPORATE RESTRUCTURING AND INSOLVENCY

Time allowed: 3 hours Maximum marks: 100

NOTE : All references to sections relate to the Companies Act, 1956 unless stated otherwise. PART — A (Answer Question No.1 which is COMPULSORY and ANY THREE of the rest from this part.) Question 1 (a) The position of capital and reserves as on 31st March, 2009 of Matrix Ltd. are given below : Rs. Equity shares (Fully paid-up of face value Rs.10 each) 1,00,00,000 Equity shares (Rs.5 is paid-up on face value of Rs.10 each) 1,00,00,000 Equity shares with differential voting rights (Fully paid-up of face value of Rs.10 each) 1,00,00,000 Preference shares (Fully paid-up of Rs.100 each) 1,00,00,000 Free reserves 7,50,00,000 The managing director of Matrix Ltd. wanted to place proposal before the Board for buy-back of its 100% preference share capital. You, as a Company Secretary, advise your managing director on the following issues : (i) Maximum limit upto which Board can approve buy-back of shares. (ii) Maximum limit upto which shareholders can approve buy-back of shares. (iii) Maximum limit upto which company can buy-back its own shares. (iv) The situation in which further offer of buy-back can be given by the company within a period of 365 days.(2 marks each) (b) State whether the following statements are correct or incorrect citing relevant provisions of the law: (i) the scheme of arrangement is to be passed at a meeting with the support of majority in number and three-fourths in value of those present and voting. The creditors or members who are present at the meeting but remain neutral or abstain from voting will be counted in ascertaining the majority in number or value. (ii) A person who is a transferee of certain shares (yet to be registered) can seek to modify a scheme of arrangement of the company concerned approved by the court. (iii) A private limited company can amalgamate with a public limited company within few days after its incorporation. (iv) Court has power to disapprove the scheme of arrangement on the grounds of mismanagement of affairs of the company and withholding of material information from the shareholders and creditors. (v) Court can modify the scheme of arrangement filed before it on its own. (vi) Section 394 does not cast17 an obligation on the court to satisfy the presence of ‘public interest’ if the scheme is duly approved by the shareholders and creditors of the companies concerned. (2 marks each) (c) Though the terms ‘diminution of share capital’ and ‘reduction of capital’ look synonymous, but sometimes diminution of share capital does not amount to reduction of capital. Briefly explain the circumstances when such exercises do not fall within the purview of ‘reduction of capital’ and procedure of reduction of capital under section 100 is not to be followed. (5 marks) Answer 1(a) (i) According to the proviso to Section 77A[2] of the Companies Act, 1956, the Board can authorize buy back of securities not exceeding 10% of total paid up equity capital and free reserves of the Company. The above limit states the quantum of fund required to be bought back with the approval of the Board. The total paid up equity capital of the company excluding the preference shares is Rs.3,00,00,000. The maximum amount upto which board can approve buy back is 10% of total paid up equity capital and free reserve which is 10% of (Rs.3,00,00,000 + Rs.7,50,00,000) = Rs. 1,05,00,000. (ii) According to Section 77A(2)(b) and (c) of the Companies Act, 1956, shareholders by passing Special resolution can approve buy back upto 25% of paid up capital and free reserves. The paid up capital shall include preference capital, if any. In the given question, shareholders can approve 25% of the paid up capital and free reserves i.e. 25% of Rs.11,50,00,000/- (Rs3,00,00,000 + Rs. 1,00,00,000+ Rs.7,50,00,000) = Rs. 2,87,50,000. (iii) A company can buy back upto 25% of the total paid up capital and free reserves (Section 77A(2)(c]. Further, buy back of equity shares in any financial year should not exceed 25% of the total paid up equity capital of the Company. However, company is free to buy back its entire preference capital during the financial year subject to overall limit of 25% of the total paid up capital and free reserves. Hence, in the given question maximum buy back of equity shares should be limited to 25% of the total paid up equity capital of Rs. 3, 00, 00,000 which is Rs.75, 00,000. (iv) Once the buyback has been made with the authorization of the Board and not that of the shareholders , no further, offer for buy back of any securities can be made without the consent of shareholders accorded by Special Resolution with in 365 days reckoned from the date of the offer [ Section 77A(2)- second proviso). However, shareholders can make further offer of buy back within a period of 365 days provided the aggregate of authorization does not exceed the limit prescribed in 77A [2) [c]. Answer 1(b) (i) Incorrect. The creditors or members who are present at the meeting but remain neutral or abstain from voting will not be counted in ascertaining the majority in number or value. The language in Section 391(2) requires the counting of those who are present and voting, cumulatively. This was the legal position obtained from the decision in the case of Re, Hindustan General Electric Corporation, AIR 1959 Cal 679 at 681. (ii) Correct. As regards the modification of a scheme, an application can be made by any person interested. ‘Any person interested’ should not be confined to creditor or member or liquidator of the company. Accordingly, any person who has obtained a transfer of shares in the company but has not yet been registered as a member is also to be included therein. [K K Gupta v. K P Jain (1978) 48 Comp. Cases 342 : AIR 1979 SC 734]. Therefore, a person who is a transferee of certain shares (yet to be registered) can seek to modify a scheme of arrangement of the company concerned approved by the Court. (iii) Correct. In Electricals (P) Ltd. (1996) 22 CLA 274 (Guj.) it was held that there can be no objection to a private limited company having its assets revalued by an expert and then amalgamating with a public limited company within a few days after its incorporation. (iv) Correct. In the case of J S Davar v. Dr. S V Marathe AIR 1967 Bom 456 (DB), it was decided that if the object of the scheme is to prevent investigation or there is failure in the management of the affairs of the company or disregard of law or withholding of material information from the meeting etc. the court will not sanction the scheme.. (v) Incorrect. In the absence of any consent on the part of any of the parties who entered into a scheme, especially on the part of the creditors, it is not open to the court to impose conditions or modifications of its own. [Mihirendra Kishore Dutt v. Brahmanbaria Loan Co. Ltd., (1935) 5 Com Cases1, 6 : AIR 1934 Cal 816]. (vi) Incorrect. It was held in the case of Union of India v. Ambalal Sarabhai Enterprises Ltd., (1984) 55 Com Cases 623, 645 (Guj) that consideration of public interest must not be ignored while sanctioning a scheme. Further, it was observed by the Judges of Supreme Court that in Hindustan Lever Employees Union v. Hindustan Lever Ltd., (1995) 83 Com Cases 30 that the company court has to apply its mind to the public interest involved in the merger. Further, a scheme which is valid and good may yet be bad if it is against public interest. Answer 1(c) Though the terms ‘diminution of share capital’ and ‘reduction of capital look synonymous, but sometimes diminution of share capital does not amount to reduction of capital. In the following cases, the diminution of share capital is not to be treated as reduction of the capital: (i) Where the company cancels shares which have not been taken or agreed to be taken by any person [Section 94(1)(e)]; (ii) Where redeemable preference shares are redeemed in accordance with the provisions of Section 80; (iii) Where the company buys-back its own shares under Section 77A of the Act. In the above mentioned situations, the procedure for reduction of capital as laid down in Section 100 of the Companies Act, 1956 is not attracted. Question 2 (a) Good Luck Ltd. (GCL), a listed company, holds 100% equity of C&S India Ltd. C&S India Ltd. holds 15% stake in C&S USA Ltd. as on 31st March, 2009. Due to poor performance of C&S USA Ltd., Board of directors of GCL and C&S USA Ltd. in their meeting held on 20th May, 2009 had approved merger of C&S USA Ltd. with GCL with effect from 1st April, 2009. The scheme of merger was filed with the Hon’ble High Court of Delhi pursuant to sections 391-394. The Registrar of Companies has raised objections that sanction of the scheme of merger would result in the buying back by the GCL of shares of its subsidiary C&S USA Ltd. and would thereby violate the provisions of sections 42 and 77. Give your comments whether the objection raised by the Registrar of Companies is sustainable in the court of law. (5 marks) (b) Define ‘corporate restructuring’. What are the various kinds of restructuring? (5 marks) (c) ABC Ltd. proposes to amalgamate with BCD Ltd. In this context, explain how to go about for convening the meeting of the creditors or class of creditors in terms of court’s order. (5 marks) Answer 2(a) In the case of Himachal Telematics Ltd. v. Himachal Futuristic Communications Ltd. (1996) 86 Comp Cas 325 (Del) a scheme of amalgamation was to be undertaken. However, the transferee company had a subsidiary which was holding shares of the transferor company. An objection was raised that the sanction of the scheme of amalgamation would result in the buying back by the transferee company of shares of its subsidiary and would thereby violate the provisions of Sections 42 and 77 of the Act. Dealing with the argument regarding violation of Section 77, it was held that no violation would result as a consequence of sanctioning the scheme of amalgamation as the transferee company was not buying any of its own shares. However the overall requirement to be satisfied prior to sanctioning a scheme of arrangement would be that the proposed scheme of compromise and arrangement should not be violative of any provision of law. [Miheer H Mafatlal v Mafatlal Industries Limited AIR 1997 SC 506.] Answer 2(b) The meaning of the term 'Corporate Restructuring' is quite wide and varied. Depending upon the requirements of a company, it is possible to restructure its business, financial and organizational transactions in different forms. Restructuring is a method of changing the organizational structure in order to achieve the strategic goals of the organization or to sharpen the focus on achieving them. The essentials of Corporate Restructuring are efficient and competitive business operations by increasing the market share, brand power and synergies. Simply stating, the expression ‘Corporate Restructuring’ implies restructuring or reorganizing a company or its business (or one of its businesses) or its financial structure, in such a way as to make it operate more effectively. Restructuring may be of the following kinds: Financial restructuring which deals with the restructuring of capital base and raising finance for new projects. This involves decisions relating to acquisitions, mergers, joint ventures and strategic alliances. Technological restructuring which involves, inter alia, alliances with other companies to exploit technological expertise. Market restructuring which involves decisions with respect to the product market segments, where the company plans to operate based on its core competencies. Organizational restructuring which involves establishing internal structures and procedures for improving the capability of the personnel in the organization to respond to changes. This kind of restructuring is required in order to facilitate and implement the above three kinds of restructuring. These changes need to have the cooperation of all levels of employees to ensure that the restructuring is successful. The most commonly applied tools of corporate restructuring are amalgamation, merger, demerger, slump sale, acquisition, joint venture, disinvestment, strategic alliances and franchises. Answer 2(c) After receiving the court’s order for convening the meeting of creditors or class of creditors as per section 391(1) of the Companies Act, 1956, the meetings are to be held as per directions of the Court under the chairmanship of the person appointed by the Court for the purpose. Normally, the Court appoints a Chairman and alternate Chairman of each meeting. The procedural aspects for convening the meeting of the creditors or class of creditors in terms of court’s orders are as follows – 1. The notice and explanatory statement under Section 393 of the Companies Act, 1956 with the form of proxy and specimen advertisement in the newspapers as approved by the Court alone should be issued. 2. Notice shall be issued to all the creditors of the Company or a class of creditors as directed by the Court. Notice should be accompanied by approved draft of the explanatory statement and proxy form. 3. The advertisement of the meeting shall be given in the approved format in newspapers approved by the Court. 4. Keep the venue of the meeting ready for the event. 5. Usually the Court may appoint a chairman for the meeting. Otherwise the Court approves the chairman or any other named director to chair the meetings. 6. The quorum shall be as specified in the direction of the Court. 7. As per Companies Court rules, 1959, even the presence of a proxy is counted for quorum purposes. 8. The meeting shall commence at the appointed time. 9. A copy of the scheme; particulars of creditors, class-wise, copies of notices and other records, financial statements, value of debt due to a creditor should be kept ready. 10. Proper arrangements should be made for voting. 11. When a resolution is put to vote, proper count shall be taken of those who are present and voting. 12. Chairman shall ask the scrutinizer to submit a report on the result of voting and the value thereof. 13. Chairman shall prepare the minutes of the meeting and furnish a report to the Court. Question 3 (a) In Broad Vision Ltd., two acquirers made open offer for acquisition of 20% of its equity capital — one made by Damanies and another by British-American Tobacco Plc. UK (BAT Group). In this case, the petitioners sought a writ of mandamus directing SEBI to conduct investigation into violations and particularly under regulation 22 dealing with obligations of acquirer, and thereby to deny permission to the abovementioned two acquirers to proceed with their public offer. Will the petitioner get the remedy as applied before the High Court of the State where the registered office of the target company is situated ? Support your answer with justification and case law(s). (7 marks) (b) A takeover bid may either be ‘friendly’ or ‘hostile’, it may also be mandatory, partial or competitive. Explain the three types of takeover bids with circumstances and purpose of such bids. (8 marks) Answer 3(a) The High Court of Andhra Pradesh in the case of M.V. Subramanyam v. Union of India (2001) 33 SCL-III (A.P.) considered the open offer made by Damanis and counter offer made by British American Tobacco P/c UK (BAT group) for acquisition of 20 percent of equity share capital of VST. In this case, the petitioners sought a writ of mandamus directing SEBI to conduct investigation into statutory violations and thereby deny permission to the two acquirers to proceed with public offer. It was held that Regulation 22 dealing with general obligations of acquirer was only directory in nature and there was no merit in contention that non-adherence to time schedule would invalidate letter of offer. It was further stated that the petitioners having failed to establish prejudice caused to shareholders in extending letters of offers or allowing acquirers to acquire would result in unforeseen circumstances, jeopardizing industrial growth or interest of shareholders, petitioners were disentitled to seek mandamus from court. In view of the above, petitioners were disentitled/denied to seek mandamus from the High Court. Answer 3(b) A takeover bid may be a “friendly takeover bid” or a “hostile takeover bid”. Bids may be mandatory, partial or competitive bids. Mandatory Bid This type of bid has arisen due to regulatory requirement. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, require acquirers to make bids for acquisition of certain level of holdings subject to certain conditions. Regulations 10, 11 and 12 of the said Regulations contain necessary provisions. A takeover bid is required to be introduced through a public announcement through newspapers. Such requirements arise in the following cases: (a) for acquisition of 15% or more of the shares or voting rights; (b) for acquiring additional shares or voting rights to the extent of 5% of the voting rights in any financial year ending on 31st March if such person already holds not less than 15% but not more than 55% of the shares or voting rights in a company; (c) for acquiring shares or voting rights, along with persons acting in concert to exercise more than 55% but less than 75% of voting rights in a company. Partial Bid Partial bid covers a bid made for acquiring part of the shares of a class of capital where the offeror intends to obtain effective control of the offeree through voting power. Such a bid is made for equity shares carrying voting rights. In other words, the offeror bids for the whole of issued shares of one class of capital in a company other than equity share capital carrying voting rights, partial bids come to the fore. Regulation 12 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 qualifies partial bid in the form of acquiring control over the target company irrespective of whether or not there has been any acquisition of shares or voting rights in a company. For such acquisitions, it is necessary to make public announcement in accordance with the Regulations. Competitive Bid This type of a bid envisages the issue of a competitive bid so that when a bid is announced by a prospective acquirer, if any other person finds interest in acquiring the shares, such acquirer should offer a competitive bid, which can be made through public announcement by any person within 21 days of public announcement of the offer made by the acquirer. No person shall make a competitive bid for acquisition of shares of a financially weak company where once lead financial institution has evaluated the bid and accepted the bid of the acquirer who has made the public announcement in pursuance of Regulation 35 of SEBI Takeover Regulations, 1997. Question 4 (a) According to the Companies Act, 1956, it is clearly understood that there is no difference between the terms ‘merger’ and ‘reverse merger’, both are the cases of amalgamation. But in common business parlance, both are quite different. Why is the amalgamation of a particular nature called ‘reverse merger’ and what are underlying circumstances and benefits for effecting a ‘reverse merger’? Discuss. (7 marks) (b) Registrar of Companies (ROC) while going through the technical scrutiny of the annual report of Gemini Ltd. for the financial year ended on March, 2008 had observed certain irregularities or non-compliance of Schedule VI of the Companies Act, 1956 related to disclosure of ‘interest accrued and due on secured loans’ and asked information from the company under section 234. The Schedule 3 of the secured loan as given in the annual report of Gemini Ltd. as on 31st March, 2008 is as follows: Rupees in Crores Schedule 3 : Secured Loans As at As at 31-3-2008 31-3-2007 Debentures : 10% Non-convertible debentures — 9.00 From banks and financial institutions : Working capital loans 241.00 243.00 Foreign currency loans 5.00 15.00 Rupee term loans 581.00 517.00 827.00 784.00 ROC in its letter to Gemini Ltd. stated that “as per the provisions of section 211 read with Schedule VI, Part 1 to the Companies Act, 1956, interest accrued and due on secured loans should be included under the appropriate sub-heads under the head secured loans. But it was observed that the company has not separately disclosed the interest accrued and due on the secured loan and thereby violated the provisions of section 211 read with Schedule VI to the Companies Act, 1956. Explain.” Gemini Ltd. in its reply to ROC has given following facts: “As per provisions of section 211 every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part 1 of the Schedule VI to the Companies Act, 1956 or as near thereto as circumstances admit. As far as not showing the interest accrued and due on secured loans under appropriate sub-head under the head secured loans, we would like to state that the same has been clubbed with secured loan under Schedule 3 of the annual report and we believe that the disclosure is as per the format set out in Part 1 of the Schedule VI or as near thereto and there is no violation of the provisions of section 211 read with Schedule VI to the Companies Act, 1956.” ROC has not agreed with the above views of the Gemini Ltd. and issued show cause notice for violation of section 211 read with Schedule VI to the Companies Act, 1956. In its show cause notice ROC has stated that “whereas during the course of technical scrutiny of the balance sheet as at 31st March, 2008, it has been observed that company has not separately disclosed the interest accrued and due on secured loans separately and as such the balance sheet is not drawn up in accordance with the requirements of provisions of section 211 read with Schedule VI to the Companies Act, 1956. Whereas in view of the above observations, the provisions of section 211 read with schedule VI to the Companies Act, 1956 have been contravened and every officer of the company who is in default have rendered themselves liable to be prosecuted under section 211(7) read with section 209(6). Now in view of what is stated herein above, every officer in default of the company as the case may be are hereby called upon to show cause as to why legal action under section 211(7) read with section 209(6) should not be taken.” ROC has served notice in terms of section 51 to the Managing Director, Executive Director (Finance) and the Company Secretary. You as the Vice-President and Company Secretary of the company, prepare a note for the Board on consequences of the situation and remedies, if any. (8 marks) Answer 4(a) Generally, a loss making or less profit earning company merges with a company with track record, to obtain the benefits of economies of scale of production, marketing network, etc. In a reverse merger, a healthy company merges with a financially weak company. The main reason for this type of reverse merger is the tax savings under the Income- Tax Act, 1961. Section 72A of the Act ensures the tax relief, which becomes attractive for such reverse mergers, since the healthy and profitable company can take advantage of the carry forward losses/of the other company. However the benefits of carrying forward of the losses and setting of against the profits of the merged entity is subject to conditions contained in section 72A of the Income Tax Act, 1961 read with Rule 9C of the Income Tax Rules. Therefore if the conditions cannot be complied with due to difficulties, companies may plan for a reverse merger such that the loss making company remains to exist even after the amalgamation. The healthy unit loses its name and surviving sick company retains its name. In the context of the Companies Act, 1956 there is no difference between a merger and a reverse merger. It is like any other amalgamation. A reverse merger is also carried out through the High Court route. However, where one of the merging companies is a sick industrial company in terms of the Sick Industrial Companies (Special Provisions) Act, 1985, such merger has necessarily to be through the Board for Industrial and Financial Reconstruction (BIFR). On the reverse merger becoming effective, the name and objects of the sick company (merged company) may be changed to that of the healthy company. The underlying circumstances generally exist to effect a ‘reverse merger’ is as below:- (i) There is a financially weak company with substantial amount of loss. However, the company has technical competence, and/or brand value but it is financially unviable and needs a financier. (ii) A sick company referred under SICA, 1985 to the Board for Industrial Reconstruction (BIFR) for reconstruction of a company and the ‘reverse merger’ had been approved by BIFR. The benefits of a reverse merger are as follows: − The merged company can save income tax on its profit since the company can take advantage of carry forward losses of the loss-making company. − The accumulated loss of financially weak company and unabsorbed depreciation shall be deemed as accumulated loss and unabsorbed depreciation of the merged company. − The financially sound company can utilize the technical competence and/or brand value of the financially weak and/or sick company. − Upon such merger, the merged company can adopt/change the name of the healthy (transferor company) company. Answer 4(b) The Board of Directors Gemini Ltd. The Schedule VI has categorically defined the sub-heads for the presentation of "SECURED LOANS" in the Balance Sheet (Horizontal Form). The sub-heads of "Secured Loans are given below: 1. Debentures 2. Loans and Advances from banks 3. Loans and advances from subsidiaries 4. Other Loans and advances Further, in order to give more clarity in the presentation of "Secured Loans" under the above subheads, Part I also provide instructions for classification of liabilities which are as under:- "Interest accrued and due on Secured Loans should be included under the appropriate subheads under the head "SECURED LOANS". In the given case, the company has contravened the provisions of section 211 of Companies Act, 1956. Consequences for contravention of Section 211 of the Companies Act 1956 If any such person as is referred to in sub-section (6) of section 209 fails to take all reasonable steps to secure compliance by the company, as respects any accounts laid before the company in general meeting, with the provisions of Section 211 and with the other requirements of this act as to the matters to be stated in the accounts, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both: Persons referred under sub-section (6) of section 209 − where the company has a managing director or manager, such managing director or manager and all officers and other employees of the company; and − where the company has neither a managing director nor manager, every director of the company Remedy The Company can make a compounding application under Section 621A to the Central Government. Vice President & Company Secretary Question 5 (a) In case of amalgamation, merger, arrangement, de-merger, etc., various courts have pronounced different opinions for valuation of shares of companies involved. In view of such pronouncements, state the principles for valuation with example of two cases. (Name of the case is not essential.) (7 marks) (b) Comment on the following in the light of judicial pronouncements: (i) Once the exchange ratio is determined by an independent expert in the field of valuation of securities and who has used his expertise to value the exchange ratio, then court has limited jurisdiction to substitute its exchange ratio. (4 marks) (ii) In a scheme of arrangement by way of demerger — one of the unsecured creditors took an objection that it will amount to transfer of technology and thereby the terms of supply agreement will be violated. Is the objection maintainable? (4 marks) Answer 5(a) PRINCIPLES FOR VALUATION OF SHARES IN TWO DIFFERENT SITUATIONS Supreme Court in CWT v. Mahadeo Jalan (1972) 86 ITR 621 (SC) observed: “An examination of the various aspects of valuation of shares in a limited company would lead us to the following conclusion: (1) Where the shares in a public limited company are quoted on the stock exchange and there are dealings in them, the price prevailing on the valuation date is the value of the shares. (2) Where the shares are of a public limited company which are not quoted on a stock exchange or of a private limited company, then value is determined by reference to the dividends, if any, reflecting the profit earning capacity on a reasonable commercial basis. But, where they do not, then the amount of yield on that basis will determine the value of the shares. In other words, the profits which the company has been making will ordinarily determine the value. (3) In the case of a private limited company also where the expenses are incurred out of all proportion to the commercial venture, they will be added back to the profits of the company in computing the yield. In such companies the restriction on share transfers will also be taken into consideration as earlier indicated in arriving at a valuation. (4) Where the dividend yield and earning method break down by reason of the company’s inability to earn profits and declare dividends, if the set back is temporary, then it is perhaps possible to take the estimate of the value of the shares before set back and discount it by a percentage corresponding to the proportionate fall in the price of quoted shares of companies which have suffered similar reverses. (5) Where the company is ripe for winding up, then the break-up value method determines what would be realised by that process. In the case of Carron Tea Co. Ltd. (1966) 2 Comp Cas 227 (Guj): Although the question of valuation of shares and fixation of exchange ratio is a matter of commercial judgment and the court should not sit in judgment over it, yet the court cannot abdicate its duty to scrutinise the scheme with vigilance. It is not expected of the court to act as a rubber stamp simply because the statutory majority has approved the scheme and there is no opposition to it. The court is not bound to treat the scheme as a fait accompli and to accord its sanction merely upon a casual look at it. It must still scrutinise the scheme to find out whether it is a reasonable arrangement which can, by reasonable people conversant with the subject, be regarded as beneficial to those who are likely to be affected by it. Where there is no opposition, the court is not required to go deeper. However, when there is opposition, and the court is not satisfied about the fairness of the valuation, it would be justified in refusing to accord sanction to the scheme. Answer 5(b)(i) It was held by the Supreme Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd. (1996) 4 Comp LJ 124 (SC) that once the exchange ratio of the shares of the transferee company to be allotted to the holders of shares in the transferor company has been worked out by a recognized firm of chartered accountants who are experts in the field of valuation, and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies. It is also not feasible for the court to say that the shareholders in their collective wisdom should not have accepted the said exchange ratio of the ground that it will be detrimental to their interest. Answer 5(b)(ii) The fundamental requirement under Section 391(2) of the Companies Act, 1956 is that the scheme of arrangement should be approved by a requisite majority of shareholders and creditors. The expression ‘creditors’ should include unsecured creditors too. If the requisite majority of creditors or shareholders had approved the scheme, it will be binding upon the dissentient shareholders or creditors too. An unsecured creditor may raise objections at the hearing of the petition for sanction of the scheme by the Court. SC in J.K.(Bombay) P Ltd. v New Kaiser I Hind Spinning and Weaving Co Ltd. [1970] 40 Company Cases 689 held that a scheme is statutorily binding even on the creditors and shareholders who dissented from or opposed to its being sanctioned. In Sequent Scientific Ltd., In Re and in P.I.Drugs and Pharmaceuticals Ltd., in Re, [2009] 151 Comp Cas 1 (Bom) the Bombay High Court held that the transferee company would step into the shoes of the successor in interest of the transferor company and would be bound by the terms and conditions of the supply agreement and is obliged to comply with the same in its letter and spirit in all respects. In this company Court accepted the contention of the Petitioner companies that the intervenor is neither a creditor nor a shareholder of the transferor company and intervenor cannot have any locus. But in the given question the objection has arisen from an unsecured creditor and he has locus to object.

PART—B (Answer ANY TWO questions from this part.) Question 6 (a) What is meant by ‘securitisation’ under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI)? What are the main motives of securitisation? (5 marks) (b) The Government of India is of the opinion that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 would bring about a financial discipline and reduce burden of NPA’s on banks and financial institutions. The ICICI Bank initiated action under this Act against Mardia Chemicals Ltd. and the later, aggrieved by the Act, challenged the same on the grounds that the Act was loaded heavily in favour of lenders, giving little chance to the borrower to explain their views, therefore is not constitutional and pleaded the following against Union of India: (i) There was no occasion to enact such a draconian legislation to find a short cut to realise NPA’s without their ascertainment when there already existed the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (Recovery of Debts Act) for doing so; (ii) No provision had been made to take into account lenders liability; (iii) That the mechanism for recovery under section 13 of the SARFAESI Act, 2002 does not provide for an adjudicatory forum of inter se disputes between lender and borrower; and (iv) That the appeal provisions were illusory because the appeal would be maintainable after possession of the property or management of the property was taken over or the property sold and the appeal is not entertainable unless 75% of the amount claim is deposited with the Debt Recovery Tribunal (DRT). State whether the Mardia Chemicals Ltd. will succeed on the stands taken by them. Give reasons. (10 marks) Answer 6(a) "Securitisation" means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise [Section 2(1)(z) on Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002]. It is a process by which the owners of financial assets, such as loans which are illiquid, are able to transfer such assets to a ‘special purpose vehicle’ (‘SPV’), which, in turn, issues tradable liquid securities to investors. There are two motives for securitisation. One, the securitised assets go off the balance sheet of the originator and so the asset-base is pruned down to that extent, thereby reducing the regulatory capital requirements to support the assets. Second, the asset portfolio is liquidated, releasing cash, which in turn reduces the need for demand and time liabilities that are subject to statutory reserves. Answer 6(b) The Hon’able Supreme Court in the case of Mardia Chemicals Ltd. v. UOI [2004] 59 CLA 380 (SC) where the facts of the present case were similar held that though some of the provisions of the Act 2002 are a bit harsh for some of the borrowers but on those grounds the impugned provisions of the Act cannot be said to unconstitutional in the view of the fact that the objective of the Act is to achieve speedier recovery of the dues declared as NPAs and better availability of capital liquidity and resources to help in growth of economy of the country and welfare of the people in general which would sub-serve the public interest. The court opined that the fairness doctrine, cannot be stretched too far, such communication is only for the purposes of the secured debtors knowledge and cannot give an occasion to the secured debtor to resort to any proceeding, which are not permissible under the provisions of the Act. The Supreme Court further held as follows: “Under sub-section (2) of Section 13 of the “The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, Act, 2002” [SARFAESI Act] it is incumbent upon the secured creditor to serve 60 days notice before proceeding to take any of the measures as provided under sub-section (4) of Section 13 of the Act. After service of notice, if the borrower raises any objection or places facts for consideration of the secured creditor, such reply to the notice must be considered with due application of mind and the reasons for not accepting the objections, howsoever brief they may be, must be communicated to the borrower.” After this landmark decision of the Supreme Court, sub-section (3A) was introduced under Section 13 of the SARFAESI Act. As per the mandatory concept of borrowers making a representation containing their objections to the enforcement action by the lenders which lenders had commenced by issuing the ’60-days’ demand notice under Section 13(2) of the SARFAESI Act. If the objections are not acceptable to the lenders, they have to communicate the reasons for non-acceptance of the objections within 1 week of the receipt of the objections. The Supreme Court had further clarified in the above case that the reasons so communicated by the lenders shall only be for the purposes of the information/ knowledge of the borrower without giving rise to any right to approach the DRT under Section 17 of the Act, at that stage. Thereafter secured creditors are at liberty to proceed to take enforcement measures under Section 13(4) of the SARFAESI Act read with Security Interest (Enforcement) Rules, 2002 [Enforcement Rules]. If a borrower is aggrieved due to any enforcement measure initiated by a secured creditor under Section 13(4) of the SARFAESI Act, Section 17(1) of the SARFAESI Act enables the borrower to file an application before DRT. It is fairly clear that every single action such as possession, letting on lease, selling the secured assets or takeover of management or any other such major action falling under Section 13(4) is certainly liable to scrutiny. The Hon’ble Supreme Court, however, found that the requirement of deposit of 75 per cent of the amount claimed before entertaining an appeal (petition) under Section 17 is an oppressive, onerous and arbitrary condition and against all the canons of reasonableness. Therefore the Court held this provision to be invalid and ordered that it was liable to be struck down. Question 7 (a) There must be strong grounds for liquidating a company as it is the last resort to be adopted and mere allegations would not constitute just and equitable ground for winding-up of a company. Comment. (5 marks) (b) The Board of directors can refuse to file a petition for winding-up of a company on their own even though members have given authorisation for filing the petition by passing ordinary resolution. Comment. (5 marks) (c) What do you mean by ‘Lok Adalat’ under the Legal Services Authorities Act, 1987 and what is the purpose, scope and purview of the same? What is the need of setting-up of Lok Adalats? (5 marks) Answer 7(a) In a petition for winding up under just and equitable clause the petitioner must convince the court not only that there are just and equitable grounds for winding up of the company but also that there is no alternative remedy open to him [Atul Drug House Ltd., In Re, (1971) 41 Com Cases 352 (Guj)]. Further, there must be strong grounds for liquidating a company as it is the last resort to be adopted and mere allegations would not constitute just and equitable ground for winding up of a company. It was held in the case of K. Venkateshwara Rao v. Phoenix Share & Stock-brokers P. Ltd., (2002) 35 SCL 561 (Bom) that where the allegations made by the petitioner, such as non-receipt of notices, absence of minutes, siphoning off of funds and monetary mismanagement, which required deeper investigation under sections 397 and 398 and 402 by the Company Law Board, the Court said that there being the availability of a good remedy under sections 397 and 398, a petition for winding up was not maintainable. Answer 7(b) A company may itself present a petition for winding up of a company on any of the grounds mentioned in clauses (a) to (f) of section 433 of the Companies Act, 1956. While a special resolution to wind up enables a company to present a petition under clause (a), such a resolution is not necessary, where the company bases the petition on any of the grounds mentioned in clauses (b) to (f) of section 433 of the Act [State of Madras v. Madras Electric Tramways Ltd., AIR 1956 Mad 131 : (1955) 25 Com Cases 378]. Further, without the authority of the general meeting the directors are not entitled to present a winding up petition in the name of the company. But where the directors have presented such a petition, it is open to general meeting of shareholders to ratify their action. So, in view of the above it seems that the Board of directors cannot refuse to file a petition for winding up if the members have authorized it by passing an ordinary resolution.

Answer 7(c) The concept of Lok Adalat is of recent origin and is set up under the Legal Service Authorities Act, 1987 (39 of 1987). Where the borrower and the banker are not able to arrive at a compromise, bringing the case before the forum of Lok Adalat can be helpful. Experience has shown that in many cases, particularly where the amount is not large, Lok Adalat has been successful in bringing the borrower to terms by using some kind of social pressure. The Reserve Bank has advised all scheduled commercial banks and all India financial institutions that they can take up the matter where outstandings are Rs. 10 lakhs and above with Lok Adalats organized by the Debt Recovery Tribunals/Debt Recovery Appellate Tribunals. Lok Adalats are being organized at difference places under the auspices of local judiciary and voluntary organizations with the object of speedy disposal of disputes of different kinds. Bank’s claims against its borrowers are also being taken-up by such Lok Adalats. The Indian Banks Association (IBA) has considered the matter relating to participation by banks before Lok Adalats by which cases of banks are settled speedily and also saving legal charges. Lok Adalats do not have statutory status, as judgements rendered by them do not take the form of a court decree so as to make it binding on the parties. If either of the parties does not give consent for settlement of dispute through Lok Adalat, the Lok Adalat cannot settle the matter. If a settlement is arrived at, terms thereof are recorded by the Presiding Officer of the Lok Adalat and signed by the parties. If there is no settlement, the matter is left unresolved. While a Lok Adalat can take up all such disputes for consideration, which have not yet reached any court, pending civil suits are also referred to Lok Adalats for decision. Question 8 (a) “It is cardinal principle of law that a person can be insolvent but a company cannot be adjudged insolvent.” In the light of this statement, state the reasons why a company can’t be adjudged insolvent but, it can be dissolved that too in case it is running in proper health and able to pay its obligation. Further, you are required to differentiate between the ‘insolvency of an individual’ and ‘winding-up of a company’ and their legal status during insolvency and winding-up process. (9 marks) (b) Write short notes on the following : (i) Cross border insolvency (ii) Meaning of ‘State’ within the UNCITRAL Model Law (iii) Requirements and stipulations to become a merchant banker of an acquirer for making a takeover bid. (2 marks each) Answer 8(a) Winding up of a company is a process of putting an end to the life of a company. Winding up is a process, in which assets of the company are disposed off and it’s dues are realized. After that its debt are paid off and collections are taken from its members in case of need. If any surplus is left, it is distributed among the members in accordance with their rights. Prof. L C B Gower defined winding up of a company as the process whereby its life is ended and administered for the benefit of its creditors and members. An administrator called liquidator is appointed and he/she takes control of the company, collects its debts and finally distributes any surplus among the members in accordance with their rights. The winding up of a company bears an analogy with the insolvency of a company. As a general rule in case of winding up if the members of a company desires that the company should be dissolved or it becomes insolvent or is otherwise unable to pay its debts, or if for any reason it seems desirable that it should cease to exist, it is wound up. Therefore, in view of the above it is clear that a company may also be wound up even it is perfectly solvent, e.g. for the purpose of reconstruction etc. Further more, a company can never be declared as insolvent although it is unable to pay its debts. It can only be wound up. Of course, some provisions of insolvency laws are made applicable to companies in liquidation i.e. section 442, 446, 477, 528 to 531 and 534 to 537 of the Companies Act, 1956. The followings are differences between insolvency of an individual or a firm and winding up of a company: (i) In the case of insolvency of an individual, the whole of the insolvent’s property is taken out of his hands and rests in the court or the official assignee. On the other hand, in case of winding up, the property remains vested in the company, subject to its being administered for the purposes of winding up as the company retains its complete existence. Its legal death comes only when it is formally dissolved. (ii) In insolvency, an insolvent individual can obtain his discharge and continue living and working free from the burden of his debts. On the other hand, a company in liquidation cannot obtain its discharge and continue free from the burden of its debts. The liquidator winds up its affairs and then terminates it through dissolution. (iii) Although, in the administration of the assets of an insolvent company the insolvency rules apply, they are however, not identical with those of insolvency. (iv) For individual, administration of his/her property by the official assignee or the official receiver occurs only if he is declared an insolvent by the court. But the assumption of the director’s powers by the liquidator occurs even if the company is fully solvent. Liquidation or winding up even of a solvent company can be proceeded with the aid of the court, as in voluntary winding up. Legal status during insolvency and winding up In case of winding up, the property and asset of the company belong to the company until dissolution takes place. Thus, in between the winding up and dissolution, the legal status of the company continues and it can be sued in the court of law. On the passing of the winding up order, a secured creditor could take action only if he chooses to stand outside the winding up. If a company is in winding up, official liquidator becomes the custodia legis of all properties. By virtue of Section 441 of the Companies Act, on the passing of a winding up order the winding up commences with retrospective effect from the date of presentation of the petition for winding up. By virtue of Section 445(3) of the Companies Act, the winding up order operates as a notice of discharge to officers, directors and employees of the company. The Board of Directors would cease to function. On the other hand, in case of insolvency, the whole of the insolvent’s property is taken out of his hands and rests in the court, under the provincial insolvency Act, 1920 or to the official assignee under the presidency towns Insolvency Act, 1909. An individual after being declared an insolvent is not capable to sue or being sued by any other person. Answer 8(b) (i) Cross border insolvency issues arise when a non-resident is either a debtor or contributory or creditor of the insolvent Indian company. The other instances include cases where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State, where the insolvency proceeding is taking place. (ii) The word "State", as used in the preamble and throughout the UNCITRAL Model Law, refers to the country that enacts the Law (the "enacting State"). The term should not be understood as referring, for example, to a state in a country with a federal system. (iii) Before making any public announcement of offer, for the purpose of making a takeover the acquirer is required to appoint merchant banker in Category I holding a certificate of registration granted by the Board (SEBI), who is not an associate of or group of the acquirer or the target company. (Regulation 13 of Takeover Regulations) ADVANCED TAX LAWS AND PRACTICE Time allowed : 3 hours Maximum marks : 100

NOTE: All references to sections mentioned in Part-A of the Question Paper relate to the Income-tax Act, 1961 and relevant Assessment Year 2010-11, unless stated otherwise.' PART—A (Answer ANY TWO questions from this part.)

Question 1 (a)Choose the most appropriate answer from the given options in respect of the following : (i)Prior recommendation of the President of India is required to Bills affecting taxation in which States are interested under Article — (a)271 of the Constitution of India (b)281 of the Constitution of India (c)274 of the Constitution of India (d)273 of the Constitution of India. (ii)All income arising to any person by virtue of a revocable transfer of assets is chargeable as the income of the transferor and shall be included in his total income under the Income-tax Act, 1961 — (a)As per section 60 (b)As per section 61 (c)As per section 62 (d)As per sections 60 and 62. (iii)As per section 5, the following is not included in the total income of a non- resident company — (a)Income which accrues or arises in India during the previous year (b)Income which is deemed to accrue or arise in India (c)Income which arises or accrues outside India (d)Income which is received or deemed to be received in India. (iv)As per Article 270(1) read with Article 4(a) of the constitution of India, the proceeds of corporation tax are –– (a)Not divisible among the States (b)Divisible among the States (c)Divisible between the Centre and States (d)None of the above. (v)Part II of the First Schedule of Finance Bill gives — (a)Rates of income-tax (b)Rates of TDS (c)Tax on agricultural income (d)None of the above. (1 mark each) (b)Re-write the following sentences after filling-in the blank spaces with appropriate 20 word(s)/figure(s) : (i)Any person discontinuing any business or profession shall give notice to the Assessing Officer under section 176(3) within ______days thereof. (ii)As per Explanation 4 to the section 115JB, every company to which the section applies shall furnish a report in the prescribed form from ______. (iii)The Commissioner (Appeals) may admit an appeal under Chapter XX of the Income-tax Act, 1961 after the expiration of ______of the receipt of order appealed against if he is satisfied that the appellant had sufficient cause for not presenting it within that period. (iv)A domestic company is liable to pay dividend tax at the rate of ______of dividend declared. (v)As per section 263(2), the revision order shall be passed within ______from the end of the financial year in which the order was passed by the assessing officer. (1 mark each) (c)Distinguish between ‘tax evasion’ and ‘tax avoidance’. Indicate whether the following acts can be considered as tax evasion/tax avoidance : (i)Rajat deposits Rs.70,000 in PPF account to avail tax deduction under section 80C. (ii)Raman is using a motor car for his personal purposes, but charges as business expenditure. (5 marks) Answer 1(a) (i)(c) 274 of the Constitution of India (ii)(b) As per Section 61 (iii)(c) Income which arises or accrues outside India. (iv)(c) Divisible between the Centre and States (v)(b) Rates of TDS Answer 1(b) (i)Fifteen days (ii)From an Accountant as defined in the explanation below sub section 2 of section 288. (iii)30 days (iv)16.995% (v)Two years Answer 1(c) Tax evasion means a method of evading tax liability by dishonest means like suppression, conscious violation of rules, inflation of expenses etc. while tax avoidance means planning for minimisation of tax burden according to the provisions of the tax laws and within legal framework, though it defeats the basic intention of legislature. Tax evasion involves no payment of tax after the liability of tax has arisen while tax avoidance is planning before hand to avoid tax legally. Tax evasion involves use of unfair means while tax avoidance takes into account various lacunas of law. (i)It is neither a tax avoidance nor tax evasion. The claiming of deduction from gross total income under Section 80C by depositing Rs. 70,000 in PPF account comes under tax planning. (ii)It is an unlawful act to treat a personal expenditure as business expenditure, which is disallowed under the law. Raman is resorting to unfair means to claim deduction by falsification of records. Therefore it is tax evasion and illegal. Question 2 (a)Answer any two of the following : (i)What is the quantum of Minimum Alternate Tax (MAT) for a ‘domestic company’ and ‘foreign company’ for the assessment year 2010-11 ? (ii)An enterprise seeks your advice regarding the applicability of the provisions of section 80-IC and the conditions, if any, to be fulfilled. Elucidate. (iii)Explain the meaning of ‘jewellery’ and ‘urban land’ under the Wealth-tax Act, 1957.(3 marks each) (b)Distinguish between the following : (i)‘Section 271AA’ and ‘section 271B’. (ii)‘Section 80-IE’ and ‘section 80-IC’ in regard to substantial expansion. (3 marks each) (c)Discuss the concept of ‘deemed dividend’ under section 2(22). (3 marks) Answer 2(a)(i) (i)The rates of Minimum Alternate Tax (MAT) for the Assessment Year 2010-11 are as follows: Domestic Company (i) If book Profit does not exceed Rs.1 crore IT 15% SC Nil EC (@ 2%) 0.3 SHEC (@ 1%) 0.15 Total 15.45% (ii) If book Profit exceeds Rs.1 crore IT 15.00 SC (10%) 1.50 EC (2%) 0.33 SHEC (1%) 0.165 Total 16.995%

Foreign company (i) If book Profit does not exceed Rs.1 crore IT 15 SC Nil EC (2%) 0.3 SHEC (1%) 0.15 Total 15.45 % (ii) If book Profit exceeds Rs.1 crore IT 15.00 SC(2.5%) 0.375 EC(2%) 0.3075 SHEC (1%) 0.15375 Total 15.83625 % Answer 2(a)(ii) The provisions of section 80IC shall be applicable on the enterprises where the gross total income includes any profits and gains derived from any: (i)business of manufacturing or producing any article in any notified specified area in the state of Himachal Pradesh and Uttaranchal not being an article prescribed in Schedule XIII or (ii)business of producing or manufacturing any article prescribed in Schedule XIV in any area other than a notified specified area in the said States. Conditions: Following conditions are to be satisfied: (i)The industrial understanding is not formed by splitting up or the reconstruction of a business already in existence. Exception: the aforesaid condition of new undertaking is not applicable where the business is reestablished, reconstructed etc. (ii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose. (iii) It begun or begins manufacture of or production of an article or thing or undertakes substantial expansion during the period beginning from 01-07-2003 and ending before 01-04-2012. Answer 2(a)(iii) Jewellery is treated as an asset under Section 2(ea)(iii) of the Wealth Tax Act. Jewellery includes the following: (a)Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones and whether or not worked or sewn into any wearing apparel. (b)Precious or semi-precious stones, whether or not set in any furniture, utensils or other articles or worked or sewn into any wearing apparel. Urban land: This is an asset vide Section2(ea)(v) Urban land means land situated in the following area: (a)Land situated within municipality: Land situated in any area which is comprised within the jurisdiction of a municipality which has a population of not less than 10000 according to the last preceding census of which relevant figures have been published before the valuation date. (b)Land situated outside municipality but within notified area : Land situated in any area within such distance (not being more than 8 km) from the local limits of any municipality, referred to above, as the Central Government may having regard to the extent of and scope for urbanization of that area and other relevant considerations specify. Municipality includes municipal corporation notified area committee, town planning committee, town committee or a municipality known by any other name. Answer 2(b)(i) Points of Difference 271AA 271B Types of default: Provides for penalty Provides for penalty for failure to keep and for failure to get maintain information accounts audited as and documents in required under respect of section 44AB international transactions as required under section 92D(1) or (2). Minimum Penalty A sum equal to 2% of One-half per cent of the value of each total sales, turnover international or gross receipts or transaction. Rs.1 lakh whichever is less. Maximum Penalty: No maximum Rs.1 lakh Authority Levying Assessing Officer or Assessing Officer the Commissioner (A). Penalty :

Answer 2(b)(ii) Section 80-IE contains special provisions in respect of certain undertakings in North- Eastern states. As per the said provisions “substantial expansion” means increase in the investment in the plant and machinery by at least twenty five per cent of the book value of Plant and Machinery (before taking depreciation in any year) as on the first day of the previous year in which the substantial expansion is undertaken. Section 80-IC contains special provisions in respect of certain undertakings or enterprises in certain special category of states. In addition to the North-Eastern states, Sikkim and Himachal Pradesh or Uttaranchal fall in this category. “Substantial expansion” means increase in the investment in the Plant and Machinery by at least fifty per cent of the book value of Plant and Machinery (before taking depreciation in any year) as on the first day of the previous year in which the substantial expansion is undertaken. Answer 2(c) In its ordinary meaning dividend is the sum paid to a shareholder proportionate to his shareholding in a company out of the total divisible profits. However, under section 2(22) following disbursements are also treated as dividend if they are paid by a company to a shareholder to the extent of accumulated profits: (i)Any distribution by a company to the extent of accumulated profits involving the release of the assets of the company; (ii)Distribution of debentures/deposit certificate to shareholders and bonus shares to preference shareholders. (iii)Distribution to shareholders on liquidation of the company; (iv)Distribution on reduction of share capital; (vi)Loans or advances by a closely held company to certain shareholders/ concerns. Question 3 (a)Examine whether penalty can be levied under section 271(1)(c) even in a case where addition of concealed income does not result in taxable income but only reduces the returned loss keeping in view Explanation 4 to section 271(1)(c) and cite relevant case law, if any. (5 marks) (b)Rana Iron Ltd. (RIL) provided ‘free meal coupons’ to its employees. RIL entered into an agreement with Atul who was in the business of providing such coupons. The employees were provided with coupons of Atul at the rate of Rs.50.00 per day per employee. RIL claimed that the value of the said coupons was not taxable perquisite within the meaning of Rule 3(7)(iii) of the Income-tax Rules, 1962. Assessing Officer found that some of the coupons were misused for purchase of grocery and cosmetic items. It was estimated by the Assessing Officer that the misuse amounted to 30% of the amount of the ‘free meal coupons’ considered it as a perquisite to the employees. The assessee company was held to be in default for non- deduction of TDS from the employees to the extent of the value of the alleged perquisite and held liable for levy of interest towards the short deduction of tax and levy of penalty. RIL contested the same. Examine whether the assessee company had defaulted in its responsibility to deduct appropriate amount of tax from the employees. Cite relevant case law. (5 marks) (c)Pankaj is holding 15% equity shares of Young India Ltd., a company in which public is not substantially interested. Pankaj needs Rs.5,00,000 to purchase a car for his personal use. He can borrow at a interest of 5% per annum from his company or from a bank @ 10% per annum interest. The company has sufficient accumulated profit to advance the requisite loan. Suggest the better alternative to Pankaj from income-tax point of view.(5 marks) Answer 3(a) Section 271(1)(C) relates to failure to furnish returns, comply with notices and concealment of income etc. Section 271(1)(c) empowers the Assessing Officer or the Commissioner of Appeal to levy penalty when he is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. The basis for levying penalty for concealment of income is “income sought to be evaded”. Explanation 4 to Section 271(1)(c), inter-alia, makes it clear that in cases where the amount of income, in respect of which particulars have been concealed or inaccurate particulars have been furnished, has the effect of reducing the loss declared in the return or converting that, loss into income, the amount of tax sought to be evaded would mean the tax would have been chargeable on the income in respect of which particulars have been furnished, had such income been the total income. Explanation 4 is retrospective in nature and applicable retrospectively. When final assessed income is also loss penalty under section 271(1)(c) can be levied. The Supreme Court held in : [CIT-I Ahmedabad vs. Gold Coin Health Food (P) Ltd. decided on 18th August 2008] That during the period 1.4.1976 to 1.4.2003 penalty was leviable even in a case where addition of concealed income reduces the returned loss and Explanation 4 to Section 271(1) (c) is clarificatory and not substantive. Hence penalty can be levied in the case referred to. Answer 3(b) Non transferable meals coupons distributed by the assessee company to its employees of the value of Rs. 50 per day which were usable only at specified eating joints not being taxable as perquisites in the hands of the employees in view of proviso to Rule 3(7)(iii) no default can be ascribed to the assessee for not deducting tax at source in respect of said meal coupons merely because some employees misused the facilities. Thus there was no default on the part of Assessee (Employer Company). The facts are similar to those in CIT vs. Reliance Industries Ltd. [2008) 175 Taxman 367 (Guj)] decided on 11.9.2008. Answer 3(c) If Mr. Patel has taken loan from a closely held company in which he has 15% equity shares, it will be treated as deemed dividend under section 2(22)(e) and loan and advance shall be considered as deemed dividend in the hands of shareholder to the extent of accumulated profits excluding capitalized profits. Hence, Mr. Patel has to pay interest at 5% as well as income tax on deemed dividend i.e., Rs.5,00,000 as per prescribed rate. Such dividend is not tax free under Section 10(34). Therefore, it is beneficial for Mr. Patel to borrow from the Bank rather than taking loan from the Company.

PART—B (Answer Question No.4 which is COMPULSORY and ANY TWO of the rest from this part.) Question 4 (a)Choose the most appropriate answer from the given options in respect of the following: (i)Non-dutiable goods means — (a)The product not given in the Tariff Act (b)The product given in the Tariff Act (c)The product given in the Tariff Act with rate of duty (d)The product given in the Tariff Act with zero rate of duty. (ii)At the time of manufacture of Product-X, the rate of basic excise duty (BED) was 14% while at the time of removal the rate of duty was 9%. The duty applicable for the Product-X will be — (a) 14% (b) 9% (c) 11.5% (d)None of the above. (iii)Excisable goods can be removed for export without payment of duty by using –– (a) B-3 bond (b) B-2 bond (c) B-4 bond (d)B-7 bond. (iv)Registration under the central excise law is not required if the turnover of an SSI unit is — (a)Less than Rs.150 lakh (b)Less than Rs.90 lakh (c)Less than Rs.10 lakh (d)Less than Rs.100 lakh. (v)In the case of Excise Audit, 2000, selection of the assessee is based on— (a)Risk factor (b)Value of goods (c)Merit of the assessee (d)Any other factor. (vi)Yearly audit is applicable where excise duty paid in cash is more than— (a)Rs.3 crore (b)Rs.1.5 crore (c)Rs.1 crore (d)Rs.4 crore.

(vii)Deemed export means — (a)Export through agent (b)Sale of goods to UN agencies (c)Local sale to a foreigner (d)None of the above. (viii)As per Rule 7 of the drawback rules, the special brand rate of duty drawback should be applied — (a)Within 90 days from the date of exports (b)Within 60 days from the date of exports (c)Within 30 days from the date of exports (d)Within 45 days from the date of exports. (1 mark each) (b)Rewrite the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i)Excisable goods consumed within the factory for manufacture of final product is called ______. (ii)Goods included in the ______schedule of the Central Excise Act, 1944 are the same on which excise duty is payable under section 4A. (iii)MRP provisions are not applicable for packaged commodities meant for ______. (iv)Duty rebate is not allowed if the rebate amount is less than ______. (v)As per section 2(38) of the Customs Act, 1962, ‘stores’ means goods for use in a ______. (vi)Anti-dumping duty is imposed when export price is ______than normal price in the exporting country. (vii)As per section 27 of the Customs Act, 1962, interest on delayed refund is payable after expiry of ______months from the date of receipt of such order. (1 mark each) (c)Following particulars are available in respect of consignment of goods imported: (i)Cost at the factory of the exporter: US$ 20,000 (ii)Carriage/freight/insurance upto the port of shipment in the exporter’s country: US$ 400 (iii)Charges for loading on to the ship at the shipping port: US$ 100 (iv) Freight charges of the ship for transportupto the Indian port: US$ 1,200 Compute the assessable value for the purpose of levy/payment of customs duty. (5 marks) Answer 4(a) (i) (d) The product given in the Tariff Act with zero rate of duty (ii) (a) 9% (iii) (a) B-3 bond (iv) (a) Les than Rs.150 lakh (v) (a) Risk factor (vi) (a) Rs.3 crore (vii) (b) Sale of goods to UN agencies (viii) (c) Within 60 days from the date of exports. Note: In Q no. 4(a)(iii), The option of B1 bond (which is correct) is not given. As per notification no. 42/2001 CE(NT) dated 26/06/2001, Form specified in annexure for Excisable goods which can be removed for export without payment of duty is ‘B1 bond’. However in case the goods dispatched to the warehouse and export there from Form B-3 should be used hence the marks should be given to those who opted for B-3. Answer 4(b) (i)Captive consumption (ii)First and Second Schedule (iii)Industrial or Institutional Consumers (iv)Rs.500 (v)Vessel or Aircraft (vi)Less (vii)3 months Answer 4(c) Computation of Assessable Value US Dollars Cost at the Factory of the exporter 20,000 Add: Carriage/freight/insurance upto the port of shipment in the exporter’s country 400 Charges for loading on to the ship at the shipping port 100 FOB 20,500 Add: Freight charges of the ship for transport upto the Indian Port 1,200 Add: Insurance @ 1.125% of FOB 231 CIF 21,931 Add: Landing charges @ 1% of CIF 219 Assessable Value 22,150 To be converted into INR as per exchange rate notified by CBEC under section 14(3)(a) of the Customs Act. Question 5 (a)Determine the basis of valuation under section 4 or section 4A of the Central Excise Act, 1944 in the following cases, citing case law wherever available — (i)Packaged products with MRP printed/marked thereon, exported to Nepal. (ii)A packaged commodity covered under MRP notification and also the Standard of Weights and Measures Act, 1976 unpacked and shown to the customer, tested and then sold to the customer. (iii)Chocolates distributed as free gift along with his bottles of soft drinks. (iv)Ice creams sold in bulk to hotels. (v)Telephone instruments supplied in bulk to a service provider with MRP duly marked and the purchaser (i.e., the service provider) lent the instruments to its customers/subscribers retaining ownership. (5 marks) (b)Examine the powers of the Central Government to exempt partly or wholly any goods subject to customs duty, and also whether the withdrawal thereof would come under the purview of the doctrine of estoppel. Cite relevant case law, if available. (5 marks) (c)What is the theory of ‘unjust enrichment’ ? What are statutory provisions to stop such practices ? (5 marks) OR Discuss the circumstances under which no custom duty is levied. (5 marks) Answer 5(a) (i)MRP provisions do not apply to export of goods to Nepal. Valuation is to be done as per section 4 of the CEA. Such goods are not liable to confiscation if MRP is not printed Gillette India Ltd. v. CCE [(2006) 193 ELT 331 CESTAT] (ii)A pre-packaged commodity is such that a consumer purchases it in packed form without opening it. In case of refrigerators, ACs these are packed in factory for safe transport. These are shown to the customer, tested and then sold. The question arises whether they are packaged commodities. In Whirlpool of India ltd. v. UOI [(2001)(137) ELT 42 it was held that provisions of declaration of MRP are applicable. Hence Section 4A of CEA is applicable. (iii)Chocolate is covered under MRP Provisions. Nature of sale is not relevant, requirement to print MRP important under SWM Act, 1976 hence the provisions of section 4A shall be applicable. Same upheld in Jayanti Food Processing v. CCE [(2007) ELT 327(SC)] case. (iv)Ice cream is sold in bulk to hotels and not intended for retail sale. Valuation will be as per section 4 of CEA and not on MRP basis as confirmed in. Monsanto Manufacture (P) Ltd. 2006 (193) ELT 495 (T-D) (v)It was held by the CESTAT that Valuation is to be done under Section 4A on basis of MRP Vide decision in ITEL Industries P Ltd. v. CCE 2004 (163) ELT 219 (CESTAT 2 VI decision). Answer 5(b) Section 25: Power to grant exemption from duty If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally either absolutely or subject to such conditions (to be fulfilled before or after clearance) as may be specified in the notification goods of any specified description from the whole or any part of duty of customs leviable thereon. The Central Government in public interest may by special order exempt from the payment of duty, under circumstances of an exceptional nature to be stated in such order, any goods on which duty is leviable. The Central Government has powers to modify or withdraw the exemptions. Such a modification or withdrawal will not affect the principle of promissory estoppel. It has been decided in Indian Charge Chrome (1999) SC that power to exempt in public interest includes power to withdraw, modify or rescind exemption in public interest. Answer 5(c) Principle of unjust enrichment The manufacturer of goods collects the duty from the purchaser and thus does not bear the incidence of Central Excise duty himself. In such a situation, if a refund of excise duty is made to the manufacturer for any reason whatsoever, such a manufacturer shall be enriched unjustly. In other words, he will get a refund of duty, the incidence of which he has already passed on to the buyer. On principle of equity, it is quite obvious that the refund is to be granted to a person who had actually borne the incidence of duty and not to any person who has not borne the incidence of duty. Statutory provision to stop the practice of Unjust Enrichment: Section 11B, was, therefore, amended from 19-09-1991, to suitably incorporate the principle of unjust enrichment expressly therein. On a claim of refund of duty of excise and interest in the prescribed form to the Assistant Commissioner (A.C.) or Deputy Commissioner (D.C.) of Central Excise before the expiry of 1 year from the relevant date along with relevant documents, refund will be sanctioned and if incidence of duty has been already passed on to the buyer, the amount will be credited to the Consumer Welfare Fund, established under section 12C of the Central Excise Act. Where duty has been paid under protest, under para 4 Part III Chapter 13 of CBEC Excise Manual, the limitation of one year shall not apply. OR Alternate Answer 5(c) In the following circumstances no custom duty will be levied: (i)Under Section 13 no duty will be levied on pilfered goods after unloading thereof and before the proper officer has made an order of clearance. (ii)When goods are damaged or defoliated before or during the course of unloading. (iii)When the warehoused goods are damaged before their actual clearance from warehouse. (iv)Where goods are lost or destroyed due to natural causes like fire, flood etc; (v)Where goods are abandoned by the importer. (vi)If Central Government is satisfied that it is necessary in the public interest not to levy import duty by issuing the notification in the Official Gazette.

Question 6 (a)A small scale manufacturer has achieved turnover of Rs.1.52 crore during financial year 2009-10. Normal duty payable on the product is 10% plus education cess. Compute the excise duty payable by SSI unit— (i)If the unit wants to avail CENVAT credit; and (ii)If the unit wants to avail exemption and CENVAT credit. (Note : The turnover is without taxes and duties.) (5 marks) (b)What is ‘importer exporter code’ (IEC) number ? What is the procedure for obtaining IEC number?(5 marks) (c)When does e-payment of duty become mandatory under the Central Excise Act, 1944? (5 marks) Answer 6(a) (i) If the unit wants to avail CENVAT Credit on total turnover: In this case, the amount of CENVAT Credit can be availed from the amount of clearance Basic Excise duty = 1.52 crores x 10% = 15,20,000 Education cess = 15,20,000 x 2% = 30,400 SHEC = 15,20,000 x 1% = 15,200 Total Excise duty = Rs. 15,65,600 (ii) If the unit wants to avail exemption and CENVAT Credit Total Turnover = 15200000 Less Exemption = 15000000 Net Dutiable = 200000 Basic Excise duty = 200000 x 10% = 20000 Education Cess = 20000 x 2% = 400 SAH Education Cess= 20000 x 1% = 200 Total Excise Duty = Rs.20600. Answer 6(b) IEC Code is unique 10 digit code issued by DGFT – Director General of Foreign Trade, Ministry of Commerce, and Government of India to Indian Companies. To import or export in India, IEC Code is mandatory. No person or entity shall make any Import or Export without IEC Code Number. Procedure for obtaining IEC Application for IEC can be obtained from any Zonal and Regional office of the Director General of Foreign Trade. The same can be down loaded from www.dgft.gov.infor. The application should be accompanied by following documents: (i)A certificate from Bank in the format 18A. (ii)Self certified copy of PAN (iii)Self addressed envelop. (iv)In case of individual certified copy of date of birth, in case of firm notarized partnership deed and in the case of company extract of Board’s resolution; (v)Two copies of passport size photo of the applicant attested by the banker. Fee: Prescribed fee for IEC is Rs.250 which can be deposited in the form of DD drawn in favour of Zonal DGFT. The application should be submitted in duplicate and each page of the application must be signed by the applicant. If the application is found in order a ten digit IEC number is allotted by DGFT to any bonafide person/firm/company for carrying out import/export. Answer 6(c) Electronic payment of excise duty has been introduced w.e.f. 1.4.2007. it is mandatory for every assessee who has paid excise duty exceeding Rs.50 lakhs during the previous year immediately preceding the current year. The due date of e-payment of tax is 6th of the following month by the ordinary manufacturers and by 16th of the following month in the case of SSI. In case of month of March, the due date is 31st March. E-payment can be made at any time from any where through the system of Electronic Accounting System in Excise and Service Tax (EASIEST). All payments effected upto 8 p.m. will be accounted for the day as that day’s receipt. Any payment effected after 8 p.m. will be accounted as next day receipt. Question 7 (a)Differentiate between the following : (i)‘Excise audit under section 14A’ and ‘special audit under section 14AA’ of the Central Excise Act, 1944. (ii)‘Preferential rates of customs duty’ and ‘lower customs duty under trade agreements’ under the Customs Tariff Act, 1975. (iii)‘Transit of goods without payment of duty’ and ‘transshipment of goods without payment of duty’ under the Customs Act, 1962. (3 marks each) (b)Compare and contrast ‘Rule 8’ and ‘Rule 9’ of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. (3 marks) (c)What are the provisions of CENVAT credit on capital goods ? Explain with relevant case law. (3 marks) Answer 7(a)(i) Audit under section 14A −To be conducted by a Qualified Cost Accountant or Chartered Accountant holding certificate of practice, nominated by the Chief Commissioner of Central Excise. −Special Audit can be ordered by Assistant/Deputy Commissioner only with the prior approval of Chief Commissioner CE, having regard to the nature and complexity of the case, and the interest of the revenue. −To ensure the accuracy of the Assessable value, proper certification, wherever required, correctness of cost of production as per cost accounting standard issued by the ICWAI. Special Audit under Section 14AA −To be conducted by a Cost Accountant or Chartered Accountant holding certificate of practice, nominated by the Commissioner of Central Excise. −Special Audit can be ordered by commissioner CE −To ensure that CENVAT Credit is utilized within normal limits and CENVAT Credit has not been improperly availed or utilized by reason of fraud, collusion or any willful misstatement or suppression of facts. In both the cases, the expenses and fees for conducting the audit will be paid by the Excise department to the Cost Auditor. Answer 7(a)(ii) Preferential Rates of Customs Duty: Some countries have been declared as ‘preferential areas’ like Mauritius, Seychelles and Tonga. Goods produced in these countries are eligible for preferential rates under section 4 of the Customs Tariff act. The Tariff provides two columns—one for ‘standard Rate and other for ‘preferential areas’. Preferential rates of duty for certain goods imported from Bangladesh, China, Korea and Sri Lanka under Asia Pacific Trade Agreement have been specified in Notification No.72/2005 dated 22.7.2005; Lower Customs Duty under Trade Agreement: Section 5(1) of Customs Tariff Act authorizes Central Government to issue notification charging lower rate of duty, if it has entered into a trade agreement with a foreign country. The owner must make claim for lower duty and should produce necessary evidence. Central Government is empowered to make rules for the ‘determination of origin’. Besides producing certificate of origin from the prescribed authority rules insist on specific value addition in the country of manufacture normally 50%. Answer 7(a)(iii) Transit of goods Transit of goods without payment of duty is covered under the provisions of Section 53 of the Act. Goods mentioned in the Import Manifest or Import report as for transit in the same conveyance to any place outside India or any custom station, will be allowed to be transited so without payment of duty. Transshipment of Goods Transshipment of Goods without payment of duty is covered under the provisions of Section 54 of the Act

In the case of transhipment, a bill of transhipment has to be presented to the proper officer in the prescribed form. In both the cases in the event that the destination after transit or transshipment finally is an Indian customs station appropriate duty is to be paid as per Section 55. In both the cases the destination port may be Indian port or Foreign Port but the transit/transshipment port is necessarily Indian. Answer 7(b) Differences between Rule 8 and Rule 9 of the CE Valuation (Determination of Price of Excisable Goods) Rules 2000 are as follows: Rule 8: −Relates to captive consumption. −Where the excisable goods are not sold by the assessee but used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred ten per cent of the cost of production or manufacture of such goods. Rule 9: −Valuation when goods sold through a related person. −When the assesee so arranges that the excisable goods are not sold except to or through a person who is related in the manner specified in either of sub-clause (ii)(ii) or (iv) of clause (b) of sub-section (3) of section 4 of the Act, the value of the goods shall be the normal transaction value at which these are sold by the related person at the time of removal, to buyers (not being related person); or where such goods are not such buyers, to buyers (being related persons) who sells such goods in retail. Provided that in a case where the related person does not sell the goods but uses or consumes such goods in the production of, or manufacture of articles the value shall be determined as per Rule 8. Answer 7(c) CENVAT Credit is also available on capital goods. There are some provisions which are common but there are some specific provisions with regard to CENVAT Credit on capital goods which are as follows: (i)The CENVAT Credit in respect of Capital Goods received in a factory or in the premises of the provider of output services at any point of time in a given financial year shall be taken only for an amount not exceeding 50% of the duty paid on such capital goods in the same financial year. Proviso: The CENVAT Credit in respect of Capital Goods shall be allowed for the whole amount of the duty paid on such Capital Goods in the same financial year, if such Capital Goods are cleared as such in the same financial year.

Further the CENVAT credit of additional duty leviable under sub-section (5) of Section 3 of C. T Act, in respect of capital goods shall be allowed fully immediately on receipt of the capital goods in the factory of a manufacturer. (ii)The balance of CENVAT Credit may be taken in any financial year subsequent to the financial year in which the capital goods were received in the factory of the manufacturer or in the premises of the provider of output service, if the capital goods, other than components, spares and accessories, refractories and refractory materials, moulds and dies and goods falling under Hd. No.6805 and S.H. No.6804 of the I Schedule to the Central Excise Tariff Act, are in the possession of the manufacturer of final products or provider of output service in such subsequent years. Case Law: Roots Cast (P) Ltd., 2007 (216/3) ELT 448 (T.Ch.), Suprajit Engineering Ltd., 2007 (6) STR 170 (T.Bang.), Prasad Machinery (P) Ltd. 2007 (218-3) ELT 445 (T.Ahmd.) PART—C Question 8 Attempt any five of the following: (i)Discuss the scope of the provisions the Central Government may make under section 90(A)(1) of the Income-tax Act, 1961 in respect of an agreement between specified associations. (4 marks) (ii)Compute the ‘arm length price’ (ALP) in the following cases : (a)Medical Instruments Ltd. is a 100% Indian subsidiary of a US company. The parent company sells one of its products to the Indian subsidiary at a price of US$ 100 per unit. The same product is sold to unrelated buyers in India at a price of US$ 125 per unit. (b)The US parent company sells the same product to an unrelated company in India @ US$ 80 per unit. (2 marks each) (iii)Compute the income-tax in the following cases : (a)Royalty of Rs.10 lakh received by a foreign company from an Indian concern in pursuance of an agreement approved by the Central Government in the previous year 2007-08. (b)Rs.10 lakh long-term capital gains received by an overseas financial organisation on transfer of units purchased in foreign currency. (2 marks each) (iv)What is the procedure for making an application for obtaining advance rulings under section 245Q of the Income-tax Act, 1961? (4 marks) (v)Discuss the steps for calculating relief under double taxation treaty. (4 marks) (vi)State, with reasons in brief, whether the following statements are correct or incorrect: (a)A tax heaven is a country where there is lot of scope for tax evasion. (b)A non-resident is not liable to pay income-tax on the income earned and received outside India. (c)Section 92 of the Income-tax Act, 1961 empowers income-tax officer to penalise a non-resident for tax avoidance. (d)As per section 115A of the Income-tax Act, 1961 where the total income of a foreign company includes any dividend, income-tax payable on such dividend will be at the rate of 30%. (1 mark each) Answer 8(i) Section 90A(1) provides as under : Any specified association in India may enter into an agreement with any specified association in the specified territory outside India and the Central Government may, by notification in the Official Gazette, make such provisions as may be necessary for adopting and implementing such provisions. Following is the scope of such provisions: (a)for the grant of relief in respect of : (i)income on which have been paid both income tax under this Act and income-tax in any specified territory outside India; or (ii)income-tax chargeable under this Act and under the corresponding law in force in the that specified territory outside India to promote mutual economic relations, trade and investment; or (b)for the avoidance of double taxation under this Act and under corresponding law in force in that specified territory outside India; or (c)for the exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that specified territory outside India or investigation of cases of such evasion or avoidance; or (d)for recovery of income-tax under this Act and under the corresponding law in force in that territory outside India (e)when provisions have been made/modified as above, then in relation to the asessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to the assessee. Answer 8(ii)(a) Computation of Arm’s Length Price: − Price charged by the US parent company for supply to − its 100% Indian subsidiary per unit 100 US dollars Sale price to unrelated buyers in India per unit 125 US dollars Here there is no loss of revenue to the Government due to the International transaction hence there is no need to calculate the Arm’s Length Price. Answer 8(ii)(b) Computation of Arm’s Length Price: − In this situation price charged by the US Parent − Company for supplies to an unrelated Indian buyer per unit 80 US dollars − Price charged to the Indian subsidiary per unit 100 US dollars

Applying comparable uncontrolled price method Arm’s length price per unit 80 US dollars Assumption: The transactions between the US Parent Company and its Indian subsidiary are not on principal to principal basis. Answer 8(iii)(a) Agreement was approved by the Central Government in Previous Year 2007-08 : For agreements approved after 31.5.2005 Income-tax rate applicable on Royalty is 10% Royalty amount Rs.10 lakhs Income Tax @ 10% Rs.1 lakh under section 115A(1)(b). Answer 8(iii)(b) As per Section 115AB the Income-tax rate is 10% Long-term Capital Gain = Rs.10 lakhs Income-tax @ 10% = Rs. 1 lakh If units are Equity Oriented Units then the LTCG shall be exempt under section 10(38) In both the above cases question 8(iii)(a) & (b) Education Cess @ 2% and SHEC @1% are also payable and surcharge @ 2.5% also applicable where income exceeds Rs.1 Crore. Answer 8(iv) Application for Advance Ruling (i)An application for obtaining advance ruling shall be made in quadruplicate in Form No.34C or 34D or 34E as the case may be and shall be verified in manner indicated therein. (ii)The application should clearly state the question on which the advance ruling is being sought. (iii)The application must be accompanied by a fee of Rs.2500 in favour of the Authority of Advance Ruling. (iv)The application and its annexures should be signed by the person making application or by authorized representative; (v)The application should be addressed to the Secretary and submitted either in person or by registered post. Answer 8(v) Steps for calculating relief under Double Taxable Treaty: (i)Calculate tax on total income inclusive of the foreign income on which relief is available. Claim any relief allowable under the provision of Income Tax Act including rebate under section 88E but excluding relief due under Section 90, 90A and 91. (ii)Add surcharge if applicable plus education cess plus SHEC after claiming rebate. (iii)Calculate average rate of tax paid by dividing the tax computed in (ii) above with the total income (inclusive of such foreign income) in India. (iv)Calculate average rate of tax of the foreign country by dividing the tax paid in foreign country by the whole amount of the income assessed thereat. (v)Claim relief from tax payable in India at average rate of tax in India or at average rate of tax in foreign country, whichever is less. Answer 8(vi) (a)Incorrect : A tax heaven is a place where tax rate is least. (b)Correct : A non-resident is liable to pay tax only on income received and earned in India. (c)Incorrect : Section 92 of the Income Tax Act, 1961 gives Income Tax Officer the power to compute the income from international transaction having regard to Arm’s Length Price. (d)Incorrect : The rate of tax on dividend income earned by a foreign Company is 20%. STRATEGIC MANAGEMENT, ALLIANCES AND INTERNATIONAL TRADE Time allowed: 3 hours Maximum marks: 100 NOTE: Answer all questions. PART—A (Answer ANY TWO questions from this part) Question 1 In a market dominated by behemoths like SAIL and TISCO, finding a niche is of crucial importance for a small player. What could a Lloyds do with a meager annual capacity of making 6 lakh tonnes of HR coils while SAIL sold over 1,600 lakh tonnes in the same time? Should Lloyds follow the market leader or adopt its own unique approach to its business strategy? It is in the context of such questions that Lloyd’s attention came to rest on the manufacturing process. Almost all steel producers adopt the blast furnace technology. In this, the process starts with a clear differentiation among the ultimate products to be manufactured. So, manufacturing batch size has to be large enough to take up customised orders. The raw material, iron ore, has to pass through several complex stages of manufacturing. Lloyds looked for an alternative technology that could suit its requirements. The solution lay in the electric arc furnace technology where the unique feature was that initial manufacturing stages need not differentiate among different products. Such a differentiation came at a much later stage. Translated into a business proposition, what is meant was that Lloyds could operate with a much smaller batch size of, say, 100 tonnes and deliver quickly. For instance, a 1,000 tonnes small order of specialised product custom-made to buyer’s specification could be delivered in as little as 15 days. Such a quick delivery schedule would not be possible for a large integrated steel manufacturer. In this manner, analogous to small gunboats that could efficiently torpedo a large slow- moving ship, Lloyds carved out a niche in the highly competitive steel market. Answer the following questions : (i)Comment on the nature of the business strategy of Lloyds. (10 marks) (ii)What are the conditions in which such a strategy would succeed? Could fail? (10 marks) Answer 1(i) Nature of business strategy of Lloyds: Lloyds as a strategy first identified their position in the steel industry in comparison with other giant leaders like SAIL, TISCO etc. Lloyds business strategy was based on its limited annual capacity. The company identified following business strategy towards building its core competencies: (i)Production in small batch size to meet customer requirements. (ii)Quick delivery by re-engineering its total supply chain and manufacturing process. For implementation of these strategies Lloyds preferred alternative technology i.e. electric arc furnace technology where the unique feature was that initial manufacturing stages need not differentiate among different products instead of adopting the blast furnace technology wherein the process starts with differentiating among the ultimate products to be manufactured. Through this process Lloyds built its niche in the highly competitive steel market by reducing its delivery time and by providing specialized products custom made to customer requirements. Answer 1(ii) Llodys may have an added advantage with the new electric arc furnace technology since their customer base may react positively to this new technology. However, it may face competition from its bigger counterparts who in the coming time shift to this new technology and wipe out Lloyds completely. The strategy would succeed in the following conditions: (i)The strategy adopted by Lloyds is successful where small batch size orders are to be manufactured. (ii)It is also successful where small orders of specialized products custom made to buyer’s specification are to be made. (iii)When a dedicated regular customer base is present. (iv)Where there is no threat of competition from big players. (v)When custom made products are to be delivered in a short span of time. The strategy would fail in the following conditions: (1)It is a failure where large orders are to be manufactured i.e., the manufacturing batch size is large enough to take-up customized orders. (2)Where large specialized products are to be delivered. (3)Where the delivery time is short. Lloyds is a small player with small administrative cost, but situation may come where Tisco and Sail may completely wipe out Lloyds by following suit. Question 2 Explain the following: (i)SWOT analysis (ii)BCG growth matrix (iii)McKinsey’s 7-S Framework (iv)Balanced Score Card approach. (5 marks each) Answer 2(i) SWOT Analysis SWOT Analysis, is a strategic planning tool used to evaluate the Strengths (S), Weaknesses (W), Opportunities (O), and Threats (T) involved in a project or in a business venture. It basically involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable for achieving the objective. It is a tool of environment analysis. The SWOT Analysis forces management to analyse what it is that makes its company successful or unsuccessful. In SWOT analysis Strengths, Weaknesses, Opportunities and Threats can be understood as: —Strengths: Attributes of the organization that are helpful in achieving the objective. —Weaknesses: Attributes of the organization that are harmful in achieving the objective. —Opportunities: External conditions that are helpful in achieving the objective. —Threats: External conditions that are harmful in achieving the objective. The merit of SWOT analysis is not limited to profit-seeking organizations. SWOT analysis may be used in any decision-making situation when a desired end-state (objective) has been defined. SWOT analysis may also be used in pre-crisis planning and preventive crisis management. Answer 2(ii) BCG Growth-Matrix (GSM) The Boston Consulting Group developed the growth-share matrix model which helps to analyze the problem of resource deployment among the business units or products of multi- business firms. It is based on product life cycle theory. It is the most renowned corporate portfolio analysis tool. In other words, it is a comparative analysis of business potential and the evaluation of environment. The business units or products are analyzed by placing each one in the matrix according to their (1) expected growth rate (vertical axis), and (2) relative market share (horizontal axis). The basic idea behind this model is that if a product has a bigger market share or if the products’ market grows faster, it is better for the organization. The original BCG model was based on a lifecycle view of the product of a company. BCG Model provides a graphical representation for an organization to examine different businesses in it’s portfolio on the basis of their related market share and industry growth rates. The four categories of strategic business units’ of BCG matrix has been shown in the following diagram:

The different categories as shown in the above pictorial presentation can be understood as follows: 1.Dogs (Low Growth, Low Market Share): Each of businesses or products with low expected growth rates and low relative market standing are labeled as "dogs" or "cash traps." The strategy for this category should consist of cost cutting. 2.Question Marks (High Growth, Low Market Share): Businesses and products with high projected growth rates and low market standing, are labeled as ‘Question Mark’. This quadrant has worst cash characteristics of all, because they have high cash demands and generate low returns because of their low market shares. 3.Stars (High Growth High Market): Products or business units with high market standing and high industry growth potential are labeled as stars. Stars are leaders in the business and generate large amounts of cash. 4.Cash Cows (Low Growth High Market Share): A product or business would become a cash generator here. Cash cows have a strong market position in industries that have matured. These products or businesses can thus be "milked" by investing just enough cash to maintain market standing and applying excess cash inflows to the firm's other activities which are growth industries or products. Answer 2(iii) McKINSEYS 7-S FRAMEWORK McKinsey developed the 7-S framework management model which organize seven factors to organize a company in an holistic and effective way with the objective to diagnose the causes of organization problem and formulate program for improvement due to the implementation of the strategy which are associated with change in the organization. The organizational change is not simply a matter of structure although the structure is a significant variable in the management change. Effective organizational change may be understood to be a complex relationship between the 7-S i.e. strategy, structure, systems, style, skills, staff and shared values (super ordinate goals). They are discussed herein below: (i) Strategy: Strategy means to achieve objectives. It provides the direction and the scope of the organization over the long-term. A strategy targets at gaining competitive advantage over rivals. (ii) Structure: It is a basic framework to designate responsibilities and functions. Organization structure prefers relatively more durable organizational arrangements and relationship. It prescribes the formal relationship among various positions and activities. (iii) System: It is a management tool for planning, decision-making, communication control and the procedures and processes regularly followed by an organization. Systems in the 7-S framework signifies all the rules and regulations, procedures both formal and informal that complement the organizational structure. (iv) Style: Style stands for the patterns of behaviour and managerial style of top management over a period of time. It is visible through relationship among the three levels of management or managers, organizational culture which is a reflection of value system. (v) Staff: According to 7-S framework the term ‘staff’ refers to the way organizations introduce young recruits into the main streams of their activities and the manner in which they manage their careers as the new entrants develop into future managers. (vi) Skills: It means organization and individual capabilities. Skill is an ability or proficiency in performing a particular task. It includes those characteristics which most people use to describe a company. (vii) Shared Values (Super Ordinate Goals): Super ordinate goals stands for company’s mission, vision, values, philosophy in the backdrop of which organizational goals and objectives are set and strategies are formulated. These are essential as they inspire the members of the organization and provide a definite direction to its operations. Answer 2(iv) BALANCED SCORE CARD APPROACH The balanced scorecard is a methodological tool meant to help businesses manage their future growth, objectives and plans.The balanced score card (BSC) is a strategic planning and management system that is used extensively in business and industry, government, and non-profit organizations worldwide to align business activities to the vision and strategy of the organization. The purpose of the balanced scorecard is to give a measuring tape by which someone can determine whether the set goals have been met or exceded. It adds non-financial metrics to traditional financial metrics to give a well-rounded view of the performance in an organization. Balanced scorecards can be as simple or complex as needed for the purposes of a company's metrics. There are four components to the balanced scorecard: −Learning and Growth Perspective −Business Processes Perspective −Customer Perspective −Financial Perspective Some of the merits of BSC are listed as under: 1.A balanced view of a company’s performance can be gauged after looking at all the four aspects of balanced scorecard. 2.Unlike traditional methods of tracking the financial health of a business, the balanced scorecard gives a full picture as to whether the company is meeting its objectives. 3.The balanced scorecard approach doesn’t only help in evaluating the immediate future rather allows for stakeholders to determine the health of short, medium, and long term objectives at a glance. Some of the demerits of BSC approach include the following:are: 1.It is not a tool that will help when immediate results are required. Thus it does not solve last minute problems It is a long term tool which has to be used and implemented to attain objectives in the long run. 2.The financial information included on the scorecard is limited. Instead, to be successfully implemented, the balanced scorecard must be part of a bigger strategy for company growth that includes meticulous accounting methods. 3.Finally, many companies use metrics that are not applicable to their own situation. It is vitally important when using balanced scorecards to make the information being tracked applicable to your needs. Otherwise, the metrics will be meaningless. Question 3 (a)Explain in detail Michael F. Porter’s five forces model of industry analysis. (10 marks) (b)Distinguish between ‘goals’ and ‘objectives’. Also mention the major features of objectives in an organisation. (10 marks) Answer 3(a) PORTER’S FIVE FORCES MODEL OF INDUSTRY ANALYSIS Michael E. Porter developed an assessment model for analyzing industry structure that focuses on the forces imposed on the process of competing by five influences: the intensity of rivalry among competitors, the threat of new entrants, the threat of substitute products, the bargaining power of suppliers, and the bargaining power of buyers or customers. Using Porter's model to analyze an industry for a particular firm, involves estimating the strength of each force, identifying its underlying source, and then formulating a strategy that will create an advantage for the firm. The key task of the analyst is to understand the underlying causes of each of the competitive forces at work. With this knowledge, a company's strengths or weaknesses can be clarified, and the most fertile areas for drafting competitive thrusts can be defined. Also, knowing the magnitude of competitive forces allows the strategist to identify the most important trends that are emerging as opportunities and threats. The five forces that can create strength for competitors are explained below: (i) Intensity of Rivalry among Competitors: Some industries appear inactive because of a low level of rivalry among competitors. An example might be industrial fasteners, the manufacturers of nuts and bolts and other devices used to connect the components of products. A large number of quite small manufacturers accept low levels of profitability for staying in business. Competition is key with little effort and expense devoted to differentiating brands or single products. (ii) Power of Buyers: From an industry’s point of view, the buyers can usually be classified into three major categories i.e.: consumers, industrial customers, and commercial customers. Consumers include the purchasers of the firm's service or product for their own use. Buyers, whether consumers, industrial, or commercial, can enjoy positions of strength over the firm from which they purchase products by superior bargaining power. For example, a large retailer (commercial buyer) with a loyal customer base and high volume of sales of the product in question may be able to virtually dictate price, shipping arrangements, order quantity, quality level, and other factors to its vendors. (iii) Power of Suppliers: The suppliers of goods and services to an industry have the power to influence their customers through their ability to set price and control quality, delivery time, and order quantity. If these customers cannot manage successfully one supplier against another to protect their interest, then the industry's profits can be drained off by the suppliers. (iv) Substitute Products: Substitute products refer to those products of industries which serve similar consumer needs. Existence of close substitutes represents a strong competitive threat which limits the price fixation power and the profitability of the firm. Conversely, if the firm’s products have very few substitutes, then the company has the opportunity to raise prices and earn additional profits. It is an eye opener for the firms to select those lines which have least substitutes. (v) Potential Entrants: New entrants to an industry pose several threats to existing competitors. New competitors can reduce the market share of all participants by dividing the pie into more pieces. As a result of this they may also bring new technology or greater resources not available to present competitors and capture a high market share position quickly to the detriment of all existing participants. Thus, conducting an industry analysis following Porter's model involves collecting data and developing explanations for the ways in which industry competition is affected by the five forces. Answer 3(b) Goals and objectives are the end results which an organization strives for. Thus, goal and objective consists of a projected state of affairs which a person or a system intends to achieve. It is the desired end-point in some sort of assumed development. A desire or an intention becomes a goal if and only if, it activates an action for achieving it. It is roughly similar to purpose or aim, the anticipated result which guides action, or end, which is an object, either a physical object or an abstract object, that has intrinsic value. Objectives are aims, or purposes that organizations wish over varying periods of time. Objectives are the intended end result that an organization desires to achieve over varying periods of time. Because of time variation, objectives may be specified in different ways in which long-term objectives are supported by short-term objectives. The objectives and goals may differ from each other in the following dimensions: (1)Time: Objectives are timeless, enduring, and unending whereas goals are temporal, time-phased, and intended to be superseded by subsequent goals. Objectives relate to the ongoing activities of an organization, their achievement tends to be open-ended and not bound by time. A goal on the other hand is short-lived as it is time bound. (2)Specification: Objectives are stated in broad, general terms, dealing with matters of image, style and self-perception. These are aspirations to be worked in the future. Goals are very specific, stated in terms of a particular result that will be accomplished by a specific date. Goals are more specific and time bound. (3)Focus: Objectives are usually stated in terms of some relevant environment which is external to the organization. Goals on the other hand, are more internally focused and carry important implications about how resources of the organization are utilized or will be utilized in future. Objectives are more generalized statements like maintaining market leadership, striving continuously for technological superiority, etc., whereas a goal may imply a resource commitment requiring the organization to use those resources in order to achieve the desired outcomes. (4)Measurement: Both objectives and goals can be stated in terms, which are quantitatively measured, but the character of measurement is different. Generally quantitative objectives are set in relative terms. For example, Reliance Industries has put its objectives like this: to acquire top position among the Indian companies. This objective may not be achieved in one year, but it is timeless and externally focused, providing a continuing challenge for the company. Quantitative goals are expressed in absolute terms; say 20% increase in sales. The achievement of this goal can be measured irrespective of environmental conditions and competitors’ actions. MAJOR FEATURES OF OBJECTIVES IN AN ORGANIZATION (1)Each organization has some objectives as it is created basically to attain the same. Members/employees in the organization try to achieve these objectives. (2)Objectives may be broad or they may be specifically mentioned. They may pertain to a wide or narrow part of the organization. They may be set either for the long term or for the short term. For example, the basic objective of a business organization may be to earn profit. This may be quite a broad objective. In order to achieve this broad objective, some specific objective may be set, for example, amount of profit to be achieved in a particular period. Thus, general objectives may be translated into operative objectives to provide definite action. (3)Objectives may be clearly defined and have to be interpreted by the behaviour of organizational members, particularly those at top level. However, clearly defined objectives provide clear direction for managerial action. (4)Objectives have hierarchy. At the top level, it may be broad organizational purpose which can be broken into specific objectives at the departmental level. From departmental objectives, units of the department may derive their own objectives. This is due to grouping of people into sections, departments, divisions, etc., in the organization. (5)Organizational objectives have social sanction; organizations are created within the social norms. They must conform to the general needs of the society. (6)An organization may have multiple objectives which may be functional and interrelated. Sometimes, the objectives may be even incompatible. This happens because over a period of time, many interest groups exert their pressure on organizational objectives. There are trade off among objectives. The achievement of one may be at the cost of the other at one point of time, while at other time, both can be integrated. (7)Organizational objectives can be changed as new ones may replace old objectives. It is possible because organizations are free to set their objectives within the overall social norms. Since objectives are formulated keeping in view the environmental factors and internal conditions, any change in these may result into change in objectives. For example, the Red Cross which was originally formed to hold itself in readiness in the war or any calamity to help the people found itself underemployed after World War I. So subsequently added another objective-that of preserving and improving public health.

PART—B (Answer ANY ONE question from this part.)

Question 4 (a)Discuss the preliminary steps required for the creation of a successful alliance. (8 marks) (b)Discuss the restrictive covenants being used in the foreign collaboration and technology transfer agreements. (8 marks) (c)What are the methods of funding investments in overseas joint-venture and wholly- owned subsidiaries? (4 marks) Answer 4(a) The preliminary steps necessary for creation of a successful alliance are as follows: −Developing qualitative and quantitative partner criteria: The organizational culture and norms should be analysed, personnel functions should be analysed and the proposed criteria of partner to be selected should be outlined. −Developing a list of prospective partners: It is essential that the partner analysis is proactive and not reactive. A partner that approaches a company may not be the optimum partner. It is therefore, necessary to examine other opportunities, if they exist. Accordingly, a list of prospective partners should be prepared. −Partner Selection: While selecting a partner, companies must list the prospective standards against which they can measure the merits of a prospective partner; the most important being the three C’s of successful alliances namely, Compatibility, Capability and Commitment. −Partner Analysis: Once the potential partner has been identified, the next step is to analyse the strategic fit of the partner with the company. As much information as possible should be gathered about the prospective partner so as to adapt and improve the understanding of the appropriateness of the partner for the stated goals of the company. The legal and accounting team of the company should be involved in researching the implications of the alliance. −Obtaining internal approvals: The policies should be completely unambiguous and clear internal approvals should be obtained from the CEO and the top advisory personnel to avoid embarrassment later. −Creating an implementation plan: Alliance conceived entirely by the planning and corporate departments without the active participation of the operational managers, who will ultimately have responsibility for the implementation of projects are bound to fail. It is therefore, essential that the operating managers are involved in at least the later stage of the negotiation process. −Final predeal evaluation of all the relevant information. −Negotiating the deal and managing the legal process. Answer 4(b) Following are some of the restrictive practices being used in the foreign collaboration and technology transfer agreements. −Restrictions after expiration of industrial property rights or loss of secrecy of technical know-how. −Restrictions on Research and Development −Non-competition clauses −Tying arrangements −Export restrictions −Direct and Indirect restrictions −Implied restrictions −Price fixing and grant-back practices −Exclusive sales and representation arrangements −Restrictions on field of use, volume or territory. Answer 4(c) Investment in an overseas joint venture and wholly-owned subsidiaries may be funded out of one or more of the following sources: −Drawal of foreign exchange from an authorized dealer bank in India −Capitalization of exports −Swap of shares −Utilization of proceeds of External Commercial Borrowings / Foreign Currency Convertible Bonds −Balances held in EEFC account of the Indian party and −Utilization of proceeds of foreign currency funds raised through ADR/GDR issues. Question 5 (a)Discuss the important clauses to be incorporated in a foreign collaboration agreement. (10 marks) (b)Discuss the types of strategic alliance and its advantages. (10 marks) Answer 5(a) The foreign collaboration agreement generally contains the following comprehensive clauses: (i)In case of agreement for provisions of technical know-how: −Definitions and characteristics of the subject matter of the know-how −The mode of transfer of technical know how −Clause safeguarding secrecy of the technology −Training of the technical personnel of the Indian company by the foreign collaborator −Performance guarantee in regard to the achievement of the required qualities, standard of the product, quantities to be produced and minimum standard of performance with suitable indemnity clause −Conferring of license or patent right for technical know how and the product to be manufactured. −Mode and method of payment. −Who would own the future improvements in the technology by the transferee made by transferring the technology. (ii) In case of agreement for a joint venture: −Since in India, a foreign company is not allowed to hold more than 51% shares in any company, care must be taken to promote the equity participation by the foreign company −The constitution of the Board of Directors with election, number of directors and power of the Board −The mode of declaration and distribution of the dividends −The area of marketing of the products −Restriction on any change in the ownership ratio, other provision as incorporated under an agreement for supply of technical know-how. Answer 5(b) Alliances may be in the form of: −Management contract −Supply or purchase agreement −Marketing or distribution agreement −Joint venture −Agreement to provide technical services −Licensing of know-how, technology, design or patent These arrangements differ in scope mainly by virtue of the following: −Capital commitment −Structure of organization −Decision making −Proportion between risk and reward Advantages A business strategic alliance is also mean to an end, not just an end in itself. Strategic alliance often takes place between firm of different industries and of varied sizes for vertical and horizontal links, consolidation of position or any of the following: (i)Gains a means of distribution in international market (ii)Overcome legal or regulatory barriers (iii)Diversification (iv)Avoiding competition (v)Focus on new products and restructuring. In addition to the above, the various perceived gains which may motivate strategic alliance include establishment of business network, gaining cost and quality competitiveness, defend business interests, updating technology, starting new project, sharing of risks, increasing efficiency through economies of scale, specialization etc.

PART—C (Answer ANY TWO questions from this part.) Question 6 (a)What is fair trade? (3 marks) (b)Explain the theory of comparative advantage in international trade. (7 marks) (c)Why was NAFTA created and what objectives has it achieved? (5 marks) (d)What are ‘deminimis margins’ and ‘price undertakings’ which necessitate the suspension or termination of anti-dumping investigations? (5 marks) Answer 6(a) Fair Trade The term ‘fair trade’ gained currency in 1870s. It meant placing home and foreign producers on an equal level with regard to artificial conditions of production caused by export bounties, dumping under protection of high tariffs in the domestic market and indirect taxation, but not interfering with natural comparative advantage. Answer 6(b) Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. It is the main concept of the pure theory of international trade. The theory of comparative advantage suggests that a country should export goods in the country in which its relative cost advantage, and not the absolute cost advantage, is greatest in comparison to other countries. Suppose that the United States can produce both shirts and automobiles more efficiently than Mexico. But if it can produce shirts twice as efficiently as Mexico and can produce automobiles three times more efficiently than Mexico, the United States has an absolute productive advantage over Mexico in both the goods but a relative advantage in producing automobiles. In this case, the United States might export automobiles in exchange for imports of shirts—even though it can produce shirts more efficiently than Mexico. The practical import of the doctrine is that a country may export a goods even if a foreign country could produce it more efficiently if that is where its relative advantage lies; similarly, a country may import a goods even if it could produce that goods more efficiently than the country from which it is importing the goods. From Mexico's standpoint, it lacks an absolute productive advantage in either commodity, but has a relative advantage in producing shirts (where its relative disadvantage is least). This trade is beneficial for both the United States and Mexico. Answer 6(c) NAFTA stands for North American Free Trade Agreement. In January 1994, Canada, the United States and Mexico launched the North American Free Trade Agreement (NAFTA) and formed the world's largest free trade area. Designed to foster increased trade and investment among the partners, the NAFTA contains an ambitious schedule for tariff elimination and reduction of non-tariff barriers, as well as comprehensive provisions on the conduct of business in the free trade area. These include disciplines on the regulation of investment, services, intellectual property, competition and the temporary entry of business persons. NAFTA has been a remarkable success story for all three partners, viz. Canada, United States and Mexico. It has contributed to significant increases in trade and investment flows between Canada, the United States, and Mexico. It has benefited companies in all three countries, paving the way for increased sales, new partnerships, and new opportunities. Since NAFTA came into effect, trade among the NAFTA countries has more than tripled. In 2008, Canada and the United States inward foreign direct investment from NAFTA partner countries enhanced. Meanwhile, Mexico has become one of the largest recipients of foreign direct investment among emerging markets from its NAFTA partners. Since NAFTA came into effect, the overall job growth has been strong in all three partner countries. NAFTA has promoted higher wages. NAFTA partners work cooperatively to better understand and improve the protection of their environment and effectively enforce its environmental laws. Answer 6(d) De Minimis Margins and Price Undertakings Any exporter whose margin of dumping is less than 2% of the export price shall be excluded from the purview of anti-dumping duties even if the existence of dumping, injury as well as the causal link is established. Further, investigations against any country are required to be terminated if the volume of the dumped imports from that particular source are found to be below 3% of the total imports, provided the cumulative imports from all those countries who individually account for less than 3%, are not more than 7%. The Designated Authority may suspend or terminate investigation if the exporter concerned furnished an undertaking to revise his price to remove the dumping or the injurious effect of dumping as the case may be. No undertaking can however be accepted before preliminary determination is made. No anti-dumping duties are recommended on such exporters from whom price undertaking has been accepted. No price undertaking may, however, be accepted in case it is found that acceptance of such undertaking is impracticable or is unacceptable for any reason. Question 7 (a)Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i)Quota is an important non-tariff barrier affecting the quantum of ______. (ii)Tariff is a source of ______to the government exchequer. (iii)When duty is assessed as a percentage of the value of the imported commodity, it is called ______. (iv)When the political relations between two countries are strained, a country imposes ______on the imports from that particular country. (1 mark each) (b)Distinguish between any four of the following : (i)‘Prohibited subsidies’ and ‘actionable subsidies’. (ii)‘Geographical indications’ and ‘trade marks’. (iii)‘Green box’ and ‘blue box’. (iv)‘Substantive rules’ and ‘procedural rules’. (v)‘Most favoured nation (MFN)’ and ‘national treatment’. (4 marks each) Answer 7(a) (i)Import (ii)Revenue (iii)Ad valorem duty (iv)Embargo Answer 7(b)(i) Distinction between Prohibited subsidies and Actionable subsidies Prohibited subsidies: subsidies that require recipients to meet certain export targets, or to use domestic goods instead of imported goods, are prohibited because they are specifically designed to distort international trade, and are therefore likely to hurt other countries’ trade. They can be challenged under the WTO dispute settlement procedure where they are handled under an accelerated timetable. If the dispute settlement procedure confirms that the subsidy is prohibited, it must be withdrawn immediately. Otherwise, the complaining country can take counter measures. If domestic producers are hurt by imports of subsidized products, countervailing duty can be imposed. Actionable subsidies: The complaining country has to show that the subsidy has an adverse effect on its interests. Otherwise the subsidy is permitted. The agreement defines three types of damage they can cause. One country’s subsidies can hurt a domestic industry in an importing country. They can hurt rival exporters from another country when the two compete in third markets. And domestic subsidies in one country can hurt exporters trying to compete in the subsidizing country’s domestic market. Answer 7(b)(ii) Distinction between Geographical indications and Trademarks Geographical indications: Geographical Indications of Goods are defined as that aspect of industrial property which refers to the geographical indication referring to a country or to a place situated therein as being the country or place of origin of that product. Typically, such a name conveys an assurance of quality and distinctiveness which is essentially attributable to the fact of its origin in that defined geographical locality, region or country. Place names are sometimes used to identify a product. Well-known examples include “Champagne”, “Scotch”, “Tequila”, and “Roquefort” cheese. Wine and spirits makers are particularly concerned about the use of place names to identify products, and the TRIPS agreement contains special provisions for these products. But the issue is also important for other types of goods. Trademarks: A Trade Mark distinguishes the goods of one manufacturer or trader from similar goods of others and therefore, it seeks to protect the interest of the consumer as well as the trader. A trade mark may consist of a device depicting the picture of animals, human beings etc., words, letters, numerals, signatures or any combination thereof. Since a trade mark indicates relationship in the course of trade, between trader and goods, it serves as a useful medium of advertisement for the goods and their quality. The object of trademark law is to permit an enterprise by registering its trademark to obtain an exclusive right to use, share, or assign a mark. Answer 7(b)(iii) Distinction between Green Box and Blue Box Green Box: In order to qualify for the “green box”, a subsidy must not distort trade, or at most cause minimal distortion. They have to be government-funded and must not involve price support. They tend to be programmes that are not directed at particular products, and include direct income supports for farmers that are not related to production. “Green box” subsidies are therefore allowed without limits, provided they comply with relevant criteria. Blue Box: The blue box is an exemption from the general rule that all subsidies linked to production must be reduced or kept within defined minimal levels. It covers payments directly linked to acreage or animal numbers, but under schemes, which also limit production, by imposing production quotas or requiring farmers to set aside part of their land. Countries using these subsidies say they distort trade less than alternative amber box subsidies. Answer 7(b)(iv) Distinction between Substantive Rules and Procedural Rules Substantive Rules: A Member may not impose a countervailing measure unless it determines that there are subsidized imports, injury to a domestic industry and a causal link between the subsidized imports and the injury. The existence of a specific subsidy must be determined in accordance with the criteria provide under SCM Agreement. SCM Agreement provides for the explicit authorization of cumulation of the effects of subsidized imports from more than one Member where specified criteria are fulfilled. In addition, SCM Agreement contains rules regarding the determination of the existence and amount of a benefit. Procedural Rules: SCM Agreement contains detailed rules regarding the initiation and conduct of countervailing investigations, the imposition of preliminary and final measures, the use of undertakings, and the duration of measures. A key objective of these rules is to ensure that investigations are conducted in a transparent manner, that all interested parties have a full opportunity to defend their interests, and that investigating authorities adequately explain the basis for their determinations. Answer 7(b)(v) Distinction between Most-favoured-nation (MFN) and National treatment Most-favoured-nation: It suggests some kind of special treatment for one particular country, but in the WTO it actually means non-discrimination — treating virtually everyone equally. Each member treats all the other members equally as “most-favoured” trading partners. If a country improves the benefits that it gives to one trading partner, it has to give the same “best” treatment to all the other WTO members so that they all remain “most- favoured”. Most-favoured nation (MFN) status did not always mean equal treatment. In the 19th Century, when a number of early bilateral MFN treaties were signed, being included among a country’s “most-favoured” trading partners was like being in an exclusive club because only a few countries enjoyed the privilege. Now, when most countries are in the WTO, the MFN club is no longer exclusive. The MFN principle ensures that each country treats its over-153 fellow-members equally. National treatment: Treating foreigners and locals equally. Imported and locally produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. This principle of “national treatment” is also found in all the three main WTO agreements (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS), although once again the principle is handled slightly differently in each of these. National treatment only applies once a product; service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally produced products are not charged an equivalent tax. Question 8 Write critical notes on any four of the following : (i)World Intellectual Property Organisation (WIPO) (ii)Multilateral trading system (iii)Export subsidy on agriculture (iv)Role of WTO (v)Necessity of dumping for exporting countries. (5 marks each) Answer 8(i) The World Intellectual Property Organization The World Intellectual Property Organization (WIPO) is an international organization dedicated to helping ensure that the rights of creators and owners of intellectual property are protected worldwide and that inventors and authors are, thus, recognized and rewarded for their ingenuity. The roots of the World Intellectual Property Organization go back to 1833. That year marked the birth of the Paris Convention for the Protection of Industrial Property, the first major international treaty designed to help people of one country obtain protection in other countries for their intellectual creations in the form of industrial property rights. In 1974, WIPO became a specialized agency of the United Nations system of organizations, with a mandate to administer intellectual property matters recognized by the member states of the UN. WIPO expanded its role and further demonstrated the importance of intellectual property rights in the management of globalized trade in 1996 by entering into a cooperative agreement with the World Trade Organization. WIPO seeks to: −Harmonize national intellectual property legislation and procedures. −Provide services for international applications for industrial property rights. −Exchange intellectual property information. −Provide legal and technical assistance to developing and other countries. −Facilitate the resolution of private intellectual property disputes. −Marshal information technology as a tool for storing, accessing, and using valuable intellectual property information. Answer 8(ii) Multilateral Trading Agreement: Trade agreements are either bilateral, involving only two countries, or multilateral, involving more than two countries. They are usually intended to lower trade barriers between participating countries and, as a consequence, increase the degree of economic integration between the participants. Multilateral trade agreements are very complicated to negotiate, but are very powerful once all parties sign the agreement. The primary benefit of multilateral agreement is that all nations get treated equally, and provides level playing field, especially for poorer nations that are less competitive by nature which bind all the members. The WTO trade agreements are multilateral trade agreement between all members of the World Trade Organization. Some of the example of multilateral agreements are: Agreement on Agriculture, Textile and Clothing, TRIPS, TRIMS, Anti-Dumping Agreement, etc. Answer 8(iii) Export Subsidy on Agriculture Agriculture Agreement prohibits export subsidies on agricultural products unless the subsidies are specified in a member’s lists of commitments. Where they are listed, the agreement requires WTO members to cut both the amount of money they spend on export subsidies and the quantities of exports that receive subsidies. Taking averages for 1986-90 as the base level, developed countries had agreed to cut the value of export subsidies by 36% over the six years starting in 1995 (24% over 10 years for developing countries). Developed countries had also agreed to reduce the quantities of subsidized exports by 21% over the six years (14% over 10 years for developing countries). Least developed countries do not need to make any cuts. During the six-year implementation period, developing countries were allowed under certain conditions to use subsidies to reduce the costs of marketing and transporting exports. Answer 8(iv) Role of WTO In pursuit of the goal of sustainable growth and development for the common good, the Ministers envisaged a world where trade flows freely and renewed their commitment to: −A fair, equitable and more open rule-based system; −Proressive liberalization and elimination of tariff and non-tariff barriers to trade in goods; −Progressive liberalization of trade in services; −Rejection of all forms of protectionism; −Elimination of discriminatory treatment in international trade relations; − I ntegration of developing and least-developed countries and economies in transition into the multilateral system; and −The maximum possible level of transparency. With this philosophy in mind the WTO has been established to ensure the above. Answer 8(v) Necessity of dumping for exporting countries Dumping obviously means exporting goods at cheaper prices, which is against the general business principle of maximizing the profits. Exporters may be compelled to change different prices in different markets for various reasons. When they charge lower prices in foreign markets as compared to prices in the domestic market it is considered to be dumping in the context of the Agreement on Anti-dumping. Since no one in the business may be expected to sell at a loss over a substantial period of time, one may sell at lower prices in the foreign market only at the cost of higher prices in the domestic market i.e. by cross subsidising the foreign market sales or one may resort to such practices for capturing the foreign markets with the ultimate intention of monopolizing the same. It may also be a result of a desire to maximize sales by pushing goods even at prices which provide only for a marginal profit over the variable costs but do not provide adequately for the recovery of all costs, particularly the fixed costs. There may be other external reasons too for dumping, for example, compulsion to bring prices in line with the prices prevailing in the importing country. Generally speaking countries having advantage of geographical nearness or having the advantage of their goods being treated with preferential tariffs or exchange rate advantages may be able to supply goods at prices cheaper than other exporters. PROFFESSIONAL PROGRAMME EXAMINATION JUNE 2010 DUE DILIGENCE AND CORPORATE COMPLIANCE MANAGEMENT Time allowed: 3 hours Maximum marks: 100

NOTE: Answer SIX questions including Question No.1 which is COMPULSORY.

PART—A Question 1 . (a) State, with reasons in brief, whether the following statements are correct or incorrect: (i) In the case of takeover, public announcement is required to be made by the acquirer either in all editions of an English national daily or in the Hindi national daily with wide circulation at the place where the registered office of the target company is situated. (ii) Indian companies issuing Global Depository Receipts (GDRs) in America and Europe have to comply with the Securities and Exchange Board of India (SEBI) requirements. (iii) A branch office of a foreign company is not allowed to carry out manufacturing activities on its own, but is permitted to sub-contract these to an Indian manufacturer. Branch office established with the approval of RBI may remit its profits outside India. (iv) The stamp duty payable on transfer of shares varies from State to State. (v) A company having a paid-up capital of Rs.2.5 crore is required to submit secretarial compliance certificate. (2 marks each) (b) Critically examine and comment on the following : (i) It is not the duty of the lead merchant bankers to ensure the despatch of share certificates/refund orders. (ii) A remuneration committee may be set-up by the Board of directors as per clause 49 of the listing agreement relating to good corporate governance. (5 marks each) Answer 1(a)(i) Incorrect Public announcement with respect to takeover is required to be made in − all editions of one English national daily with wide circulation; − one Hindi national daily with wide circulation and − a regional language daily with wide circulation at the place where the registered office of the target company is situated and at the place of the stock exchange where the shares of the target company are mostly traded. Answer 1(a)(ii) Correct FCCB and Ordinary Shares (Through Depository Receipt Mechanism) Scheme 2003 requires unlisted companies floating GDRs, to get its shares simultaneously listed in Indian exchanges, with respect to underlying shares of the company issuing GDR. Thus the companies issuing GDRs are required to comply with SEBI Requirements also in addition to SEC requirements and EU directives. Answer 1(a)(iii) Correct A branch office is not allowed to carry out manufacturing activities on its own but is permitted to sub-contact these to an Indian manufacturer. It may be noted that foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India only for the purposes specified under FEM (Establishment in India or branch or office or other place of business) Regulations 2000. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI Regulations, permission for setting up branch offices is granted by the Reserve Bank of India (RBI). Answer 1(a)(iv) Incorrect In the case of transfer of shares the stamp duty is uniform throughout the country. In case of transfer of debentures or other securities the stamp duty payable on transfer thereof vary from state to state. Answer 1(a)(v) Correct The Central Government in exercise of the powers conferred under Section 642 and Section 383A of the Companies Act, 1956 has amended the COMPANIES (APPOINTMENT AND QUALIFICATIONS OF SECRETARY) RULES, 1988. The amendment seeks to enhance the paid-up capital requirements for companies compulsorily required to appoint a whole time secretary to “five crore rupees”. Under the amended rules a company having a paid up share capital of two crore rupees or more but less than five crore rupees may appoint any individual who is a member of the Institute of Company Secretaries of India as a whole-time secretary to perform the duties of a secretary under the Companies Act, 1956. Further, where a company has appointed a whole-time company secretary, possessing the qualification of membership of the Institute of Company Secretaries of India, such a company is not required to obtain a certificate from a secretary in whole-time practice under rule 3 of the Companies (Compliance Certificate) Rules, 2001. Hence, in the given case the paid up capital of the company being Rs.2.5 crores, the company is required to obtain compliance certificate unless it appoints a whole time company secretary possessing the qualification of membership of the Institute of Company Secretaries of India. Answer 1(b)(i) The statement is not correct. As per SEBI (ICDR)Regulations 2009, the post-issue merchant banker is required to ensure that the despatch of refund orders, allotment letters and share certificates is done by way of registered post or certificate of posting, as may be applicable. The post-issue merchant banker shall also ensure payment of interest to the applicants for delayed dispatch of allotment letters, refund orders, etc. as per the disclosure made in the offer document. If the issue is managed by more than one merchant banker, the rights, obligations and responsibilities, relating inter alia to disclosures, allotment, refund and underwriting obligations, if any, of each merchant banker shall be predetermined and disclosed in the offer document Answer 1(b)(ii) The state is correct. As per clause 49 of the listing agreement it is recommendatory for the company to have a remuneration committee. The board may set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment. This committee may comprise of at least three directors, all of whom should be non-executive directors, the Chairman of committee being an independent director. Question 2 (a) Choose the most appropriate answer from the given options in respect of the following: (i) When a charge on the assets of a company is created or modified, which one of the following forms is required to be filed with the Registrar of Companies— (a) Form No.21 (b) Form No.12 (c) Form No. 8 (d) Form No.15. (ii) All companies to which Companies (Compliance Certificate) Rules, 2001 apply are required to file with the Registrar of Companies the compliance certificate within — (a) 60 Days from the date on which its AGM is held (b) 45 Days from the date on which its AGM is held (c) 30 Days from the date on which its AGM is held (d) 90 Days from the date on which its AGM is held. (iii) Which one of the following Acts does not come under the purview of securities laws— (a) Securities and Exchange Board of India Act, 1992 (b) Foreign Contribution (Regulation) Act, 1976 (c) Securities Contracts (Regulation) Act, 1956 (d) Depositories Act, 1996.

(iv) Foreign investment which does not qualify under automatic route — (a) Will have to be cancelled and refunded (b) Is prohibited (c) Has to go for government approval (d) None of the above. (v) As per compliances under the listing agreement, the Audit Committee shall meet in a year atleast — (a) Two times (b) Three times (c) Four times (d) Five times. (vi) Maximum period of imprisonment for non-compliance of listing agreement is — (a) One year (b) Three years (c) Five years (d) Ten years. (1 mark each) (b) Distinguish between the following : (i) ‘Horizontal merger’ and ‘vertical merger’; and (ii) ‘Friendly takeover’ and ‘hostile takeover’. (3 marks each) (c) Write a note on ‘pre-issue due diligence’ and ‘post-issue due diligence’. (4 marks) Answer 2(a)(i) (c) Form No. 8 Answer 2(a)(ii) (c) 30 days from the date on which its AGM is held. Answer 2(a)(iii) (b) Foreign Contribution Regulations Act, 1976 Answer 2(a)(iv) (c) Has to go for government approval Answer 2(a)(v) (c) Four Times Answer 2(a)(vi) (d) Ten years Answer 2(b)(i) Horizontal Merger This class of merger is a merger between business competitors who are manufacturers or distributors of the same type of products or who render similar or same type of services for profit. It involves joining together of two or more companies which are producing essentially the same products or rendering same or similar services or their products and services directly to compete in the market with each other. Horizontal mergers result into a reduction in the number of competing companies in an industry and increase the scope for economies of scale and elimination of duplicate facilities. However, their main drawback is that they promote monopolistic trend in the industrial sector. Vertical Merger In a vertical merger two or more companies are complementary to each other e.g. one of the companies is engaged in the manufacture of a particular product, the other is established and expert in the marketing of that product. In this merger the two companies merge and control the production and marketing of the same product. A vertical merger may result into smooth and efficient flow of production and distribution of a particular product and reduction in handling and stockholding costs. It also poses a risk of monopolistic trend in the industry. Answer 2(b)(ii) Friendly Takeover A friendly takeover is with the consent of taken over company. There is an agreement between the management of two companies through negotiations and the takeover bid may be with the consent of majority or all shareholders of the target company, which is referred to as friendly takeover bid. Hostile Takeover When an acquirer company does not offer the target company the proposal to acquire its undertaking but silently and unilaterally persues efforts to gain control against the wishes of existing management such acts of acquirer are known as ‘takeover raids’ or hostile ‘takeover bids’. The main distinction between a friendly takeover and hostile takeover is whether there is a mutual understanding between the acquirer and the taken over company. When there is a mutual understanding, it is friendly takeover otherwise it is termed as hostile takeover. Answer 2(c) Due diligence spans the entire public issue process. Pre-IPO due diligence process will result in a gap analysis between the present status of the company and the company that should be floated i.e., a gap is an expectations gap, created as a result of how the market expects a listed company to conduct its affairs. In this scenario, once these gaps have been highlighted, the due diligence exercise should extend in advising the company on the processes and activities which are required to fill the gaps identified. The due diligence process aspires to achieve the following: — to assess the reasonableness of historical and projected earnings and cash flows; — to identify key vulnerabilities, risk and opportunities; — to gain an intimate understanding of the company and the market in which the company operates such that the company’s management can anticipate and manage change; — to set in motion the planning for the post-IPO operations. The scope of pre-issue due diligence includes compliance with regard to eligibility, pricing, disclosure, lock in requirements etc as prescribed under SEBI(ICDR) Regulations 2009. Post issue due diligence includes post issue requirements like dispatch of share certificates, refund orders, basis of allotment, post issue monitoring reports, redressal of investor grievances, co-ordination with depositories, registrars, bankers etc. Question 3 (a) Ambitious Constructions Ltd., a listed company, is planning to acquire controlling interest in Fine Cements Ltd. As a Practising Company Secretary, you are required to advise the managing director of the acquirer company about the meaning of ‘trigger point’ and the different trigger points to be followed under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. (10 marks) (b) Gokul Financial Services Ltd. has made a public issue for 25 crore shares of Rs.10 each at a premium of Rs.370 per share. The following information has been provided to you: (i) The company has reserved 25% shares for retail category. (ii) The total issue was over-subscribed 3.5 times whereas the retail category was over-subscribed by 7.20 times. (iii) The company has fixed a minimum application/bid size as 15 shares. Applications can be made for a minimum of 15 shares and in multiples thereof. (iv) Three retail investors Ankur, Bobby and Varsha have applied for 225 shares, 105 shares and 90 shares respectively. On the basis of above information, calculate the actual entitlement of shares by Ankur, Bobby and Varsha, if the company has finalised the allotment on proportionate basis. (6 marks) Answer 3(a) Trigger points Trigger point is a point where provisions of SEBI (SAST) Regulations, 1997 i.e takeover code gets triggered and the acquirer is required to follow public announcement and other requirements as mentioned in the regulations in respect of further acquisition. Following are the trigger points where an acquirer is required to follow SEBI(SAST) Regulations, 1997. (i) 15% shares or voting rights: An acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 15% or more voting rights, can acquire such additional shares only after making a public announcement (PA) to acquire atleast additional 20% of the voting capital of Target Company from the shareholders through an open offer. (ii) Creeping acquisition limit: An acquirer together with persons acting in concert who holds 15% or more but less than 55% of shares or voting rights of a target company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year ending March 31 only after making a public announcement to acquire atleast additional 20% shares of target company from the shareholders through an open offer. (iii). Consolidation of holding: An acquirer who holds 55% or more but less than 75% shares or voting rights of a target company, can acquire further shares or voting rights only after making a public announcement to acquire atleast additional 20% shares of target company from the shareholders through an open offer. Answer 3(b) Calculation of allotment of shares on the basis of proportionate basis: Sr. No. Name of Investor Total number of Total number of shares shares applied for eligible to be allotted (No. of shares applied for/7.20) Ankur 225 shares 225/7.20 = 31.25 1. shares rounded off to 31 shares Booby 105 shares 105/7.20 = 14.58 2. shares rounded off to 15 shares i.e. minimum application size. Varsha 90 Shares 90/7.20 = 12.5 i.e. 13 3. shares application liable to be rejected as the entitlement is less than the minimum application size. How- ever, the successful applicants out of the total applicants shall be determined by drawal of lots.

Question 4 (a) Priyanka Ltd., a listed company wants to make an issue of securities through a rights issue where the aggregate value of securities including premium exceeds Rs.70 lakh. As the Company Secretary of Priyanka Ltd., how will you advise your company in respect of procedures to be followed? (6 marks) (b) Anjan has applied for shares under the Employees Stock Option Scheme and his option is granted. Now, Anjan wants to transfer his option to one of his friends, Sanjay. Examine the request of Anjan in the light of the SEBI Guidelines, 1999. (5 marks) (c) The managing director of Cautious Bank Ltd. invites you as a Practising Company Secretary to explain him about compilation and preparation of search report before lending funds to a private company. Explain briefly the issues involved in this regard. (5 marks) Answer 4(a) SEBI (ICDR) Regulations 2009 are applicable to a rights issue, where the aggregate value of specified securities offered is fifty lakh rupees or more. Accordingly an issuer making a rights issue, where the aggregate value of the specified securities offered is fifty lakh rupees or more, is required to file a draft offer document, along with fees as specified with SEBI through the lead merchant banker, at least thirty days prior to registering the prospectus, red herring prospectus or shelf prospectus with the Registrar of Companies or filing the letter of offer with the designated stock exchange, as the case may be. The following are important procedures to be followed with respect to a rights issue. 1. Record Date. Ensure that the record date has been announced for the purpose of determining the shareholders eligible to apply for specified securities in the proposed rights issue. 2. Restriction on rights issue. No issuer shall make a rights issue of equity shares if it has outstanding fully or partly convertible debt instruments at the time of making rights issue, unless it has made reservation of equity shares of the same class in favour of the holders of such outstanding convertible debt instruments in proportion to the convertible part thereof. 3. Letter of offer, abridged letter of offer. The abridged letter of offer, along with application form, shall be dispatched through registered post or speed post to all the existing shareholders at least three days before the date of opening of the issue. The letter of offer shall be given by the issuer or lead merchant banker to any existing shareholder who has made a request in this regard. 4. Pricing The issue price shall be decided before determining the record date which shall be determined in consultation with the designated stock exchange. 5. Period of subscription A rights issue shall be open for subscription for a minimum period of fifteen days and for a maximum period of thirty days. 6. Pre-Issue Advertisement for rights issue. The issuer shall issue an advertisement for rights issue disclosing the following: (a) the date of completion of despatch of abridged letter of offer and the application form; (b) the centres other than registered office of the issuer where the shareholders or the persons entitled to receive the rights entitlements may obtain duplicate copies of the application forms in case they do not receive the application form within a reasonable time after opening of the rights issue; 7. Obligation of issuer/intermediaries The obligation of issuer/intermediaries for a rights issuer, with respect to advertisement, appointment of compliance offier, redressal of investor grievances, due diligence, post issue reports, post issue advertisements etc is same as the public issue. Answer 4(b) As per Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999, there shall be a minimum period of one year between the grant of options and vesting of option. However, in a case where options are granted by a company under an ESOS in lieu of options held by the same person under an ESOS in another company which has merged or amalgamated with the first mentioned company, the period during which the options granted by the transferor company were held by him shall be adjusted against the minimum vesting period required. Further, the company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise of option. The employee shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till shares are issued on exercise of option. No person other than the employee to whom the option is granted shall be entitled to exercise the option. The option granted to the employee shall not be pledged, hypothecated, mortgaged or otherwise alienated in any other manner. Hence Anjan cannot trasfer his options to his friend Sanjay. Answer 4(c) MCA-21 enables viewing of public documents of companies for which payment has been made by user. Form 8, Form 10, Form 17 and copies of certificates of registration thereof are available for inspection at the website. Before proceeding with the inspection it would be advisable to ensure that the format in which the search report is required. Meticulous care will have to be taken in noting down the following particulars from the Register of Charges: (a) Date of registration (preferably with the serial number) of the document (b) Date and nature of the document creating the charge (c) Amount of the charge (d) Brief particulars of the property charged (e) Name and address of the person in whose favour the charge is created. In respect of each of the charges created, it would be essential to identify the modifications effected from time to time by noting down carefully the following particulars: (a) Date of registration of the document (preferably with the serial number) (b) Nature and date of the instrument modifying the charge (c) Effect of Modification. Each modification should be noted in chronological order and the above particulars should be compiled together for each charge. As and when the charge is satisfied, fool-proof identification of the exact charge which is satisfied is of paramount necessity. The following particulars can be noted chronologically by way of modification by the Search Report. (a) Date of registration (preferably with the serial number) of the document (b) Date of satisfaction. Non-essential particulars of charges comprise of the gist of terms and conditions with regard to (a) mode of repayment (b) rate of interest and (c) margin; these need not be given in the Search Report unless specifically so required by the client. If the client requires particulars of the charges pending registration, it is advisable to give a separate report based on the verification of the registers and records maintained by or available with the company. Question 5 (a) The Board of directors of National Food Corporation Ltd., a listed company decides to go for issue of shares through the Employees Stock Purchase Scheme (ESPS). As a professional, the Board has asked you to draft a due diligence check-list on the following issues : (i) Eligibility to participate in the scheme; (ii) Shareholders approval; and (iii) Pricing and lock-in period. (10 marks) (b) State the procedure for viewing of public documents of companies on MCA portal. (6 marks) Answer 5 (a)(i) Eligibility to Participate in the Scheme (i) An employee eligible to participate in the scheme should be: (a) a permanent employee of the company working in India or out of India; or (b) a director of the company, whether a whole time director or not; (c) an employee as defined in sub-clauses (a) or (b) of a subsidiary, in India or out of India, or of a holding company of the company. (ii) Check that the employee is not a promoter nor belongs to the promoter group. (iii) Ensure that a director who either by himself or through his relatives or through any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company is not participating, as he is not eligible to participate in the scheme. Answer 5 (a)(ii) Shareholder Approval (i) Check that the Scheme has been approved by the shareholders by passing a special resolution in the meeting of the general body of shareholders. (ii) Check that the explanatory statement to the notice has been sent to the shareholders and it specifies— (a) the price of the shares and also the number of shares to be offered to each employee; (b) the appraisal for determining the eligibility of employee for the scheme; (c) total number of shares to be issued. (iii) The number of shares offered may be different for different categories of employees. (iv) Check that special resolution states that the company shall conform to the accounting policies as specified in Schedule II of the SEBI (Employee Stock Option Scheme and Stock Purchase Scheme) Guidelines, 1999. (v) Check that approval of shareholders have been obtained by way of separate resolution in the general meeting in case of— (a) allotment of shares to employees of subsidiary or holding company and; (b) allotment of shares to identified employees, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of allotment of shares. Answer 5(a)(iii) Pricing and Lock-in-period (i) The company has the freedom to determine price of shares to be issued under an ESPS, provided they comply with the accounting policies specified. (ii) Check that the shares issued under an ESPS are subject to lock-in for a minimum period of one year from the date of allotment. Also ensure that in a case where shares are allotted by a company under a ESPS in lieu of shares acquired by the same person under an ESPS in another company which has merged or amalgamated with the first mentioned company, the lock-in-period already undergone in respect of shares of the transferor company shall be adjusted against the lock-in required under this clause. (iii) If the scheme is part of a public issue and the shares are issued to employees at the same price as in the public issue, the shares issued to employees under the scheme are not subject to any lock-in-period. Answer 5(b) MCA-21 offers the facility to view documents and also search and other facilities of public documents. This facility is handy for users and banks and financial institutions while sanctioning loans. This facility enables viewing of public documents of companies for which payment has been made by user. The document can be viewed only within 7 days after the payment has been confirmed. Also, the documents are available for only 3 hours after the user has started viewing the first document of the company. (a) User has to access My MCA portal and login to the My MCA portal. (b) Click on the ‘My Documents’ tab after logging into the system. (c) List of company names will be displayed, for which user have already paid for public viewing. It also displays (i) Date of request i.e. the date, when user made the request to view the company document. (ii) Status of the request i.e. whether viewed or to view. (d) Click on the view link under status field. (e) The documents are grouped under five categories i.e. user has to click on the desired category under which the document falls. (f) If more than one document is listed, the user can arrange them name wise or date wise. (g) On clicking the document name, the document shall be displayed for viewing. The public documents under this facility are available for viewing by public on payment of requisite fee. Public documents include Incorporation documents, charge documents, annual returns and balance sheet, change in directors and other documents. Question 6 (a) Draft a note to the Board of directors on the major compliances for public issue/listing of securitised debt instruments on the recognised stock exchange under the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008. (8 marks) (b) Draft a check-list for an issue of Indian Depository Receipts (IDRs) under Chapter VI-A of the SEBI (Disclosure of Investor Protection) Guidelines, 2000 with respect to the following: (i) Eligibility for issue of IDRs; (ii) Investors; and (iii) Minimum subscription. (8 marks) Answer 6(a) Major compliances for pubic issue and/or listing of securitized debt instruments on the recognized stock exchange under SEBI(Public Offer and Listing of Securitized Debt Instruments) Regulations, 2008: 1. Ensure that special purpose distinct entity files draft offer document with SEBI at least 15 days before proposed opening the issue; 2. Ensure that special purpose distinct entity has made arrangements with Registered Depositories for damaterialisation of the securised debt instruments. 3. Ensure that special purpose distinct entity has made an application for listing to one or more recognized exchanges in terms of 17A (2) of SCRA. 4. Ensure that credit rating is obtained from at least two registered credit rating agencies and the same is disclosed in the offer document. 5. Ensure that the contents of offer document has the required details and does not contain any misleading information. 6. Ensure to file necessary information/reports post issue as directed by SEBI from time to time. 7. Ensure that the special purpose distinct entity complies with its obligation relating to Minimum public offering for listing, continuous listing conditions etc Answer 6 (b)(i) Eligibility for issue of IDRs Check whether the issuer of IDR (a) fulfils the eligibility criteria as specified in rule 4 of the IDR Rules; (b) is listed in its home country; (c) has not been prohibited to issue securities by any Regulatory Body; and (d) has good track record with respect to compliance with securities market regulations. Answer 6 (b)(ii) Investors (a) Check that at least 50% of the IDRs issued has been subscribed to by QIBs; and (b) The balance 50% has been made available for subscription by non- institutional investors (i.e., investors other than QIBs and retail individual investors) and retail individual investors, including employees. IDRs shall be allocated among non institutional investors, retail individual investors and employees at the discretion of the issuer. The manner of allocation shall be disclosed in the prospectus for IDRs. (c) Check that application amount in an IDR is not less than Rs. 20,000. (d) Check that Procedure to be followed by each class of applicant for applying has been mentioned in the prospectus Answer 6 (b)(iii) Minimum subscription For non-underwritten IDR issues: “If the issuing company does not receive the minimum subscription of 90 per cent of the issued amount on the date of closure of the issue, or if the subscription level falls below 90 per cent. after the closure of issue on account of cheques having being returned unpaid or withdrawal of applications, the issuing company shall forthwith refund the entire subscription amount received. If the issuing company fails to refund the entire subscription amount within 15 days from the date of the closure of the issue, it is liable to pay the amount with interest to the subscribers at the rate of 15 per cent per annum for the period of the delay” For underwritten IDR issues: "If the issuing company does not receive the minimum subscription of 90 per cent of the net offer to public including devolvement of Underwriters within 60 days from the date of closure of the issue, the issuing company shall forthwith refund the entire subscription amount received with interest to the subscribers at the rate of 15 per cent per annum for the period of the delay beyond 60 days.” Question 7 (a) Write notes on any two of the following : (i) Escrow account (ii) Foreign direct investment (iii) Compliance management. (4 marks each) (b) Distinguish between any two of the following : (i) ‘Operational due diligence’ and ‘strategic due diligence’. (ii) ‘Transposition of shares’ and ‘transmission of shares’. (iii) ‘Level-I ADR’ and ‘Level-II ADR’. (4 marks each) Answer 7(a)(i) Escrow Account The escrow amount shall be calculated in the following manner, as specified in the sub-regulation 2 of regulation 28 of SEBI(SAST) Regulations 1997,— (a) For consideration payable under the public offer,— up to and including Rs. 100 crores 25 per cent; exceeding Rs. 100 crores 25 per cent up to Rs. 100 crores and 10 per cent thereafter.

(b) For offers which are subject to a minimum level of acceptance, and the acquirer does not want to acquire a minimum of 20 per cent, then 50 per cent of the consideration payable under the public offer in cash shall be deposited in the escrow account. The escrow account referred to in sub-regulation (1) shall consist of,— (a) cash deposited with a scheduled commercial bank; or (b) bank guarantee in favour of the merchant banker; or (c) deposit of acceptable securities with appropriate margin, with the merchant banker; or (d) cash deposited with a scheduled commercial bank in case of clause (b) of sub-regulation (2) of regulation 28, as mentioned in the abovesaid paragraphs. In case the escrow account consists of deposit with a scheduled commercial bank, the acquirer has to ensure while opening the account that the merchant banker appointed for the offer is empowered to instruct the bank to issue a banker’s cheque or demand draft for the amount lying to the credit of the escrow account, as provided in the regulations. If the escrow account consists of bank guarantee, such bank guarantee must be in favour of the merchant banker and shall be valid at least for a period commencing from the date of public announcement until twenty days after the closure of the offer. In case there is any upward revision of offer, consequent upon a competitive bid or otherwise, the value of the escrow account must be increased to equal at least 10 per cent of the consideration payable upon such revision. Answer 7(a)(ii) Investment in Indian companies can be made both by non-resident as well as resident Indian entities. Any non-resident investment in an Indian company is direct foreign investment. Investment by resident Indian entities could again comprise of both resident and non-resident investment. Thus, such an Indian company would have indirect foreign investment if the Indian investing company has foreign investment in it. The indirect investment can be a cascading investment i.e. through multi-layered structure also. Foreign Direct Investments (FDI) can be made under the following two routes 1. Automatic Route and 2. Government Route/Approval Route. Answer 7(a)(iii) A compliance management system is the method by which corporate manage the entire compliance process. It includes the compliance program, compliance audit, compliance report etc. and in other words it is called compliance solution. Corporate compliance management involves a full process of research and analysis as well as investigation and evaluation. Such an exercise is undertaken in order to determine the potential issues and get a realistic view about how the entity is performing and how it is likely to perform in the future. Company Secretaries with core competence in compliance and corporate governance play a crucial role in the corporate compliance management. Installing proper compliance process is a must for the success of compliance programme. Systematic approach helps in chalking out a plan of action in right direction. Installing a process presupposes planning for the activity, identification of desired objective and resources, detailed plan of action with provision for eventualities and continuous monitoring and corrective measures. Answer 7 (b)(i) (i) Operational due diligence Operational due diligence aims at the assessment of the functional operations of the target company, connectivity between operations, technological upgradation in operational process, financial impact on operational efficiency etc. It also uncovers aspects on operational weakness, inadequacy of control mechanisms etc. (ii) Strategic due diligence Strategic due diligence tests the strategic rationale behind a proposed transaction and analyses whether the deal is commercially viable, whether the targeted value would be realized. It considers factors such as value creation opportunities, competitive position, critical capabilities. Answer 7(b)(ii) Transposition In the case of joint-shareholders, one or more of them may require the company to alter or rearrange the serial order of their names in the register of members of the company. In this process, there will be need for effecting consequential changes in the share certificates issued to them. If the company provides in its articles that the senior-most among the joint-holders will be recognised for all purposes like service of notice, a copy of balance sheet, profit and loss account, voting at a meeting etc., the request of transposition may be duly considered and approved by the Board or other authorised officer of the company. Since no transfer of any interest in the shares takes place on such transposition, the question of insisting on filling transfer deed with the company, may not arise. Transposition does not also require stamp duty. Transmission ‘Transmission by operation of law’ is not a transfer. It refers to those cases where a person acquires an interest in property by operation of any provision of law, such as by right of inheritance or succession or by reason of the insolvency or lunacy of the shareholder or by purchase in a Court-sale, while a transfer is effected by act of parties. This is known as transmission or transfer by operation of law, or involuntary assignment. Thus, transmission of shares takes place when the registered shareholder dies or is adjudicated as an insolvent, or if the shareholder is a company, it goes into liquidation. Answer 7(b)(iii) Level I ADR(unlisted/OTC Traded/pink Sheets) This is the least expensive level to provide for issuance of shares in ADR form in the US. The company issuing ADRs has to comply with the Securities and Exchange Commission (SEC) registration requirements but can be exempted from full SEC reporting requirements under certain circumstances. It can only be traded over the counter and cannot be listed on a national exchange in the US. The electronic OTC markets are also called pink sheets which is a centralized quotation service that collects and pubishes market maker quotes for OTC securities in real time. Level II ADR (US Listed Non capital raising transaction. i.e., without going for public issue): This programme gives more liquidity and marketability as it enables listing of ADRs in one or more of the US exchange. Under this programmes the company has to comply with registration requirements reporting requirements of SEC. Question 8 Critically examine and comment on any four of the following: (i) Indian companies are allowed to make payments for foreign technology collaboration under automatic route subject to certain limits under the FEMA Regulations. (ii) As part of good corporate governance practices under clause 49 of the listing agreement, a company is required to make disclosures on certain aspects. (iii) Securities audit is a mechanism relieving the company and its directors from the consequences of unintended non-compliance by timely corrective actions. (iv) The legal due diligence process varies depending upon the scope of work dictated by the client, the focus, special areas of weakness, the type of business, etc. (v) Where a company desires to roll over the debentures issued by it, a copy of the notice of the resolution is to be filed with SEBI. (4 marks each) Answer 8(i) Indian Companies are allowed to make the payment for foreign technology collaboration under automatic route subject to the following limits under the FEMA Regulations: (a) The lump sum payments not exceeding US$ 2 million. (b) Royalty payable is being limited to 5% for domestic sales and 8% for exports, without restriction on duration of royalty payments. The royalty limits are net of taxes and are calculated according to standard conditions; (c) Payment of royalty upto 2% for exports and 1% for domestic sales is allowed under automatic route for use of trade marks and brand name of the foreign collaborator without technology transfer. Answer 8(ii) Disclosures under the Clause 49 of Listing Agreement Basis of related party transactions; Details of material individual transactions with related parties or others, which are not on an arm’s length basis should be placed before the audit committee, together with Management’s justification for the same. Disclosure of Accounting Treatment. Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report Board disclosures on risk management The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. Proceeds from public issues, rights issues, preferential issues etc. When money is raised through an issue (public issues, rights issues, preferential issues etc.), it shall disclose to the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part of their quarterly declaration of financial results. Further, on an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice and place it before the audit committee. Remuneration of Directors. All pecuniary relationship or transactions of the non-executive directors vis-à-vis the company shall be disclosed in the Annual Report. Management As part of the directors’ report or as an addition thereto, a Management Discussion and Analysis report should form part of the Annual Report to the shareholders. This Management Discussion & Analysis should include discussion on certain matters Industry structure and developments, Opportunities and Threats, Risks and concerns etc. Disclosures to shareholders. Disclosures to directors pertains to information like resume of director with respect to his appoingment, Disclosure of relationships between directors inter-se etc Answer 8(iii) Securities Audit is a mechanism relieving the company and its directors from the consequences of unintended non-compliance by timely corrective actions. There are several penal provisions in the Companies Act, 1956, Securities and Exchange Board of India Act, 1992, Foreign Exchange Management Act, 1999, Securities Contracts (Regulations) Act, 1956 and other securities related laws. As securities audit ensures the timely and proper compliances of all statutory provisions and early detention of errors and frauds, it provides trustworthy mechanism relieving the company and its directors from the consequences of unintended non-compliances of statutory provisions. Securities Audit is also a powerful tool for proper compliance of all obligations and also for investors’ protection. Answer 8(iv) A legal due diligence is scrutiny of all, or specific parts, of the legal affairs of the target company depending on the purpose of legal due diligence which may be mergers, acquisition or any major investment decision, with a view of uncovering any legal risks and provide the buyer with an extensive insight into the company’s legal matters. It also improves the buyer’s bargaining position and ensures that necessary precautions are taken in relation to the transaction proposed. The scope of due diligence depends on the purpose and objectives of due diligence and may vary from case to case. The scope of due diligence by a large institutional investor will vary from the scope of due diligence by the company which proposes to acquire a target company. Thus it is not possible to define the scope of due diligence specifically. However, certain mandatory issues that should be covered in any type of legal due diligence are as follows: 1. Regulatory compliance 2. Contractual compliance 3. Compliance under intra-corporate aspects 4. Financial aspects 5. Non financial aspects 6. Cultural aspects Especially in case of cross border transactions, compatiability and adaptability of corporate cultures are to be analysed to eliminate the problems that may arise out of cultural differences. Answer 8(v) As per the chapter X of erstwhile SEBI(DIP) Guidelines, 2000, if the company desires to roll over the debentures issued by it, it has to file with SEBI a copy of the notice of the resolution to be sent to the debenture-holders for the purpose, through a merchant banker prior to dispatching the same to the debenture-holders. The notice shall contain disclosures with regard to credit rating, necessity for debenture-holders resolution and such other terms which SEBI may specify. As per SEBI(ICDR) Regulations 2009, the non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which exceeds fifty lakh rupees, may be rolled over without change in the interest rate, subject to compliance with the provisions of section 121 of the Companies Act, 1956 and the following conditions: (a) seventy five per cent. of the holders of the convertible debt instruments of the issuer have, through a resolution, approved the rollover through postal ballot; (b) the issuer has, along with the notice for passing the resolution, sent to all holders of the convertible debt instruments, an auditors’ certificate on the cash flow of the issuer and with comments on the liquidity position of the issuer; (c) the issuer has undertaken to redeem the non-convertible portion of the partly convertible debt instruments of all the holders of the convertible debt instruments who have not agreed to the resolution; (d) credit rating has been obtained from at least one credit rating agency registered with the Board within a period of six months prior to the due date of redemption and has been communicated to the holders of the convertible debt instruments, before the roll over; GOVERNANCE BUSINESS ETHICS AND SUSTAINABILITY

Time allowed: 3 hours Maximum marks: 100 PART—A (Answer Question No.1 which is COMPULSORY and ANY TWO of the rest from this part.) Question 1 (a) “The silver lining in the Satyam episode is that it has opened a window of opportunity for corporate governance reforms in the country. Even though there has been a failure of the checks and balances in corporate governance, this crisis provides a great opportunity to rebuild our governance framework and regulatory control.” In the context of this statement, examine the issues and challenges in corporate governance with special reference to the role of independent directors. (10 marks) (b) State, with reasons in brief, whether the following statements are correct or incorrect: (i) An independent director is a director who has been an executive of the company in the immediate preceding three financial years. (ii) Organisation for Economic Co-operation and Development (OECD) is not connected with corporate governance. (iii) Insurance is a method of risk avoidance. (iv) In India there is no legal requirement for separation of the role of the Chairman and Chief Executive officer. (v) Shareholders Grievance Committee is a non-mandatory committee. (2 marks each) Answer 1(a) The Satyam case led to a re-look at the corporate governance practices and framework prevalent in the country. This event highlighted the lack of independent directors interest in the Board processes, they did not play their role in efficient manner and the consequences proceeded. The mere meeting of criteria of independence does not ensure that an independent director is acting independently. They should play a vigilant role by attending the meetings, studying and analysing the agenda papers, ask the right questions at the right time, insist that dissent if any is recorded, and have separate sessions of independent directors and act with integrity. Some issues and challenges that need scrutiny are: (i) The process of nomination and selection of independent directors Globally it is considered a good practice to constitute a nomination committee, comprising a majority of independent directors. Such committee shall be responsible for nomination and selection of independent directors on the basis of certain specified criteria relating to age, qualifications etc.

20 (ii) Tenure of independent directors Excessively long tenure of independent directors may compromise their independence. On being associated for a long period with a company, there is a strong likelihood of independent directors to lose their objectivity. Clause 49 does specify as a non-mandatory requirement that the maximum term should not exceed nine years. (iii) Role of independent directors in audit committee Independent directors’ play a very crucial role in Audit Committee. The audit committee is responsible to ensure the integrity of financial reporting, therefore, each independent director who is a member of audit committee should be able to read and understand financial statements. (iv) Training to Independent Directors It is important that independent directors should undergo induction training which will enable new directors to gain understanding of − company’s financial, operational, strategic risk management position − the rights, responsibilities and duties − the role and responsibilities of senior executives − the role of board committees. In addition, all directors should undergo training from time to time. (v) Flow of information to the board Companies should ensure that timely, relevant and complete information is made available to independent directors so that they are able to make informed decisions. The independent directors on their part should also question and seek clarifications whenever in doubt. (vi) Recording of dissent: It is important that where an independent director is not in agreement with the decision of the majority, he should insist that his dissent be recorded. Answer 1(b)(i) Incorrect Clause 49 of the Listing Agreement has provided that an ‘Independent Director’ shall mean a non-executive director of the company. Independent director is defined as a director who has not been an executive of the company in the immediately preceding 3 financial years. Answer 1(b)(ii) Incorrect The Organisation for Economic Cooperation and Development (OECD) was one of the first non-governmental organizations to spell out the principles that should govern the corporate and issued the OECD Principles of Corporate Governance. Answer 1(b)(iii) Incorrect Insurance is not a method of risk avoidance but it is a method of risk transfer. In this the risk is transferred to an organization that specializes in accepting risk at a price. Answer 1(b)(iv) Correct There is no legal requirement of separation of roles of Chairman and CEO. However, the separation of the roles of the Chairman and CEO determines the composition of the Board of Director as per Listing Agreement. Answer 1(b)(v) Incorrect Shareholders’ Grievance Committee is a mandatory committee which has to be constituted by a listed entity, to which Clause 49 of the Listing Agreement is applicable. Question 2 (a) Write notes on any two of the following: (i) Role of Company Secretary in ensuring risk management (ii) Corporate governance in public sector undertakings (iii) The Greenbury Report. (5 marks each) (b) Describe composition of the ‘audit committee’ and ‘remuneration committee’ as per clause 49 of the listing agreement. (5 marks) Answer 2(a)(i) ROLE OF COMPANY SECRETARY As a top level officer and board confidante, a Company Secretary can play a significant role in ensuring that a sound enterprise wide risk management which is effective throughout the company is in place. The board of directors may have a risk management sub-committee assisted by a Risk Management Officer. As an officer responsible for coordination and communication for effective corporate functioning and governance, a Company Secretary shall ensure that there is an Integrated Framework on which a strong system of internal control is built. Such a Framework will become a model for discussing and evaluating risk management efforts in the organization. Risk and control consciousness should spread throughout the organization. A Company Secretary can ensure that this happens so that the risk factor will come into consideration at the every stage of formulation of a strategy. It will also create awareness about inter-relationships of risks across business units and at every level of the organization. Answer 2(a)(ii) CORPORATE GOVERNANCE IN PUBLIC SECTOR UNDERTAKING The Ministry of Heavy Industries and Public Enterprises, Department of Public Enterprises has issued Guidelines on Corporate Governance for Central Public Sector Enterprises. For the purpose of evolving Guidelines on corporate governance, Central Public Sector Enterprises (CPSEs) have been categorized into two groups, namely,— (i) those listed in the Stock Exchanges; (ii) those not listed in the Stock Exchanges. CPSEs listed in Stock Exchanges In so far as listed CPSEs are concerned, they have to follow the SEBI guidelines on corporate governance. In addition, they may follow those provisions in guidelines issued by Department of Public Enterprises which do not exist in the SEBI guidelines and also do not contradict any provisions in the SEBI guidelines. Non-listed CPSEs As per DPE directive, each PSE should strive to institutionalize good corporate governance practices broadly in conformity with the SEBI guidelines. The listing of the non-listed CPSEs in the stock exchanges may also be considered within a reasonable time frame to be set by the Administrative Ministry concerned in consultation with the CPSEs concerned. The non-listed CPSEs may follow the Guidelines on Corporate Governance, which are voluntary in nature. The guidelines for listed and unlisted CPSEs deal with the subject of Corporate Governance, under the following headings: — Board of Directors — Audit Committee — Subsidiary Companies — Disclosures — Report, Compliance and Schedule of Implementation. Answer 2(a)(iii) The Greenbury Report (1995) The confederation of British Industry set up a group under the Chairmanship of Sir Richard Greenbury. It was set up to examine the remuneration of the directors, particularly compensation packages, large pay increases and share options. The Committee’s findings were documented in the Greenbury Report, which incorporated a Code of Best Practice on Director’s Remuneration. Specifically, four main issues were dealt with, as follows: — the role of a Remuneration Committee in setting the remuneration packages for the CEO and other directors; — the required level of disclosure needed to shareholders regarding details of director’s remuneration and whether there is the need to obtain shareholder approval; — specific guidelines for determining a remuneration policy for directors; and — service contracts and provisions binding the Company to pay compensation to a director, particularly in the event of dismissal for unsatisfactory performance. The important recommendation was the establishment of Remuneration Committee composed of Non-Executive Directors which would be responsible for deciding the remuneration of executive directors. The majority of the recommendations of the Committee were incorporated in the Listing Rules of the London Stock Exchange. Answer 2(b) Audit Committee 1. The audit committee shall have minimum three directors as members. Two- thirds of the members of audit committee shall be independent directors. 2. All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise. Explanation 1: The term “financially literate” means the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows. Explanation 2: A member will be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. 3. The Chairman of the Audit Committee shall be an independent director; 4. The audit committee may invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee, but on occasions it may also meet without the presence of any executives of the company. The finance director, head of internal audit and a representative of the statutory auditor may be present as invitees for the meetings of the audit committee; 5. The Company Secretary shall act as the secretary to the committee. Remuneration Committee Constitution of Remuneration Committee is a non-mandatory requirement in terms of Clause 49 of the Listing Agreement. With regard to composition, it provides as under: (i) The remuneration committee, which would determine the remuneration packages of the executive directors may comprise of at least three directors, all of whom should be non-executive directors, the Chairman of committee being an independent director. Question 3 (a) “The Chairman’s primary responsibility is to lead the Board and ensure its effectiveness.” Elucidate this statement. (5 marks) (b) Discuss the principles of corporate governance evolved by the Institute of Company Secretaries of India. (5 marks) (c) “Corporate Social Responsibility (CSR) is also called corporate citizenship or corporate responsibility.” Discuss. (5 marks) Answer 3(a) The responsibility for ensuring that boards provide the leadership which is expected of them is that of its Chairperson. A Chairman though has no legal position; he is the person elected by the board to take the chair at a particular meeting. Boards are not bound to continue with the same chairman for successive meetings. In law, all directors have broadly equal responsibilities and chairmen are no more equal than any other board member. Chairmen are an administrative convenience and a means of ensuring that board meetings are properly conducted. The Chairman’s primary responsibility is for leading the Board and ensuring its effectiveness. The role of the Chairman includes: — setting the Board agenda, ensuring that Directors receive accurate, timely and clear information to enable them to take sound decisions, ensuring that sufficient time is allowed for complex or contentious issues, and encouraging active engagement by all members of the Board; — taking the lead in providing a comprehensive, formal and tailored induction programme for new Directors, and in addressing the development needs of individual Directors to ensure that they have the skills and knowledge to fulfill their role on the Board and on Board Committees; — evaluating annually the performance of each Board member in his/her role as a Director, and ensuring that the performance of the Board as a whole and its Committees is evaluated annually. Holding meetings with the non-executive Directors without the executives being present; — ensuring effective communication with shareholders and in particular that the company maintains contact with its principal shareholders on matters relating to strategy, governance and Directors’ remuneration. Ensuring that the views of shareholders are communicated to the Board as a whole. Answer 3(b) The principles of corporate governance evolved by the ICSI are as under: — Sustainable development of all stakeholders – to ensure growth of all individuals associated with or effected by the enterprise on sustainable basis. — Effective management and distribution of wealth – to ensure that enterprise creates maximum wealth and judiciously uses the wealth so created for providing maximum benefits to all stakeholders and enhancing its wealth creation capabilities to maintain sustainability. — Discharge of social responsibility – to ensure that enterprise is acceptable to the society in which it is functioning. — Application of best management practices – to ensure excellence in functioning of enterprise and optimum creation of wealth on sustainable basis. — Compliance of law in letter and spirit – to ensure value enhancement for all stakeholders guaranteed by the law for maintaining socio-economic balance. — Adherence to ethical standards – to ensure integrity, transparency, independence and accountability in dealings with all stakeholders. Answer 3(c) Corporate Social Responsibility (CSR) is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. The main function of an enterprise is to create value through producing goods and services that society demands, thereby generating profit for its owners and shareholders as well as welfare for society, particularly through an ongoing process of job creation. Corporate Social Responsibility can be explained as under: Corporate means organized business. Social means dealing with the people/society including environment. Responsibility means accountability of the corporate towards society. The term corporate citizenship implies the behaviour which would maximize a company’s positive impact and minimize the negative impact on its social and physical environment. CSR means open and transparent business practices that are based on ethical values and respect for employees, communities and the environment. Corporate Social Responsibility is also called corporate citizenship or corporate responsibility. Question 4 (a) Describe briefly any three of the following : (i) Barriers to ‘visionary leadership’. (ii) Social accountability and the ‘AA 1000’. (iii) Diligence report in banks. (iv) Scope of work of the Asian Corporate Governance Association. (3 marks each) (b) Describe and differentiate ‘risk reduction’ and ‘risk retention’. (6 marks) Answer 4(a)(i) Barriers to Visionary Leadership Frank Martinelli - Lists the barriers with a view to helping companies identify them in their organizations and to remove them to facilitate visionary board leadership: 1. Micro Management - It is necessary that the board focuses its attention on items of critical importance to the organization. If the board is tempted to micro manage or to meddle in lesser matters, an opportunity to provide visionary leadership is lost. 2. Clinging to Tradition – Boards often resist change in order to preserve tradition. However, changing environment requires the Boards to be open to change. 3. Confused Roles - Some boards assume that it is the job of the executive director to do the visionary thinking and that the board will sit and wait for direction and inspiration. 4. Time Management - Lack of time to attend meetings, read materials and maintain contact with each other in between meetings. 5. Resistance to risk taking - Board leadership must strike a balance between taking chances and maintaining the traditional stewardship role. 6. Strategic Planning - Strategic planning offers boards an opportunity to think about changes and trends that will have significant impact and develop strategies to respond to challenges. 7. Complexity - Board members frequently lack a deep understanding of critical changes, trends and developments that challenge fundamental assumptions about how it defines its work. Answer 4(a)(ii) The Social Accountability - SA 8000 is a certification standard based on the UN Universal Declaration of Human Rights, Convention SA 8000 seeks to provide transparent, measurable and verifiable performance standards in the areas of child labour; forced labour; health and safety; compensation; working hours; discrimination; discipline; free association and collective bargaining; and management systems. The AA 1000 - framework developed by the Institute of Social and Ethical Accountability provides a standard for social and ethical accounting, auditing and reporting, including mandatory external verification and stakeholder engagement. It aims to assist an organisation in the definition of goals and targets, the measurement of progress made against these targets, the auditing and reporting of performance and in the establishment of feedback mechanisms. This is done by — Developing stakeholder engagement strategy - an integrated strategy for stakeholder engagement that strengthens both their relationships with stakeholders and their internal decision making processes. — Facilitation of Stakeholder Dialogues - support through the planning, design, capacity building, facilitation and follow-up stages of stakeholder engagement to create processes that create change. — Capacity building for stakeholder engagement - Engaging with stakeholders requires new skills and ways of thinking. Through in-house training in stakeholder engagement, as well as ongoing mentoring support for leadership teams. Answer 4(a)(iii) The Reserve Bank of India recently has advised all the scheduled commercial Banks to obtain regular certification (Diligence Report) by a professional, preferably a Company Secretary, regarding compliance of various statutory prescriptions that are in vogue. The Diligence Report will not only act as an effective mechanism to ensure that the legal and procedural requirements under the respective legislations are duly complied with but also instill professional discipline in the working of the companies that have taken loan, besides building up the necessary confidence in the state of affairs of the companies.

Answer 4(a)(iv) Asian Corporate Governance Association’s scope of work covers three areas: 1. Research: Tracking corporate governance developments across 11 markets in Asia and producing independent analyses of new laws and regulations, investor activism and corporate practices. 2. Advocacy: Engaging in a constructive dialogue with financial regulators, stock exchanges, institutional investors and companies on practical issues affecting the regulatory environment and the implementation of better corporate governance practices in Asia. 3. Education: Organising conferences and seminars that foster a deeper understanding of the competitive benefits of sound corporate governance and ways to implement it effectively. Answer 4(b) Risk Reduction The Physical risk reduction (or loss prevention, as it is often called) is one of ways of dealing with any risk situation. It is done in steps to reduce the probability of loss. The ideal time to think of risk reduction measures is at the planning stage of any new project when considerable improvement can be achieved at little or no extra cost. Risks are reduced by taking actions to lessen the probability of negative consequences associated with a risk. The only cautionary note regarding risk reduction is that, as far as possible expenditure should be related to potential future saving in losses and other risk costs; in other words, risk prevention generally should be evaluated in the same way as other investment projects. Risk Retention It is also known as risk assumption or risk absorption. It is the most common risk management technique. This technique is used to take care of losses ranging from minor to major break-down of operation. There are two types of retention methods for containing losses as under: (i) Risk retained as part of deliberate management strategy after conscious evaluation of possible losses and causes. This is known as active form of risk retention. (ii) Risk retention occurred through negligence. This is known as passive form of risk retention. PART—B (Answer ANY TWO questions from this part) Question 5 . (a) You are the Company Secretary of Universal Development Ltd. The company often faces ethical dilemma. The Board wants to circulate a guidance note for its managers to resolve ethical dilemma. Draft guidance note for the consideration and approval of the Board. (7 marks) (b) Write notes on any two of the following : (i) Ethics in finance (ii) Ethics training and communication (iii) Stakeholder orientation. (4 marks each) Answer 5(a) Universal Development Limited Draft of the guidance note for resolving an ethical dilemma Steps to Resolving an Ethical Dilemma: (i) What are the options? List the alternative courses of action available. (ii) Consider the Consequences Think carefully about the range of positive and negative consequences associated with each of the different paths of action available. − Who/What will be helped by what is done? − Who/What will be hurt? − What kinds of benefits and harms are involved and what are their relative values? − What are the short-term and long-term implications? (iii) Analyse the actions Actions should be analysed in a different perspective i.e. viewing the action per se disregard the consequences concentrating instead on the actions and looking for that option which seem problematic. How do the options measure up against moral principles like honesty, fairness, equality and recognition of social and environmental vulnerability? In the case you are considering, is there a way to see one principle as more important than the others? (iv) Make decision and act with commitment Now, both parts of analysis should be brought together and a conscious and informed decision should be made once the decision is made, act on the decision assuming responsibility for it. (v) Evaluate the system Think about the circumstances which led to the dilemma with the intention of identifying and removing the conditions that allowed it to arise. Sd/- ABC (Company Secretary) For Universal Development Limited

Answer 5(b)(i) Ethics in Finance The ethical issues in finance that companies and employees are confronted with include: — In accounting – window dressing, misleading financial analysis. — Related party transactions not at arms length — Insider trading, securities fraud leading to manipulation of the financial markets. — Executive compensation. — Bribery, kickbacks, over billing of expenses, facilitation payments. Answer 5(b)(ii) ETHICS TRAINING AND COMMUNICATION A major step in developing an effective ethics program is implementing a training program and communication system to communicate and educate employees about the firm’s ethical standards. Training can educate employees about the firm’s policies and expectations, as well as relevant laws and regulations and general social standards. Training programs can make employees aware of available resources, support systems, and designated personnel who can assist them with ethical and legal advice. They can also empower employees to ask tough questions and make ethical decisions. Many companies are now incorporating ethics training into their employee and management development training efforts. If ethics training is to be effective, it must start with a foundation, a code of ethics, a procedure for airing ethical concerns, line and staff involvements, and executive priorities on ethics that are communicated to employees. Managers from every department must be involved in the development of an ethics training program. Training and communication initiatives should reflect the unique characteristics of an organization: its size, culture, values, management style, and employee base. It is important for the ethics program to differentiate between personal and organizational ethics. To be successful, business ethics programs should educate employees about formal ethical frameworks and more for analyzing business ethics issue. Then employees can base ethical decisions on their knowledge of choices rather than on emotions. Answer 5(b)(iii) STAKEHOLDER ORIENTATION The degree to which a firm understands and addresses stakeholder demands can be referred to as a stakeholder orientation. This orientation comprises three sets of activities: (1) the organization wide generation of data about stakeholder groups and assessment of the firm’s effects on these groups, (2) the distribution of this information throughout the firm, and (3) the organization’s responsiveness as a whole to this intelligence. A stakeholder orientation is not complete unless it includes activities that actually address stakeholder issues. The responsiveness of the organization as a whole to stakeholder intelligence consists of the initiatives the firm adopts to ensure that it abides by or exceeds stakeholder expectations and has a positive impact on stakeholder issues. Such activities are likely to be specific to a particular stakeholder group (e.g., family friendly work schedules) or to a particular stakeholder issue (e.g., pollution reduction programs). Noticeably, these responsiveness processes may involve the participation of the concerned stakeholder groups. Question 6 (a) Explain the Clarkson principles of stakeholder management. (5 marks) (b) “A commitment by corporate management to follow an ethical code of conduct confers a variety of benefits.” What are these benefits? (5 marks) (c) What is ‘social and ethical accounting’? (5 marks) Answer 6(a) THE CLARKSON PRINCIPLE OF STAKEHOLDER MANAGEMENT Max Clarkson (1922-1998) founded the Centre for Corporate Social Performance and Ethics in the Faculty of Management. Principle 1: Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and should take their interests appropriately into account in decision-making and operations. Principle 2: Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions, and about the risks that they assume because of their involvement with the corporation. Principle 3: Managers should adopt processes and modes of behavior that are sensitive to the concerns and capabilities of each stakeholder constituency. Principle 4: Managers should recognize the interdependence of efforts and rewards among stakeholders, and should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking into account their respective risks and vulnerabilities. Principle 5: Managers should work cooperatively with other entities, both public and private, to insure that risks and harms arising from corporate activities are minimized and, where they cannot be avoided, appropriately compensated. Principle 6: Managers should avoid altogether activities that might jeopardize inalienable human rights (e.g., the right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to relevant stakeholders. Principle 7: Managers should acknowledge the potential conflicts between (a) their own role as corporate stakeholders, and (b) their legal and moral responsibilities for the interests of all stakeholders, and should address such conflicts through open communication, appropriate reporting and incentive systems and, where necessary, third party review. Answer 6 (b) ADVANTAGES OF BUSINESS ETHICS More and more companies recognize the link between business ethics and financial performance. Companies displaying a "clear commitment to ethical conduct" consistently outperform companies that do not display ethical conduct. Code of Conduct is formal statement that describes what an organization expects of its employees. Adherence to a Code of Conduct offers the following advantages: It deters wrongdoing and promote: 1. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; 2. Full, fair, accurate, timely, and understandable disclosure in reports and documents that a company files with, or submits to, the Commission and in other public communications made by the company; 3. Compliance with applicable governmental laws, rules and regulations; 4. The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and, 5. Accountability for adherence to the code. Answer 6 (c) SOCIAL AND ETHICAL ACCOUNTING Social and ethical accounting is a process that helps a company to address issues of accountability to stakeholders, and to improve performance of all aspects i.e. social, environmental and economic. The process normally links a company’s values to the (i) development of policies and, performance targets and (ii) to the assessment and communication of performance. Social and ethical accounting has no standardized model. There is no standardized balance sheet or unit of currency. The issues are defined by the company’s values and aims by the interests and expectations of its stakeholders, and by societal norms and regulations. With the focus on the concerns of society, the social and ethical accounting framework implicitly concerns itself with issues such as economic performance, working conditions, environmental and animal protection, human rights, fair trade and ethical trade, human resource management and community development, and hence with the sustainability of a company’s activities. The dominant principle of social and ethical accounting is inclusivity. This principle requires that the aspirations and needs of all stakeholder groups are taken into account at all stages of the social and ethical accounting process. Question 7 (a) Elaborate the various ‘ethics philosophies’. (5 marks) (b) “An organisation’s structure is important to the study of business ethics.” Comment. (5 marks) (c) Explain and differentiate ‘ethical decisions’ and ‘ethical dilemma’. (5 marks) Answer 7(a) The following are some of the ethics philosophies. Deontological ethics or deontology (Greek: (deon) meaning 'obligation' or 'duty') is an approach to ethics that focuses on the rightness or wrongness of actions themselves, as opposed to the rightness or wrongness of the consequences of those actions. This can be clarified with an example – if a manager decides that it is his duty to always be on time to meetings is running late for reasons not in his control, how is he supposed to drive to reach the meeting on time? Is he supposed to speed, breaking his duty to uphold the law, or is he supposed to arrive at his meeting late, breaking his duty to be on time? Teleology (Greek: telos: end, purpose) is the philosophical study of design and purpose. A teleological school of thought is one that holds all things to be designed for or directed toward a final result, that there is an inherent purpose or final cause for all that exists. Enlightened-egoism. This model takes into account harms, benefits and rights. Therefore, under this model an action is morally correct if it increases benefits for the individual in a way that does not intentionally hurt others, and if these benefits are believed to counterbalance any unintentional harms that ensue. For example, a company provides scholarships for education to needy students with a condition that the beneficiary is required to compulsorily work for the company for a period of 5 years. Although, the company’s providing the scholarship benefits the needy students, but ultimately it is in the company’s self interest. Utilitarianism is the idea that the moral worth of an action is solely determined by its contribution to overall utility, that is, its contribution to happiness or pleasure as summed among all persons. It can be described by the phrase "the greatest good for the greatest number". For example, one may be tempted to steal from a rich wastrel to give to a starving family. Relativism is the idea that some elements or aspects of experience or culture are relative to, i.e., dependent on, other elements or aspects. The term often refers to truth relativism, which is the doctrine that there are no absolute truths, i.e., that truth is always relative to some particular frame of reference, such as a language or a culture. For example, killing animals for sport (like bull fighting) could be right for one culture and wrong in another culture. Virtue Ethics theory is a branch of moral philosophy that emphasizes character, rather than rules or consequences, as the key element of ethical thinking. An example of this – when a person of good standing is found possessing a valuable article belonging to someone else it will be presumed that the article was loaned to him or kept with him for safe-keeping, whereas if it were in the possession of a person of doubtful or dubious character it would be presumed that he has stolen article. Justice is the concept of moral rightness in action or attitude; it is closely linked to fairness. A conception of justice is one of the key features of society. Answer 7(b) An organization’s structure is important to the study of business ethics. In a Centralized organization, decision-making authority is concentrated in the hands of top-level managers, and little authority is delegated to lower levels. Responsibility, both internal and external, rests with top management. This structure is especially suited for organizations that make high-risk decisions and whose lower-level managers are not highly skilled in decision making. It is also suitable for organizations in which production processes are routine and efficiency is of primary importance. These organizations are usually extremely bureaucratic, and the division of labour is typically very well defined. Each worker knows his or her job and what is specifically expected, and each has a clear understanding of how to carry out assigned tasks. Centralized organizations stress formal rules, policies, and procedures, backed up with elaborate control systems. Their codes of ethics may specify the techniques to be used for decision making. Because of their top-down approach and the distance between employee and decision maker, centralized organizational structures can lead to unethical acts. If the centralized organization is very bureaucratic, some employees may behave according to “the letter of the law” rather than the spirit. In a decentralized organization, decision-making authority is delegated as far down the chain of command as possible. Such organizations have relatively few formal rules, and coordination and control are usually informal and personal. They focus instead on increasing the flow of information. As a result, one of the main strengths of decentralized organizations is their adaptability and early recognition of external change. With greater flexibility, managers can react quickly to changes in their ethical environment. Weakness of decentralized organizations is the difficulty they have in responding quickly to changes in policy and procedures established by top management. In addition, independent profit centers within a decentralized organization may deviate from organizational objectives. Answer 7(c) By definition, an ethical dilemma involves the need to choose from among two or more morally acceptable courses of action when one choice prevents selecting the other or the need to choose between equality unacceptable alternatives. Ethical decision is arrived at by resolving the ethical dilemma, by following a certain predetermined procedure or a method. An ethical dilemma is a situation that will often involve an apparent conflict between moral imperatives, in which to obey one would result in transgressing another. While ethical decision involves selection of one moral imperative by abandoning the other. An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing to do, while ethical decision results in selection of right thing to do. Ethical dilemmas make individuals think about their obligations, duties or responsibilities. Most ethical decisions have personal implications. PART—C Question 8 Attempt any four of the following: (i) Write note on ‘life cycle assessment’. (ii) Discuss the concept of ‘sustainable development’. (iii) What is the main function of ‘global reporting initiatives’? (iv) State any five principles of Rio Declaration on Environment and Development. (v) Once the activity carried out by any person is hazardous or inherently dangerous, the person carrying on such activity is liable to make good the loss caused to any other person by his activity. Whether in such case the plea that reasonable care was taken while carrying out such activity is valid? Discuss in the light of decided case law. (5 marks each) Answer 8(i) Life Cycle Assessment (LCA) Life Cycle Assessment tracks the environmental impacts of a product from its raw materials through disposal at the end of its useful life. LCA is an important tool for developing an environmental self-portrait and for finding ways to minimize harm. A good LCA can shed light on ways to reduce the resources consumed and lower costs all along the value chain. A Life Cycle Assessment looks at this complete circle and measures environmental impact at every phase. It provides the foundation for understanding the issues a company must address and clues to help find Eco-Advantage. Answer 8(ii) Sustainable development is a broad concept that balances the need for economic growth with environmental protection and social equity. It is a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are all in harmony and enhance both current and future potential to meet human needs and aspirations. Sustainable development is a broad concept and it combines economics, social justice, environmental science and management, business management, politics and law. In 1987, a report of the World Commission on Environment and Development of the United Nations (popularly known as Brundtland Report) first introduced the concept. The Commission describes Sustainable Development as a process of change in which the exploitation of resources, the direction of investments, and the orientation of technological development … instrumental change and the ability of biosphere to absorb the effects of human activities are consistent with future as well as present needs. It indicates development that meets the needs of the present generation without compromising the ability of the future generations to meet their needs. Answer 8(iii) GLOBAL REPORTING INITIATIVE The Sustainability Reporting Guidelines developed by the Global Reporting Initiative (GRI), the Netherlands, is a significant system that integrates sustainability issues in to a frame of reporting. The GRI also admits that in the era of unprecedented economic growth, achieving this goal can seem more of an aspiration than a reality. Organisation’s purpose is not more merely to engage in a creative operation or activity. Be it a business organization or a non-profit or non-government organization its operation must also address the concerns of sustainable development. The GRI Reporting framework intends to serve as a generally accepted framework for reporting on an organization’s economic, environmental and social performance. Organisations of any size, sector or location can use it. The framework contains general and sector specific content for reporting an organization’s sustainability performance. The GRI sustainability Reporting Guidelines consist of Principles for defining report content and for ensuring the quality of reported information. Answer 8 (iv) The Rio Declaration on Environment and Development consists of following 27 principles intended to guide future sustainable development around the world. 1. Human beings are at the centre of concerns for sustainable development. They are entitled to a healthy and productive life in harmony with nature. 2. States have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to exploit their own resources pursuant to their own environmental and developmental policies, and the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other States or of areas beyond the limits of national jurisdiction. 3. The right to development must be fulfilled so as to equitably meet developmental and environmental needs of present and future generations. 4. In order to achieve sustainable development, environmental protection shall constitute an integral part of the development process and cannot be considered in isolation from it. 5. All States and all people shall cooperate in the essential task of eradicating poverty as an indispensable requirement for sustainable development, in order to decrease the disparities in standards of living and better meet the needs of the majority of the people of the world. 6. The special situation and needs of developing countries, particularly the least developed and those most environmentally vulnerable, shall be given special priority. International actions in the field of environment and development should also address the interests and needs of all countries. 7. States shall cooperate in a spirit of global partnership to conserve, protect and restore the health and integrity of the Earth's ecosystem. In view of the different contributions to global environmental degradation, States have common but differentiated responsibilities. The developed countries acknowledge the responsibility that they bear in the international pursuit to sustainable development in view of the pressures their societies place on the global environment and of the technologies and financial resources they command. 8. To achieve sustainable development and a higher quality of life for all people, States should reduce and eliminate unsustainable patterns of production and consumption and promote appropriate demographic policies. 9. States should cooperate to strengthen endogenous capacity-building for sustainable development by improving scientific understanding through exchanges of scientific and technological knowledge, and by enhancing the development, adaptation, diffusion and transfer of technologies, including new and innovative technologies. 10. Environmental issues are best handled with participation of all concerned citizens, at the relevant level. At the national level, each individual shall have appropriate access to information concerning the environment that is held by public authorities, including information on hazardous materials and activities in their communities, and the opportunity to participate in decision-making processes. States shall facilitate and encourage public awareness and participation by making information widely available. Effective access to judicial and administrative proceedings, including redress and remedy, shall be provided. 11. States shall enact effective environmental legislation. Environmental standards, management objectives and priorities should reflect the environmental and development context to which they apply. Standards applied by some countries may be inappropriate and of unwarranted economic and social cost to other countries, in particular developing countries. 12. States should cooperate to promote a supportive and open international economic system that would lead to economic growth and sustainable development in all countries, to better address the problems of environmental degradation. Trade policy measures for environmental purposes should not constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on international trade. Unilateral actions to deal with environmental challenges outside the jurisdiction of the importing country should be avoided. Environmental measures addressing transboundary or global environmental problems should, as far as possible, be based on an international consensus.

13. States shall develop national law regarding liability and compensation for the victims of pollution and other environmental damage. States shall also cooperate in an expeditious and more determined manner to develop further international law regarding liability and compensation for adverse effects of environmental damage caused by activities within their jurisdiction or control to areas beyond their jurisdiction. 14. States should effectively cooperate to discourage or prevent the relocation and transfer to other States of any activities and substances that cause severe environmental degradation or are found to be harmful to human health. 15. In order to protect the environment, the precautionary approach shall be widely applied by States according to their capabilities. Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation. 16. National authorities should endeavour to promote the internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution, with due regard to the public interest and without distorting international trade and investment. 17. Environmental impact assessment, as a national instrument, shall be undertaken for proposed activities that are likely to have a significant adverse impact on the environment and are subject to decision of a competent national authority. 18. States shall immediately notify other States of any natural disasters or other emergencies that are likely to produce sudden harmful effects on the environment of those States. Every effort shall be made by the international community to help States so afflicted. 19. States shall provide prior and timely notification and relevant information to potentially affected States on activities that may have a significant adverse transboundary environmental effect and shall consult with those States at an early stage and in good faith. 20. Women have a vital role in environmental management and development. Their full participation is therefore essential to achieve sustainable development. 21. The creativity, ideals and courage of the youth of the world should be mobilized to forge a global partnership in order to achieve sustainable development and ensure a better future for all. 22. Indigenous people and their communities and other local communities have a vital role in environmental management and development because of their knowledge and traditional practices. States should recognize and duly support their identity, culture and interests and enable their effective participation in the achievement of sustainable development. 23. The environment and natural resources of people under oppression, domination and occupation shall be protected. 24. Warfare is inherently destructive of sustainable development. States shall therefore respect international law providing protection for the environment in times of armed conflict and cooperate in its further development, as necessary. 25. Peace, development and environmental protection are interdependent and indivisible. 26. States shall resolve all their environmental disputes peacefully and by appropriate means in accordance with the Charter of the United Nations. 27. States and people shall cooperate in good faith and in a spirit of partnership in the fulfilment of the principles embodied in this Declaration and in the further development of international law in the field of sustainable development. Note: Candidates can list out any five of the above principles. Answer 8(v) The Apex Court held that the rule laid down by Supreme Court in Oleum gas leak case (AIR 1987 SC 1086), namely that once the activity carried on is hazardous or inherently dangerous, the person carrying on such activity is liable to make good the loss caused to any other person by his activity irrespective of the fact whether he took reasonable care while in carrying his activity is by for the more appropriate one and binding, the rule is premised upon the very nature of the activity carried on. In the words of the Constitution Bench, ‘such an activity can be tolerated only on the condition that the enterprise engaged in such hazardous or inherently dangerous activity indemnifies all those who suffer on account of the carrying on of such hazardous or inherently dangerous activity regardless whether it is carried on carefully or not. The Constitution Bench has also assigned the reason for stating the law in the said terms. It is that the enterprise (carrying on the hazardous or inherently dangerous activity) alone has the resource to discover and guard against hazards and dangerous and not the person affected and the practical difficulty on the part of the affected person, in establishing the absence of reasonable care or that the damage to him was foreseeable by the enterprise.