Guideline Answers: Professional Programme

GUIDELINE ANSWERS
PROFESSIONAL PROGRAMME
DECEMBER 2018
MODULE 1
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These answers have been written by competent persons
and the Institute hope that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.
The Guideline Answers contain the information based on the

Laws/Rules applicable at the time of preparation. However,
students are expected to be well versed with the amendments
in the Laws/Rules made upto six months prior to the date of
examination.
C O N T E N T S
Page
MODULE 1
1. Advanced Company Law and Practice 1
2. Secretarial Audit, Compliance Management

and Due Diligence 21
3. Corporate Restructuring, Valuation and Insolvency 42

1 PP–ACLP–December 2018
PROFESSIONAL PROGRAMME EXAMINATION
DECEMBER 2018
ADVANCED COMPANY LAW AND PRACTICE

Time allowed : 3 hours Maximum marks : 100
NOTE : 1. Answer ALL Questions.
2. All references to sections relate to the Companies Act, 2013 unless stated
otherwise.
Question 1
(a) Sun Ltd made the following offers during the financial year 2017-18 on private
placement basis :
(i) 10,00,000 equity shares of `10 each at an issue price of `25 each, to 230
persons, which included 25 Qualified Institutional Bidders;
(ii) Under the above equity issue, 10,000 shares offered to Ram, were allotted
to Shyam, his brother in whose favor, Ram had renounced the offer;
(iii) 2,00,000 equity shares of `10 each to 50 employees of the Company under
ESOP scheme;
(iv) 5,00,000 preference shares of `100 each at par, to 150 persons.
Do you find any violation of private placement provisions by the Company ? Will
your answer be different if Sun Ltd was a housing finance company registered
with the National Housing Bank under National Housing Bank Act 1987 ?
(5 marks)
(b) Draft a resolution to be passed by the Board of Directors of a Company for the
removal of the auditor of the Company covering also the incidental matters.
(5 marks)
(c) Divya, a director in 3 companies, finds that she has three DIN obtained on
different occasions by mistake. DIN 1 is mapped to X Ltd while DIN 2 is mapped
to Y Ltd and DIN 3 to Z Ltd. Has she contravened any provision of the Act and
if so, what is the remedy ? (5 marks)
(d) Target Ltd convened a meeting of the Board of Directors on 1st September
2018 to approve the financial statements of the Company as on 31st March
2018. The Board has strength of 5 directors and the quorum as per Articles of
Association is 3 directors physically present. While 3 directors participated in
the meeting physically, the fourth and the fifth directors participated through
video conferencing. Do you see any violation on the part of the Company ?
(5 marks)
Answer 1(a)
As per Rule 14 of the Companies (Prospectus & Allotment of Securities) Rules
2014, an offer under private placement shall be made to not more than 200 persons in
1
PP–ACLP–December 2018 2
the aggregate in a financial year, subject to a proviso that offer made to Qualified
Institutional Buyers (QIB) and employees under ESOP scheme will not be counted for
this limit of 200. Further, the above restriction will be reckoned individually to each kind
of security. Rules provide that no person other than the person so addressed in the
application form shall be allowed to apply through such application form and any
application not conforming to this condition shall be treated as invalid.
In view of the above,
(i) the offer made to 230 persons including 25 QIBs is a violation of the rules, as
the total number of offers made excluding QIBs exceeds 200.
(ii) Section 42 read with Rules provide that no person other than the person so
addressed in the application form shall be allowed to apply through such
application form and any application not conforming to this condition shall be
treated as invalid. Therefore, Ram to whom the offer was made, cannot renounce
in favor of Shyam and hence any allotment to Shyam is invalid in terms of
private placement rules.
(iii) the offer made to 50 employees under ESOP scheme is in order as it is specifically
excluded from the limit of 200.
(iv) offer of preference shares made to 150 persons is also in order as the limit of
200 is to be reckoned separately for each kind of security.
These limits are not applicable to a Housing Finance Company registered under the
National Housing Bank Act, 1987 and hence, in that case, all the above offers of Sun
Limited will be valid.
Answer 1(b)
BOARD RESOLUTION FOR REMOVAL OF THE AUDITOR
RESOLVED THAT pursuant to Section 140(1) of the Companies Act 2013 read with
Rule 7 of the Companies (Audit and Auditors) Rules 2014, subject to the approval of
shareholders at a general meeting and subject to the approval of Central Government
(powers has been delegated to Regional Director) in this behalf, Mr. X, Chartered
Accountant, the auditor of the Company be removed from his office as auditor.
RESOLVED FURTHER THAT an Extraordinary General Meeting of the Company
be held at 1600 Hrs on 14th October 2018 at the Residency Hall, Mahatma Gandhi
Road, Kanpur, to transact the business as set out in the draft notice of the meeting
tabled at this meeting which, together with the explanatory statement to be annexed
thereto, are approved.
RESOLVED FURTHER THAT Mr. Y, Company Secretary of the Company, is hereby
authorized to issue the notice of the Extraordinary General Meeting to the members of
the Company.
authorized to inform the Auditor of the decision of the Board as required under the Act.
authorized to digitally sign e-form ADT-2 for making an application to the Central
Government for approval for the removal of the Auditor under Section 140 of the Act.
Answer 1(c)
Sec 155 of the Companies Act, 2013 provides that no individual, who has already
been allotted a DIN under Sec 154, shall apply for, obtain or possess another DIN. Thus,
Divya has violated Sec 155 and has to surrender the two additional DIN possessed by
her. She has to file e form DIR-5 to surrender the two extra DIN obtained by her, explaining
that the two extra DIN were obtained by mistake and without any malafide intentions.
MCA (Ministry of Corporate Affairs) has clarified in its website that in such cases, the
oldest DIN will be retained and all the subsequent DIN in currency shall be surrendered.
All the entities with which Divya is connected shall be mapped to the oldest DIN while
subsequently obtained DIN will be cancelled. [Refer Rule 11(1)(f) of Chapter 11.]
Answer 1(d)
Rule 4 of the Companies (Meetings of Board and its Powers) Rules 2014 stipulates
that approval of annual financial accounts cannot be dealt with in any meeting held
through video conferencing or other audiovisual means. The board meeting held by
Target Ltd on 1st September 2018 is attended by three directors physically present
which satisfies the quorum requirement and hence is not a meeting conducted through
video-conferencing or audiovisual means. Hence Target Ltd can transact the business
of approval of financial statements of the company at such meeting. Sec 173(2) further
provides that where there is quorum in a meeting through physical presence of directors,
any other director may participate through video conferencing or other audiovisual means
in such a meeting. In view of the above, Target Ltd has not violated any rule in the given
occasion.
Attempt all parts of either Q. No. 2 or Q. No. 2A
Question 2
(a) X Ltd, an unlisted public company, with the following :
Paid-up share capital ` 25 Crore
Reserves & Surplus ` 40 Crore
Annual turnover ` 300 Crore
wants to accept deposits from its members and the public. Advise the company
on the compliance required. (4 marks)
(b) Infra Ltd came out with an IPO of equity shares in April 2018. The prospectus
issued for the purpose explained that the purpose of the IPO was to fund a 1000
MW mega solar power project and substantiated the position by citing the contract
they have won from Solar Power Corporation with a tariff rate of `4.00 per kWhr.
Prashant subscribed to the IPO for 50,000 equity shares at `10 each, which
was duly allotted by the company. Subsequently in July 2018, the Company
came out with an update that the tariff rate in the above contract has been
slashed down to `3.00 per kWhr. Prashant is of the view that the company will
lose money with such a low tariff and would not like to continue his investment
in the company. The said equity share was trading at `7.00 in the market. Is
there any remedy available to Prashant ? Advise. (4 marks)
(c) Liberty Ltd, an unlisted company, registered in the state of Maharashtra with 20
shareholders wants to organize the annual general meeting of the company for
the financial year 2017-18 as under :
(i) The meeting shall be held on 17th September 2018 which happens to be
Raksha Bandhan, a day declared as holiday by Maharashtra Government.
(ii) The venue for the meeting shall be Ootacamund, a hill resort in Tamil Nadu.
Advise the Company on the feasibility of the above. (4 marks)
(d) Peak Ltd, a listed company, proposes to issue Non-Convertible Debentures for
an amount of `500 Crores to the public, incorporating call and put options only
to the retail investors. Enumerate the conditions to be complied for the purpose.
(4 marks)
OR (Alternate question to Q. No. 2)
Question 2A
(i) Comment if the following transactions entered into by A Ltd attract compliance
with provisions relating to acceptance of deposit.
(a) A sum of `5 lakh paid by Gautam towards subscription to equity shares on
1st April 2018 was adjusted towards sales invoices for goods supplied to
him on 31st August 2018.
(b) Ashwin, a director of the Company, arranged for `10 lakh to meet an
emergency requirement, by taking a personal loan from State Bank of India.
(c) Bharat, a customer who has bought a machinery from the Company has
paid a sum of `5 lakh towards life-time warranty for the machinery.
(d) A sum of `1 lakh collected from every employee in April 2018 towards
contribution to a Housing Society which will be formed in January 2019.
(4 marks)
(ii) Smart Ltd, a listed company, has a paid-up share capital of `50 crore divided
into 50 Lakh equity shares of `100 each, carrying a voting right of one vote per
share. The Company needs infusion of funds but the promoters of the Company
do not prefer dilution of control. Hence it is proposed to issue further equity
shares carrying a voting right of one vote for every 10 equity shares. Advise the
Board of Directors on the eligibility conditions to be complied. (4 marks)
(iii) Healthy Ltd provides the following information for the financial year ended 2017-
18 :
• Paid-up share capital – `50 Crore
• Profit after tax – `10 Crore
• The investments have been valued at fair market value which resulted
in a gain of `2 Crore.
• The fixed assets of the Company have been revalued during the year
resulting in a gain of `1 Crore.
• Average dividends declared during the previous three years – 12%.
Calculate the available surplus for the purpose of dividend and the maximum
percentage of dividend that can be declared by the company, assuming a
100% payout.
Further, during the current financial year 2018-19, the Company has made a
loss in the first two quarters and the company wants to declare an interim
dividend of 15% for the financial year 2018-19. Is this feasible ? (4 marks)
(iv) X Ltd is a wholly owned subsidiary of Y Ltd. As on 31st March 2018, X Ltd owns
60% of equity in A Ltd and 26% of equity in B Ltd. Y Ltd has totally 8 shareholders.
Y Ltd files consolidated accounts of all subsidiaries in accordance with Schedule
III of the Act and the relevant accounting standards. Advise the Board of Directors
of X Ltd if they are required to consolidate the financial statements of A Ltd and
B Ltd while presenting their financial statements mandatorily. (4 marks)
Answer 2(a)
X Ltd does not fall under the definition of "eligible company" under the Companies
(Acceptance of Deposits) Rules 2014, the primary condition of which is that a public
company shall have net worth of not less than Rs. 100 crores or turnover of not less
than Rs. 500 crore. In the present case, neither of the threshold limits are met, therefore,
X Ltd is not an "eligible company".
In the present case, X Ltd can accept deposits only from members of the Company
up to a limit of 35% of the aggregate of the paid-up share capital, free reserves and
securities premium account. X Ltd can accept deposits from its members up to an
amount of 35% of Rs. 65 Crore. They cannot accept any deposit from the public. However,
there is no limit for acceptance of deposit from its directors.
X Ltd is required to ensure inter alia compliance of the following, for acceptance of
deposits from members:
(i) The Company is required to pass an ordinary resolution in the shareholders
meeting authorizing the acceptance of deposit from the members.
(ii) A Circular should be issued to its members in form DPT-1 and in addition, the
company may publish the same in English language in one English newspaper
and one vernacular language in vernacular newspaper having wide circulation in
the state of the registered office of the company.
(iii) The Company should obtain a credit rating before the submission of the circular
to the Registrar as disclosure of the same is required in the circular.
Answer 2(b)
Sec. 27 of the Companies Act, 2013 provides that where there is a variation in the
contract indicated in the prospectus, on the basis of which the Company issued securities,
the Company needs to get the approval of the shareholders in the general meeting by
way of a special resolution. The dissenting shareholders, being those shareholders who
have not agreed to the proposal to vary the said terms of contract referred to in the
prospectus, shall be given an exit offer by the promoters or controlling shareholders of
the Company at such exit price and terms and conditions as may be specified by SEBI.
Thus, Prashant can exercise the exit offer made by the Company and mitigate his loss.
Answer 2(c)
(i) Sec 96(2) of the Companies Act, 2013 provides that every annual general meeting
shall be called on any day that is not a national holiday. Hence, Raksha Bandhan,
not being a national holiday but only a local holiday declared by the Government
of Maharashtra, calling of annual general meeting on that day does not violate
the rules.
(ii) The Section further provides that the annual general meeting shall be held at the
registered office of the company or at some other place within the city, town or
village in which the registered office of the company is situated. The section has
a proviso that the annual general meeting of an unlisted company may be held at
any place in India if consent is given in writing or by electronic mode by all the
members in advance. So, in this case, if Liberty Ltd, being an unlisted company,
can obtain a consent in writing or through electronic mode from all the 20
shareholders of the Company, then the meeting can be validly held at Ootacamund.
Answer 2(d)
A call option is one where the company issuing the NCDs has a right to recall the
securities prior to maturity and put option is one where the investors get a right to
redemption of the securities prior to maturity.
Peak Ltd, while making the offer for issue of NCDs with call and put option only to
the retail investors, shall ensure compliance with the following conditions:-
(i) Such right shall be exercised in accordance with the terms of issue like the date
from which such right is exercisable, period of exercise which shall not be less
than 3 working days, redemption amount including the premium or discount at
which the redemption shall take place etc.
(ii) The call or put option may be exercised for the entire securities issued or invested
or only for a part of the issue.
(iii) In case of exercise on part of the issue, it shall be done on proportionate basis
only.
(iv) No such right shall be exercisable before the expiry of 24 months from the date
of issue of the securities.
(v) Peak Ltd shall send notice to all the eligible holders of such securities at least
21 days before the date from which such right is exercisable.
(vi) Peak Ltd shall also provide a copy of such notice to the stock exchange where
such securities are listed for wider dissemination and shall make an advertisement
in the national daily having wide circulation indicating the details of such right
and the eligibility of the holders who are entitled to avail such right.
(vii) The Company shall pay the redemption proceeds to the investors along with
interest due to the investors within 15 days from the last day within which such
right can be exercised.
(viii) The company shall pay interest at 15% p.a. for the period of delay, if any.
(ix) After the completion of the exercise of such right, the company shall submit a
detailed report to the stock exchange for public dissemination regarding the
securities redeemed during the exercise period and details of the redemption
thereof.
Answer 2A(i)
Rule 2 (c) of the Companies (Acceptance of Deposits) Rules, 2014 provides for
inclusions and exclusions under the term "deposit" for the purpose of compliance of the
rules. Part wise answer is given as under:-
(a) Sub-rule (vii) provides that the subscription money received against issue of
securities is not a deposit provided in case of non-allotment of securities, the
money is refunded to the subscriber within 60 days from the receipt of money.
Further, adjustment of the money for any other purpose shall not be considered
as a refund. Hence this is a case of deposit.
(b) Sub-rule (viii) provides that money received from a director as loan is not a
deposit, provided the money is not given by the director out of any loan taken by
him from others. In this case, since it is out of a loan from SBI, it does not fall
under the exclusion. It is a case of deposit.
(c) Sub-rule (xii) (e) excludes from deposit, any advance received for warranty and
maintenance, if the warranty period does not exceed the period prevalent as per
common business practice or 5 years whichever is less. In this case, as it is a
life-time warranty, it does not fall under the exclusion and hence it is a deposit.
(d) Sub-rule (x) excludes from deposit any non-interest-bearing amount received
and held in trust. In this case, company has received the amount in trust, for a
housing society to be formed for the benefit of the employees and the money is
not interest bearing. Hence it is not a deposit.
Answer 2A(ii)
The case is related to issue of shares with differential rights. Rule 4 of the Companies
(Share Capital and Debentures) Rules 2014 provides for the following conditions to be
satisfied before issuing shares with differential rights: —
(a) Issue of shares with differential rights should be authorized by the articles and
by an ordinary resolution in the shareholders' meeting and by postal ballot in the
case of a listed company.
(b) The issue shall not exceed 26% of the total post-issue paid up equity share
capital including the equity shares with differential rights, at any point of time.
(c) The Company should have consistent track record of distributable profits for the
last three years.
(d) The Company has not defaulted in filing financial statements and annual returns
for three financial years immediately preceding the financial year in which it is
decided to issue shares with differential rights.
(e) The Company has no subsisting default in payment of declared dividend to its
shareholders or matured deposits or redemption of preference shares or
debentures that have become due for redemption and the interest thereon.
(f) The Company has not defaulted in payment of dividend on preference shares or
repayment of term loan from a public financial institution or state level financial
institution or schedule bank that has become payable or interest thereon or
dues with respect to statutory payments relating to employees or default in
crediting the amount to IEPF;
Provided that a company may issue equity shares with differential rights upon
expiry of 5 years from the end of the financial year in which such default was
made good
(g) The Company has not been penalized by Court or Tribunal during the last 3
years of any offence under RBI Act, SEBI Act, Securities Contracts (Regulation)
Act, FEMA Act or any other special Act under which such companies are being
regulated by sectoral regulators.
(h) The Company cannot convert the existing equity shares into equity shares with
differential rights and vice versa.
Answer 2A(iii)
Proviso to Sec 123 (1) of the Companies Act, 2013 stipulates that profits for the
purpose of arriving at available surplus for dividend shall be computed after excluding any
amount representing unrealized gains, notional gains or revaluation of assets and any
changes in carrying amount of an asset or of a liability on measurement of the asset or
liability at fair market value. Thus, Healthy Ltd has to deduct the gain of Rs. 2 Crore in
valuation of investments at fair market value and revaluation gain of Rs. 1 Crore in respect
of the fixed assets. Thus, the available surplus for the purpose of declaration of dividend
shall be Rs. 7 Crore. The maximum percentage of dividend that can be declared shall be
14% (Rs 7 Crore on Rs 50 Crore paid up share capital) for the financial year 2017-18.
Proviso to Sec 123 (3) of the Act provides that in case the Company has incurred
loss during the current financial year up to the end of the quarter immediately preceding
the date of declaration of interim dividend, such interim dividend shall not be declared at
a rate higher than the average dividend declared by the Company during immediately
preceding three financial years. Thus, Healthy Ltd cannot declare interim dividend in
2018-19 at a rate exceeding 12% as the Company has made a loss in the preceding two
quarters.
Answer 2A(iv)
As per Sec 129(3) of the Act, a company which has one or more subsidiary or
associate companies shall prepare consolidated financial statements in accordance
with the provisions of Schedule III of the Act and the applicable accounting standards.
Proviso to Rule 6 of the Companies (Accounts) Rules 2014 stipulates that consolidation
of accounts by a Company is not required if —
• The Company is a wholly owned subsidiary or partly owned subsidiary of another
company and all its members have been informed in writing about the
company not presenting consolidated financial statements and no member
objects to it.
• The company is not listed or in the process of listing.
• The ultimate holding company or any intermediate holding company files

consolidated financial statements with the Registrar which are compliant with
the applicable accounting standards.
In respect of X Ltd, it is a wholly owned subsidiary of Y Ltd. Y Ltd files consolidated

accounts with the Registrar in compliance with the rules. A Ltd is a subsidiary of X Ltd
and B Ltd is an associated company of X Ltd.
Therefore, in accordance with second proviso to Rule 6 of the Companies (Accounts)

Rules, 2014, X Ltd is not required to consolidate the accounts of A Ltd and B Ltd, if Y
Ltd intimates in writing to X Ltd for not preparing consolidated financial statements.
Provided that proof of delivery of such intimation shall be maintained with the X Ltd.
Question 3
(a) A public company secured residential accommodation for the use of its Managing
Director by entering into a leave and licence arrangement with the landlord. As
per the terms of the agreement, the company deposited a sum of `5,00,000 as
rental advance with landlord.
Can it be considered as a loan given to the director ?
Explain the relevant provisions.
(b) Cautious Ltd, an unlisted company with 1200 shareholders proposes to extend
loans and make investments in excess of the limits prescribed under Sec 186(3)
of the Act. As part of the compliance requirements, the Company is required to
pass a special resolution. Advise the Company if a polling by show of hands is
adequate or a poll is required.
(c) Fashion SpA is a Company incorporated in ltaly, having a place of business in

Mumbai for the conduct of its business. For the year ended March 2018, Fashion
SpA filed their financial statements with the ROC in compliance with Sec 381 of
the Act, which declared a turnover of `1,200 Crore and net profit of `49 Crore.
Advise the Company on the applicability of CSR provisions and the compliance,
if any, required.
(d) Flex Ltd, a Company incorporated in 2001, has 8 shareholders with a net worth
of `2 Crore. During the month of August 2018, Flex Ltd got a term loan of `10
Crore sanctioned by a scheduled bank which was immediately availed. On 1st
January 2018, based on their request, the Company registered the transfer of
the entire shares held by 5 shareholders in favor of Ram, another shareholder of
the Company. Discuss the consequences. (4 marks each)
OR (Alternate question to Q. No. 3)
Question 3A
Write short notes on the following :
(i) RUN
(ii) Valuation by Registered Valuer
(iii) Deposit insurance
(iv) Credit rating. (4 marks each)
Answer 3(a)
According to Section 185 (1) of the Companies Act 2013, no company shall directly
or indirectly advance any loan including any loan represented by a book debt, to any of
its directors, or to any other person in whom the director is interested or give any guarantee
or provide any security in connection with any loan taken by him or such other person.
In the present case, housing accommodation is provided to the managing director.
The company has not given any advance or loan to the Managing Director. The amount
deposited with the landlord in respect of housing accommodation cannot be said to be
an indirect loan to the Managing Director as the contract has been entered into by the
company with the landlord. The company has paid the security advance on account of a
bonafide business transaction towards the fulfillment of condition of contract entered by
the company with the landlord. The company can at any time have the house vacated
by the Managing Director and Company may accommodate any other person in the said
house or company can use it for any other purpose at its own discretion. Hence, this
transaction does not amount to loan by the company to the Managing Director. [case
law Dr. Fredie Ardeshir Mehta V. Union of India [1991] 70 Comp. Cas. 210 (Bom.)]
Answer 3(b)
As per Rule 22(16) of the Companies (Management & Administration) Rules 2014, it
is mandatory for a company with more than 200 members to transact the business of
authorizing provision of loans or guarantees in excess of the limit specified under Sec
186(3) of the Act only through postal ballot and not by show of hands. Rule 20 regarding
voting by electronic means shall apply, as far as applicable, mutatis mutandis to the
postal ballot in respect of the voting by electronic means. Under the circumstances, it is
mandatory for Cautious Ltd, being an unlisted company, with 1200 members to conduct
a poll and electronic means to approve the lending under Sec 186(3) of the Act.
Answer 3(c)
Sec 135 of the Companies Act, 2013 provides the threshold limits for a company to
get attracted by the CSR provisions as turnover of Rs. 1,000 Crore or more, networth of
Rs. 500 Crore or more and net profit of Rs. 5 Crore or more. Rule 3 of the Companies
(CSR Policy) Rules 2014 further clarifies that Sec 135 shall be applicable to a foreign
company defined under Sec 2(42) of the Act and the threshold numbers for testing the
applicability of Sec 135 shall be as per the financial statements filed by the foreign
company under Sec 381 of the Act. Thus, Fashion SpA attracts the provisions of Sec
135 as they are above the threshold limit. Therefore, the Company has to form a CSR
Committee in line with the provisions, frame the CSR policy and spend at least 2% of
the average profits of the Company for the preceding three financial years. The net profit
for the purpose shall be computed in line with Sec 198 of the Act.
Answer 3(d)
Sec 3A of the Act provides that if at any time, the number of members of a company
is reduced (in the case of public company below 7 and in case of private company below
2) and the company carries on business for more than 6 months while the number of
members is so reduced, every person who is a member of the company during the time
that it so carries on business after those 6 months and is cognizant of the fact that it is
carrying on business with less than the required number, shall be severally liable for the
payment of the whole debts of the company contracted during that time and may be
severally sued therefor.
Flex Ltd by making a share transfer in January 2018 got its members reduced to 3,
below the statutory minimum of 7. Thus, the Company will attract the provisions of Sec
3A when a term loan was availed by the Company from a scheduled bank. Under the
circumstances, the remaining three shareholders shall become severally liable for the
repayment of the term loan and the concerned scheduled bank can proceed against
them individually.
Answer 3A(i)
RUN
RUN (Reserve Unique Name) is a process for reserving a name for a new company
or for change of name of an existing Company.
An application for reservation of name shall be made through the web service available
at www.mca.gov.in by using form RUN (Reserve Unique Name) along with fee which
may either be approved or rejected, as the case may be, by the Registrar, Central
Registration Centre after allowing re-submission of such application within fifteen days
for rectification of the defects, if any.
The name approved under RUN Process for new Company registration is valid for a
period of 20 days from the date of approval. In case of change of name of an existing
company, the name shall be valid for 60 days from the date of approval.
Answer 3A(ii)
Valuation by Registered Valuer
Section 247 of the Companies Act 2013 provides for Valuation by Registered Valuer.
It deals with the mechanism for valuation by the Registered Valuer.
Any property, stocks, shares, debentures, securities, goodwill or any other asset or
net worth of a company or its assets or liabilities is to be valued by a person having such
qualification and experience as a valuer in accordance with such rules as may be
prescribed.
The valuer shall be appointed by Audit Committee or in its absence by the Board of
Directors of the Company. The Valuer shall make impartial valuation and exercise due
diligence in making valuation. He is prohibited from undertaking valuation of any asset
in which he has a direct interest or indirect interest.
If the Valuer contravenes the provisions of the law, he shall be punishable.
If he is punished under the provisions of this law, he shall be liable to:-
(i) refund the remuneration received by him to the company, and
(ii) pay for damages to the company or to any other person for loss arising out of
incorrect or misleading statement of particulars made in his report.
Answer 3A(iii)
Deposit Insurance
Companies (Acceptance of Deposits) Rules 2014 has made it mandatory for
companies inviting deposits from the public to buy a deposit insurance at least 30 days
before the issue of the circular or advertisement or at least 30 days before the renewal
of the deposit, as the case may be. Such deposit insurance shall provide that in case
the company defaults in repayment of principal amount and interest thereon, the depositor
shall be entitled to the repayment of principal amount of deposits and the interest thereon
by the insurer up to the aggregate monetary ceiling as specified in the insurance contract.
The deposit insurance contract shall provide for payment of not less than Rs. 20,000 for
each depositor or the amount of deposit and interest due, whichever is lower. The premium
payable on such insurance shall be borne by the company and shall not be recovered
from the depositors by deducting the same from the principal amount or interest payable
thereon.
If any company defaults in taking the insurance cover or any default is made in the
terms and conditions of such cover, the company shall rectify the same within 30 days
and the amount of deposit and interest in such cases, shall be paid within the next 15
days failing which the company shall be liable to pay interest at 15% per annum for the
period of delay. In such circumstances, the company shall be treated as having defaulted
and shall be liable to be punished in accordance with the provisions of the Act.
Amendments have been made from time to time to make this mandatory, subject to
availability of this product of insurance and currently, the deposit insurance is mandatory
from 31st March 2018.
Answer 3A(iv)
Credit Rating
As per Rule 3(8) of the Companies (Acceptance of Deposits) Rules 2014, credit
rating is mandatory when a company wants to accept deposits from the public. Such a
company has to obtain at least once a year, credit rating for the deposits accepted by it.
A copy of the rating shall be sent to the Registrar of Companies along with the return of
deposits in form DPT-3. Such credit rating shall not be below the minimum investment
grade rating or other specified credit rating for fixed deposits, from any one of the approved
credit rating agencies as specified for Non-Banking Financial Companies in the Non-
Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions
1998 issued by the Reserve Bank of India.
Credit rating is also required when a listed company wants to issue securitized debt
instruments as per Regulation 84 of SEBI (LODR) Regulations 2015. Such rating shall
be periodically reviewed, preferably once a year, by a credit rating agency registered by
SEBI. Any revision in ratings shall be disseminated by the stock exchanges.
Question 4
(a) Star Ltd is a company incorporated in Tamil Nadu in which 26% of the equity is
held by the Government of Tamil Nadu in the name of the Governor of the State.
When the Company proposed to hold its annual general meeting for the year
2017-18, the Collector of the District of Vellore where the company is situated,
insisted on receiving the notice of the AGM and wanted to attend the meeting.
Examine the legality of the claim. (4 marks)
(b) Noble Ltd has borrowed on various occasions from banks and institutions by
securing its assets against the loans. Advise the company on the requirements
of the Act relating to the register to be maintained by the Company for the
charges filed. (4 marks)
(c) Medium Ltd, an unlisted company with a net worth of `5 Crore and turnover of
50 Crore has 200 shareholders spread across the country. Out of this, 175
shareholders hold their shares in dematerialized format while the rest hold in
physical format. The Company wants to circulate the financial statements for
the year ended 31st March 2018 in the most efficient way. Advise. (4 marks)
(d) Super Pharma Inc, a company registered in USA has a place of business in
India with manufacturing operations and is dealing in Cardiac Stents in addition
to other medical equipment. The overall turnover of the company is `200 crore
during the financial year 2017-18 while the turnover relating to Cardiac Stents
was `40 Crore. It is to be noted that out of this, `25 Crore related to the Cardiac
Stents manufactured in its Indian facility while the balance `15 Crore related to
the Cardiac Stents imported from their parent in USA and traded in the Indian
market.
Advise the company on the applicability of Cost Records and Audit to the
Company during the financial year 2018-19. Will the position differ, if the export
turnover of Cardiac Stents for the company was `32 Crore during the said period?
(4 marks)
Answer 4(a)
As per Sec 112 of the Companies Act, 2013, when the President of India or the
Governor of a State is a member of a company, he may appoint such person as he
thinks fit to act as his representative at any meeting of the company or at any meeting
of any class of members of the company. A person so nominated shall be deemed to be
a member of the Company and shall be entitled to exercise the same rights and powers,
including the right to vote by proxy and postal ballot, as the President or Governor as the
case may be, could exercise as a member of the company.
In view of the above, unless the Collector of the District of Vellore is nominated by
the Governor of Tamil Nadu, he is not entitled to receive the notice of the AGM and he
cannot be permitted to attend the meeting.
Answer 4(b)
As per Sec 85 of the Companies Act, 2013, every company shall maintain at its
registered office a register of charges in Form CHG-7 which shall include therein details
of all charges including floating charges affecting any property or assets of the company
or any of its undertakings, indicating in each case such particulars as may be prescribed.
The entries in the register of charges maintained by the company shall be made
forthwith after the creation, modification or satisfaction of the charge, as the case may
be.
Such register of charges shall contain the particulars of all the charges registered
with the Registrar on any of the property, assets or undertaking of the company and the
particulars of any property acquired subject to a charge as well as particulars of any
modification of a charge and satisfaction of charge.
All the entries in the register shall be authenticated by a director or the secretary of
the company or any other person authorized by the Board for the purpose.
The register of charges shall be preserved permanently and the instrument creating
a charge or modification thereon shall be preserved for a period of eight years from the
date of satisfaction of the charge made by the company.
A copy of the instrument creating the charge shall also be kept at the registered
office of the company along with the register of charges.
The register of charges and instrument of charges shall be kept open for inspection
during the business hours by members or creditors without fees or any other person on
payment of a fee, subject to reasonable restriction as the company may by its articles
impose.
Answer 4(c)
Rule 11 of the Companies (Accounts) Rules 2014 provides for the manner in which
circulation of financial statements can be made to the eligible members. In case of all
listed companies and such public companies with a net worth of more than Rs. 1 Crore
and turnover of Rs. 10 Crore, the financial statements may be sent-
• By electronic mode to such members whose shareholding is in dematerialized

format and whose email ids are registered with Depository for communication
purposes;
• Where shareholding is held otherwise than by dematerialized format, to such

members who have positively consented in writing for receiving by electronic
mode and;
For the rest, by dispatch of physical copies through any recognized mode of delivery
such as registered post, speed post, courier etc. as specified under section 20 of the
Act.
In view of the above, Medium Ltd can send the financial statements by electronic
mode to the 175 shareholders who hold in dematerialized format and can approach the
balance 25 shareholders to get their consent for receiving the financial statements by
electronic mode. To the extent, they succeed in getting such consent, the circulation
will be efficient. Where they are not successful, they can send them in physical
mode.
Answer 4(d)
As per Rule 3 of the Companies (Cost Records and Audit) Rules 2014, companies,
including foreign companies, engaged in the production of goods or services specified in
the table given in the Rule 3 having an overall turnover from all its products and services
of Rs. 35 Crore or more during the immediately preceding financial year are required to
maintain cost records for the products and services included in such table. Production,
import and supply or trading of Cardiac Stents is included in Point No. 33 of such table
under non-regulated sector. However, as per proviso to Rule 3, nothing contained in
serial number 33 shall apply to foreign companies having only liaison offices.
Further, as per Rule 4, every company covered under Rule 3 in non-regulated sector
shall get its cost records audited if the overall turnover of the company from all its
products and services during the immediately preceding year is Rs. 100 Crore or more
and the aggregate turnover of the individual product or service for which cost records are
maintained is Rs. 35 Crore or more.
Therefore, in the instant case, since the Super Pharma has manufacturing operations
in India and having overall turnover of Rs. 200 Crore and the turnover from Cardiac
Stents is Rs. 40 Crore, cost audit is mandatory for the company for Cardiac Stents.
Rule 4(3) provides exemption from cost audit if the revenue from exports in foreign
exchange exceeds 75% of its total revenue. Therefore, in case if Super Pharma Inc has
an export turnover of 80% then they will be exempted from the requirement of cost audit
in respect of Cardiac Stents.
Question 5
(a) Fortune Ltd proposes to draw a term loan of `20 Crore from Life Insurance
Corporation. The Company owns a property comprising of land and buildings
valued at `100 Crore. As per the sanction letters issued by the lender, a first
charge on the above property is to be created in favor of LIC. Draft necessary
resolution to give effect to the above charge creation. (8 marks)
(b) At the ensuing AGM of Quotient Ltd, Sriram wants to stand for directorship in
the Company, even though he is not a retiring director of the company. His
candidature is recommended by the Board of Directors. The Company is not
required to constitute a Nomination and Remuneration Committee. Indicate the
compliance required on the part of Sriram. (4 marks)
(c) Ram and Sam are the independent directors of Taurus Ltd. Ram was appointed
for a period of 5 years on August 1, 2015 while Sam was originally appointed for
3 years on August 1, 2014 and was subsequently reappointed for 5 years on
August 1, 2017. Now, in August 2018, the Company wants to remove both the
independent directors. Is this feasible and if so, what is the procedure ?
(4 marks)
Answer 5(a)
Resolution under Sec 180(1)(a) of the Companies Act, 2013 for creating a charge
on company's assets
Kind of Meeting : Shareholders meeting
Type of Resolution : Special Resolution
To consider and, if thought fit, to pass with or without modification(s), the following
resolution as a special resolution:
"RESOLVED THAT consent of the Company be and is hereby accorded in terms of
Section 180(1) (a) and other applicable provisions, if any, of the Companies Act, 2013
to mortgaging and / or charging by the Board of Directors of the Company by way of
equitable and / or legal mortgage on immovable property of the Company, both present
and future, represented by land and buildings more specifically described in the loan
agreement document signed by the Company with Life Insurance Corporation, together
with power to take over the assets of the Company in certain events, to or in favor of Life
Insurance Corporation of India (LIC) by way of first pari passu charge to secure the term loan
of Rs. 20 Crore granted to the Company, together with interest at the agreed rate payable by
the Company under the loan agreements, hypothecation deeds and other documents executed
or to be executed by the Company in respect of the term loans from LIC.
RESOLVED FURTHER THAT the Board of Directors be and is hereby authorized to
finalize with Life Insurance Corporation, the documents for creating the aforesaid mortgage
or charge and to do all acts, deeds and things as may be required for giving effect to the
above resolution.
Explanatory statement:
Life Insurance Corporation of India (LIC) have sanctioned term loan of Rs. 20 Crore
to the company. This loan is to be secured by first charge on immovable property of the
Company, both present and future, represented by Land and Buildings owned by the
Company, in the manner as may be required by LIC. Such mortgage / charge shall rank
first pari passu charge with the charges already created, if any, or to be created in favor
of the participating institutions and banks for their assistance.
Section 180(1)(a) of the Companies Act, 2013 provides inter alia, that the Board of
Directors of a public company shall not, without the consent of a public company in
general meeting, sell, lease or otherwise dispose off the whole or substantially the whole
of any such undertaking. Mortgaging / charging of the immovable property of the Company
as aforesaid to secure the term loans may be regarded as disposal of the whole or
substantially the whole of the said undertaking(s) of the Company and therefore requires
consent of the Company pursuant to Section 180(1) (a) of the Companies Act, 2013.
The Directors recommend the resolution for approval of the shareholders as a special
resolution under Sec 180(1) (a) of the Companies Act, 2013.
None of the directors are concerned or interested in the proposed resolutions.
Notes:
Section 180(1)(a) will arise only when the whole or substantially the whole of the
undertaking is being sold, leased or otherwise disposed off. If the company has land,
say, worth about Rs. 5000 crores, it may not be attract the section.
Further, under Rule 22(16)(j), resolution under Sec. 180(1)(a) needs to be passed by
postal ballot.
Answer 5(b)
As per Sec 160 of the Companies Act, 2013, a person, who is not a retiring director,
may be proposed as a candidate for directorship of the company, either by himself or by
any other member of the company, through a proper notice in writing at least 14 days
before the ensuing AGM. The candidate is required to deposit a sum of Rs.1 lakh with
the Company which shall be refunded to such person or the member as the case may
be, if such person gets elected as a director or gets more than 25% of the total valid
votes cast either on show of hands or on poll on such resolution.
The section also exempts from the requirement of making a deposit of Rs. 1 lakh if
the Candidature is recommended by the Board of Directors of the company in case the
company is not required to constitute a Nomination and Remuneration Committee.
Thus, Sriram can get his appointment recommended by the Board of Directors of
Quotient Ltd for his candidature to the office of directorship at the ensuing AGM and
seek appointment as a director without making any deposit of Rs.1 lakh. He has to
ensure that a notice proposing his candidature is left at the Company either by himself
or by any member of the company at least 14 days before the ensuing AGM.
Answer 5(c)
Sec 169 of the Companies Act, 2013 provides that a company may, by ordinary
resolution, remove a director before the expiry of the period of office, after giving him a
reasonable opportunity of being heard. The proviso to the section stipulates that an
independent director re-appointed for a second term shall be removed by the company only
by passing a special resolution and after giving him a reasonable opportunity of being heard.
In the instant case, Taurus Ltd. can remove Ram who was appointed on Aug 1,
2015 for a term of 5 years, by passing an ordinary resolution after giving him a reasonable
opportunity of being heard, as this is the first term for Ram.
However, to remove Sam who was re-appointed for the second term on Aug 1, 2017,
the Company needs to pass a special resolution and further give him a reasonable
opportunity of being heard.
Question 6
(a) Draft a resolution by shareholders of X Ltd to convert the company into a private
company. (8 marks)
(b) The Board of Directors of Zebra Ltd wants to enter into certain supply and
service agreements with some of their related parties and would like to understand
the compliance requirement based on the threshold limits fixed by the Act.
Prepare a comprehensive note in this regard. (4 marks)
(c) Narrate the procedure for the appointment of Secretarial Auditor of Little Ltd
having a paid-up share capital of `60 Crore. (4 marks)
Answer 6(a)
Resolution type : Special
Meeting : Shareholders' Meeting
RESOLVED THAT pursuant to proviso to Section 14(1) of the Companies Act 2013
and relevant Rules made thereunder in this behalf and subject to the approval of the
National Company Law Tribunal, the status of the Company be and is hereby converted
from a public limited into a private limited company.
RESOLVED FURTHER THAT the articles of association of the Company be and
hereby altered by inserting the following new Article No 3A after Article No 3:
The Company is a private limited company and accordingly-
i. restricts the right to transfer its shares;
ii. limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company
jointly, they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have continued
to be members after the employment ceased,
iii. shall not be included in the number of members; and
iv. prohibits any invitation to the public to subscribe for any securities of the
company;
RESOLVED FURTHER THAT the name of the Company be and is hereby accordingly
changed from X Limited to X Private Limited and the Memorandum and Articles of
Association of the Company shall be amended to that extent.
RESOLVED FURTHER THAT the Company Secretary of the Company be and is
hereby authorized to make an application in the prescribed form and enclosures together
with the applicable fee.
Explanatory Statement
The Company was originally incorporated as a public limited company. During the
course of its operations, it was found that the Company has to comply with various
provisions of the Act as applicable to public limited companies. Since the Company is a
family owned Company with few shareholders, its requirements of funds are being met
by the existing shareholders, director or their relatives. As the Company does not intend
to borrow any public funds for its operations, there is no point in retaining the public
character of the Company. The Board of Directors of the Company, at their meeting held
on 4th September 2018 resolved to convert the Company into a private limited company.
Accordingly, it is proposed to pass a special resolution for conversion of the company
into a private limited company and effect consequent alterations in the Articles of
Association as applicable to a private limited company.
A copy of the existing Memorandum and Articles of Association of the Company is
available for inspection at the Registered Office of the Company during business hours
on any working day.
None of the directors is concerned or interested in the proposed resolution.
Answer 6(b)
Sec 188 of the Companies Act, 2013 read with Rule 15(3) of the Companies (Meetings
of Board and its Powers) Rules 2014 stipulates the threshold limits of transactions with
related parties for which the Company needs approval of the shareholders —
i. Sale, purchase or supply of any goods or materials directly or through
appointment of agent- 10% or more of the turnover of the Company or Rs. 100
Crore whichever is lower
ii. Selling or otherwise disposing off or buying property of any kind, directly or
through appointment of agent — 10% of the net worth of the Company or Rs.
100 Crore whichever is lower
iii. Leasing of property of any kind — 10% of the net worth of the Company or 10%
of turnover of the Company or Rs. 100 Crore whichever is lower
iv. Availing or rendering of any services, directly or through appointment of agent
— 10% of the turnover of the Company or Rs. 50 Crore whichever is lower. The
limits specified above shall apply for transactions to be entered into either
individually or taken together with the previous transactions in a year.
v. Appointment to any office or place of profit in the Company, its subsidiary
company or associate company at a monthly remuneration exceeding
Rs. 2,50,000.
vi. Remuneration for underwriting the subscription of any securities or derivatives
thereof, of the Company exceeding 1% of the net worth of the Company.
The turnover and net worth referred to above shall be computed on the basis of the
audited financial statements of the Company for the preceding financial year.
Answer 6(c)
The following procedure shall be adopted by Little Ltd for the appointment of a
Secretarial Auditor for the Company —
• Ensure that the individual to be appointed satisfies the definition of company
secretary in practice under Sec 2(25) of the Companies Act, 2013 viz., he is a
member of the Institute of Company Secretaries of India and is not in full time
employment anywhere.
• Further ensure that he has a certificate of practice from the Institute of Company
Secretaries of India and the certificate is valid.
• Convene a board meeting of the Company by giving notice to all the directors of
the company and in accordance with Sec 173 of the Companies Act, 2013. It
may be noted that the appointment of secretarial auditor shall not be done by
way of a circular resolution.
• Consider the proposal to appoint company secretary in practice as Secretarial
Auditor and pass a resolution in the meeting confirming the appointment.
• The resolution should indicate the remuneration to be paid to such individual as
Secretarial Auditor or authorize the Managing Director or any other director to fix
the remuneration.
• File e-form MGT-14 for board resolution passed for appointment of secretarial
auditor within 30 days of the appointment.
***
21 PP–SACM&DD–December 2018
SECRETARIAL AUDIT, COMPLIANCE MANAGEMENT

AND DUE DILIGENCE
NOTE : Answer ALL Questions.
PART A
(Attempt all parts of either Q.No. 1 or Q.No. 1A)
Question 1
(a) XYZ Ltd., a listed company, seeks your advice, as the Secretarial Auditor of
the company, on the inclusion of Extract Annual Return in the Board’s Report
for the financial year 2017-18. (5 marks)
(b) XYZ Ltd., a listed company, adopted Electronic Bidding Mechanism for its
proposed issue of Debt Securities to the tune of `450 crore. The Board of directors
wants you, as company secretary of the company, to ensure the post bid
procedural compliances. Prepare a report to be submitted to the Board.
(5 marks)
(c) Write short notes on :
(i) Qualified and Unqualified Secretarial Audit Report
(ii) Reliance of Secretarial Auditor on the reports of other designated auditors.
(5 marks)
(d) XYZ Ltd. wants to avail the enabling provisions of Section 135 of the Companies
Act, 2013 in rendering its Corporate Social Responsibility (CSR) activities through
any other entity in 2018-19. Enlighten XYZ Ltd. in this regard. (5 marks)
(e) Does a company, incorporated in India, raising rupee denominated loan from a
Non-resident Indian (NRI)/Person of Indian Origin (PIO) by way of Non-Convertible
Debentures (NCDs) through a public offer get covered under the External
Commercial Borrowings (ECB) framework ? (5 marks)
OR (Alternative Question to Q. No. 1)
Question 1A
(i) The Standard Rules and Regulations framed with ultimate knowledge and vision,
for any discipline, act as a guide for ensuring integration, harmonization and
compliance of the statutory and other requirements of that discipline. In this
respect detail the procedure which shall be adopted by the Secretarial Standards
Board for formulating and issuing Secretarial Standards. (5 marks)
(ii) Assumed discipline without insistence is the virtue to be adopted by all
professionals in their course of conduct of their professionalism. Explain the
application of this concept in relation to Secretarial Audit Report. (5 marks)
21
PP–SACM&DD–December 2018 22
(iii) XYZ Ltd. received a written request from Sumithra, the widow of the company’s
deceased shareholder Vedic Sharma to transfer in her name the shares of the
company held by her deceased husband and also to advise her regarding fulfilling
the procedure for the same. The shares are held in physical form. The share
transfers are done in-house. As the company secretary of the company advise
Sumithra suitably. (5 marks)
(iv) Is an employee who is also a promoter of a company eligible to obtain sweat

equity shares and employee stock option ? Explain. (5 marks)
(v) List out compliances under the Foreign Direct Investments (FDI) Regulations of
the Foreign Exchange Management Act, 1999 on issue of shares against import
of capital goods. (5 marks)
Answer 1(a)
As per the provisions under Section 92(3) of the Companies Act, 2013 read with
rule 12 of the Companies (Management and Administration) Rules, 2014 an extract of
the annual return in form MGT- 9 is to be attached with the Board’s Report of the
company.
However, the amendment in Section 92(3) through Companies (Amendment) Act,
2017 provides that every company shall place a copy of the Annual Return on the
website of the Company, if any, and the web-link of such Annual Return shall be disclosed
in the Board's Report. But the same is not yet notified.
Therefore, as a Secretarial Auditor of the company, it is advised that for the Financial
Year 2017-18, the company should prepare the Extract of the Annual Return in Form
MGT-9 and attach the same with the Board’s report.
Answer 1(b)
To,
The Board of Directors
XYZ Ltd.
Sub : Report with respect to compliance of post-bid procedures in Electronic Bidding

Mechanism for issuance of Debt Securities on private placement basis
Dear Sir(s),
I would like to bring to your kind information that as per SEBI (Issue and Listing of
Debt Securities) Regulations,2008 the compliance with Post Bidding Procedure involves
the following-
i. All bids received within bidding time window shall be provided by EBP (Electronic
Book Provider) to the Issuer after bidding process is over;
ii. Issuer shall have the option to accept or reject bids received, if the issuer
agrees to the yield so discovered;
iii. Issuer shall provide details of accepted bids to depositories to make allotment;
iv. EBP shall display bid details on the end of the bidding time window;
v. At the end of the bidding time window, EBP shall on an anonymous basis,
disclose the aggregate volume data, including yield, amount including the
amount of over subscription, total bids received, ratings(s), category of investor
etc., to avoid any speculations;
vi. For issues below Rs. 500 crore, Issuer shall upload details as mentioned above
with EBP and/or with information repository for corporate debt market as notified
by SEBI, in the format as specified;
vii. EBP shall upload the allotment data on its website to be made available to the
public.
As Company Secretary of the company, I ensure that all the above requirements
are complied with including point "vi", as our issue size is Rs 450 crores.
For XYZ Ltd.
Sd/-
Company Secretary
Answer 1(c)
(i) Unqualified Secretarial Audit Report is one which indicates a clean report
mentioning that company has complied with relevant law and procedural aspects
of Secretarial Records and other relevant records with respect to the company
law and other relevant industry specific laws applicable to the Company.
Qualified Report is one which indicates the non-compliances, with the provisions
of law and procedures. Deviations from secretarial standards and frauds if any,
are also reported. Qualifications, reservations and/or adverse remarks, if any,
should be stated by the secretarial auditor at the relevant places in his report
in bold type and italics.
Qualifications/reservations or adverse remarks, if any, should be stated by the
secretarial auditor at the relevant places in his report in bold type and in italics.
If the secretarial auditor is unable to express an opinion on any matter, he
should mention that he is unable to express an opinion on that matter and the
reasons therefor. If the scope of work required to be performed is restricted on
account of restrictions imposed by the company or on account of circumstantial
limitations (like certain books or papers being in the custody of another person
who is not available or a Government Authority), the Report should indicate
such limitations. If such limitations are so material that the secretarial auditor is
unable to express any opinion, the secretarial auditor should state that in the
absence of necessary information and records, he is unable to report on
compliance(s) relating to such areas by the Company.
The Board's Report shall include its comments on the Secretarial Audit Report
including the remedial measures adopted to rectify the qualifications, if any,
stated in the Secretarial Audit Report.
(ii) Reliance of Secretarial Auditors on the Reports of the other designated
Auditors
The mandatory audit areas to be covered during Secretarial audit include
finance and taxation areas. The audit of finance is done by the Statutory Auditors
of the Company and the details are covered in the Statutory Audit Report
provided by him. Tax Audit is done by the Statutory auditor or any other
designated auditor, who provides the Tax Audit Report covering the areas of
Taxation.
The Secretarial Auditor may rely on the Reports given by these professionals
on their respective areas while performing his audit duties. However, Secretarial
Auditor is expected to report on the Board Processes, Secretarial Compliances
as well as the laws covered in Form MR-3 along with the other applicable laws.
Answer 1(d)
As per the provisions of Rule 4(1) of the Companies (Corporate Social Responsibility
Policy) Rules, 2014, the CSR activities shall be undertaken by the company, as per its
stated CSR Policy, as projects or programs or activities (either new or ongoing),excluding
activities undertaken in pursuance of its normal course of business.
However, Rule 4(2) of the Companies (Corporate Social Responsibility Policy) Rules,
2014 provides that the Board of a company may decide to undertake its CSR activities
approved by the CSR Committee through
(a) a company established under section 8 of the Companies Act, 2013 or a
registered trust or a registered society, established by the company, either
singly or alongwith any other company, or
(b) a company established under section 8 of the Companies Act, 2013 or a
registered trust or a registered society, established by the Central Government
or State Government or any entity established under an Act of Parliament or a
State legislature:
Provided that if, the Board of a company decides to undertake its CSR activities
through a company established under section 8 of the Act or a registered trust or a
registered society, other than those specified in this sub-rule, such company or trust or
society shall have an established track record of three years in undertaking similar
programs or projects; and the company has specified the projects or programs to be
undertaken, the modalities of utilisation of funds of such projects and programs and the
monitoring and reporting mechanism.
A company may also collaborate with other companies for undertaking projects or
programs or CSR activities in such a manner that the CSR Committees of respective
companies are in a position to report separately on such projects or programs in
accordance with these rules.
Companies may build CSR capacities of their own personnel as well as those of
their Implementing agencies through Institutions with established track records of at
least three financial years but such expenditure including expenditure on administrative
overheads, shall not exceed five percent of total CSR expenditure of the company in
one financial year.
Therefore, advise to XYZ Ltd. in this regard would be- to identify such a trust or a
society or a company as specified above having an established track record of three
years in undertaking similar programs or projects which the company is going to undertake
as a CSR activity or expenditure in this regard.
Answer 1(e)
No, NRI/PIO giving rupee denominated loan, to resident company by way of Non-
Convertible Debentures (NCDs) through a public offer is not covered under the ECB
framework. It is covered under Foreign Exchange Management (Borrowing and Lending
in Rupees) Regulations, 2000 issued vide Notification No. FEMA 4/2000-RB dated May
3, 2000 as amended from time to time. As per the provisions contained in these
Regulations, a company incorporated in India is permitted to raise Rupee denominated
loan from an NRI / PIO only by way of issuance of NCDs through a public offer and is
subject to other provisions contained in these Regulations like redemption period for
such NCDs should not be less than 3 years, the rate of interest on such NCDs issued
does not exceed the prime lending rate of the State Bank of India as on the date on
which the resolution approving the issue is passed in the borrowing company's General
Body Meeting, plus 300 basis points etc.
Answer 1A(i)
The following procedure shall be adopted for formulating and issuing Secretarial
Standards:
1. The Secretarial Standards Board (SSB), in consultation with the Council of
ICSI, shall determine the areas in which Secretarial Standards need to be
formulated and the priority in regard to the selection thereof.
2. In the preparation of Secretarial Standards, SSB may constitute Working Groups
to formulate preliminary drafts of the proposed Standards.
3. The preliminary draft of the Secretarial Standard prepared by the Working Group
shall be circulated amongst the members of SSB for discussion and shall be
modified appropriately, if so required.
4. The preliminary draft will then be circulated to the members of the Central Council
as well as to Chairman of Regional Councils/Chapters of ICSI, various
professional bodies, Chambers of Commerce, regulatory authorities such as
the Ministry of Corporate Affairs, the Department of Economic Affairs, the
Securities and Exchange Board of India, Reserve Bank of India, Department of
Public Enterprises and to such other bodies/organisations as may be decided
by SSB, for ascertaining their views, specifying a time-frame within which such
views, comments and suggestions are to be received.
A meeting of SSB with the representatives of such bodies/organisations may
then be held, if considered necessary, to examine and deliberate on their
suggestions.
5. On the basis of the preliminary draft and the discussion with the bodies/
organisations referred to in 4 above, an Exposure Draft will be prepared and
published in the “Chartered Secretary”, the journal of ICSI, and also put on the
Website of ICSI to elicit comments from members and the public at large.
6. The draft of the Secretarial Standard generally includes the following basic points:
a. Concepts and fundamental principles relating to the subject of the Standard;
b. Definitions and explanations of terms used in the Standard;
c. Objectives of issuing the Standard;
d. Disclosure requirements; and
e. Date from which the Standard will be effective.
7. After taking into consideration the comments received, the draft of the Secretarial
Standard will be finalised by SSB and submitted to the Council of ICSI.
8. The Council will consider the final draft of the Secretarial Standard and finalise
the same in consultation with SSB. The Secretarial Standard on the relevant
subject will then be issued under the authority of the Council.
Answer 1A(ii)
Secretarial Audit is a process to check compliance with the provisions of all applicable
laws and rules/regulations/procedures; adherence to good governance practices with
regard to the systems and processes of seeking and obtaining approvals of the Board
and/or shareholders, as may be necessary, for the business and activities of the company,
carrying out activities in a lawful manner and the maintenance of minutes and records
relating to such approvals or decisions and implementation.
The objectives of Secretarial Audit may be summarized as under:
— To check & report on compliances of applicable laws and Secretarial Standards
— To point out non-compliances and inadequate compliances
— To protect the interest of various stakeholders, i.e., the customers, employees,
society etc.
— To avoid any unwarranted legal actions/penalties by law enforcing agencies and
other persons as well.
Under Section 204 of the Companies Act, 2013 read with Rule 9 of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014, the Secretarial
Audit is mandatory for -
i. every listed company;
ii. every public company having a paid-up share capital of fifty crore rupees or
more; or
iii. every public company having a turnover of two hundred fifty crore rupees or
more.
Such companies are required to annex a secretarial audit report with its Board’s
report, with the comments of the board on the same in case such report contains any
qualification, reservation or adverse remark or disclaimer etc., if any.
Since the Board has the overarching responsibility of ensuring transparent, ethical
and responsible governance of the company, it is important that the Board processes
and compliance mechanisms of the company are robust. To ensure this, the companies
may get the Secretarial Audit conducted by a competent professional. The Board should
give its comments on the Secretarial Audit in its report to the shareholders where such
report contains any qualification, reservation or adverse remark or disclaimer etc.
Answer 1A(iii)
The following advise shall be sent on the letter head of the Company to Sumithra-
To Date:
Sumithra
Address:
Madam
Sub: Transmission of shares - reg
Ref: Your letter dated xx/xx/xxxx
We are sorry for the sad demise of our beloved shareholder.
Kindly arrange to send the following documents to enable us to duly transmit
the shares of our company from the name of your deceased husband to your name-
a. Original share certificate(s);
b. A copy of the Death Certificate of the deceased;
c. Succession Certificate/Legal Heir Certificate/Probate/Letter of Administration
(anyone) in favour of you.
d. No Objection Certificate from the other legal heirs, if any, for transmission in
your favour.
e. Your self-certified Income Tax PAN copy along with other KYC Documents.
Thanking You
For XYZ Ltd.
Sd/-
Company Secretary
Answer 1A(iv)
As per Rule 12 of Companies (Share Capital and Debentures) Rules, 2014, an
employee who is also a promoter or person belonging to the promoter group is specifically
excluded from obtaining shares issued under ESOP.
In case of a start-up company as defined in notification number G.S.R. 180(E) dated
17th February, 2016 issued by the Department of Industrial Policy and Promotion,
Ministry of Commerce and Industry, Government of India, this condition shall not apply
up to five years from the date of its incorporation or registration.
However, in case of sweat equity shares, the said exclusion is not specified in the
provisions. Thus, an employee who is also a promoter of a company is eligible to get
sweat equity shares.
Accordingly, the employee who is also promoter of the company is not entitled to
get employee stock option subject to above exemption, however he is eligible to obtain
the Sweat Equity shares.
Answer 1A(v)
Issue of equity shares against Import of capital goods / machinery / equipment
(excluding second-hand machinery); is allowed under automatic route if the Indian
investee company is engaged in a sector under automatic route or with prior Government
approval if the Indian investee company is engaged in a sector under Government,
subject to the compliance with the following conditions:
(a) The import of capital goods, machineries, etc., made by a resident in India, is in
accordance with the Export / Import Policy issued by the Government of India
as notified by the Directorate General of Foreign Trade (DGFT) and the regulations
issued under the Foreign Exchange Management Act (FEMA), 1999 relating to
imports issued by the Reserve Bank;
(b) There is an independent valuation of the capital goods /machineries /
equipments by a third party entity, preferably by an independent valuer from
the country of import along with production of copies of documents / certificates
issued by the customs authorities towards assessment of the fair-value of such
imports;
(c) The application should clearly indicate the beneficial ownership and identity of
the importer company as well as the overseas entity; and
(d) All such conversions of import payables for capital goods into FDI should be
completed within 180 days from the date of shipment of goods.
PART B
Question 2
(a) Under the provisions of Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011, examine the following:
Company A Ltd. has a paid-up share capital of `10,000 (1,000 shares of ` 10
each) and shareholder A is holding 50 shares totalling to ` 500. In case an open
offer is made for 26% of the share capital and the shares tendered are 300
which are in excess of the 26% shareholding, how the shares will be accepted
by the acquirer on a proportionate basis ? (5 marks)
(b) A subsidiary to a listed company, irrespective of its registered status, to a large
extent is treated as a listed company by the authorities. As the Secretarial
advisor and auditor of XYZ Ltd., which is a Public Ltd. company and a subsidiary
to a listed company ABC Ltd., how would you ensure the compliance of Corporate
Governance requirements by XYZ Ltd., with reference to the Securities and
Exchange Board of India (Listing Obligations and Disclosure Requirements)
Regulations, 2015 ? (5 marks)
(c) As per the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009, what are the conditions for
preferential issue of specified securities by a listed issuer ? (5 marks)
OR (Alternate Question to Q. No. 2)
Question 2A
(i) SAM Ltd. and MAS Ltd. intend to amalgamate. The enterprise created as a
result of such amalgamation will have assets worth `600 crore and turnover of
`2,000 crore. Examine whether the proposed amalgamation attracts the
provisions of the Competition Act, 2002 ? (5 marks)
(ii) The intent of the law makers is to be carried out in letter and spirit in complying
with the regulatory requirements of Corporate Governance in a corporate.
Elaborate this statement with explanations. (5 marks)
(iii) Ranjit is director in 11 companies. He has got two DINs (Director Identification
Number) allotted to him inadvertently. Out of the 11 directorships he holds 5
with the DIN allotted to him at first and the rest with the DIN allotted to him later.
He wants to surrender one of his DINs, but to keep all his 11 directorships.
Advise him. (5 marks)
Answer 2(a)
No. of shares of A accepted = Total no. of shares offered in the open offer X Number
of shares tendered by A divided by Total shares tendered in the Open offer by all
investors = (260 X 50) / 300 = 43.33 shares = 43 shares
Shares which are invalid or are rejected due to the valid acceptances being more
than the offer size are subsequently returned to the respective shareholders within 10
working days of the closure of the open offer.
Answer 2(b)
As per the Regulation 24 of the SEBI (LODR) Regulations, 2015, the following
compliances are required to be ensured by a subsidiary of a listed company with reference
to Corporate Governance:
(1) At least one independent director on the board of directors of the listed entity
shall be a director on the board of directors of an unlisted material subsidiary,
incorporated in India.
(2) The audit committee of the listed entity shall also review the financial statements,
in particular, the investments made by the unlisted subsidiary.
(3) The minutes of the meetings of the board of directors of the unlisted subsidiary
shall be placed at the meeting of the board of directors of the listed entity.
(4) The management of the unlisted subsidiary shall periodically bring to the notice
of the board of directors of the listed entity, a statement of all significant
transactions and arrangements entered into by the unlisted subsidiary.
Explanation.- For the purpose of this regulation, the term significant transaction
or arrangement shall mean any individual transaction or arrangement that
exceeds or is likely to exceed ten percent of the total revenues or total expenses
or total assets or total liabilities, as the case may be, of the unlisted material
subsidiary for the immediately preceding accounting year.
(5) A listed entity shall not dispose of shares in its material subsidiary resulting in
reduction of its shareholding (either on its own or together with other subsidiaries)
to less than fifty percent or cease the exercise of control over the subsidiary
without passing a special resolution in its General Meeting except in cases
where such divestment is made under a scheme of arrangement duly approved
by a Court/Tribunal.
(6) Selling, disposing and leasing of assets amounting to more than twenty percent
of the assets of the material subsidiary on an aggregate basis during a financial
year shall require prior approval of shareholders by way of special resolution,
unless the sale/disposal/lease is made under a scheme of arrangement duly
approved by a Court/Tribunal.
(7) Where a listed entity has a listed subsidiary, which is itself a holding company,
the provisions of this regulation shall apply to the listed subsidiary in so far as
its subsidiaries are concerned.
As a Secretarial advisor and auditor of XYZ Ltd., which is a Public Ltd. company
and a subsidiary to a Listed company ABC Ltd., I would focus on checking the compliance
by XYZ Ltd. of the above cited points and thereby ensure the compliance of Corporate
Governance requirements by XYZ Ltd., with reference to the Securities and Exchange
Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Answer 2(c)
Conditions for preferential issue : According to Regulation 72 of the SEBI (ICDR)
Regulations, 2009,
(1) A listed issuer may make a preferential issue of specified securities, if:
(a) a special resolution has been passed by its shareholders specifying the
relevant date on the basis of which price of the equity shares to be allotted
on conversion or exchange of convertible securities shall be calculated;
(b) all the equity shares, if any, held by the proposed allottees are in
dematerialised form;
(c) the issuer is in compliance with the conditions for continuous listing of
equity shares as specified in the listing agreement with the recognised
stock exchange where the equity shares of the issuer are listed;
(d) the issuer has obtained the Permanent Account Number of the proposed
allottees.
(2) The issuer shall not make preferential issue of specified securities to any person
who has sold any equity shares of the issuer during the six months preceding
the relevant date:
However, in respect of the preferential issue of equity shares and compulsorily
convertible debt instruments, whether fully or partly paid, SEBI may grant
relaxation from the requirements of this sub-regulation, if SEBI has granted
relaxation in terms of the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011, to such preferential
allotment except to the promoters or persons from promoter group.
(3) Where any person belonging to promoter(s) or the promoter group has
previously subscribed to warrants of an issuer but failed to exercise the warrants,
the promoter(s) and promoter group shall be ineligible for issue of specified
securities of such issuer on preferential basis for a period of one year from:
(a) the date of expiry of the tenure of the warrants due to non-exercise of the
option to convert; or
(b) the date of cancellation of the warrants as the case may be.
(4) Copy of the certificate of its statutory auditor be placed by the issuer before the
General Meeting considering such preferential issue, certifying that the issue is
being made in accordance with the requirements of the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011.
(5) Valuation by an Independent Qualified Valuer be obtained while making
preferential issue of specified securities to promoters, their relatives, associates
and related entities for consideration other than cash, the valuation of the assets
in consideration for which the equity shares are issued shall be done and it shall
be submitted to the recognised stock exchanges where the equity shares of the
issuer are listed.
(6) As a general rule, such allotment be completed within 15 days from the date of
passing of such special resolution.
(7) The tenure of the convertible securities of the issuer shall not exceed eighteen
months from the date of their allotment.
Answer 2A(i)
Sections 5 and 6 of The Competition Act, 2002 deal with the combination of enterprises
and persons. The amalgamation of enterprises shall be a combination of such enterprises
if the enterprise remaining after merger or the enterprise created as a result of the
amalgamation, as the case may be, have,—
(A) either in India, the assets of the value of more than rupees two thousand crores
or turnover more than rupees six thousand crores; or
(B) in India or outside India, in aggregate, the assets of the value of more than one
billon US dollars, including at least rupees one thousand crores in India, or
turnover more than three billion US dollars, including at least rupees three thousand
crores in India.
Hence, in the present case, the proposed amalgamation of SAM Ltd. and MAS Ltd.
will not attract the provisions of The Competition Act, 2002 as they have assets of value
of Rs.600 crore and turnover of Rs.2000 less than the threshold specified under the
provisions.
Answer 2A(ii)
Good Corporate Governance demands compliance levels that match the intentions
of legislature, expectations of stakeholders and requirements of regulators. The
compliances, however, generally found to fall in three categories, i.e., Apparent
Compliances, Adequate Compliances and Absolute Compliances.
Apparent compliance is a disguise form of non-compliance, which is worse than a

non-compliance.The classic example for Apparent Compliances are generating documents
such as notice, agenda, minutes on papers for board and general meeting which are not
actually held.
Adequate compliance is compliance in letters. The aspects specified in law are

complied in letters, without getting into the spirit of the law, e.g. box ticking practices.
Absolute compliances are those which are in line with the spirit and intent of the law.
A typical example in this regard is demonstrating shareholder democracy as prescribed
by law. When a company complies with law in spirit it gains public confidence as well.
In order to attain corporate sustainability and to ensure a level playing field with
international market, corporates need to necessarily increase their level of compliance
from apparent to adequate, thereby leading to the level of absolute compliances.
Answer 2(A)(iii)
As per the requirements of the Companies Act, 2013, relevant to filing of form
DIR 5 for surrendering the DIN, if a person possesses multiple DINs and wants to
surrender them retaining only one DIN, he shall retain the DIN allotted to him in the
first instance and surrender the others allotted later.
Applying the above provisions, the advice to Ranjit would be-
i. Regarding retaining 11 directorships, he could give resignation to companies'
directorship which he is holding with the second DIN, and afterwards could
be co-opted to the Board of such companies with the first DIN,
ii. After the above cited activities in point (i), he shall retain the DIN allotted to
him at the first instance and surrender the second one allotted after the first by
filing Form DIR 5 completed in all respects with the Registrar of Companies.
Question 3
(a) As per the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009, what are the conditions for offering
specified securities at differential prices ? (8 marks)
(b) List out the key differences between Statutory Audit, Internal Audit and Due
Diligence. (7 marks)
Answer 3(a)
Differential Pricing
According to Regulation 29 of the SEBI (ICDR) Regulations,2009, an issuer may
offer specified securities at different prices, subject to the following:
(a) Retail individual investors or retail individual shareholders or employees
entitled for reservation made under regulation 42 making an application for
specified securities of value not more than two lakh rupees, may be offered
specified securities at a price lower than the price at which net offer is made to
other categories of applicants. Provided that such difference shall not be more
than ten per cent of the price at which specified securities are offered to other
categories of applicants;
(b) In case of a book building issue, the price of the specified securities offered
to an anchor investor shall not be lower than the price offered to other applicants;
(c) In case of a composite issue, the price of the specified securities offered in the
public issue may be different from the price offered in rights issue and justification
for such price difference shall be given in the offer document.
(d) In case the issuer opts for the alternate method of book building in terms of
Part D of Schedule XI, the issuer may offer specified securities to its employees
at a price lower than the floor price: Provided that the difference between the
floor price and the price at which specified securities are offered to employees
shall not be more than ten per cent of the floor price.
Answer 3(b)
Parameter Statutory Audit Internal Audit Due Diligence
Appointed by Shareholder of a Management of the Normally by the buyers

company company and, in certain cases by
the management of the
target.
Reader of the Shareholders, Management Deal Making Parties.

Report regulatory
authority
Extent of Relatively high Relatively high Low to medium; the

Reliance on information is first
information challenged/ tested for its
provided by reliability.
management
Mandatory Mandatorily Mandatorily required Not Mandatory

required under under statute for
statute specified class of
companies

Objectives To report on the To report on To highlight exposures
truth and fairness specific issue with and upside of the targets
of the financial the internal
statements processes of the
company
Scope Defined by the Defined by the No specific scope

statute itself management – defined by the buyer or
mainly limited to limited to financial seller (in case of vendor
financial analysis analysis due diligence). The scope
largely depends on deal
mechanics and the
agreement among the
parties involved.
Includes not only
analysis of the financial
statements but also
business sustainability of
the business, future
aspects, corporate and
management structure,
legal issues etc.
Perspective Focuses on Adopts a futuristic Blend of both historical

and focus historical infor- approach based on and futuristic perspec-
mation the available infor- tives
mation
Confidentiality Low; in the case High normally, only High; only the deal
of listed compa- management has making parties have an
nies, the audit access to the access to the report
report is publicly report
available and in
other type of
companies also it
is available as a
public document
in public domain
at a payment of
prescribed fees to
the MCA.
Type Post mortem Analysis of the Useful for the future
analysis current situation like decisions
timely diagnosis
and treatment

Nature Always uniform May be modified Always flexible procedure
with slight changes based on the object of the
exercise and who is
doing such
exercise
Question 4
(a) The process of preparing search/status report enables determination out of total
borrowing power, the extent upto which the company has already borrowed
money or created charges on its movable and immovable properties and also
the balance limit to borrow. However, there are certain exceptions to the term
‘borrowing of money’. Enumerate those exceptions i.e., the borrowings which
are not included in determining the limit on borrowings. (5 marks)
(b) List out the procedural steps for conducting Legal Due Diligence. (5 marks)
(c) Explain the terms ‘Diversion of funds’ and ‘Siphoning of funds’ with regard to
due diligence for banks. (5 marks)
Answer 4(a)
The term borrowing of money includes all type of borrowings whether secured or
unsecured, loan in the nature of debentures or otherwise etc. However, the following are
exceptions to it as enumerated under Section 180(1)(c) of the Companies Act, 2013:
1. Temporary loans obtained from the company’s bankers in the ordinary course
of business : the expression “temporary loans” means loans repayable on
demand or within six months from the date of the loan such as short-term, cash
credit arrangements, the discounting of bills and the issue of other short-term
loans of a seasonal character, but does not include loans raised for the purpose
of financial expenditure of a capital nature;
2. Acceptance by a banking company : In the ordinary course of its business, of
deposits of money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a
borrowing of monies by the banking company within the meaning of Section
180(1)(c) of the Companies Act, 2013.
3. Contingent liability like amount outstanding on deferred payment agreement or
under guarantees issued by bank or in respect of letter of Credit.
Answer 4(b)
There is no definitive process of a legal due diligence. The investigative aspects as
well as 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. In general,
the following process is involved in legal due diligence:
— Entering of Memorandum of Understanding between the transacting parties along
with confidentiality agreement.
— Determination of scope of Legal Due Diligence.
— Calculation of time frame.
— Drafting of various questionnaire and checklists.
— Obtaining of access to records and data room agreement.
— Interaction with management and key managerial persons with the questionnaires
and checklists and for other material information.
— Interaction with regulatory authorities for independent check.
— Checking of regulatory and contractual compliance.
— Analysis of financial and non financial information.
— Collation with financial due diligence for confirmation of representations, warranties
and liabilities.
— Investigation of material issues.
— Drafting of preliminary report.
— Discussions with the management of the target company.
— Finalisation of the Report.
— Determination of strategy.
While undergoing such procedure one has to consider organisational / internal aspects
(MOA/AOA/Minutes/Statutory Registers documents filed with Regulatory Authorities,
etc.), Financial aspects (financial statements, audit qualifications, internal audit report
business projections etc.), IPR/Patents/R&D Details etc., HR Aspects, Environmental
Aspects, Material contracts, etc. other relevant aspects as may be necessary with
respect to the specific assignment.
Answer 4(c)
Diversion and Siphoning of funds
Diversion of funds, would be construed to include any one of the under noted
occurrences:
(a) utilisation of short-term working capital funds for long-term purposes not in
conformity with the terms of sanction;
(b) deploying borrowed funds for purposes/activities or creation of assets other
than those for which the loan was sanctioned;
(c) transferring funds to the subsidiaries/Group companies or other corporates by
whatever modalities;
(d) routing of funds through any bank other than the lender bank or members of
consortium without prior permission of the lender;
(e) investment in other companies by way of acquiring equities/debt instruments
without approval of lenders;
(f) shortfall in deployment of funds vis-à-vis the amounts disbursed / drawn and
the difference not being accounted for.
Siphoning of funds, should be construed to occur if any funds borrowed from banks/
financial institutions are utilised for purposes un-related to the operations of the borrower,
to the detriment of the financial health of the entity or of the lender. The decision as to
whether a particular instance amounts to siphoning of funds would have to be a judgment
of the lenders based on objective facts and circumstances of the case.
Question 5
(a) Answer the following :
(i) Under the provisions of Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011, how do you
determine whether the shares of the target company are frequently traded
or infrequently traded ?
(ii) How is the offer price calculated in case shares are infrequently traded on
the stock exchange ?
(iii) XYZ Ltd. which has listed its Indian Depository Receipts, seeks your advice,
as its Company Secretary, as to the list of documents to be provided to the
Indian Depository Receipt holders on an annual basis. (3 marks each)
(b) Write short notes on the following :
(i) Time limit for filing the forms for charges requiring registration with the
Registrar of Companies.
(ii) Compliance Dash Board. (3 marks each)
Answer 5(a)(i)
Under the provisions of the SEBI (SAST) Regulations, 2011, the shares of the
target company will be deemed to be frequently traded if the traded turnover on any
stock exchange during the 12 calendar months preceding the calendar month, in which
the public announcement is made, is at least 10% of the total number of shares of the
target company. If the said turnover is less than 10%, it will be deemed to be infrequently
traded.
Answer 5(a)(ii)
If the target company’s shares are infrequently traded then the open offer price for
acquisition of shares under the minimum open offer shall be highest of the following:
• Highest negotiated price per share under the share purchase agreement (“SPA”)
triggering the offer;
• Volume weighted average price of shares acquired by the acquirer during 52
weeks preceding the public announcement (“PA”);
• Highest price paid for any acquisition by the acquirer during 26 weeks immediately
preceding the PA;
• The price determined by the acquirer and the manager to the open offer after
taking into account valuation parameters including book value, comparable trading
multiples, and such other parameters that are customary for valuation of shares
of such companies.
Answer 5(a)(iii)
Documents and Information to IDR Holder (Regulation 73 of SEBI (LODR)
Regulations, 2015)
Check whether the listed entity disclose/send the following documents to IDR Holders,
at the same time and to the extent that it discloses to security holders:
(a) Soft copies of the annual report to all the IDR holders who have registered their
email address(es) for the purpose.
(b) Hard copy of the annual report to those IDR holders who request for the same
either through domestic depository or Compliance Officer.
(c) The pre and post arrangement capital structure and share holding pattern in
case of any corporate restructuring like mergers / amalgamations and other
schemes.
Answer 5(b)(i)
Event Time Limit Effect
Creation of charge or modi- Within thirty days from the The date when the event takes
fication of charge or date of creation, modifi- place is also included while
acquisition of property cation or acquisition calculating the limit.
which is subject to charge.
and, within 300 days in With the additional fees and
case the Registrar on on condonation of delay by
being satisfied that the the Registrar.
company had sufficient
cause for not filing the
particulars within 30
days.
Satisfaction of the charge. Within a period of thirty The date when the event takes
days from the date of place is to be excluded while
payment or satisfaction in calculating thirty days .
full of any charge regis-
tered under the Act.
As per the Amendment
Act, the Registrar of
Companies may, on an
application by the
Company or charge-
holder, allow such
intimation of payment or
satisfaction to be made
within a period of 300 days
of such payment or
satisfaction.
Answer 5 (b)(ii)
The compliance dashboard helps in simplifying the compliance obligation, effectively
managing the compliance risk, facilitating board oversight, effective co-ordination of
functional units. Some of the features of an effective Compliance Dashboard is as
follows:
• The Compliance Dashboard should alert the company in the risk prone areas or
in case of non compliances.
• It should display the compliance obligations on the compliance calendar or
dashboard.
• Before the date of regulatory mandate an e-mail should be sent to the compliance
owner.
• The Compliance owner should send the response once compliance is done.
Question 6
(a) Section 3(1) of the Competition Act, 2002 prohibits five types of agreements
between companies. Briefly explain those agreements.
(b) Ragul, a director in XYZ Ltd., did not attend the Board meetings held for a period
of 12 months after seeking leave of absence.
Though as per Section 167(1)(b) of the Companies Act, 2013 his office of
directorship was vacated :
(i) The Board of XYZ Ltd. wants to keep Ragul’s directorship. Can it condone
his absence for this purpose ?
(ii) Ragul also wants to keep the directorship in XYZ Ltd.
As the Company Secretary of the company the Board seeks your advice on this
issue. (5 marks)
(c) Highlight the regulatory framework governing environmental aspects in India.
(5 marks)
Answer 6(a)
Section 3 of the Competition Act, 2002 relates to “Anti-Competitive agreements”.
Section 3(1) of the Competition Act, 2002 reads as under:
3(1) No enterprises or association of enterprises or person or association of persons
shall enter into any agreement in respect of production, supply, distribution, storage,
acquisition or control of goods or provision of services, which causes or is likely to
cause an appreciable adverse effect on competition within India.
In terms of Section 3(4), the following agreements are considered as an agreement
in contravention of sub-section 3(1) of the Competition Act, 2002, if such agreement
causes or is likely to cause an appreciable adverse effect on competition in India:
(a) “tie-in arrangement” includes any agreement requiring a purchaser of goods, as
a condition of such purchase, to purchase some other goods;
(b) “exclusive supply agreement” includes any agreement restricting in any manner
the purchaser in the course of his trade from acquiring or otherwise dealing in
any goods of the competitor of the seller and other than those of the seller ;
(c) “exclusive distribution agreement” includes any agreement to limit, restrict or
withhold the output or supply of any goods or allocate any area or market for the
disposal or sale of the goods;
(d) “refusal to deal” includes any agreement which restricts, or is likely to restrict,
by any method the persons or classes of persons to whom goods are sold or
from whom goods are bought;
(e) “resale price maintenance” includes any agreement to sell goods on condition
that the prices to be charged on the resale by the purchaser shall be the prices
stipulated by the seller unless it is clearly stated that prices lower than those
prices may be charged.
However, these agreements are not considered anti-competitive per se as in the
case of horizontal agreements and have to be judged by the rule of reason.
Section 3(3) of the Competition Act, 2002 read as under:
In terms of Section 3(3) of the Competition Act, 2002, any agreement entered into
between enterprises or associations of enterprises or persons or associations of persons
or between any person and enterprise or practice carried on, or decision taken by, any
association of enterprises or association of persons, including cartels, engaged in identical
or similar trade of goods or provision of services, which -
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development, investment
or provision of services;
(c) shares the market or source of production or provision of services by way of
allocation of geographical area of market, or type of goods or services, or number
of customers in the market or any other similar way;
(d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed
to have an appreciable adverse effect on competition.
Answer 6(b)
As per Section 167(1)(b) of the Companies Act,2013 (Act), the office of a director
shall become vacant in case, he absents himself from all the meetings of the Board
of Directors held during a period of twelve months with or without seeking leave of
absence of the Board.
Hence, the office of directorship of Ragul is automatically vacated on happening of
the event of his absence from the Board meetings held for a period of 12 months.
Getting leave of absence has no significance or relevance as per the provision in the
Act in this regard.
There is no provision in the Act to empower the Board to waive the event of
absence or to condone the absence or act in any manner which cause the vacation of
office of director void.
Hence, the advice to the Board would be to co-opt Ragul on the board as an
Additional Director in the subsequent Board meeting held after the cited 12 months
during which Ragul did not attend the Board meetings, as there is no prohibition in
the Act for such co-option and re-appointment.
Answer 6(c)
The Constitution of India, as amended casts obligations on the 'State' as well as the
'citizens' to conserve, perceive, protect and improve the environment. A number of
Central/State Legislations/Regulations etc., govern environmental aspects in India. It
includes the following:
— The Water (Prevention and Control of Pollution) Act. This Act was enacted
in 1974 to provide for Prevention and control of water pollution, and for maintaining
or restoring of wholesomeness of water in the country.
— The Water (Prevention and Control of Pollution) Cess Act. This Act was
enacted in 1977, to provide the levy and collection of a cess on water consumed
by persons operating and carrying on certain types of industrial activities and
with a view to augment the resources of the Central Board and State Boards
for the prevention and control of water pollution constituted under the
water (Prevention and Control of Pollution) Act, 1974.
— The Air (Prevention and Control of Pollution) Act. This Act was enacted in
1981 and amended in 1967 to provide for the prevention, control and abatement
of air pollution in India.
— The Environment (Protection) Act. This Act was enacted in 1986 with the
objective of providing for the protection and improvement of the environment.
— Public Liability Insurance Act, 1991. This Act was enacted to provide for
damages to victims of accident which occurs as a result of any hazardous
activity or due to handling any hazardous substance.
— National Green Tribunal Act, 2010. This Act was enacted for effective and
expeditious disposal of cases relating to environmental protection and
conservation of forests and other natural resources including enforcement of
any legal right relating to environment and giving relief and compensation for
damages to persons and property and for matters connected therewith or
incidental thereto.
***
PP–CRVI–December 2018 42
CORPORATE RESTRUCTURING, VALUATION

AND INSOLVENCY
NOTE : 1. Answer ALL Questions.
2. All references to sections relate to the Companies Act, 2013 unless stated
otherwise.
PART A
Question 1
(a) “Corporate Restructuring is an inorganic growth strategy that significantly changes
a company’s business model, management team or financial structure to address
challenges and increase shareholders’ value”. Elucidate the statement with
different options of Corporate Restructuring. (5 marks)
(b) XYZ Resources Ltd., a listed company, is in the process of merging into ABC
Transactions Ltd., which is not a listed Company. As a Company Secretary,
detail the additional aspects to be noted for the merger of XYZ Resources Ltd.
and ABC Transactions Ltd. in terms of Companies Act, 2013 and Securities
and Exchange Board of India (SEBI) Regulations. (5 marks)
(c) Secure Source Ltd., an Indian Company, is contemplating to take over Super
Securers Pte. Ltd. of Singapore through a process of merger and its top
Management seeks your advice. Suggest the required compliances. (5 marks)
(d) “Accounting treatment under AS 14 is confined to Amalgamations unlike Ind AS
103.” Discuss how far Ind AS 103 can be distinguished with AS 14.
(5 marks)
Answer 1(a)
Organic growth strategy in corporate restructuring relates to business or financial
restructuring within the organization that results in enhanced customer base, higher
sales, increased revenue, without resulting in change of corporate entity. In contrast, if
there is involvement of other entities in the form of mergers, takeovers, divestment, etc.
it is referred to as inorganic growth strategy in corporate restructuring. Obviously, the
business model changes so also management positions, financial structure with sole
object of enhancing the value to shareholders. Mergers, demergers, reverse mergers,
disinvestments, takeovers, joint ventures, franchising, strategic alliances, slump sale
are some options that are adopted as a measure to achieve inorganic growth strategy
in Corporate Restructuring.
Orderly redirection of activities, redeployment of surplus cash in other enterprises,
exploiting inter-dependence among present or future businesses within corporate
portfolio, risk reduction and development of core competencies are some of the objectives
within overall objective of increasing the value to the shareholders on resorting to
restructuring. Corporates can achieve the economies of scale through vertical, horizontal
integration of enterprises for maximization of profits.
42
43 PP–CRVI–December 2018
Answer 1 (b)
In the given question, XYZ Resources Ltd. is the transferor and ABC Transactions
Ltd. is the transferee company. Hence, any order of National Company Law Tribunal
sanctioning the Scheme of Amalgamation does not automatically operate to make the
transferee company a listed company. Further the scheme needs to have a provision for
opting out of the scheme with proper compensation for the shareholders of the transferor
listed company as per the provisions of section 232(3)(h) of the Companies Act, 2013.
In addition, XYZ Resources Ltd., being a listed company need to file the draft scheme
with stock exchange well before filing it with the Tribunal to obtain No Objection or
Observation Letter in compliance with SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015. The validity of such "No Objection or Observation”
Letter is six months and such letter need to be placed before the Tribunal considering
the sanction of the Scheme.
Answer 1(c)
Since the matter involved pertains to cross border merger of companies, it is
necessary to comply with the procedure as per rule 25A of the Companies (Compromises,
Arrangements and Amalgamations) Rules, 2016 inserted since 13th April 2017. In
accordance with said rule, a foreign company incorporated outside India may merge
with an Indian Company by filing petition with National Company Law Tribunal in terms
of sections 230 to 232 of the Companies Act, 2013.
It is also necessary to obtain prior approval from Reserve Bank of India (RBI). RBI
has also issued Foreign Exchange Management (Cross Border Merger) Regulations,
2018 for ease of doing compliance. Merger is generally permitted with companies
incorporated in foreign countries whose securities regulator is a member of Organization
of Securities Commission's Multilateral Memorandum of Understanding, Central Bank
is enrolled with Bank of International Settlements (BIS) and identified with Financial
Action Task Force.
Answer 1(d)
Ind AS-103 deals with accounting treatment in case of each and every kind of
combinations unlike AS-14 that confine only to amalgamations. Even there are judicial
pronouncements stating AS-14 is not applicable even for mergers. AS-14 describes two
methods of amalgamation i.e. pooling of interests method and purchase method whereas
Ind AS-103 prescribes only the acquisition method for each business combination. There
is no amortisation of goodwill under Ind AS-103 but tested for impairment on annual
basis as per Ind AS-36 but AS-14 requires goodwill to be amortised within a maximum
period of five years. Reverse acquisitions are also dealt with under Ind AS-103 but not
under AS-14. Under Ind AS-103, the consideration the acquirer transfers in exchange to
the acquiree includes any asset or liability resulting from a contingent consideration
arrangement but this aspect is not dealt with under AS-14.
Question 2
(a) The unpalatable or inevitable recession can also be a key factor to trigger Mergers/
Takeovers—how far is it proved true ?
(b) “There may be no express protection to any dissenting minority shareholder to
file his objections as a matter of right, yet the Courts/Tribunals, while approving
the Scheme, follow judicious approach by inviting objections through Public
Notice in Newspapers.” Elucidate.
(c) Is it possible to retain the same characters of various reserves of transferor
Companies post amalgamation, mergers or demergers as per Standards of
Accounting concepts or conventions ? (5 marks each)
OR (Alternate Question to Q. No. 2)
Question 2A
(i) “Due Diligence starts much before the process of restructuring and helps in
better negotiation of deals, to handle taxation and stamp duty aspects in better
manner, to minimise and resolve the human and cultural issues that may arise
out of mergers/ amalgamation etc”. Discuss the statement in view of the fact
that Due Diligence is considered as ‘background check’.
(ii) Briefly explain four major types of anti-takeover amendments.
(iii) “In addition to the normal event risks, stock swap mergers involve risks
associated with fluctuations in the stock prices of the two companies”. Comment
on the statement in view of the funding through swaps or stock to stock mergers.
(5 marks each)
Answer 2(a)
The year 2008 witnessed the Global Economic Crisis, thereby, bringing the economic
growth across the globe to a grinding halt. A survey and study by New Zealand Trade &
Enterprise revealed acquisitions and strategic alliances as a key factor to overcome
economic recession to strengthen, re-focus and position the company for increased
growth and profitability. The mentioned research study has also identified that Companies
made acquisitions to access new markets, products, technologies, customers and talent
at an accelerated pace. There were the examples of organizations that have adopted,
survived and prospered during recessionary periods. All the companies studied, achieved
dramatic increase in growth and profitability during the period of economic downturn or in
the following recovery period.
Answer 2(b)
As per section 230(4) of the Companies Act, 2013 it is provided that in a scheme of
arrangement any person or persons holding at least 10% of the shareholding or 5% of
the total outstanding debt can put objection to the proposed scheme. But this does not
mean that others are disabled. There exists inbuilt safeguard in the form of serving
notices to every individual shareholder and creditor, so also to various statutory authorities
and sectoral regulators. Stakeholders with lesser than specified percentage of
shareholding may utilize such forums. Public notices issued in Newspapers also open a
forum to raise objections that are just and genuine but not frivolous. Securities and
Exchange Board of India (SEBI) has powers to undertake investigation, if a complaint is
received from an investor or otherwise against substantial acquisitions.
Answer 2(c)
Amalgamation may be either in the nature of merger or purchase as per Accounting
Standards prescribed. In case of merger, the identity of the Reserves is retained and
shall be reflected in the financial statements of the transferee company in the same
form in which they appeared in the balance sheet of the transferor company prior to
amalgamation.
General reserve of the transferor company remains part of general reserve of the
transferee company and similarly, capital reserve or revaluation reserve forms part of
the Capital or Revaluation Reserve of the transferee company. Consequently, reserves
available for distribution of dividends prior to amalgamation would also be available for
distribution of dividends post amalgamation. However, in case of purchase only statutory
reserves retain the character for the unexpired period.
Answer 2A(i)
Due diligence is the process by which confidential, legal, financial and other material
information is exchanged, reviewed and appraised by the parties to a business
transaction, which is conducted prior to the transaction. It is the analysis and risk
assessment of an impending business transaction. It is the careful and methodological
investigation of a business or persons, or the performance of an act with a certain
standard of care to ensure that information is accurate and to uncover information that
may affect the outcome of the transaction. It is basically a "background check" to
make sure that the parties to the transaction have the required information that is
needed to proceed with the transaction.
Due diligence report should provide information and insight on aspects such as the
risks of a transaction, the value at which a transaction should be undertaken, the warranties
and indemnities that needs be obtained from the vendor, etc.
Answer 2A(ii)
Four major types of anti-takeover amendments are mentioned below:
1. Supermajority Amendments - These amendments require shareholders’
approval by at least 2/3 vote and sometimes as much as 90% of the voting
power. Pure or inflexible super majority provisions would seriously limit the
management's scope of options and flexibility in takeover negotiations.
2. Fair-Price Amendments - These are supermajority provisions with a Board
out clause and an additional clause waiving the supermajority requirement if a
fair-price is paid for the purchase of all the shares. Thus, fair-price amendments
defend against two-tier tender offers that are not approved by the target’s
Board.
3. Classified Boards - It provides for a staggered, or classified Board of Directors
to delay effective transfer and control in a takeover.
4. Authorization of Preferred Stock - This device is a defense against hostile
takeover bids. Under this provision, the Board of directors is authorized to create
a new class of securities with special voting rights.
Answer 2A(iii)
Funding through swaps or stock to stock mergers
In stock swap mergers or stock to stock mergers, the holder of the target company’s
stock receives shares of the acquiring company's stock. The majority of mergers during
the past few years have been stock for stock deals. A merger arbitrage specialist will
sell the acquiring company's stock short, and will purchase a long position in the target
company, using the same ratio as that of the proposed transaction. If the purchasing
firm is offering a half share of its stock for every share of the target company, then the
merger arbitrageur will sell half as many shares of the purchasing firm as he or she buys
of the target company. By going long and short in this ratio, the manager ensures that
the number of shares for which the long position will be swapped is equal to the number
of shares sold short. When the deal is completed, the manager will cover the short and
collect the spread that has been locked in.
As with all mergers, stock swap mergers may involve event risk. In addition to the
normal event risks, stock swap mergers involve risks associated with fluctuations in the
stock prices of the two companies.
The terms of the deal involve an exchange of shares and are predicted on the prices
of the two companies' stock at the time of the announcement, drastic changes in the
share price of one or both of the companies can cause the entire deal to be re-evaluated.
Merger arbitrageurs derive returns from stock swap mergers when the spread or potential
return justifies the perceived risk of deal's failing.
Question 3
(a) “Price received on sale of an undertaking as a Going Concern is a Capital
Receipt”. Comment on the statement with judicial pronouncements, supporting
the statement. (3 marks)
(b) Corporates encounter pitfalls in post-merger statutory approval due to certain
common errors, that need to be taken care of. Try to point out certain errors that
need to be taken care of. (3 marks)
(c) Enumerate certain circumstances that necessitates financial restructuring, being
part of Internal Corporate Restructuring. (3 marks)
(d) Identify the factors which make a company a desirable candidate for a takeover
from the acquirer’s point of view. (3 marks)
(e) Is it possible for a shareholder to seek an amendment to exchange ratio embodied
in the scheme while considering the resolution, put forth for approval. Support
your answer with decided case law(s). (3 marks)
Answer 3(a)
Any sale of an undertaking as a going concern for a lump sum consideration is a
slump sale in which values are not assigned to individual assets and liabilities that are
sold. Normally, any sale of a capital asset is considered as capital receipts and subjected
to capital gain tax and stock in trade is subjected to tax as revenue profit or loss.
Supreme Court held in CIT v. West Coast Chemicals and Industries Ltd. 46 ITR 135
and CIT v. Mugneeram Bangur & Co 57 ITR 299, where a slump price is paid, and no
portion is attributable to the stock-in-trade, since it may not be possible to say that there
is a profit other than what is resulted as the appreciation of capital.
Gujarat and Bombay High Courts have also held that there will be a capital gain only
when a sale of business as a whole occurs. Undertaking of a business is a capital asset
as its disposal at slump price is capital receipt which can attract capital gain tax alone.
Answer 3(b)
Some common mistakes that need to be taken care of by Corporates after post-
merger are:
(a) Ego problems result in clashes that make bad situations worse;
(b) Sudden and radical changes such as relocating the company's entire production
operations should be carefully considered;
(c) While the company is focussed on integration, it furnishes an ideal time for
competitors to make a run on the market;
(d) If the acquired business does not belong to the area / field in which the acquiring
company operates then different apporaches need to be applied;
(e) A dangerous mistake is laying off crucial employees of the acquired company.
It is very complicated, delicate matter and even the seller might not have accurate
idea as job titles are normally misleading.
Answer 3(c)
During the life of a Company, any one or more of the following circumstances prompt
for Company’s restructuring:
(i) Injecting more working capital to meet the increased market demand.
(ii) Scenarios where a company is unable to fulfill its commitments.
(iii) If there is shortage in obtaining further credit from suppliers of raw materials,
consumable stores, components, etc. and from other parties like those doing
job work for the Company.
(iv) Failure to utilise optimum capacity for lack of liquid funds.
Financial restructuring involves rearrangement of its financial structure so as to
make the Company’s finances more balanced. Every Company targets to strike a balance
in ever changing business environment.
Answer 3(d)
It is possible to identify some characteristics that make a company a desirable
candidate for a takeover from the acquirer's point of view. These are:
— Low stock price in relation to the replacement cost of assets of their potential
earning power;
— A highly liquid balance sheet with large amounts of excess cash, a valuable
securities portfolio, and significantly unused debt capacity;
— Good cash flow in relation to current stock prices;
— Subsidiaries and properties which could be sold off without significantly impairing
cash flow; and
— Relatively small stockholdings under the control of an incumbent management.
Answer 3(e)
A shareholder attending the meeting either can assent or dissent the resolution but
cannot suggest any alteration in the scheme. It was held by Mumbai High Court in the
matter of Dinesh Veajlal Lakhani v. Parke Davis (India) Ltd [2005] 66 CLA 91 (Bom) that
the swap ratio forms integral part of scheme of amalgamation and the procedural provisions
are embodied in the relevant rules. The exchange ratio is a matter of expert determination.
Since it constitutes the foundation of the scheme of amalgamation any amendment to it
will nullify that basis. Thus, the shareholder has no other right beyond assenting or
dissenting the resolution put for voting.
PART B
Question 4
(a) “Valuation is influenced not only by the motive of the acquirer company but also
that of target company’s objectives.” Analyse the statement in brief. (5 marks)
(b) The Managing Director of a company decides that his company will not pay any
dividend till he survives. His current life expectancy is 20 years. After that time
it is expected that the company could pay dividend of `30 per share indefinitely.
At present the company could afford to pay `5 per share forever. The shareholders
of the company expect return on equity @ 10%.
Find out :
(i) What would be the share price at the end of 20 years ?
(ii) What would be the present value of a share using discounting factor of
0.1468 (at 10% for 20 years period) ?
(iii) What is the current price of a share if dividend payment is Rs. 5 per share?
(iv) What is the loss to the shareholders in the aforesaid scenario ? (5 marks)
(c) Explain Market Comparables Method of valuation. What are the steps involved
in this method of valuation ? (5 marks)
Answer 4(a)
Merger/Amalgamation/Takeover is backed by the aspect of valuation. Appropriate
method of valuation of a business depends to a great extent on the acquisition motives.
The reasons for valuation could be to achieve the objectives of the top management i.e.
either purely financial aspects relating to taxation, assets stripping, financial restructuring
or business related such as expansion or diversification.
However, behavioural reasons have more to do than personal ambitions or objectives
of the top management. Normally, top management has desire to expand and diversify
the needs to be chosen between Make or Buy decision. A criterion adopted to arrive at
a decision is to evaluate present value of the differential cash flows. Acquisitions are
not only normally market driven but also influenced by non-financial considerations.
Thus the value of a target gets affected not only by the motive of the acquirer, but also
by the target company’s objectives. The price could be affected by the motives of the
other bidders as well.
Answer 4(b)
As per Managing Director's policy:
(i) The value of the share at the end of 20 years = 30/ 0.10 = Rs.300
(ii) The present value of share = 300 x (0.1468) = Rs.44.04
As per current status of company:
(iii) If the company could pay dividends of Rs.5 per share forever from the beginning,
the current price of share would be = 5/0.10 = Rs.50.00
(iv) Thus, the loss to each shareholder is the difference of two prices : Rs.50 –
Rs.44.04 = Rs. 5.96 per share
Answer 4(c)
Market Comparables : This method of valuation is generally applied in case of

unlisted entities. This method estimates value by relating the same to underlying elements
of similar companies for past years. It is based on market multiples of 'comparable
companies'. For example:
— Earnings / Revenue Multiples (Valuation of Pharmaceutical Brands)
— Book Value Multiples (Valuation of Financial Institution or Banks)
— Industry Specific Multiples (Valuation of steel companies based on production

capacities like price per ton capacity of steel, per store value in the days of
retail boom, price per click in e-commerce)
— Multiples from recent M&A Transactions
Following steps are involved in this method of valuation:
1. Comparable assets are identified and their market values are obtained
2. Market values are converted into standardized values, since the absolute price
cannot be compared
3. Standardised value or multiple for the asset being analysed are compared with
the standardised value of the comparable asset, controlling for any difference
between the firms that might affect the multiple, to judge whether the asset is
under or over-valued.
Question 5
(a) From the following information determine the possible value of brand :
(` in lakh)
Profit After Tax (PAT) 2,000
Tangible Fixed Assets 8,000
Identifiable intangible assets other than the brand 1,200
Weighted average cost of capital 15%
Normal return on tangible assets 20%
Capitalisation factor for intangible assets 25%
(b) From the following information calculate the value of a share if you want to :
(i) buy a small lot of shares;
(ii) buy a controlling interest in the company.
Year Profit ( `) Capital Employed ( `) Dividend (%)
2015 24,50,000 3,50,00,000 15
2016 40,00,000 5,00,00,000 18
2017 60,00,000 6,00,00,000 20
2018 72,00,000 6,00,00,000 25
The market expectation is 15% from the similar industry.
(c) “The key to valuation is finding a common ground between all the companies for
the purpose of a fair evaluation.” Comment with reference to factors influencing
valuation. (5 marks each)
Answer 5(a)
Calculation of possible value of brand
(Rs. in lakh)
Profit after tax (PAT) 2,000

Less : Profit allocated to tangible assets (20% of Rs.8,000) 1,600
Profit allocable to intangible assets including brand capitalization
factor = 25% 400
Capitalised value of intangible assets including brand (400/25x100) 1,600
Less : Identifiable intangible assets other than the brand 1,200
Value of the brand 400
Hence, value of the brand = Rs.400 lakh
Answer 5(b)
(i) Buying a small lot of shares : For this purpose dividend yield method is most
appropriate for valuation of shares. For calculation of average dividend, weighted
average will be more appropriate since dividend rate is rising :
Year Rate of dividend (%) Weights Products
2015 15 1 15
2016 18 2 36
2017 20 3 60
2018 25 4 100
10 211
Average dividend = 211/10 = 21.10%
Value of a share on the basis of dividend for buying a small lot =
(Average dividend rate / Market expectation) x 100
= (21.10 / 15) x 100 = Rs.140.67 per share
(ii) Buying a controlling interest in the company : For this purpose, total profit will
be relevant to determine the value of shares as the shareholders have the
capacity to influence the decision of distribution of profit. As the profit is displaying
a rising trend, weighted average will be more appropriate for calculation purposes:
Year Yield (%) = (Profit/capital Weights Products
employed) x 100
2015 7 1 7
2016 8 2 16
2017 10 3 30
2018 12 4 48
10 101
Average yield = 101/10 = 10.10 %
Average value per share = (10.10/15) x 100 = Rs.67.33
Answer 5(c)
Determining the value of a business is a complicated and intrinsic process. Valuing
a business requires the determination of its future earnings potential, the risks inherent
in those future earnings. Strictly speaking, a company's fair market value is the price at
which the business would change hands between a willing buyer and willing seller when
neither is under any compulsion to buy or sell and both parties have knowledge of
relevant facts.
The other salient factors influencing valuation are:
– The stock exchange price of the shares of the two companies before the
commencement of negotiations or the announcement of the bid.
– Dividends paid on the shares.
– Relative growth prospects of the two companies.
– In case of equity shares, the relative gearing of the shares of the two companies.
– Debenture stock to the amount of issued ordinary share capital.
– Net assets of the two companies.
– Voting strength in the merged enterprise of the shareholders of the two companies.
– Past history of the prices of shares of the two companies.
PART C
Question 6
(a) Explain the concept “Ease of doing business includes easy exit by investors
and creditors that prompts national policy makers’ constant endeavour to reform
law relating to Insolvency or Bankruptcy”.
(b) The purpose of the Model Law is to provide effective mechanism for dealing
with cases of cross-border insolvency. Comment upon the statement.
(c) Write a short note on winding up under the Companies Act, 2013 with special
reference to Insolvency and Bankruptcy Code, 2016.
(d) There are certain persons who are not entitled to make application to NCLT for
initiation of corporate insolvency resolution process. Explain. (5 marks each)
OR (Alternative question to Q. No. 6)
Question 6A
(i) “Committing default or failure of Resolution Plan may lead to liquidation of a
body corporate under Insolvency and Bankruptcy Code, 2016 but could there be
other circumstances for which a Tribunal may order for winding up ?” Examine
and explain. (5 marks)
(ii) SARFAESI Act is a complete code in itself and there is no lacuna or ambiguity
in it to warrant reading something more into it or to borrow anything from the
Companies Act. Comment on the statement in light of decided case laws.
(5 marks)
(iii) Write a note on “Effect of recognition of a foreign main proceeding” under the
UNCITRAL Model law. (5 marks)
(iv) Write a short note on the role of Insolvency and Bankruptcy Board of India.
(5 marks)
Answer 6(a)
Every stakeholder especially investors and creditors chose to get early return on their
investments for sustenance. Hence, policy makers constantly reform law relating to
insolvency for ease of doing business that includes easy exit also. During last two and
half decades, Indian financial system has undergone tremendous transformation. Several
financial reforms have been initiated to promote an efficient, well diversified and competitive
financial system with ultimate objective of improving the allocative efficiency of resources
so as to accelerate economic development. There are reforms in laws and systems to be
at par with International Standards and to incentivise the foreign investors to invest in the
Indian economy. Committees were formed to find ways to improve the law relating to
Insolvency resulting into framing of Insolvency and Bankruptcy Code, 2016.
Answer 6(b)
The purpose of the Model Law is to provide effective mechanisms for dealing with
cases of cross-border insolvency so as to promote the objectives of:
(a) Cooperation between the courts and other competent authorities of different
countries dealing with cases of cross-border insolvency;
(b) Greater legal certainty for trade and investment;
(c) Fair and efficient administration of cross-border insolvencies that protects the
interests of all creditors and other interested persons, including the debtor;
(d) Protection and maximization of the value of the debtor’s assets; and
(e) Facilitation of the rescue of financially troubled businesses, thereby protecting
investment and preserving employment.
Answer 6(c)
Winding-up under the Companies Act, 2013
The Companies Act, 2013 contain provisions for winding-up of companies on various
grounds including inability of companies to pay their debts. The notification of the
Insolvency and Bankruptcy Code, 2016 has deleted the provisions in the Companies
Act, 2013 regarding winding-up of companies on the ground of inability to pay their debts
and those relating to voluntary winding-up of companies and detailing the requirements
for insolvency resolution of corporate persons and voluntary winding-up in the Code
itself. The Code will exclusively be governing the insolvency resolution and liquidation
of corporates.
The Companies Act, 2013 shall continue to govern winding-up of companies on
various other grounds excluding inability to pay debts. Sections 270 to 288, Sections
290 to 303, Section 324 and Sections 326 to 365 of Chapter XX of the Companies Act,
2013 contain the provisions related to winding-up of the company.
Answer 6(d)
The following persons shall not be entitled to make application to NCLT for initiation
of corporate insolvency resolution process:
(a) a corporate debtor undergoing a corporate insolvency resolution process; or
(b) a corporate debtor having completed corporate insolvency resolution process
twelve months preceding the date of making of the application; or
(c) a corporate debtor or a financial creditor who has violated any of the terms of
resolution plan which was approved twelve months preceding the date of making
application; or
(d) a corporate debtor in respect of whom a liquidation order has been passed so
that finality of the liquidation order is ensured.
For making an application, a corporate debtor includes a corporate applicant in
respect of such corporate debtor.
Answer 6A(i)
In case the Resolution Professional is unable to come-up with a resolution plan
approved by at least sixty six percent of the Committee of Creditors or the plan submitted
does not confirm the requirements of the Code, the Tribunal may pass an order of liquidation
of the Corporate Debtor in terms of Section 33 of the Insolvency and Bankruptcy Code,
2016 so also in case the approved resolution plan is contravened by the Corporate Debtor.
Apart from the above, Section 271 of the Companies Act, 2013 enumerates
circumstances such as company’s own resolution, fraudulent or felony activities, default
in filing financial statements or annual returns for more than 5 consecutive years or just
and equitable reasons for which Tribunal may order liquidation. If the company has
acted against the interests of the sovereignty and integrity of India, the security of the
State then also it may be wound-up.
Answer 6(A)(ii)
Pegasus Assets Reconstruction (P) Ltd v. Haryana Concast Ltd., civil appeal nos.
3646 of 2011, 9293-9294 OF 2014 AND 14736 TO 14738 of 2015, date December 29,
2018, [2015] 64 taxmann.com 394 (SC)
Considering section 283 of the Companies Act, 2013 / Section 456 of Companies
Act, 1956 read with section 13 of the SARFAESI Act, 2002, the Supreme Court in the
matter of winding-up and custody of company's property opined that SARFAESI Act,
2002 is a complete code in itself and there is no lacuna or ambiguity in it to warrant
reading something more into it or to borrow anything from Companies Act, 2013. The
Court mentioned that as per section 13 of the SARFAESI Act, a secured creditor has
right to enforce its security interest without intervention of Court or Tribunal and the
powers under Companies Act, 2013 cannot be wielded by Company Judge to interfere
with proceedings by a secured creditor who has opted to stay outside winding-up process
to realize its secured interests as per provisions of SARFAESI Act.
Answer 6(A)(iii)
Effect of recognition of a foreign main proceeding (Article 20)
Once foreign proceeding is recognized which is a foreign main proceeding under the
UNCITRAL Model Law, the following are the effects:
(a) Commencement or continuation of individual actions or individual proceedings
concerning the debtor's assets, rights, obligations or liabilities is stayed;
(b) Execution against the debtor's assets is stayed; and
(c) The right to transfer, encumber or otherwise dispose of any assets of the debtor
is suspended.
The effects provided by Article 20 are not discretionary in nature. These flow
automatically from recognition of the foreign main proceeding. The automatic effects
under Article 21 apply only to main proceedings.
Answer 6(A)(iv)
Role of the Insolvency and Bankruptcy Board of India (IBBI) is as under:
1. Regulating all matters related to insolvency and bankruptcy process.
2. Setting out eligibility requirements of insolvency intermediaries i.e., Insolvency
Professionals, Insolvency Professional Agencies and Information Utilities.
3. Regulating entry, registration and exit of insolvency intermediaries.
4. Making model bye laws for Insolvency Professional Agencies.
5. Setting our regulatory standards for Insolvency Professionals.
6. Specifying the manners in which information utilities can collect and store data.
***

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GUIDELINE ANSWERS

The Guideline Answers contain the information based on the

1. Advanced Company Law and Practice 1

2. Secretarial Audit, Compliance Management

3. Corporate Restructuring, Valuation and Insolvency 42

ADVANCED COMPANY LAW AND PRACTICE

• The company is not listed or in the process of listing.

• The ultimate holding company or any intermediate holding company files

In respect of X Ltd, it is a wholly owned subsidiary of Y Ltd. Y Ltd files consolidated

Therefore, in accordance with second proviso to Rule 6 of the Companies (Accounts)

Can it be considered as a loan given to the director ?

Explain the relevant provisions.

(c) Fashion SpA is a Company incorporated in ltaly, having a place of business in

Valuation by Registered Valuer

• By electronic mode to such members whose shareholding is in dematerialized

• Where shareholding is held otherwise than by dematerialized format, to such

SECRETARIAL AUDIT, COMPLIANCE MANAGEMENT

OR (Alternative Question to Q. No. 1)

(iv) Is an employee who is also a promoter of a company eligible to obtain sweat

Sub : Report with respect to compliance of post-bid procedures in Electronic Bidding

Apparent compliance is a disguise form of non-compliance, which is worse than a

Adequate compliance is compliance in letters. The aspects specified in law are

Parameter Statutory Audit Internal Audit Due Diligence

Appointed by Shareholder of a Management of the Normally by the buyers

Reader of the Shareholders, Management Deal Making Parties.

Extent of Relatively high Relatively high Low to medium; the

Mandatory Mandatorily Mandatorily required Not Mandatory

Parameter Statutory Audit Internal Audit Due Diligence

Scope Defined by the Defined by the No specific scope

Perspective Focuses on Adopts a futuristic Blend of both historical

Parameter Statutory Audit Internal Audit Due Diligence

Event Time Limit Effect

CORPORATE RESTRUCTURING, VALUATION

OR (Alternate Question to Q. No. 2)

As per Managing Director's policy:

(ii) The present value of share = 300 x (0.1468) = Rs.44.04

As per current status of company:

Market Comparables : This method of valuation is generally applied in case of

— Earnings / Revenue Multiples (Valuation of Pharmaceutical Brands)

— Book Value Multiples (Valuation of Financial Institution or Banks)

— Industry Specific Multiples (Valuation of steel companies based on production

— Multiples from recent M&A Transactions

Following steps are involved in this method of valuation:

Profit after tax (PAT) 2,000

Average yield = 101/10 = 10.10 %

Average value per share = (10.10/15) x 100 = Rs.67.33

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