Suggested Answer - Syl12 - June 2015 - Paper - 13

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Suggested Answer_Syl12_June 2015_Paper_13

a recognized stock exchange outside its area of operation to enable the
investors to buy and sell securities through such trading floor under the
regulatory frame work of that Stock-Exchange.
(b) Section 12 of the Securities Contracts (Regulation) Act, 1956 deals with the
powers of the Central Government to suspend business of recognized Stock
Exchange. Central Government, if it deems fit, is vested with power to suspend
business for a period not exceeding 7 days by notification in Gazette. Central
Government also have power to extend this period by a like notification.
However, such power can be exercised by the Central Government, if it is of
opinion that an emergency has arisen and it is expedient so to do.
(iv) Investigation into affairs of related companies: According to section 219 of the
Companies Act, 2013, if an inspector appointed under section 210 or section 212 or
section 213 to investigate into the affairs of a company considers it necessary for the
purposes of the investigation, can also investigate the affairs of—
(i) any other body corporate which is, or has at any relevant time been the
company‘s subsidiary company or holding company, or a subsidiary company
of its holding company;
(ii) any other body corporate which is, or has at any relevant time been managed
by any person as managing director or as manager, who is, or was, at the
relevant time, the managing director or the manager of the company;
(iii) any other body corporate whose Board of Directors comprises nominees of the
company or is accustomed to act in accordance with the directions or
instructions of the company or any of its directors; or
(iv) director or manager or employee.
SECTION C
3. Answer any two questions: 10×2 = 20

(a) (i) What are the CORE elements of the Corporate Social Responsibility (CSR) policy as
per the CSR Voluntary Guidelines, 2009? 5
(ii) According to Altered Images: The 2001 State of Corporate Responsibility in India Poll’
a survey conducted by TATA Energy Research Institute (TERI), the evolution of CSR in
India has followed a chronological evolution of 4 thinking approaches.—Explain the
same. 5
(b) (i) Risk assessment form a major element in whole life costing. Discuss. 5
(ii) Discuss corporate brand as CSR initiative to enable corporate to build a stronger
brand. 5
(c) (i) Discuss the issue of subjectivity in Whole Life Cycle Costing (WLCC). 5
(ii) What is the need for Corporate Governance in India? 5
Answer:
3. (a) (i)
The Government of India released guidelines to assist companies in India to understand
the new voluntary Corporate Social Responsibility Code. As per these guidelines, the core
elements that one must consider while establishing such a CSR policy are as under:
1. Care for Stake Stakeholders - Respect the interests of all your stakeholders such as
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shareholders, customers, suppliers, society at large.
2. Ethical functioning - Ensure that your Company maintains the highest levels of
standards in ethics, transparency and accountability.
3. Respect for Workers‘ Rights and Welfare - Ensure fair treatment of all employees by
instituting policies covering key aspects such as safety, hygiene, training, healthcare,
grievance redressal. anti-discrimination etc.
4. Respect for Human Rights - Ensure that there are no Human Rights violations in the
operations - either with employees, customers, society, production, labour etc.
5. Respect for Environment - Ensure sustainability of key natural resources and optimal
utilization of land, water, energy to minimize the impact on the environment.
6. Social and Inclusive Development - Respect the area what you work in and the people
that work for you. Include the community through economic and social improvement
activities.
3. (a) (ii)
According to ―Altered Images: the 2001 State of Corporate Responsibility in India Poll‖, a
survey conducted by Tata Energy Research Institute (TERI), the evolution of CSR in India has
followed a chronological evolution of 4 thinking approaches:
Ethical Model (1930-1950): One significant aspect of this model is the promotion of
―trusteeship‖ that was revived and reinterpreted by Gandhiji. Under this notion the
businesses were motivated to manage their business entity as a trust held in the interest of
the community. The idea prompted many family run businesses to contribute towards
socio-economic development. The efforts of Tata group directed towards the well being
of the society are also worth mentioning in this model.
Statist Model (1950 -1970s): Under the aegis of Jawahar Lal Nehru, this model came into
being in the post independence era. The era was driven by a mixed and socialist kind of
economy. The important feature of this model was that the state ownership and legal
requirements decided the corporate responsibilities.
Liberal Model (1970s -1990s): The model was encapsulated by Milton Friedman. As per this
model, corporate responsibility is confined to its economic bottom line. This implies that it is
sufficient for business to obey the law and generate wealth, which through taxation and
private charitable choices can be directed to social ends.
Stakeholder Model (1990s - Present): The model came into existence during 1990s as a
consequence of realisation that with growing economic profits, businesses also have
certain societal roles to fulfill. The model expects companies to perform according to
―triple bottom line‖ approach. The businesses are also focusing on accountability and
transparency through several mechanisms.
3. (b) (i)
Combined with WLCC, risk assessment should form a major element m the strategic
decision making process during project procurement and also in value analysis, especially
in today‘s highly uncertain business environment WLCC decisions are complex (the
complexity level is usually determined by the scale, funding and financial environment
surrounding the scheme, amongst other factors), and usually comprise an array of
significant factors affecting the ultimate cost decisions. WLCC decisions generally have
multiple objectives and alternatives, long-term impacts, multiple constituencies in the
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procurement of construction projects, generally involve multiple disciplines and numerous
decision makers, and always involve various degrees of risk and uncertainty. Project cost,
design and operational decision parameters are often established very early in the life of a
given building project. Often, these parameters are chosen based on owner‘s and project
team‘s personal experiences or on an adhoc static economic analysis of the anticipated
project costs, while these approaches are common, they do not provide a robust
framework for dealing with the risks and decisions that are taken in the evaluation process.
Nor do they allow for a systematic evaluation of all the parameters that are considered
important in the examination of the WLCC aspects of a project. The existing methods also
do not adequately quantify the true economic impacts of many quantitative and
qualitative parameters.
3. (b) (ii)
In an economy where corporates strive for a unique selling proposition to differentiate
themselves from their competitors, CSR initiatives enable corporates to build a stronger
brand that resonates with key external stake-holders—customers, general public and the
government.
Businesses are recognizing that adopting an effective approach to CSR can open up new
opportunities, and increasingly contribute to the corporates‘ ability to attract passionate
and committed workforces.
Corporates in India are also realizing that their reputation is intrinsically connected with
how well they consider the effects of their activities on those with whom they interact.
Wherever the corporates fail to involve parties, affected by their activities, it may put at risk
their ability to create wealth for themselves and society. Therefore, in terms of business, CSR
is essentially a strategic approach for firms to anticipate and address issues associated with
their interactions with others and, through those interactions, to succeed in their business
endeavors. The idea that CSR is important to profitability and can prevent the loss of
customers, shareholder, and even employees is gaining increasing acceptance.
Further, CSR can help to boost the employee morale in the organization and create a
positive brand-centric corporate culture in the organization. By developing and
implementing CSR initiatives, corporates feel contented and proud, and this pride trickles
down to their employees.
3. (c) (i)
The issue of subjectivity and vagueness is also a very important facet of WLGC. Subjectivity,
vagueness and ambiguity are different from randomness. Randomness deals with
uncertainty (in terms of probability) concerning the occurrence or non-occurrence of an
event. Subjectivity, on the other hand, has to do with the imprecision and inexactness of
events and judgments, including probability judgments. Many WLCC decision problems
involve variables and relationships that are difficult, if not impossible, to measure precisely.
For example, probability judgments about issues like inflation, operation costs, etc. are not
always precise in WLCC and often cost analysts use subjective expressions to express their
probability judgments. This applies to probability judgments as well as the costs and
benefits in many WLCC decision problems. The requirement for high levels of precision may
cause WLCC models to lose part of their relevance to the real world by ignoring some of
the relevant decision attributes because these variables are incapable of precise
measurement or because their inclusion may increase the complexity of the models.
Hence, the key to successful WLCC and risk assessment is to build models that require little
information - no more than the users can provide.
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3. (c) (ii)
Need for Corporate Governance:
Corporate Governance is integral to the existence of the company. It is needed to create
a corporate culture of transparency, accountability and disclosure.
Corporate Performance: Improved governance structures and processes help ensure
quality decision-making, encourage effective succession planning for senior management
and enhance the long-term prosperity of companies, independent of the type of
company and its sources of finance.
Enhanced Investor Trust: Investors consider Corporate Governance as important as
financial performance when evaluating companies for investment.
Combating Corruption: Companies that are transparent, and have sound system that
provide full disclosure of accounting and auditing procedures, allow transparency in all
business transactions, provide environment where corruption will certainly fade out.
Better Access to Global Market: Good Corporate Governance systems attracts investment
from global investors, which subsequently leads to greater efficiencies in the financial
sector.
Enhancing Enterprise Valuation: Improved management accountability and operational
transparency fulfill investors‘ expectations and confidence on management and
corporations, and return, increase the value of corporations.
Accountability: Investor relations‘ is essential part of good Corporate Governance,
investors have directly/indirectly entrusted management of the company for creating
enhanced value for their investment.
Easy Finance from Institutions: Evidence indicates that well-governed companies receive
higher market valuations.
Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures
efficient risk mitigation system in place.
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RTP_Final_Syllabus 2012_Dec 2014
Paper-13: CORPORATE LAWS AND COMPLIANCE
STUDY NOTE 1 – THE COMPANIES ACT:
Question 1:
(a) What will be the consequence in case of a private Company incorporated under the
provisions of the Indian Companies Act defaults in complying with the conditions constituting a
Private Company, as per Companies Act, 1956?
(b) The paid-up Share Capital of Asha Private Limited is ` 1 crore, consisting of 8 lacs Equity
Shares of ` 10 each, fully paid-up and 2 lacs Cumulative Preference Shares of ` 10 each, fully
paid-up. Disha Private Limited and Nisha Private Limited are holding 3 lacs Equity Shares and
1,50,000 Equity Shares respectively in Asha Private Limited.
Disha Private Limited and Nisha Private Limited are the subsidiaries of Pratiksha Private Limited.
Examine whether Asha Private Limited is a subsidiary of Pratiksha Private Limited? Would your
answer be different if Pratiksha Private Limited has 8 out of total 10 directors on the Board of
Directors of Asha Private Limited? Answer as per Companies Act, 2013.
(c) Noble Meters Limited was incorporated with the equity share capital of ` 50 lakh. The
company received the Certificate of Incorporation on 20th May, 2009. The company issued the
prospectus inviting the public to subscribe for its equity shares. Meanwhile, the company
intended to commence its business. Whether Noble Meters Ltd. is entitled to commence its
business without obtaining the Certificate to Commencement of Business?
Advice the company stating the conditions to be fulfilled for obtaining the Certificate to
Commencement of Business from the Registrar of Companies under Companies Act, 1956.
(d) The object clause of the Memorandum of Association of Rishi Limited authorizes it to publish
and sell text-books for students. The company however entered into an agreement with Kashi to
supply 100 laptops of worth ` 5 lakh for resale purposes. Subsequently, the company refused to
make payment on the ground that the transaction was ultra vires the company. Examine the
validity of the company's refusal for payment to Kashi under the provisions of the Companies
Act, 1956.
Answer:
(a) The consequence in case of a private Company are:
Nature of default:
Sec. 43 of Companies Act, 1956 applies where a private company makes a default in complying
with any of the conditions constituting a private company. In other words, in case of
contravention or violation of any of the conditions specified u/s 2(68) of the Companies Act,
2013, Sec. 43 of the Companies Act, 1956 is attracted.
Consequences of default:
 The company shall cease to be entitled to the privileges and exemptions conferred on
private companies.
 The Companies Act shall apply to the company as if it were not a private company, i.e. the
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private company shall have to comply with such provisions of the Companies Act, 1956 and
the Companies Act, 2013 as are applicable to public companies'.
Restoration of privileges:
 CLB has the power to restore the privileges {i.e. relieve the company from the consequences
of default) if it is satisfied that -
(a) failure to comply with the conditions was accidental or due to inadvertence or due to
some other sufficient cause; or
(b) on other grounds it h just and equitable to grant relief.
 CLB may exercise such powers on an application made by the company or any other
interested person.
 CLB may specify in its order such terms and conditions as it may deem fit.
(b) The stated case relates to section 2(46) and Sec 2(87) of Companies Act, 2013.
Total ESC of Asha Pvt. Ltd. - is ` 80,00,000.

ESC held by Disha Pvt. Ltd. in Asha Pvt. Ltd. - is ` 30,00,000.
ESC held by Nisha Pvt. Ltd. in Asha Pvt. Ltd. - is ` 15,00,000.
ESC held by Pratiksha Pvt. Ltd. in Asha Pvt. - is ` 45,00,000, since for the purpose of determining
Ltd. holding-subsidiary relationship, ESC held in Asha
Ltd. by its Subsidiaries Disha Pvt. Ltd. (viz. `
30,00,000) and Nisha Pvt. Ltd. (viz. ` 15,00,000)
shall be considered.
Asha Pvt. Ltd. is a subsidiary of Pratiksha - since Pratiksha Pvt. Ltd. holds more than one-half
Pvt. Ltd. of ESC of Asha Pvt. Ltd.
The answer would remain same - even if Pratiksha Pvt. Ltd. has 8 out of 10 directors
on the Board of Directors of Asha Pvt. Ltd. since in
such a case Pratiksha Pvt. Ltd. controls the
composition of Board of Directors of Asha Pvt.
Ltd.
(c) The stated case relates to section 149 of Companies Act, 1956.
Noble Meters Ltd. not entitled to commence business:

 Since it has not obtained certificate of commencement of business;
 Since it is a public company having share capital;
 Since a public company having share capital cannot commence its business unless it has
obtained certificate of commencement of business.
Conditions to be satisfied for obtaining certificate of commencement of business:

Where a company issues a prospectus, the certificate of commencement of business shall be
issued only if the following conditions, as given u/s 149(1) are satisfied:
(i) The company must apply to one or more stock exchanges for listing of its shares. If any of
these stock exchanges refuse to list the shares of the company, the company shall have to
refund the entire amount received from the applicants, and the company shall not be
issued a certificate of commencement of business.
(ii) Where shares have been allotted to the directors and manager, the company must have
received the amount due on application and allotment from every such director or
manager.
(iii) The company must have received the minimum subscription. Further, the company must
have made the allotment of such number of shares as are not less than the minimum
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subscription.
(iv) The company shall file a declaration with the Registrar that all the requirements of Sec.
149(1) have been duly complied with.
(d) The contract to purchase laptops is an ultra vires contract, and is therefore, void ab initio.
Kashi cannot enforce the contract against Rishi Limited since the contract is ultra vires; and since
no party to an ultra vires contract has a right to sue.
The Court may order Rishi Limited to deliver back the laptops to Kashi if the laptops are still in the
possession of the company; and if the Court, applying the principle of equity, deems it fit
considering the circumstances of the case.
Question 2:
(a) Ashi Company Limited at a general meeting of members of the company passes an
ordinary resolution to buy-back 30% of its equity share capital. The articles of the company
empower the company for buy-back of shares. The company further decides that the payment
for buy-back be made out of the proceeds of the company's earlier issue of equity shares.
Explaining the provisions of the Companies Act,1956 and stating the sources through which the
buy-back of companies own shares be executed, examine:
(i) Whether company's proposal is in order?
(ii) Would your answer be still the same in case the company, instead of 30%, decides to
buy-back only 20% of its equity share capital?
(b) Superb Furniture‟s Limited was willing to purchase teakwood estate in Chhattisgarh State. Its
prospectus contained some important extracts from an expert report giving the number of
teakwood trees and other relevant information in the estate in Chhattisgarh State. The report was
found inaccurate. Mr. 'X' purchased the shares of Superb Furniture‟s Limited on the basis of the
above statement in the prospectus. Will Mr. 'X' have any remedy against the company? When
an expert will not be liable? State the provisions of the Companies Act, 2013 in this respect.
(c) Define the term „Financial Statement‟, as per Companies Act, 2013.
(d) 'A' commits forgery and thereby obtains a certificate of transfer of shares from a company
and transfers the shares to 'B' for Value acting in good faith. Company refuses to transfer the
shares to 'B'. Whether the company can refuse? Decide the liability of 'A' and of the company
towards 'B'.
Answer:
(a)
(i) The proposal of the company to buy-back its shares is not valid since the company has
passed OR instead of SR, as required u/s 77A of Companies Act, 1956; and also since the
company proposes to buy-back 30% of the equity share capital which exceeds the statutory
ceiling of 25% of total paid up equity capital; The company also proposes to buy-back out of
the proceeds of an earlier issue of same kind of shares, which is prohibited u/s 77A.
(ii) The decision to buy-back 20% of equity share capital shall not be valid since buy-back by
passing OR is violative of Sec. 77A of Companies Act, 1956 and buy-back out of the proceeds of
an earlier issue of same kind of shares is prohibited u/s 77A.
(b) The stated case relates to section 35 of Companies Act, 2013.
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 Mr. X is entitled to repudiate the allotment:

Since he purchased the shares relying on a mis-statement contained in the prospectus.
 An expert is not liable if:

He proves that the prospectus was issued without his knowledge or consent, and that on
becoming aware of its issue, he forthwith gave a reasonable public notice that it was issued
without his knowledge or consent.
(c) 'Financial statement' as per Section 2(40) of Companies Act, 2013 in relation to a company,
includes -
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit,
an income and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in sub-
clause (i) to sub-clause (iv).
However, in the case of a One Person Company, small company and dormant company, the
financial statement may not include the cash flow statement.
(d)
Rights of the true owner:

He can compel the company to restore his name on the register of members (since a forged
transfer is without any legal effect and the true owner continues to be the member of the
company).
Liabilities of A:
'A is liable to compensate the loss caused to the company since he had lodged the forged
transfer deed.
Rights of B:
No title could be transferred to B even if he is a bona fide purchaser since as per the general rule
forgery is nullity (It means if any of the signatures are forged, it shall be taken as if no signatures
are there, and thus no tile can be transfer to transferee). This view was also held in the case of
[Rubben v Great Fingal Consolidated]
1. The company can refuse to register 'B' as a member.
2. The company is liable to 'B' since the company had issued share certificate to A, and
therefore, the company shall be stopped from denying the liability accruing to it from its own
default.
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Question 3:
(a) Following information is available from the audited Balance Sheet as at 31st March, 2014 of
Sarah Ltd.:
Capital and Liabilities ` Assets `

Share Capital: Fixed Assets:
Equity Share Capital 50,00,000 Goodwill 10,00,000
(5,00,000 shares of ` 10 each fully Land & buildings 75,00,000
paid up in cash) Plant & Machinery 1,50,00,000
Less: Calls in arrears 50,000 Furniture & Other Assess 2,50,000
49,50,000
Investments:
Preference Share Capital 15,00,000 Equity Shares in wholly owned
Share Application Money 10,00,000 Subsidiary Company - Sama 12,50,000
Reserves and Surplus: Ltd.
Securities Premium A/c 15,00,000 Equity Shares representing 90%
Capital Redemption Reserve 12,00,000 of Share capital of Cezar Ltd. 4,50,000
Fixed Assets Revaluation Reserve 10,50,000 Debentures in Sona Ltd. 12,00,000
Sinking Fund Reserve 11,00,000 Preference Shares in Hareem 5,00,000
General Reserve 40,00,000 Ltd.
Profit & Loss A/c 22,00,000 Capital Account Balance in 8,00,000
Dividend Equalisation Reserve 6,00,000 Partnership Firm - Bashir & Co.
Secured Loans: Current Assets:
Cash Credit facility from Bank 1,00,00,000 Stock and Book Debts 14,00,000
Unsecured Loans: Cash & Bank Balances 1,00,000
Fixed Deposits (from general 20,00,000 Loans & Advances:
public maturing after 31.12.2014) Inter-corporate Deposits 25,00,000
Current Liabilities A Provisions: Business Advances 14,00,000
Current Liabilities 12,50,000
Provision for Taxation 10,00,000
3,33,50,000 3,33,50,000
The directors of the company want to make further investments stated below by taking a
decision in the meeting of Board of directors without seeking approval of the shareholders:
(i) Loan to Sama Ltd. 25,00,000
(ii) Loan to Cezar Ltd. 15,00,000
(iii) Purchase of further debentures in Sona Ltd. 8,00,000
(iv) Purchase of shares from the open market in Ocean Ltd. 15,00,000
You are required to state, with to the relevant provisions of the Companies Act, 1956, whether the
directors can do so and mention the relevant calculations.
(b) A group of creditors of a company lodged a complaint with the Registrar of Companies
alleging that the Directors of the company are engaged in falsification and destruction of
account books and records of the company and urged the Registrar to seize the account books
and records of the company. Discuss whether the Registrar can exercise such powers under the
provisions of Companies Act, 1956.
Answer:
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(a) Requirements for making inter-corporate loans and investments as per section 372 of
Companies Act, 1956:
1. Unanimous approval of Board is required. The approval shall be obtained by passing a

resolution at a Board meeting.
2. Special resolution is required if the aggregate of loans etc. (already made plus proposed)
exceeds the higher of-
 60% of the aggregate of paid-up capital and free reserves; or
 100% of its free reserves.
The notice of special resolution must state the specified particulars.
3. Approval of Public Financial Institution shall be obtained unless -
 the limits of 60% is not exceeded: and
 there is no default in repayment of loan installments or interest.
4. No default of section 58A (Public deposits) is subsisting.
Loan includes debentures or deposits, of money made by one company with another
company.
'Free reserves' as per Section 2(43) of Companies Act, 2013 means those reserves which, as per
the latest audited balance sheet, are free for distribution as dividend, provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets,
whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognized in equity, including
surplus in profit and loss account on measurement of the asset or the liability at fair value,
shall not be treated as free reserves;
Thus it, includes the balance to the credit of securities premium account but does not include
share application money. Capital redemption reserve, Fixed Assets Revaluation Reserve and
sinking fund are not free for distribution as dividend and hence are not included in free reserves.
Provision for taxation is a liability and is therefore not included in free reserves.
First determine whether a special resolution is required for making the proposed loans and
investments. This can be determined as under:
Step 1: Determine the paid up share capital

Amount (`)
Equity share capital 50,00,000
Less. Calls unpaid 50,000
Balance 49,50,000
Preference share capital 15,00,000
Paid up share capital 64,50,000
Step 2. Determine the 'free reserves'

Amount (`)
Securities premium A/c 15,00,000
General reserve 40,00,000
Profit & loss A/c 22,00,000
Dividend equalisation reserve 6,00,000
Free reserves 83,00,000
Step 3. Determine the overall limit for inter-corporate loans and investments, i.e.
Amount (`)
higher of'60% of (paid up capital and free reserves) or 100% of free 88,50,000
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reserves
60% of (64,50,000 + 83,00,000) 83,00,000
100% of free reserves
Overall limit for loans and investments 88,50,000
Step 4. Determine inter-corporate loans and investments already made

Amount (`)
Equity Shares in wholly owned Subsidiary Company - Sama Ltd. Nil
Equity Shares of Cezar Ltd. 4,50,000
Debentures in Sona Ltd. 12,00,000
Preference Shares in Hareem Ltd. 5,00,000
Inter-corporate Deposits 25,00,000
Total investments and loans already made 46,50,000
As per section 372A(8), investments made by a holding company in its wholly owned subsidiary
are outside the purview of section 372A of Companies Act, 1956. Therefore, Investments made in
equity shares of Sama Ltd. are excluded from the investments already made.
Step 5. Determine further inter-corporate loans and investments permissible without passing a
special resolution
Amount (`)
Overall limit for inter-corporate loans and investments 88,50,000
Less: investments already made 46,50,000
Further loans and investments permissible without special resolution 42,00,000
Step 6. Determine inter-corporate loans and investments proposed to be made

Amount (`)
Loan to Sama Ltd. Nil
Loan to Cezar Ltd. 15,00,000
Debentures in Sona Ltd. 8,00,000
Shares in Ocean Ltd. 15,00,000
Proposed loans and investments 38,00,000
As per section 372/4(8), investments made by a holding company in its wholly owned subsidiary
are outside the purview of section 372A. Therefore, proposed loan of ` 25,00,000 to Sama Ltd.
has been ignored.
Step 7. Determine whether special resolution is required

Since proposed loans and investments (` 38,00,000) are within the permissible limits (` 42,00,000),
special resolution is not required.
Therefore, Sarah Ltd. can make the proposed investment as follows:

(i) A resolution shall be passed at a Board meeting with the consent of all the directors present.
(ii) The company shall enter the prescribed particulars in the register within 7 days.
(iii) The company shall ensure that no default in compliance with section 58A of Companies Act
1956 (relating to public deposits) is subsisting. Since deposits are maturing only after
31.12.2014, this condition is fulfilled.
(b) The provisions of section 234A are explained as follows:
1. Application by registrar for seizure of books and papers
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The registrar may make an application to the Magistrate of the First Class or the Presidency
Magistrate having jurisdiction for an order for the seizure of books and papers. Such an
application may be made if the registrar has reasonable ground to believe that books and
papers relating to the affairs of the company may be destroyed, mutilated, altered, falsified or
secreted. The books and papers may relate to the company or other body corporate or
managing director or manager of such company or other body corporate.
2. Magistrate's power
After considering the application and hearing the registrar, the Magistrate may authorise the
registrar-
(a) to enter, with such assistance as may be required, the places where such books and papers
are kept;
(b) to search those places in the manner specified in the order;
(c) to seize such books and papers as he considers necessary.
The search or seizure shall be carried out in accordance with the provisions of the Code of
Criminal Procedure, 1898.
3. Return of books and papers
The registrar shall return the books and papers within 30 days to the person from whose custody
or power they were seized and inform the magistrate of such return. Before returning the books
and papers the registrar may take copies or extracts, place identification marks or deal with the
books and papers in such other manner, as he considers necessary.
Question 4:
(a) Profound Housing Finance Company Limited is prepared to give housing loans to the
employees of Super Chemicals Limited subject to the condition that the loans are guaranteed by
Super Chemicals Limited. Super Chemicals Limited is not a listed company and the company will
be exceeding the limits prescribed under the Companies Act, 1956 by providing such
guarantee. The company desires to give the guarantee early as part of employees' welfare
measure without waiting for the next annual general meeting, which is due only after eight
months. Advise the company about the legal requirements under the Companies Act, 1956 to
give effect to the above proposal. What would be your advice, if the company was required to
provide security instead of guarantee?
(b) An inspector was appointed under Section 235 of the Companies Act, 1956 to investigate
the affairs of a public Company. Mr. Winny, the works manager of the company, who is aware of
certain misdeeds of the management, desires to know whether he is entitled to any protection
against dismissal by the company, if he discloses the misdeeds during the course of examination
by the inspector. Advise him explaining the relevant provisions of the Companies Act, 1956.
Answer:
(a) Inter-corporate loans and investments are governed by the provisions of section 372A of
Companies Act, 1956.
Legal requirements for giving guarantee by Super Chemicals Limited

 Approval of the Board must be obtained by passing a unanimous resolution in a Board
meeting.
 Approval of the members must be obtained by passing a special resolution in a general
meeting (whether annual general meeting or extraordinary general meeting). However,
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since the company desires to give guarantee without waiting for the next annual general
meeting, the Board may give guarantee, without being previously authorised by special
resolution, if the following three conditions are satisfied:
1. There exist exceptional circumstances which prevent the company from passing special
resolution.
2. Unanimous approval of the Board is obtained in a Board meeting.
3. The resolution of the Board is confirmed by the members –
(i) within 12 months, or
(ii) in the ensuing annual general meeting,
whichever is earlier.
 If the company has taken any term loan from any Public Financial Institution, the approval of
such Public Financial Institution shall also be obtained,
 No default of section 58A must be subsisting, otherwise the company cannot give such
guarantee.
Legal requirements for providing security by Super Chemicals Limited
If instead of giving guarantee, Super Chemicals Limited is required to provide security, the same
legal requirements shall have to be complied with as in case of giving guarantee, except that, it
is mandatory to pass special resolution before providing security.
(b)
(i) Non-disclosure of source of information
Section 457 of the Companies Act, 2013 seeks to protect the informant (the registrar, any officer
of the Government or any other person). Thus, no Court or any other authority can compel the
informant to disclose the source from where he got any information which -
1. led to the order of investigation; or
2. has been material or relevant in connection with such investigation.
(ii) Temporary protection of employees
Object of the section. Section 635B of Companies Act, 1956 seeks to protect the interest of
employees who disclose information to the inspectors during the investigation proceedings.
Procedure for discharging or punishing an employee. During the pendency of the investigation,
a company can discharge or punish (whether by way of dismissal, removal, reduction in rank or
otherwise) any employee only after giving a previous intimation to the Company Law Board. If
the Company Law Board does not make any objection within 30 days, the company may
proceed to take the proposed action. If the company is dissatisfied with the objection raised by
the Company Law Board, it may within 30 days prefer an appeal to the Court. The decision of
the Court shall be final and binding on the company.
The Company Law Board acts unilaterally. The Company Law Board is not bound to hear
representatives or evidence on behalf of the parties in arriving at its opinion. The principles of
natural justice are not attracted to make such a decision. The Company Law Board has to form
its opinion unilaterally and subjectively [Ashoka Marketing Ltd. v Additional Registrar of
Companies, W.B. (1985) 57 Comp Cas 187 (Cal)].
Question 5:
(a) Jacqueline, having substantial interest in Sunlit Ltd, is appointed as a sole selling agent by the
Board of directors of the company for a period of 5 years. The company's paid-up share capital
is ` 49 (Forty nine) crores. The Board of directors did not place the matter in the AGM, for paucity
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of time and communicated to Jacqueline about her appointment, who in turn accepted the
appointment. Explaining the provisions of the Companies Act, 1956 decide:
(i) Whether the appointment of Jacqueline is in order?
(ii) What course of action would you take as the secretary of the company in case Jacqueline
does not have substantial interest?
(b) The Board of directors of a company decides to revise the accounts which have already
been adopted by the shareholders in annual general meeting. Advise.
Answer:
(a) The legal position:
(i) A sole selling agent may be appointed for a maximum period of 5 years.
(ii) The appointment of a sole selling agent must be made subject to the condition that his
appointment shall be approved by the company in first general meeting held after her
appointment. If her appointment is not so approved in the first general meeting, the
appointment ceases from the date of the general meeting [Section 294(2A)]. She will not be
entitled to claim any compensation for premature termination in such a case.
(iii) The appointment of a sole selling agent requires the previous approval of the Central
Government if she has substantial interest in the company.
(iv) The appointment of a sole selling agent requires the approval of the Central Government
and the consent of the company by way of a special resolution, if the paid up capital of the
company is ` 50 lakhs or more. However, it shall be lawful, if the special resolution is passed in
the first general meeting held after appointment of sole selling agent, and the approval of
the Central Government is obtained after the appointment of sole selling agent.
The given case:
 The paid up capital of the company is ` 49 crores [i.e., more than ` 50 lakhs) and so the
approval of the Central Government and a special resolution is required for the
appointment of a sole selling agent.
• Jacqueline has a substantial interest in the company, and so the prior approval of the
Central Government is necessary for the appointment of Jacqueline as a sole selling agent.
 As is evident, the prior approval of the Central Government has not been obtained and
special resolution has not been passed by the company. Thus, the appointment of
Jacqueline is not in order.
In case Jacqueline had no substantial interest in the company, her appointment requires special
resolution (in first general meeting held after appointment) and approval of the Central
Government (after appointment), since the paid up capital of the company is more than ` 50
lakhs. Accordingly, the appointment of Jacqueline shall be valid subject to the condition that
special resolution approving her appointment is passed in the first general meeting held after her
appointment, and the approval of the Central Government is obtained subsequent to her
appointment.
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(b) There is no provision in the Companies Act, 1956, expressly permitting or prohibiting revision
or reopening of accounts after adoption.
Generally, reopening or rectification of accounts is not permitted if the accounts have already
been adopted at the annual general meeting. The Institute of Chartered Accountants of India is
also of this opinion. Accordingly, accounts once adopted by the members cannot be
reopened, revised or rectified under any circumstances.
However, the Department of Company Affairs (now Ministry of Corporate Affairs) has permitted
revision/rectification of accounts provided that -
 the revision is made for meeting the technical requirements of taxation laws or of any other
law;
 such revision will result in true and fair view of state of affairs of the company;
 the revised annual accounts shall be adopted in the subsequent annual genera! meeting or
extraordinary general meeting;
 the revised annual accounts shall be filed with the registrar as per section 220 of the
Question 6:
(a) M/s Contrasts Ltd. is a company controlled by two family groups. The first family group has
four directors, namely, Mr. Anand, Mr. Bikash, Mr. Chandu and Mr. Deva on the Board of
directors. The second family group has two representatives Mr. Zoom and Mr. Space on the
Board. Because of internal family troubles, the first group, by virtue of its majority shareholding
removed both Mr. Zoom and Mr. Space as the directors of the company. Aggrieved by this
action the second group is planning to move an application before the Company Law Board.
You have been approached for advice. Advise as to the eligibility and restrictions regarding
filing the application and the chances of getting the relief from the Company Law Board,
assuming that there is no other material on record in support of oppression on the minority group.
You may refer to provisions of Companies Act, 1956 for this purpose.
(b) The issued, subscribed and paid-up share capital of ABC Company Limited is ` 10 lakhs
consisting of 90,000 equity shares of ` 10 each fully paid up and 10,000 preference shares of ` 10
each fully paid up. Out of members of company, 400 members holding one preference share
each and 50 members holding 500 equity shares applied for relief under Sections 397 and 398 of
the Companies Act, 1956. As on the 'date of petition', the company had 600 equity shareholders
and 5,000 preference shareholders.
Examine whether the above petition under Sections 397 and 398 of Companies Act, 1956 is
maintainable. Will your answer be different, if preference shareholders have subsequently
withdrawn their consent?
Answer:
(a) The management of the company is based on the Majority Rule. The Courts do not usually
intervene in the matters of internal management of the company. However, where the exercise
of voting power by the majority results in oppression on the members or results in
mismanagement or prejudice to public interest, the Company Law Board may grant the relief to
the minority.
616
As per section 399 of Companies Act, 1956, the eligibility criterion to file an application with the
Company Law Board for claiming relief from oppression or mismanagement is as follows:
(i) In the case of a company having a share capital. Members eligible to apply shall be the
lowest of the following:
(a) 100 members; or
(b) l/10th of the total number of members; or
(c) Members holding not less than l/10th of the issued share capital of the company.
(ii) In the case of a company having no share capital. The application shall be made by at least
l/5th of total number of members.
The applicants must have paid all the calls and other sums due on their shares. The applicants
must hold the requisite number of shares at the time of filing the application.
In the present case the removal of two directors cannot, ipso facto, amount to an act of
mismanagement or an act prejudicial to public interest. Also, it does not amount to oppression
because-
 The election and removal of directors is the prerogative of the members and such an act
cannot ipso facto be treated as oppression on minority, unless the conduct of the majority is
based on malafide considerations.
 The conduct can be said to be oppression only when it is burdensome, harsh and wrongful.
Oppression involves an element of lack of probity and fair dealings to a member. Mere
removal of two directors does not amount to oppression.
 The oppression complained of must affect a person in his capacity as a member of the
company. Oppression in any other capacity, i.e., as a director of a company is outside the
purview of section 397.
 The relief is available only when the acts complained of are shown to be continued acts of
oppression.
 The relief is available only if it is established that oppression is so severe that there is just and
equitable ground for winding up of the company.
In the given case, it has been made clear that there is no other material on record in support of
oppression on the minority. Since the conditions specified in section 397 have not been fulfilled,
there is no oppression on the second family group and therefore relief from Company Law
Board cannot be claimed.
(b) As per section 399, of Companies Act, 1956, in the case of a company having a share
capital, members eligible to apply for oppression and mismanagement shall be lowest of the
following:
(i) 100 members; or
(ii) 1/10th of the total number of members; or
(iii) Members holding not less than l/10th of the issued share capital of the company.
It must be noted that the term 'member' includes an equity shareholder as well as preference
shareholder. The consent to be given by shareholder is reckoned at the beginning of the
proceedings. The withdrawal of consent by shareholder during the course of proceedings does
not affect the maintainability of the application [Rajahmundri Electric Supply Corporations
Nageshwara Rao AIR 1956 SC 213].
In the present case, the shareholding pattern of the company is as follows:
 ` 9,00,000 equity share capital held by 600 members.
 ` 1,00,000 preference share capital held by 5,000 members.
 ` 10,00,000 total share capital held by 5,600 members.
The application alleging oppression and mismanagement has been made by the members as
follows:
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(a) Number of members making the application:

 Preference shareholders 400
 Equity shareholders 50
 Total members 450
(b) Amount of share capital held by the members making the application:
 Preference share capital 4,000 (400 preference shares of ` 10 each)
 Equity share capital 5,000 (500 equity shares of ` 10 each)
 Total capital 9,000
The application shall be valid if it has been made by the lowest of the following:
(a) 100 members
(b) 560 members (being 1/10th of 5,600)
(c) Members holding ` 1,00,000 share capital (being 1/10th of ` 10,00,000)
As is evident, the application made by 450 members meets the eligibility criteria specified under
section 399, and therefore the application is maintainable.
Such application shall remain valid despite the fact that some of the applicants have
subsequently withdrawn their consents [Rajahmundri Electric Supply Corporation v Nageshwara
Rao AIR 1956 SC 213].
Please note that, it has been assumed that the members making the application have paid all
the calls due on their shares.
Question 7:
(a) On 1st January, 2014 the Board of directors of Xeal Co. Ltd. appointed Mr. Ankit as sole
selling agent of the company for a period of five years. On 6th February, 2014 Xeal Co. Ltd. in its
general meeting disapproved the appointment of Mr. Ankit as sole selling agent of the
company.
Explain, as per provisions of Companies Act, 1956:
(i) Is Mr. Ankit entitled to payment of compensation for loss of office?
(ii) Are there some other circumstances when compensation for loss of office is prohibited to a
sole selling agent?
(b) Penguin Limited had taken a loan of ` 2 crores from a bank secured by some of its assets.
The company has defaulted in the matter of payment of some installments of loan as per terms
of the loan agreement. The bank has filed a petition in the High Court on the ground that the
company is unable to pay its debts.
The company opposes the petition for winding up on the ground that it has employed 1,000
workers, paid their salaries regularly and that it has paid all the tax dues to the Government. The
company has further contended that if the company is compelled to repay the loan
immediately, it will cripple the company causing hardship to employees and other persons
having business dealings with the company. The company is also supported by some major
creditors.
Explain the circumstances under which a company may be ordered to be wound up by the
Court on the ground of inability to pay its debts and whether the bank will succeed in this case.
Refer to provisions of Companies Act, 1956, for the said purpose.
(c) The promoters of Brahma Producer Company Ltd., proposed to be registered under Section
581C of the Companies "Act, 1956 desire to have the following information; what is the minimum
number of directors required to be appointed?
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Answer:
(a) As per section 294A of Companies Act 1956, a sole selling agent shall not be entitled to any
compensation for premature termination of the agency brought about in any of the following
circumstances:
(i) Where the appointment of sole selling agent is not approved in the first general meeting
held after his appointment.
(ii) Where the sole selling agent resigns because of the reconstruction or amalgamation of the
company and is appointed as the sole selling agent of the reconstructed or amalgamated
company.
(iii) Where the sole selling agent resigns voluntarily.
(iv) Where the sole selling agent is guilty of fraud or breach of trust or gross negligence in the
conduct of his duties.
(v) Where the sole selling agent has instigated or is directly or indirectly responsible for the
termination of the sole selling agency.
In the present case, the appointment of Mr. Ankit has been disapproved by the general meeting
and therefore he is not entitled to any compensation for loss of office.
(b) The Court may order the winding up of a company under any of the circumstances
mentioned under section 433(a) to (f) of Companies Act, 1956. Section 433(e) provides that a
company may be wound up by the Court if it is unable to pay its debts. As per section 434 of
Companies Act, 1956, a company shall be deemed to be unable to pay its debts in the
following circumstances:
1. When a company fails in paying its debts exceeding ` 500 within 3 weeks from the date of
demand by its creditors.
2. When the company fails to satisfy a Court decree in favour of a creditor, whether whole or in
part.
3. When it is proved that the company is unable to pay its debts.
Applying the principles laid down in Tata Iron and Steel Co. v Micro Forge (India) Ltd. 2000 CLC
1669 to the given case, it is very unlikely that the Court would order winding up of the company
because of the following reasons:
(i) Section 433 is indicative of the fact that even if one or more grounds mentioned in section
433 exist, it is not obligatory for the Court to make an order of winding up. The Court has
discretionary power. The Court must in each case exercise its discretion in deciding whether in
the circumstances of the case, it would be in the interest of justice to wind up the company. The
Court would take into consideration the entire status and position of the company in the market,
and the element of public policy.
(ii) The company has employed 1,000 workers and is paying their salaries regularly. Winding up
the company would mean loss of employment to the existing employees. It would also result in
diminishing employment opportunities.
(iii) The company is paying taxes to the Government regularly. Winding up order would result in
loss of revenue to the Government.
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(iv) The other creditors of the company have opposed the winding up petition which means
that winding up order would not benefit the company's creditors in general. Therefore, winding
up order shall not be made on a creditor's petition.
(v) The company seems to be in a temporary cash crisis. The Court would give the company
some time to come out of the momentary financial crisis.
(vi) The company is an ongoing concern having regular business and employment of
employees. The effect of winding up would be of putting an end to the business resulting in loss
of employment to several employees and loss of production and effect on the larger interest of
the society.
(c) As per section 5810 -

(i) Every Producer Company shall have at least 5 and not more than 15 directors.
(ii) Where an inter-state co-operative society is incorporated as a Producer Company, such
company may have more than 15 directors for a period of 1 year from the date of its
incorporation as a Producer Company.
In the given case, the Producer Company is proposed to be incorporated afresh, and not to be
incorporated by way of conversion of an inter-state co-operative society into a producer
company. Therefore, it shall have a minimum of 5 directors.
Question 8:
(a) The High Court at Mumbai appointed the Official Liquidator as the liquidator of Privy
Engineering Co. Ltd. Some of the creditors have brought to the notice of the liquidator that
though the company is in liquidation for the past several years, nothing worthwhile has been
done to speed up the winding up and no documents have been filed to indicate the progress of
liquidation. Examine in this connection the nature and periodicity of returns required to be field
by the liquidator in terms of the provisions contained in the Companies Act, 1956.
(b) Examine in the light of the provisions of the Companies Act, 2013 whether the following
companies can be considered as "Foreign Companies":
(i) A company incorporated outside India having a share registration office at New Delhi;
(ii) A company incorporated outside India having shareholders who are all Indian Citizens;
(iii) A company incorporated in India but all the shares are, held by foreigners.
Also examine whether the above companies can issue Indian Depository Receipts under the
provisions of the Companies Act, 1956?
Answer:
(a) The liquidator has to maintain an account of the proceedings of the winding up. As per
section 462 of Companies Act, 1956, the liquidator shall comply with the following provisions:
(i) So long as the liquidator is in office, he shall present to the Court an account of his receipts
and payments, at least twice a year. He shall furnish the Court with such vouchers and
information as the Court may require. The Court may require the production of any books or
accounts kept by the liquidator.
(ii) The Court shall cause the account to be audited in such manner as it thinks fit.
620
(iii) The account shall be in the prescribed form, shall be made in duplicate, and shall be verified
by a declaration in the prescribed form. One copy of the account shall be kept by the Court
and the other shall be filed with the registrar.
(iv) The copies filed with the Court and the registrar shall be open to the inspection of any
creditor, contributory or any other interested person.
(v) A printed copy of the audited accounts shall be sent by the liquidator to every creditor and
to every contributory. Instead of the complete account, a summary of the account may be
sent. However, the Court may dispense with sending of account or summary thereof, e.g.,
where the assets of the company are not sufficient to meet all the liabilities.
(vi) In case of a Government company, the liquidator shall send a copy of the accounts to the
Central Government and/or the State Government, as the case may be.
As per section 551 of Companies Act, 1956, the liquidator shall submit to the Court information
relating to pending liquidation. The liquidator shall comply with the following provisions:
(i) Where the winding up proceedings continue for more than 1 year, the liquidator shall file a
statement with respect to the proceedings of winding up.
(ii) The statement shall be duly audited by a person who is qualified to act as an auditor of the
company.
(iii) The statement shall be filed within 2 months of the end of the first year and thereafter until
the winding up is concluded, at intervals of not exceeding 1 year.
(iv) The statement is to be filed with the Court. A copy shall also be filed with the registrar.
In the given case, no documents have been filed by the liquidator. Therefore, the liquidator has
made a default in compliance with the provisions of sections 462 and 551. For default of section
551, the liquidator shall be punishable with fine which may extend to ` 5,000 per day during
which the failure continues. Since no penalty has been provided for contravention of section
462, the residuary penalty section 450 of Companies Act, 2013 gets attracted and consequently
the liquidator shall be punishable with fine which may extend to ` 5,000 and a further fine of `
5,000 per day in case of continuing contravention.
(b) As per section 2(42) of Companies Act,2013, a company shall be a foreign company if -
(i) it is incorporated outside India; and
(ii) it has established a place of business in India.
The answer to the given problem is as follows:

(i) A share transfer office or share registration office constitutes a place of business (Section 386
of the Companies Act, 2013). Since, the company incorporated outside India has a share
registration office at New Delhi, it is clear that the company has established a place of
business in India and is therefore a foreign company.
(ii) A company incorporated outside India does not become a foreign company by the mere
fact that all its shareholders are Indian citizens. Assuming that the company has not
established any place of business in India, the company is not a foreign company.
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(iii) A company incorporated in India is a 'company' within the meaning of Clause (20) of Section
2 of the Companies Act, 2013. It cannot become a foreign company by the mere fact that
all the shares of the company are held by foreigners.
Section 605A of the Companies Act, 1956 authorises a company incorporated outside India
(whether or not it has established a place of business in India, i.e. whether or not it is a foreign
company) to issue Indian Depository Receipts in accordance with the Rules prescribed by the
Central Government. Accordingly, -
(i) 'A company incorporated outside India having a share registration office at New Delhi' can
issue IDRs.
(ii) 'A company incorporated outside India having shareholders who are all Indian Citizens' can
issue IDRs.
(iii) 'A company incorporated in India but all the shares are held by foreigners' cannot issue IDRs.
Question 9:
(a) Explain briefly with reference to Companies Act,1956 the provisions relating to -
(1) Transfer of shares to be void after the commencement of winding up

(2) Disclosure of continuance of liquidation
(3) Submission of information as to pending liquidation
(b) Mr. Scrooge, a director of Donald Ltd. made default in filing of annual accounts and annual
returns with the Registrar of Companies for a continuous period of three financial years ending
31st March, 2005. Referring to the provisions of the Companies Act, 1956 examine the validity of
the following:
(i) Whether Scrooge can continue to be a director of Donald Ltd., and also Duckky Ltd., where
he is a director. Also state whether he can be reappointed as a director in Donald Ltd. as well
as Duckky Ltd.
(ii) Would your answer be still the same in case Scrooge is a nominee director of a Public
Financial Institution?
(iii) What would be your answer in case the defaulting company (i.e. Donald Ltd.) is a private
company?
Answer:
(a)
(1) Transfer of shares to be void (Section 536)
Any transfer of shares and alterations in the status of the members of the company made
after the commencement of the winding up shall be void, except if made with the sanction
of the liquidator.
(2) Disclosure of continuance of liquidation (Section 547)

Every document of the company on which the name of the company appears, shall contain a
statement that it is being wound up, e.g., by writing the words 'in liquidation'. These documents
include invoices, orders for goods, letters and other documents, whether issued by the liquidator,
receiver or manager of the property of the company.
(3) Submission of information as to pending liquidation (Section 551)
(a) When is submission required? Where the winding up proceedings continue for more than 1
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year, the liquidator shall file a statement with respect to the position of the liquidation.
(b) Audit. The statement shall be duly audited by a person who is qualified to act as auditor of
the company.
(c) Time limit for filing. The statement shall be filed within 2 months of the end of the first year and
thereafter until the winding up is concluded, at intervals of not exceeding 1 year.
(d) With whom to be filed? In case of winding up by the Court or under supervision of the Court,
the statement is to be filed with the Court. A copy shall also be filed with the registrar. In case of
voluntary winding up, the statement shall be filed with the registrar.
(b) The legal position
1. A director of a public company shall be disqualified from being appointed as a director in

any other public company, if the public company of which he is already a director -
(i) does not file the annual accounts and annual returns for any continuous 3 financial years
commencing on and after 1.4.1999; or
(ii) fails to repay its deposit or interest thereon on due date or redeem its debentures on due
date or pay dividend and such failure continues for 1 year or more. Such disqualification
shall remain in force for a period of 5 years.
2. A director to whom disqualification under section 274(l)(g) has been attracted, shall not be
eligible to be appointed in any other public company. Also, he shall be disqualified from
being reappointed in any other public company in which he is already a director. However,
he shall not be disqualified for reappointment in the defaulting company.
3. The disqualification under section 274(l)(g) shall apply if -

(i) the company which has committed any of the two defaults mentioned under section
274(l)(g) is a public company (i.e. the defaulting company is a public company); and
(ii) the company in which the director is seeking appointment or reappointment is a public
company, other than the defaulting company (i.e. the appointing company is a public
company).
4. Defaults under section 274(l)(g) results in incurring a disqualification. However, a director is

not required to vacate his office in the companies in which he is already a director.
5. The Department of Company Affairs (Now Ministry of Corporate Affairs) has clarified that
nominee directors appointed by the Financial Institutions having non-obstante provisions
over the Companies Act, 1956 like IDBI, LIC, UTI, etc., in their respective statutes, shall not be
liable to be disqualified under section 274(l)(g) [Department Circular No. 11/2001,
dated25.5.2001].
The Given Case
A public company namely Donald Ltd. has made default in filing of annual accounts and
annual returns for 3 consecutive financial years ending 31st March, 2005. Mr. Scrooge is a
director in Donald Ltd.
Hence,
(i) Non-filing of annual accounts and annual returns for 3 consecutive financial years results in
incurring disqualification for appointment or reappointment as a director, but it does not
623
result in vacation of office. Therefore, Scrooge can continue to be a director in Donald and
also in Duckky Ltd.
Scrooge cannot be reappointed as a director in Duckky Ltd. since a director disqualified
under section 274(1)(g) is not eligible for reappointment in any other public company.
However, Scrooge can be reappointed as a director in Donald Ltd. since a director
disqualified under section 274(1)(g) is not disqualified for reappointment in the defaulting
company.
(ii) Nominee directors appointed by the Financial Institutions are not liable to be disqualified
under section 274(1)(g). Accordingly, Mr. Scrooge shall not be disqualified under section
274(1)(g). Also, in such a case, he shall be eligible to be reappointed as a director in Donald
Ltd. as well as Duckky Ltd.
(iii) Disqualification under section 274(1)(g) is not attracted if the defaulting company is a private
company. In other words, no director of a private company shall be disqualified under
section 274(1)(g) even though such private company fails to file annual accounts and
annual returns for 3 consecutive financial years. Accordingly, Mr. Scrooge shall not be
disqualified under section 274(1)(g). Also, in such a case, he shall be eligible to be
reappointed as a director in Donald Ltd. as well as Duckky Ltd.
Question 10:
(a) Mr. John has been appointed as additional director on the Board of MCX Ltd. on 12th
January, 2006. Mr. John has filed his consent to Act as a director, if appointed, only with the
company. Examine with reference to the provisions of the Companies Act, 1956 whether he is
also required to file his consent with the Registrar of Companies.
(b) The Articles of Association of Smile Ltd. provide that the qualification of a director shall be
holding of at least 10 shares in the company. Mr. Rishab has been appointed as a director in the
said meeting on 1st May, 2014. Mr. Rishab applied for 10 equity shares of the company on 30th
July, 2014. The said shares were allotted to him on 20th August, 2014 when the Board meeting
was held.
Discuss the relevant provisions of the Companies Act, 1956 in the matter of share qualification
requirements and the consequences of non-compliance thereof. Also state whether Mr. Rishab
has complied with the requirements in this regard.
Answer:
(a) The present problem relates to section 264(2) of the Companies Act, 1956.
The legal position
1. As per section 264(1), every person proposed as a director (subject to certain exceptions)
shall file his consent with the company.
2. As per section 264(2), a person shall not act as a director unless he has filed his consent within
30 days with the Registrar. However, following persons need not file their consent with the
Registrar:
(i) A director reappointed after retirement (whether by rotation or otherwise).
(ii) Additional director, alternate director or a person filling a casual vacancy when
appointed as a director or reappointed as an additional or alternate director.
(iii) A director named in the articles as first registered.
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The given case
Mr. John filed his consent under section 264(1), to act as a director, with the company. The issue
raised in the given case is "whether Mr. John is required to file his consent under section 264(2),
after he is appointed as an additional director?"
Analysis of the case
As per section 264(2), consent is not required to be filed with the registrar when, at an ASM, the
tenure of additional director has to come to an end, and he is appointed as a regular director
by the members in the same ASM (by complying with the requirements of section 257). Thus, the
exemption from filing the consent is available only when at the time of appointment as a regular
director at an ASM, the person is already an additional director.
When a person who is not a director at all, is appointed as an additional director, no exemption
from filing consent is available under section 264(2). Thus, consent is to filed with the registrar
within 30 days of appointment as an additional director.
Hence we can conclude that, Mr. John is required to file his consent with the Registrar within 30
days of his appointment as an additional director.
(b) In the given case, Mr. Rishab was appointed as a director on 1.5.2014 and therefore, he
must obtain the qualification shares on or before 1.7.2014. Mr. Rishab applied for shares on
30.07.2014. However, his office of director had already been vacated as on 2.7.2014. As on
30.07.2014, he was not a director, and so question of obtaining qualification shares does not
arise. Therefore, Mr. Rishab has not complied with the requirements of qualification shares
specified u/s 270. In this case, following consequences shall follow.
(i) Mr. Rishab shall vacate the office of the director on 2.7.2014. The vacation of office shall be
automatic and no notice is required to be given to Mr. Rishab.
(ii) If he acts as a director when he knows that the office of director held by him has become
vacant, he shall be punishable with fine upto ` 5,000 per day for the period he acts as a
director [Section 283(2/1) of Companies Act, 1956].
(iii) If after the expiry of 2 months, a person acts as a director when he does not hold the
qualification shares, he shall be punishable with fine upto ` 500 per day for the period he
acts as a director [Section 272 of Companies Act, 1956].
The penalties prescribed under sections 283(2A) and 272 are cumulative.
Question 11:
(a) Board of Directors of M/s. Regal Ltd. in its meeting held on 29th May, 2014 declared an
interim dividend payable on paid up Equity Share Capital of the Company. In the Board Meeting
scheduled for 10th June, 2014, the Board wants to revoke the said declaration. You are required
to state with reference to the provisions of the Companies Act, 1956 whether the Board of
Directors can do so.
(b) Under provisions of Companies Act, 1956, relating to producer company, examine whether
the office of director of such company shall fall vacant in the following circumstances:
(i) Asraf, a Director of Rimjhim Ltd., a producer company has made a default in payment of
loan taken from a company and default continues for 60 days.
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(ii) Zulfi, a Director of the above company could not call the Annual General Meeting for the
company due to some natural calamity occurred three days before the Schedule date.
(c) By an oversight, a notice of meeting of the Board was not sent to one of the directors who
were in India. Is the meeting valid, as per Companies Act, 1956 ?
Answer:
(a) As per section 2(35) of the Companies Act, 2013, dividend includes any interim dividend.
Therefore, all the provisions applicable to final dividend shall equally apply to interim dividend.
Thus, interim dividend once declared, like final dividend, is a debt due from the company.
Accordingly, once declared, interim dividend cannot be revoked except under the same
circumstances in which the final dividend can be revoked.
The amount of interim dividend is to be compulsorily deposited in a separate bank account,
within 5 days of passing the Board resolution declaring the interim dividend [Section 205(1A)].
The provisions contained in sections 205, 205A, 205C, 206, 206A of the Companies Act, 1956 and
Section 127 of the Companies Act, 2013 shall, as far as may be, also apply to any interim
dividend [Section 205(1C) of the Companies Act, 1956].
As per section 127 of the Companies Act, 2013, dividend must be paid within 30 days of its
declaration. Thus, interim dividend must also be paid within 30 days of its declaration, i.e., within
30 days of date of passing the Board resolution declaring the interim dividend.
In the instant case, on declaration of interim dividend by the Board in a Board Meeting held on
29th May, 2014, the Liability of the company to pay the interim dividend has become certain,
and the payment of interim dividend must be made within next 30 days, viz. on or before 28th
June 2014.
Therefore, revocation of interim dividend in the Board Meeting held on 10th June is not possible.
(b) The given problem relates to sections 581Q of the Companies Act, 1956, as discussed
below: Besides other grounds specified under section 581Q, the office of a director of a
Producer Company shall become vacant in the following cases:
 Where the Producer Company, in which he is a director, has made a default in repayment
of any advances or loans taken from any company or institution or any other person and
such default continues for 90 days.
 Where the annual general meeting or extraordinary general meeting of the Producer
Company, in which he is a director, is not called in accordance with the provisions of this Act
except due to natural calamity or such other reason.
The given problem is answered as under:
(i) The producer company Rimjhim Ltd. has made a default in payment of loan and such
default has continued for 60 days.
This does not result in vacation of office of Asraf, since the said default has not continued for
90 days, which is a pre-requisite for vacation of office under section 581Q.
(ii) The Annual General Meeting could not be called due to some natural calamity.
The office of director of Mr. Zulfi does not fall vacant since the reason for non-calling of the
general meeting is some natural calamity.
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(c) According to section 286 of Companies Act, 1956, notice of every meeting of the Board
shall be given in writing to every director in India and to every other director at his usual address
in India. Provisions of section 286 are mandatory and failure to send the notice even to a single
director would make the meeting and the resolution passed at the meeting null and void [Kuldip
Singh Dhillon v Paragon Utility Financiers (P) Ltd. (1988) 60 Comp Cas 77]. Even an accidental
omission to give notice to a director would make the meeting invalid [Parmeshwari Prasad
Gupta v Union of India(1974) 44 Comp Cas 1].
Question 12:
(a) One of the directors of Fast Track Company has been prosecuted for non-payment of sales
tax by the company. He intends to obtain relief under the Companies Act. Will he suceed, as per
provisions of Companies Act, 2013.
(b) In a Board meeting, a few directors raise disagreements on the minutes of the earlier Board
meeting alleging that the decisions were recorded wrongly. Advise the chairman, as per
(c) Decide in the light of the provisions of the Companies Act,2013 the validity and extent of
powers of Board of Directors and the procedure to be complied with in the following matters:
Donation of `5 lakhs to a political party registered with the appropriate authority.
Answer:
(a) The Court may, in its discretion, relieve an officer of the company from liability, if it appears
to the Court that -
(i) he is or may be liable for negligence, default, breach of duty, misfeasance or breach of
trust;
(ii) he has acted honestly and reasonably; and
(iii) having regard to all the circumstances of the case, he ought fairly to be excused.
Relief under section 463 of the Companies Act, 2013 cannot be extended in respect of any
liability under any Act, other than the Companies Act. The expression any proceedings'
occurring in section 463 of the Companies Act, 2013 cannot be read out of context and treated
in isolation, and must be confined to the Companies Act only.
Accordingly, section 463 of the Companies Act, 2013 applies to all legal proceedings under the
Companies Act only. Otherwise the application of section 463 of the Companies Act, 2013
would result in the penal provisions of other Acts being rendered ineffective. Furthermore, if the
parliament had intended that section 463 of the Companies Act, 2013 should apply to other
Acts also, it would have specifically provided for it. It is a sound rule of construction to confine
the provisions of a statute to itself and therefore section 463 of the Companies Act, 2013 cannot
be availed in respect of any proceedings under any other Act [Rabindra Chamaria v ROC[1992)
73 Comp Cas 257].
In the present case a director of the company has been prosecuted under the Sales Tax Act.
Since the application of section 463 is restricted to Companies Act only, the Court cannot grant
any relief to the director.
627
(b) The provisions relating to minutes of Board meeting are contained in sections 193 to 195 of
Companies Act, 1956. As per section 193, minutes of Board meeting shall be signed by the
chairman of the same meeting or chairman of the next succeeding meeting.
The chairman has an absolute discretion in regard to the inclusion or non-inclusion of any matter
in the minutes. If minutes have been drafted by the secretary but have not been signed, any
alteration may be made in the minutes by the chairman. Such alteration does not require
passing of any Board resolution or consent of any of the directors.
However, if minutes have already been signed but certain directors raise disagreements on the
minutes, the proper course is to pass a fresh resolution modifying the earlier resolution recorded
in the minutes. The old minutes shall not be deleted or crossed out [Re, Cawley and Company,
(1889) 42 Ch. D 209].
In the given case it is not clear whether the minutes have already been signed by the chairman
or not (since minutes of a Board meeting can be signed even after the conclusion of
succeeding Board meeting). If the minutes have not been signed, the chairman may, after
considering the objections of the directors, make alterations in the minutes drafted by the
secretary. However, if the minutes have already been signed, then the chairman should allow
the moving of a motion, for passing a fresh resolution modifying the earlier resolution. Such
subsequent resolution would make the earlier resolution inoperative.
(c) As per section 182 of the Companies Act, 2013, a company shall not make a political
contribution unless all the following conditions are satisfied:
(i) The company is not a Government company.

(ii) The company has been in existence for 3 or more financial years.
(iii) The aggregate amount of political contribution in a financial year shall not exceed 7.5% of
average net profits during immediately preceding 3 financial years.
(iv) The Board shall make a political contribution only by passing a resolution at a Board meeting.
(v) The company shall disclose in its profit and loss account the amount of political contribution
and the name of the political party or the person to whom such amount has been
contributed.
In the given case, the Board shall be entitled to make the political contribution of ` 5 lakh only if -
(i) the company has been in existence for 3 financial years;
(ii) the average net profits of the company during immediately preceding 3 financial years is
equal to or more than `66,66,667 (i.e. 5,00,000 x 100/7.5); and
(iii) the resolution approving the political contribution is passed at a Board meeting;
The Board shall ensure that adequate disclosures are made in the profit and loss account.
Question 13:
(a) Adil, a 15% shareholder of a company and other shareholders have lost confidence in the
Managing Director (MD) of the company. He is a director not liable to retire by rotation and was
re-appointed as Managing Director for 5 years w.e.f. 1.4.2005 in the last Annual General Meeting
of the company.
Mr. Adil seeks your advise to remove the MD after following the procedure laid down under the
(i) Specify the steps to be taken by Mr. Adil and the Company in this behalf;
(ii) Is it necessary to state reasons to support the resolution for his removal?
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(b) M/s Oasis Builders Limited is contemplating to enter into a joint venture agreement with
another construction company for the development of landed properties located at Bangalore.
Since it is not possible to convene the Board meeting immediately, as the directors are. at
different places in connection with various works, the managing director seeks your advice as to
whether the resolution pertaining to the joint venture agreement is required to be passed at the
Board meeting convened for the purpose or whether it can be passed by means of a circular
resolution. What steps are required to be taken to pass a Board resolution by circulation?
(c) Seven wonders Limited has 9 Directors out of whom 3 Directors have gone abroad. The
Chairman had an urgent matter to be approved by the Board of Directors which could not be
postponed till the next Board meeting. The Company, therefore, circulated the resolution for
approval of the Directors. 4 out of 6 Directors in India approved the resolution. The Company
claimed that the resolution was passed. Examine with reference to the provisions of Section 289
of the Companies Act, 1956 the validity of the resolution.
Answer:
(a) Removal of a non-rotational managing director is possible, since section 284 empowers the
members to remove any director, whether he is a rotational or non-rotational director, or
managing director, whole time director or a non-executive director.
The given problems are answered as under:

(i) Steps to be taken by Mr. Adil
Mr. Adil shall give a special notice to the company at least 14 days before the general
meeting.
Steps to be taken by the company
(a) The company shall send a copy of special notice to the managing director.
(b) The managing director has a right to make a representation against his removal.
(c) Representation given by the managing director, if any, shall be sent by the company to
every member at least 7 days before the general meeting.
(d) If the representation is not sent to the members, the representation shall be read at the
general meeting.
(e) The general meeting shall be held.
(f) The managing director shall have a right to be heard at the meeting. The right to make an
oral representation is in addition to, written representation.
(ii) Whether it is necessary for the special notice must disclose the reasons for removal of a
director -
It was held in LIC v Escorts Ltd. (1986) 59 Comp Cas 548 that it is not necessary for a member
to state the grounds for removal of a director at the time of calling the extraordinary general
meeting. The Court held that, under section 173, it is the duty of the management to disclose
the material facts in the explanatory statement. Section 173 does not require a member to
disclose the reasons for the resolutions proposed at the meeting. In other words, a member
cannot be compelled to disclose the reasons for proposing a resolution for removal of a
director.
Therefore, non-disclosure of reasons for removal of managing director does not make a
special notice invalid. Accordingly, the special notice given by Mr. Adil is as per the
requirements of Companies Act, 1956, and the company is required to act on such notice as
per the provisions of section 284.
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(b) The Board can pass any resolution by circulation except those resolutions which are
required by the Act to be passed only at a Board meeting. For example, powers specified under
sections 292, 372A, 316 and 386 of Companies Act, 1956 can be exercised only by passing a
resolution at a duly convened Board meeting.
The Act does not require holding of a Board meeting for entering into a joint venture agreement.
Thus, the Board can enter into a joint venture by passing a resolution by circulation provided the
joint venture does not contain any matter which is to be compulsorily exercised in a BM. Also the
Board shall ensure the compliance of the following conditions:
(a) The number of directors present in India must not be less than the quorum fixed for a meeting
of Board of directors.
(b) The resolution shall be circulated in draft, together with necessary papers, to all the members
of Board or committee then in India and to all other members at their usual address in India.
(c) The resolution shall be approved by -
(i) all the directors who are then in India and are entitled to vote on the resolution; or
(ii) a majority of all the directors who are entitled to vote on the resolution.
(c) A resolution is said to be duly passed by circulation if the following conditions are satisfied;
(i) The resolution shall be circulated in draft, together with necessary papers, to all the
members of Board or committee then in India and to all other members at their usual
address in India.
(ii) The resolution shall be approved by such of the directors as are then in India or by a
majority of such of them as are entitled to vote on the resolution.
In the present case, 3 directors (1/3rd of 9 directors) shall form the quorum for a meeting of
Board of directors. Since, 6 directors are present in India, the quorum required for holding a
Board meeting is present and so the resolution may be passed by circulation. The resolution shall
be passed only if -
(i) any of the 5 directors (whether in India or outside India) vote in favour of the resolution; or
(ii) all the 6 directors who are present in India vote in favour of the resolution.
In the given case, the resolution has been approved by 4 out of 6 directors who are for the time
being in India. Since neither the approval of all the directors in India is obtained (viz. 6) nor the
approval of majority of those directors who are entitled to vote (whether in India or outside
India) is obtained (viz. 5), the resolution shall not be deemed to be passed by circulation. Thus,
the resolution is not validly passed.
STUDY NOTE 2 – LAWS AND PROCEDURES FOR CORPORATE RESTRUCTURING:
Question 14:
(a) A meeting of members of a company was convened under the orders of the Court to
consider a scheme of compromise and arrangement. The meeting was attended by 200
members holding 5,00,000 shares in aggregate. 70 members holding 4,00,000 shares voted for
the scheme. The remaining members voted against the scheme. Examine with reference to the
relevant provision of the Companies Act, 1956 whether the scheme is approved by the required
majority.
(b) Explain the term 'arrangement‟.
Answer:
(a) The given problem relates to section 391 of the Companies Act, 1956.
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The legal position
Where the scheme of compromise of arrangement is required to be approved by the members,

it must be approved by a majority of the members who are present and voting. Such majority of
members must also be the members representing three-fourths in the value of members present
and voting at the meeting. In other words, a scheme of arrangement between the company
and members must be approved by more than 50% of the members who hold at least 75% of
the value of shares. It is to be noted that members or creditors not present in the meeting or
present in the meeting but abstain from voting, are not to be counted.
Members or creditors may vote in person or by proxy, where the proxies are allowed.
The given case
Members who attended the meeting 200 members

Shares held by the members who attended the meeting 5,00,000 shares
Members who voted in favour of the scheme 70 members
Shares held by the members who voted in favour of the scheme 4,00,000
Members who voted against the scheme 130 members
Shares held by the members who voted against the scheme 1,00,000
Hence, the scheme has not been approved by the majority of members, present and voting,
though it has been approved by the members holding three-fourth of the shares. It is evident
that the requirements of approval by members in terms of 'majority in number of members' and
'three-fourths in value of shares' are cumulative, i.e., these are two separate compliances.
Accordingly, the scheme has not been approved by the requisite majority, and therefore this
scheme shall not be sanctioned by the Court.
(b) Arrangement involves a readjustment of the rights and liabilities of the members or
creditors or any class of them. There need not be any dispute for an 'arrangement'. The term is
wider in scope than the word 'compromise'. It includes any form of internal reorganisation of the
company or its affairs, as well as scheme for amalgamation of two or more companies. A few
examples of arrangement are as follows:
(i) Issue of fully paid up shares to pay off debentures.

(ii) Creditors agreeing to waive a part of their dues.
(iii) Preference shareholders surrendering their right of arrears of dividend.
(iv) Exchange of company's assets for shares in a newly formed company.
Arrangement includes reorganisiation of the share capital of the company. It includes the
following methods:
(i) the consolidation of shares of different classes; or
(ii) the division of shares into shares of different classes; or
(iii) both these methods.
The words 'compromise' and 'arrangement' imply that both the parties make concessions and
give up something. A total surrender of the rights by one party would not amount to a
compromise or arrangement. As such, where it was proposed that members should abandon all
their rights without any compensating advantage, it was held not to be a compromise or
arrangement and hence the Court had no jurisdiction to sanction it [Re, N.F.U. Development
Trust Ltd (1972) 1 WLR 1548].
631
Question 15:
(a) M/s Moonlit Consultants Ltd. had, in the course of its operations over the years acquired
various other ventures like plantations and tourism businesses. With a view to consolidate its core
business activities, the management decided to hive off its non-core activities by demerging
them with an associate company. Advise, with reference to Companies Act, 1956 briefly the
steps the management should take to achieve the purpose of demerger.
(b) At the time of filing of the petition for amalgamation, the object clause of both the transferor
and transferee Companies does not contain power to amalgamate. Comment on the statement,
based on Companies Act, 1956.
Answer:
(a) For effecting the reconstruction of a company, the provisions of section 394 of Companies
Act, 1956 need to be complied with. Section 394 requires that an application shall be made to
the Court under section 391 (under section 391, an application is made to the Court for entering
into a compromise or arrangement). Since, demerger is also a kind of reconstruction, M/s
Moonlit Consultants Ltd may demerge its plantation and tourism business by complying with the
provisions of section 394, which are as under:
1. Moonlit Consultants Ltd. (known as 'transferor company') shall prepare a draft scheme under
which the assets and liabilities of Moonlit Consultants Ltd. as comprised in the plantation and
tourism business shall be transferred to the associate company (known as 'transferee
company'). The scheme shall specify the necessary details like-
(a) agreed values for transfer of assets and liabilities;
(b) the consideration for the transfer;
(c) where the associate company issues shares to the shareholders of M/s Moonlit Consultants
Ltd., the exchange ratio of the shares;
(d) other terms and conditions.
2. An application shall be made to the Court by Moonlit Consultants Ltd. jointly with the
Associate company.
3. The Court may order that a meeting of the creditors or members or any class of them be
called, held and conducted in the manner directed by the Court.
4. The Court shall give notice of every application seeking a compromise or arrangement to
the Central Government. The Central Government is empowered to make a representation
and the Court shall take into account such representation while passing any order in respect
of the scheme of compromise or arrangement (Section 394A).
5. Where a meeting of creditors or members is called, the notice given to them must contain-
(a) the terms of the compromise or arrangement;
(b) an explanatory statement explaining the effect of compromise or arrangement;
(c) a statement explaining any material interests of the directors, managing director, or
manager of the company. The effect of those interests on the scheme should be explained
stating if and how they are different from the like interests of other persons.
6. The meeting shall be held and conducted in the manner as directed by the Court. The
scheme must be approved by more than 50% of the members who hold at least 75% of the
value of shares.
7. The Court has the discretion to sanction the scheme placed before it. Where the Court is
Satisfied that the scheme is bona fide, it may sanction the scheme.
8. The scheme becomes effective only after a certified copy of the order is filed with the
registrar. Until such filing the sanctioned scheme remains dormant and no creditor or
632
member can enforce any right under the scheme.

9. After the certified copy of the scheme is filed with the registrar, the company shall annex to
every copy of memorar.dum, a copy of such scheme.
10. Necessary Steps shall be taken to give effect to the scheme as approved by the Court.
(b) The memorandum of association explains the scope of operations of a company beyond
which the company cannot go. Anything done by a company outside the objects clause of
memorandum is ultra vires the company.
However, to amalgamate with another company is a power of the company, and not an
object of the company. Therefore, no power to amalgamate is required in the memorandum of
a company before making an application to the Court for effecting amalgamation. Also, the
power to amalgamate has been given by the statute under section 394 of Companies Act,
1956. Since there is a statutory provision dealing with amalgamation of companies (which does
not require that such a provision must be present in the memorandum or articles of the
company), no special power in the objects clause of the memorandum is necessary for its
amalgamation with another company. Section 394 is a complete code which gives full
jurisdiction to the Court to sanction amalgamation of companies, even though there may be no
power in the objects clause of memorandum [Re, EITA India Ltd., AIR 1997 Cal 208; United Bank
of India v United India Credit d Development Co. Ltd. (1977) 47 Comp Cos 689, 730 (Cal)].
Question 16:
(a) Unhappy Ltd. has gone into liquidation because of the inability of the company to pay its
debts. During the course of winding up, a proposal was put forward by the previous
management to revive the working of the company through a scheme of arrangement between
the company and its creditors. As per the scheme, all the creditors have to forego fifty percent of
their dues. Some of the creditors have voiced their opposition to the said scheme. The company
approaches you for advice. State the steps that have to be taken by the company in this regard,
as per companies Act, 1956.
(b) The members of both Sujata Synthetix Limited and Gita Textiles Limited approved the
scheme of amalgamation by overwhelming majority. A reputed firm of Chartered Accountants
fixed the exchange ratio. The scheme of amalgamation was submitted, as per procedure, for
the sanction of the Court. During pendency of the matter a small group of members of one of the
merging companies objected to the amalgamation on the ground that the exchange ratio was
unfair.
Decide whether the said objection is likely to be sustained. Would your answer be different if
similar objection was raised by the Central Government?
Answer:
(a) Section 517, of Companies Act, 1956 provides the opportunity to a company to enter into
an arrangement with its creditors even though it is about to be, or is in the course of being,
wound up. However, a company can claim the benefit of section 517 only in case of voluntarily
winding up (whether members' voluntary winding up or creditors' voluntary winding up).
1. Requirements of section 517:
The provisions of section 517 are explained as under:

(a) The scheme of arrangement must be sanctioned by a special resolution of the company.
(b) The scheme must also be agreed to by three-fourths in number and value of the
633
creditors.
(c) Any creditor or contributory may, within 3 weeks from the completion of the
arrangement, appeal to the Court against the scheme of arrangement.
(d) On an appeal made to the Court, the Court shall have the power to amend, vary,
confirm or set aside the arrangement.
2. Procedure under section 517:
A company may enter into a scheme of arrangement with the creditors by following the
procedure as given hereunder:
(a) The draft scheme of arrangement shall be considered and approved by the Board of
directors.
(b) The company shall apply to the Court for directions to convene the meetings of the
members and creditors.
(c) A general meeting of the company shall be held and the special resolution approving
the scheme of arrangement shall be passed.
(d) A meeting of creditors shall be held whereat the scheme shall be agreed to by three-
fourths in number and value of the creditors.
(e) The company shall approach the Court for approval of the scheme.
(f) On receipt of the Court's order, the company shall file a certified copy of the Court's
order with the registrar.
(b) On an application made to the Court for sanctioning a scheme of amalgamation or

reconstruction, the Court may make an order sanctioning it. Once statutory formalities are
complied with, the onus lies on those opposing the scheme to satisfy the Court that the scheme
is unfair or unreasonable or fraudulent [Re, Hindustan General Electric Corporation Ltd. (1959) 29
Comp Cas 46; Re, Sussex Brick Co. Ltd. (1960) 30 Comp Cas 536].
Where, the valuation is confirmed to be fair by eminent firm of Chartered Accountants and is
also approved by overwhelming majority, the Court will not find fault with the exchange ratio
(Re, Tata Oil Mills Co. Ltd., Re, Hindustan Lever Ltd.).
Where the exchange ration was fixed by two reputed firms of chartered accountants who had
examined the accounts, annual reports, working results and financial positions of the two
companies and certified on that basis that the share exchange ratio of 5:2 was fair and
reasonable, and the scheme was widely advertised, unanimously approved and no objection
was raised by any of the affected quarters, and the Central Government had not affirmatively
established that the valuation of assets was unfair or inequitable, the Court refused to interfere
(M. G. Investment d Industrial Co. Ltd. v New Shorrock Spg. & Mfg. Co. Ltd.).
Thus, if, on overall consideration the Court is satisfied as to feasibility of the scheme, it should not
hesitate to grant sanction [Re, Ucal Fuel Systems Ltd.].
Applying the above Court rulings, the given problems are answered as under:
(a) The dissenting shareholders shall not succeed unless they satisfy the Court that the valuation
is grossly unfair (Re, Piramal Spg. & Wvg. Mills Ltd.)
(b) Even if exchange ratio is objected by the Central Government, the Court may sanction the
scheme, since the representation or opinion made by the Central Government to the Court
under section 394A is not binding on the Court.
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STUDY NOTE 3 – SEBI LAWS AND REGULATIONS:
Question 17:
(a) Write short note on Audit Committee under clause 49 of the Listing Agreement of SEBI.
(b) Referring to the provisions of SEBI Act, 1992, discuss the meaning and functions of the board.
Answer:
(a) Clause 49 of the Listing Agreement with SEBI lays down the following in respect of Audit
Committee:
1. Applicability:
An audit committee shall be set up –(a) All companies seeking listing for the first-time, at the time
of seeking in-principle approval for such listing, and (b) all existing listed Companies with a Paid-
up Capital of `3 crores or more, or Net Worth of `25 crores or more, at any time in the history of
the Company.
2. Composition:
A qualified and independent Audit Committee shall be set up giving the terms of reference, and
subject to the following:
(i) The audit committee shall have minimum 3 directors as members. 2/3rd of the members of
audit committee shall be independent directors.
(ii) All members of audit committee shall be financially literate and at least one member shall
have accounting or related financial management expertise.
(iii) The Chairman of the Audit Committee shall be an independent director;
(iv) The Chairman of the Audit Committee shall be present at Annual General Meeting to
answer shareholder queries;
(v) The audit committee may invite such of the executives, as it considers appropriate (and
particularly the head of the finance function) to be present at the meetings of the
committee, but on occasions it may also meet without the presence of any executives of
the company. The finance director, head of internal audit and a representative of the
statutory auditor may be present as invitees for the meetings of the audit committee;
(vi) The Company Secretary shall act as the secretary to the committee.
3. Meeting of Audit Committee:
The audit committee should meet at least four times in a year and not more than four months
shall elapse between two meetings. The quorum shall be either two members or one third of the
members of the audit committee whichever is greater, but there should be a minimum of two
independent members present.
4. Powers of Audit Committee
The audit committee shall have powers, which should include the following:
(i) To investigate any activity within its terms of reference.

(ii) To seek information from any employee.
635
(iii) To obtain outside legal or other professional advice.

(iv) To secure attendance of outsiders with relevant expertise, if it considers necessary.
5. Review of Information:
The Audit Committee shall mandatorily review the following:

(i) Management discussion and analysis of financial condition and results of operations,
(ii) Statement of significant Related party Transactions, submitted by management,
(iii) Management Letters/Letters of Internal Control Weaknesses issued by the Statutory Auditors,
(iv) Internal Audit Reports relating to Internal Control Weaknesses, and
(v) Appointment, removal and terms of remuneration of the Chief Internal Auditor.
(b) As per section 2(1)(a) of SEBI Act, 1992, "Board" means the Securities and Exchange Board
of India established under section 3;
As per section 3:
(1) With effect from such date as the Central Government may, by notification, appoint, there
shall be established, for the purposes of this Act, a Board by the name of the Securities and
Exchange Board of India.
(2) The Board shall be a body corporate by the name aforesaid, having perpetual succession
and a common seal, with power subject to the provisions of this Act, to acquire, hold and
dispose of property, both movable and immovable, and to contract, and shall, by the said
name, sue or be sued.
(3) The head office of the Board shall be at Bombay.
(4) The Board may establish offices at other places in India
The functions of the board as per section 11 of SEBI Act, 1992 are as follows:
(1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of
investors in securities and to promote the development of, and to regulate the securities market,
by such measures as it thinks fit.
(2) Without prejudice to the generality of the foregoing provisions, the measures referred to
therein may provide for-
(a) regulating the business in stock exchange and any other securities markets;
(b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents,
bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters,
portfolio managers, investment advisers and such other intermediaries who may be associated
with securities markets in any manner;
(c) registering and regulating the working of collective investment schemes, including mutual
funds;
(d) promoting and regulating self-regulatory organizations;
(e) prohibiting fraudulent and unfair trade practices relating to securities markets;
(f) promoting investors' education and training of intermediaries of securities markets;
(g) prohibiting insider trading in securities;
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(h) regulating substantial acquisition of shares and take-over of companies;
(i) calling for information from, undertaking inspection, conducting inquiries and audits of the
stock exchange and intermediaries and self-regulatory organizations in the securities market;
(j) performing such functions and exercising such powers under the provision of the Capital
Issues (Control) Act, 1947 (29 of 1947) and the Securities Contracts (Regulation) Act, 1956, (42 of
1956) as may be delegated to it by the Central Government;
(k) levying fees or other charges for carrying out the purposes of this section;
(l) conducting research for the above purposes;
(m) performing such other function as may be prescribed
STUDY NOTE 4 – THE COMPETITION ACT AND ITS ROLE IN CORPORATE GOVERNANCE:
Question 18:
(a) Explain the powers of the Commission to approve modify or disapprove a combination as
per The Competition Act, 2002.
(b) An arrangement has been made among the Silk Producers that the Silk produced by them
will not be sold to mills below a Certain Price. The arrangement is in writing but it not intended to
be enforced by legal proceedings. Examine whether the said arrangement can be considered
as an arrangement within the meaning of Sec. 2 (b) of the Competition Act, 2002.
Answer:
(a) The Powers of the Commission to approve, modify or disapprove a combination are
explained below:
1. Where combination does not have any adverse effect on competition:

Where the Commission is of the opinion that any combination does not, or is not likely to, have
an appreciable adverse effect on competition, it shall, by order, approve that combination
including the combination in respect of which a notice has been given under section 6(2).
2. Combination not to take effect if it has any adverse effect on competition:

Where the Commission is of the opinion that the combination has, or is likely to have, an
appreciable adverse effect on competition, it shall direct that the combination shall not take
effect.
3. Modification of combination to eliminate the adverse effect:
(i) When can Commission propose modification?

Where the Commission is of the opinion that the combination has, or is likely to have, an
appreciable adverse effect on competition but such adverse effect can be eliminated by
suitable modification to such combination, it may propose appropriate modification to the
combination, to the parties to such combination.
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(ii) Acceptance of modification

The parties, who accept the modification proposed by the Commission, shall carry out such
modification within the period specified by the Commission.
(iii) Failure to carry out accepted modification -Consequences

If the parties to the combination, who have accepted the modification, fail to carry out the
modification within the period specified by the Commission, such combination shall be
deemed to have an appreciable adverse effect on competition and the Commission shall
deal with such combination in accordance with the provisions of this Act.
(iv) Refusal of parties to accept modification

 The parties to the combination may not accept the modification proposed by the
Commission.
 In such a case, the parties may, within next 30 working days, submit amendment to
the modification proposed by the Commission.
 However, if the parties do not accept the modification proposed by the Commission
within 30 days, and also do not submit amendment to the modification proposed by
the Commission, the combination shall be deemed to have an appreciable adverse
effect on competition.
(v) Commission may agree to the amendments

If the Commission agrees with the amendment submitted by the parties, it shall, by order,
approve the combination.
(vi) Refusal of Commission to agree to amendments

 If the Commission does not accept the amendment submitted by the parties, then,
the parties shall be allowed a further period of 30 working days within which such
parties shall accept the modification proposed by the Commission.
 If the parties fail to accept the modification proposed by the Commission within next
30 working days, the combination shall be deemed to have an appreciable adverse
4. Consequences where the Commission declares that combination has adverse effect on
competition
Where the Commission has directed that the combination is deemed to have an appreciable
adverse effect on competition, then, without prejudice to any penalty which may be imposed
or any prosecution which may be initiated under this Act, the Commission may order that the
combination shall not be given effect to.
(b) As per Sec. 3(4), Vertical Agreements are amongst enterprises or persons at different stages
or levels of the production chain in different markets, in respect of production, supply,
distribution, storage sale or price of, or trade in goods (or) provision of services. They include the
following arrangements / agreements –
1. Tie-in Arrangement:
Includes any agreement requiring a purchaser of goods, as a condition of such purchase, to
purchase some other goods.
2. 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 other than those of the Seller or any other person.
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3. 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 goods.
4. 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.
5. 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 stipulate by the Seller, unless it is clearly stated that prices
lower than those prices may be charged.
Such Vertical Agreements shall be considered anti-competitive (and hence void), if it causes or
is likely to cause an appreciable adverse effect on competition in India.
Note:
Horizontal Agreements are presumed anti-competitive u/s 3(3) and hence void. However,
Vertical Agreements are anti-competitive and void u/s 3(4) only when they cause appreciable
adverse effect on competition in India.
In the given case, agreement stipulates the Resale Price and does not allow the Purchaser to sell
the goods at prices lower than the stipulated prices, hence invalid. It is a Vertical Anti-
Competitive Agreement.
STUDY NOTE 5 – LAWS RELATED TO BANKING SECTOR:
Question 19:
(a) Mr. Gabbar is a director in a Bank. The Reserve Bank of India terminates him on the ground
that his conduct is detrimental to the interest of the depositors. Decide whether the Reserve Bank
of India can do so under the Banking Regulation Act, 1949. Can the Reserve Bank of India
appoint Additional Director in a Bank under the said Act?
(b) The Banking Companies, Financial Institutions and Intermediaries of securities market are
under some obligations under the Prevention of Money Laundering Act, 2002. State in brief, these
obligations.
(c) Zodiac Bank Limited is not managing its affairs properly. Employees as well as depositors of
the bank have complained to the Central Government from time to time about such
mismanagement and requested the Central Government to acquire the undertaking of the
Banking Company. Explain the powers of the Central Government in this regard under the
Banking Regulation Act, 1949.
(d) Printed Computer is a Singapore based company having several business units all over the
world. It has a unit for manufacturing computer printers with its headquarters in Pune. It has a
branch in Dubai which is controlled by the headquarters in Pune. What would be the residential
status under FEMA, 1999 of printer units in Pune and that of Dubai branch?
(e) Ranvir Ltd. is a securitization and reconstruction company under SARFAESI Act, 2002. The
certificate of registration granted to it was cancelled. State the authority which can cancel the
registration and the right of Ranvir Ltd. against such cancellation.
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Answer:
(a) The Reserve Bank is empowered to remove the managerial and other persons as per the
provisions of section 36AA, which is explained below:
1. Conditions for removal of managerial and other persons (Section 36AA(1)]
Where the Reserve Bank is satisfied that in the public interest or for preventing the affairs of a
banking company being conducted in a manner detrimental to the interests of the depositors or
for securing the proper management of any banking company it is necessary so to do, the
Reserve Bank may, for reasons to be recorded in writing, by order, remove from office, with
effect from such date as may be specified in the order, any chairman, director, chief executive
officer (by whatever name called) or other officer or employee of the banking company
2. Issue of show cause notice before removal [Section 36AA(2)]
No order under sub-section (1) shall be made unless the chairman, director or chief executive
officer or other officer or employee concerned has been given a reasonable opportunity of
making a representation to the Reserve Bank against the proposed order.
Note: Overriding effect of Section 36AA (Section 36AC)
Any removal of a director, chief executive officer or other officer or employee in pursuance of
section 36AA shall have effect notwithstanding anything to the contrary contained in the
Companies Act, 1956 or any other law for the time being in force or in any contract or any other
instrument.
(b) The obligations of Banking Companies, Financial Institutions and Intermediaries with respect
to maintenance of accounts is explained below:
1. Duties of Banking companies, Financial Institutions and Intermediaries [Section 12(1)]:
Every banking company or financial institution and intermediary shall -
(i) maintain a record of all transactions, the nature and value of which may be prescribed,
whether such transactions comprise of a single transaction or a series of transactions
integrally connected to each other, and where such series of transactions take place within
1 month;
(ii) furnish information of transactions referred to in clause (a) to the Director within such time as
may be prescribed;
(iii) verify and maintain the records of the identity of all its clients, in such a manner as may be
prescribed.
2. Furnishing of information where transaction(s) below the prescribed value are suspicious
[Proviso to Section 12(1)]:
Where the principal officer of a banking company or financial institution or intermediary, as the
case may be, has reason to believe that a single transaction or series of transactions integrally
connected to each other have been valued below the prescribed value so as to defeat the
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provisions of this section, such officer shall furnish information in respect of such transactions to
the Director within the prescribed time.
3. Period of maintenance of records [Section 12(2)]
(i) The records referred to in clause (a) of sub-section (1) shall be maintained for a period of 10
years from the date of transactions between the clients and the banking company or
financial institution or intermediary, as the case may be.
(ii) The records referred to in clause (c) of sub-section (1) shall be maintained for a period of 10
years from the date of cessation of transactions between the clients and the banking
company or financial institution or intermediary, as the case may be.
The Central Government may, in consultation with the Reserve Bank of India, prescribe the
procedure and the manner of maintaining and furnishing information under sub-section (1) of
section 12 for the purpose of implementing the provisions of this Act (Section 15).
(c) Section 36AE empowers the Reserve Bank to acquire the undertakings of banking
companies, as explained below:
A. Conditions for acquisition of any undertaking of a banking company [Section 36AE(1)]
If, upon receipt of a report from the Reserve Bank, the Central Government is satisfied that a
banking company -
1. has, on more than one occasion, failed to comply with the directions given to it, in so far as
such directions relate to banking policy, or
2. is being managed in a manner detrimental to the interests of its depositors, and that –
(i) in the interests of the depositors of such banking company, or
(ii) in the interest of banking policy, or
(iii) for the better provision of credit generally or of credit to any particular section of the
community or in any particular area, it is necessary to acquire the undertaking of such
banking company, the Central Government may, after such consultation with the
Reserve Bank as it thinks fit, by notified order, acquire the undertaking of such company
(hereinafter referred to as the acquired bank) with effect from such date as may be
specified in this behalf by the Central Government (hereinafter referred to as the
appointed day).
B. No acquisition unless opportunity to show cause given [Proviso to Section 36AE(1)]
No undertaking of any banking company shall be acquired unless such banking company given
a reasonable opportunity of showing cause against the proposed action.
C. Vesting of undertaking in the Central Government from the appointed day [Section
36AE(2)]
Subject to the other provisions contained in this Part, on the appointed day, the undertaking of
the acquired bank and all the assets and liabilities of the acquired bank shall stand transferred
to, and vest in, the Central Government.
D. Continuation of suits and other proceedings [Section 36AE(7)]
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If, on the appointed day, any suit, appeal or other proceeding of whatever nature is pending by
or against the acquired bank, the same shall not abate, be discontinued or be, in any way,
prejudicially affected by reason of the transfer of the undertaking of the acquired bank or of
anything contained in this Part, but the suit, appeal or other proceeding may be continued,
prosecuted and enforced by or against the Central Government.
(d) Section 2(u) defines a 'person'. As per this definition, the following shall be covered in the
definition of a 'person':
(i) A company.
(ii) Any agency, office or branch owned by a 'person'.
Section 2(v) defines a 'person resident in India'. As per this definition, the following shall be
covered in the definition of a 'person resident in India':
(i) An office, branch or agency in India owned or controlled by a person resident outside India.
(ii) An office, branch or agency outside India owned or controlled by a person resident in India.
In the given case, Printed Computers (Singapore), its headquarters in Pune as well as Dubai
Branch is a 'person'. Therefore, residential status under FEMA shall be determined for each of
them separately.
(i) Printed Computers (Singapore) does not fall under any of the clauses of the definition of a
'person resident in India'. Therefore, Printed Computers (Singapore) is a person resident
outside India.
(ii) The Pune Headquarters of Printed Computers is a 'person resident in India' since it falls under
the clause 'an office, branch or agency in India owned or controlled by a person resident
outside India'.
(iii) The Dubai branch of Printed Computers (Singapore), though not owned, is controlled by the
Pune headquarters. The Dubai branch is a 'person resident in India' since it falls under the
clause 'an office, branch or agency outside India owned or controlled by a person resident
in India'.
(e) The provisions relating to cancellation of certificate of registration of a securitisation or

reconstruction company are explained below:
1. Circumstances in which certificate may be cancelled [Section 4(1)]
The Reserve Bank may cancel a certificate of registration granted to a securitisation company
or a reconstruction company, if such company:
(i) ceases to carry on the business of securitisation or asset reconstruction; or

(ii) ceases to receive or hold any investment from a qualified institutional buyer; or
(iii) has failed to comply with any conditions subject to which the certificate of registration has
been granted to it; or
(iv) at any time fails to fulfill any of the conditions referred to in clauses (a) to (g) of sub-section
(3) of section 3; or
(v) fails to:
 comply with any direction issued by the Reserve Bank under the provisions of this Act; or
 maintain accounts in accordance with the requirements of any law or any direction or
order issued by the Reserve Bank under the provisions of this Act; or
 submit or offer for inspection its books of account or other relevant documents when so
demanded by the Reserve Bank; or
 obtain prior approval of the Reserve Bank required under sub-section (6) of section 3.
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Opportunity of being heard before cancellation in certain cases [Proviso to Section 4(1)].
Provided that before cancelling a certificate of registration on the ground that the securitisation
company or reconstruction company has failed to comply with the provisions of clause (c) or
has failed to fulfill any of the conditions referred to in clause (d) or sub-clause (iv) of clause (e),
the Reserve Bank, unless it is of the opinion that the delay in cancelling the certificate of
registration granted under sub-section (4) of section 3 shall be prejudicial to the public interest or
the interest of the investors or the securitisation company or the reconstruction company, shall
give an opportunity to such company on such terms as the Reserve Bank may specify for taking
necessary steps to comply with such provisions or fulfillment of such conditions.
2. Appeal against order of cancellation [Section 4(2)]
A securitisation company or reconstruction company aggrieved by the order of cancellation of

certificate of registration may prefer an appeal, within a period of 30 days from the date on
which such order of cancellation is communicated to it, to the Central Government.
Opportunity of being heard before rejection of appeal [Proviso to Section 4(2)].
Before rejecting an appeal such company shall be given a reasonable opportunity of being
heard.
3. Consequences of rejection or cancellation of certificate of registration where the

company is already holding investments |Section 4(3)]
A securitisation company or reconstruction company, which is holding investments of qualified

institutional buyers and whose application for grant of certificate of registration has been
rejected or certificate of registration has been cancelled shall, notwithstanding such rejection or
cancellation, be deemed to be a securitisation company or reconstruction company until it
repays the entire investments held by it (together with interest, if any) within such period as the
Reserve Bank may direct
STUDY NOTE 6 – LAWS RELATING TO INSURANCE SECTOR:
Question 20:
(a) Explain briefly the powers of the Central Government to issue directions to the Authority
under The Insurance Regulatory & Development Authority Act, 1999
(b) Is the Central Government empowered to supersede the Authority under Insurance
Regulatory & Development Authority Act, 1999? Explain.
Answer:
(a) The provisions of section 18 may be explained as follows:
(i) Nature of directions and their binding effect [Section 18(1)]
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Without prejudice to the foregoing provisions of this Act, the Authority shall, in exercise of its
powers or the performance of its functions under this Act, be bound by such directions on
questions of policy, other than those relating to technical and administrative matters, as the
Central Government may give in writing to it from time to time:
Opportunity to Authority before giving directions [Proviso to Section 18(1)].
The Authority shall, as far as practicable, be given an opportunity to express its views before any
direction is given under this sub-section.
(ii) 'Question of policy or not' to be decided by the Central Government [Section 18(2)]
The decision of the Central Government, whether a question is one of policy or not, shall be final.
(b) Section 19 empowers the Central Government to supersede the Authority. These provisions
may be explained as follows:
1. Reasons for supersession [Section 19(1)]:
The Central Government may supersede the Authority if it is of the opinion:
(i) that, on account of circumstances beyond the control of the Authority, it is unable to
discharge the functions or perform the duties imposed on it by or under the provisions of this
Act; or
(ii) that the Authority has persistently defaulted in complying with any direction given by the
Central Government under this Act or in the discharge of the functions or performance of
the duties imposed on it by or under the provisions of this Act and as a result of such default
the financial position of the Authority or the administration of the Authority has suffered; or
(iii) that circumstances exist which render it necessary in the public interest to supersede the
Authority.
2. Conditions for making an order of supersession [Section 19(1) and Proviso to Section
19(1)]
(i) The Central Government shall be required to issue a notification stating therein the reasons
for supersession and the period of supersession, which shall not exceed 6 months.
(ii) Before issuing any such notification, the Central Government shall give a reasonable
opportunity to the Authority to make representations against the proposed supersession and
shall consider the representations, if any, of the Authority.
(iii) The Central Government shall appoint a person to be the Controller of Insurance under
section 2B of the Insurance Act, 1938, if not already done.
3. Effects of supersession [Section 19(2)]
Upon the publication of notification under sub-section (1) superseding the Authority, -
(i) the Chairperson and other members shall, as from the date of supersession, vacate their
offices as such;
(ii) all the powers, functions and duties which may, by or under the provisions of this Act, be
exercised or discharged by or on behalf of the Authority shall, until the Authority is
reconstituted under sub - section (3), be exercised and discharged by the controller of
Insurance; and
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(iii) all properties owned or controlled by the Authority shall, until the Authority is reconstituted
under sub-section (3), vest in the Central Government.
4. Reconstitution of Authority [Section 19(3)]
On or before the expiration of the period of supersession specified in the notification issued
under sub section (1), the Central Government shall reconstitute the Authority by a fresh
appointment of its Chairperson and other members and in such case any person who had
vacated his office under clause (a) of sub-section (2) shall not be deemed to be disqualified for
reappointment.
5. Laying of documents before the Parliament [Section 19(4)]
The Central Government shall cause a copy of the notification issued under sub-section (1) and
a full report of any action taken under this section and the circumstances leading to such action
to be laid before each House of Parliament at the earliest.
Question 21:
(a) What are the provisions in the Insurance Act, 1938 regarding nomination by a Life Insurance
Policy Holder? Whether a minor can be a nominee in a Life Insurance Policy
(b) Write short note on management by administrator under The Insurance Act, 1938.
Answer:
(a) The provisions regarding nomination by a Life Insurance Policy Holder are as under:
1. Nomination:
The holder of a policy of life insurance on his own life, may, when effecting the policy or at any
time before the policy matures for payment, nominate the person or persons to whom the
money secured by the policy shall be paid in the event of his death.
2. Endorsement on the policy:
Any such nomination in order to be effectual shall, unless it is incorporated in the text of the
policy itself, be made by an endorsement on the policy communicated to the insurer and
registered by him in the records relating to the policy and any such nomination may at any time
before the policy matures for payment be cancelled or changed by an endorsement or a
further endorsement or a will, as the case may be, but unless notice in writing of any such
cancellation or change has been delivered to the insurer, the insurer shall not be liable for any
payment under the policy made bona fide by him to a nominee mentioned in the text of the
policy or registered in records of the insurer.
3. Acknowledgement:
The Insurer shall furnish to the Policy-Holder a written acknowledgement of having registered a
nomination or a cancellation or change thereof, and may charge a fee not exceeding `1 for
registering such cancellation or change.
4. Assignment u/s 38:
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A transfer or assignment of a policy made in accordance with section 38 shall automatically

cancel a nomination. The assignment, of a policy to the Insurer who bears the risk on the policy
at the time of the assignment, in consideration of a loan granted by that insurer on the security
of the Policy within its surrender value, or its reassignment on repayment of the loan shall not
cancel a nomination, but shall affect the rights of the nominee only to the extent of the insurer's
interest in the policy
5. Minor Nominee:
Where any nominee is a minor, it shall be lawful for the Policy Holder to appoint in the prescribed
manner any person to receive the money secured by the policy in the event of his death during
the minority of the nominee. Hence, a Minor can be a nominee in a Life Insurance policy.
(b) When Administrator for management of insurance business may be appointed [Section 52A]:
1. If at any time the Authority has reason to believe that an insurer carrying on life insurance
business is acting in a manner likely to be prejudicial to the interests of holders of life insurance
policies, he may, after giving such opportunity to the insurer to be heard as he thinks fit, make a
report thereon to the Central Government.
2. The Central Government, if it is of opinion after considering the report that it is necessary or
proper to do so, may appoint an Administrator to manage the affairs of the insurer under the
direction and control of the Authority.
3. The Administrator shall receive such remuneration as the Central Government may direct
and the Central Government may at any time cancel the appointment and appoint some other
person as Administrator.
4. The management of the business of the insurer shall as on and after the date of appointment
of the Administrator vest in such Administrator, but except with the leave of the Authority the
Administrator shall not issue any further policies.
5. As on and after the date of appointment of the Administrator any person vested with any
such management immediately prior to that date shall be divested of that management.
6. The Authority may issue such directions to the Administrator as to his powers and duties as he
deems desirable in the circumstances of the case, and the Administrator may apply to the
Authority at any time for instructions as to the manner in which he shall conduct the
management of the business of the insurer or in relation to any matter arising in the course of
such management.
Powers and duties of the Administrator [Section 52B]:
1. The Administrator shall conduct the management of the business of the insurer with the
greatest economy compatible with efficiency and shall, as soon as may be possible, file with the
Authority a report stating which of the following courses is in the circumstances most
advantageous to the general interests of the holders of life insurance policies, namely:
(i) the transfer of the business of the insurer to some other insurer:
(ii) the carrying on of its business by the insurer (whether with the policies of the business
continued for the original sum insured with the addition of bonuses that attach to the policies
or for reduced amounts);
646
(iii) the winding up of the insurer; and

(iv) Such other course as he deems advisable.
2. On the filing of the report with the Authority, the Authority may take such action as he thinks
fit for promoting the interests of the holders of life insurance policies in general.
3. Any order passed by the Authority under sub-section (2), shall be binding on all persons
concerned, and shall have effect notwithstanding anything in the memorandum or articles of
association of the insurer, or a company.
STUDY NOTE 7 – LAWS RELATING TO POWER SECTOR:
Question 22:
(b) Discuss the circumstances under which the Appropriate Government may revoke the
license under The Electricity Act, 2003.
(c) What are the qualifications to be appointed as members of Central Commission as per „The
Indian Electricity Act, 2003‟?
Answer:
(a) The circumstances under which the Appropriate Government may revoke the license under
‘The Indian Electricity Act, 2003 has been stated under section 19 of the Act as follows:
1. If the Appropriate Commission, after making an enquiry, is satisfied that public interest so
requires, it may revoke a license in any of the following cases, namely:
(a) where the licensee, in the opinion of the Appropriate Commission, makes willful and
prolonged default in doing anything required of him by or under this Act or the rules or
regulations made there under;
(b) where the licensee breaks any of the terms or conditions of his license the breach of which is
expressly declared by such license to render it liable to revocation;
(c) where the licensee fails, within the period fixed in this behalf by his license, or any longer
period which the Appropriate Commission may have granted therefore:
(i) to show, to the satisfaction of the Appropriate Commission, that he is in a position fully
and efficiently to discharge the duties and obligations imposed on him by his license; or
and obligations imposed on him by his license; or
(ii) to make the deposit or furnish the security, or pay the fees or other charges required by
his license;
(d) Where in the opinion of the Appropriate Commission the financial position of the licensee is
such that he is unable fully and efficiently to discharge the duties and obligations imposed
on him by his license.
Where in its opinion the public interest so requires, the Appropriate Commission may, on
application, or with the consent of the licensee, revoke his license as to the whole or any part of
his area of distribution or transmission or trading upon such terms and conditions as it thinks fit.
No license shall be revoked under sub-section (1) unless the Appropriate Commission has given
to the licensee not less than 3 months’ notice, in writing, stating the grounds on which it is
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proposed to revoke the license, and has considered any cause shown by the licensee within the
period of that notice, against the proposed revocation.
The Appropriate Commission may, instead of revoking a license under sub-section (1), permit it
to remain in force subject to such further terms and conditions as it thinks fit to impose, and any
further terms or conditions so imposed shall be binding upon and be observed by the licensee
and shall be of like force and effect as if they were contained in the license.
Where the Commission revokes a license under this section, it shall serve a notice of revocation
upon the licensee and fix a date on which the revocation shall take effect.
Where an Appropriate Commission has given notice for revocation of license under sub-section
(5), without prejudice to any penalty which may be imposed or prosecution proceedings which
may be initiated under this Act, the licensee may, after prior approval of that Commission, sell his
utility to any person who is found eligible by that Commission for grant of license.
(b) Qualification for appointment of Members of Central Commission [Section 77]:
1. The Chairperson and the Members of the Central Commission shall be persons having
adequate knowledge of, or experience in, or shown capacity in, dealing with, problems relating
to engineering, law, economics, commerce, finance or, management and shall be appointed
in the following manner, namely:
(i) one person having qualifications and experience in the field of engineering with
specialisation in generation, transmission or distribution of electricity;
(ii) one person having qualifications and experience in the field of finance;
(iii) two persons having qualifications and experience in the field of economics, commerce, law
or management:
2. Notwithstanding anything contained in sub-section (1), the Central Government may

appoint any person as the Chairperson from amongst persons who is, or has been, a Judge of
the Supreme Court or the Chief Justice of a High Court:
Provided that no appointment under this sub-section shall be made except after consultation
with the Chief Justice of India.
3. The Chairperson or any other Member of the Central Commission shall not hold any other
office.
4. The Chairperson shall be the Chief Executive of the Central Commission.
STUDY NOTE 8 – CORPORATE GOVERNANCE:
Question 23:
(a) Explain the term “Corporate Governance”, in details.
(b) Discuss about the importance and functions of the „supervisory board‟ as per the Cromme
code of Germany.
Answer:
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There is no single, accepted definition of Corporate Governance. There are substantial

differences in definition according to which country we are considering. Corporate Governance
as a discipline in its own right is relatively new. We consider that the subject may be treated in a
narrow or a broad manner, depending on the viewpoint of the policy maker, practitioner,
researcher or theorist. It seems that existing definitions of Corporate Governance fall on to a
spectrum, with ‘narrow’ views at one end and more inclusive, ‘broad’ views placed at the other.
Once approach toward Corporate Governance adopts a narrow view, where Corporate
Governance is restricted to the relationship between a company and its shareholders. This is the
traditional finance paradigm, expressed in ‘agency theory’. At the other end of the spectrum,
corporate governance may be seen as a web of relationships, not only between a company
and its owners (shareholders) but also between a company and a broad range of other
‘stakeholders’: employees, customers, supplies, bondholders, to name but a few. Such a view
tends to be expressed in ‘stakeholder theory’. This is a more inclusive and broad way of treating
the subject of corporate governance and one which is gradually attracting greater attention.
Corporate governance is…
 The process of supervision and control intended to ensure that the company’s management
acts in accordance with the interests of shareholders (Parkinson, 1994). – Strongly agree
 The governance role is not concerned with the running of the business of the company per
se, but with giving overall direction to the enterprise, with overseeing and controlling the
executive actions of management and with satisfying legitimate expectations of accountability
and regulation by interests beyond the corporate boundaries (Tricker, 1984). – Agree
 The governance of an enterprise is the sum of those activities that make up the internal
regulation of the business in compliance with the obligations placed on the firm by legislation,
ownership trusteeship of assets, their management and their deployment (cannon, 1994). –
Agree
 The relationship between shareholders and their companies and the way in which
shareholders act to encourage best practice (e.g., by voting at AMs and by regular meetings
with companies’ senior management). Increasingly, this includes shareholder ‘activism’ which
involves a campaign by a shareholder or a group of shareholders to achieve change in
companies (the Corporate Governance Handbook, 1996). – Some agreement
 The structures, process, cultures and systems that engender the successful operation of the
Organization (Keasey and Wright, 1993). – Some agreement
 The system by which companies are directed and controlled (The Cadbury Report, 1992) –
slight agreement
Theoretical frameworks that suggest companies should be accountable only to their

shareholders are not necessarily inconsistent with theoretical frameworks that champion
stakeholder accountability. The reason underlying this argument is that shareholders’ interest
can only be satisfied by taking account of stakeholder interests, as companies that are
accountable to all of their stakeholders are over the long term more successful and more
prosperous. Definition of Corporate Governance therefore rests on the perception that
companies can maximize value creation over the long term, by discharging their accountability
to all of their stakeholders and by optimizing their system of Corporate Governance.
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Overall, this perception is growing among the professional community and academic research
is beginning to provide empirical in support of this view of corporate governance, accountability
and corporate profitability. However, this is the ‘business case’ for corporate governance and,
more generally, for corporate social responsibility. Should companies improve corporate
governance and discharge accountability to all of their stakeholders purely because it is
ethical? We discuss these ethical issues in the subsection on stakeholder theory. In the real world,
it is unlikely that businessmen and investors will be interested in acting ethically unless there are
positive financial returns to be made from so doing, as there appears to be a strong business
case underlying corporate governance reform and stakeholder accountability, then the
corporate and financial communities are more likely to embrace these approaches.
(b) The committee on corporate governance in Germany was chaired by Dr. Gerhard
Cromme and is usually referred to as the Cromme Report or Cromme Code. The code
harmonizes a wide variety of laws and regulations and contains recommendations and also
suggestions for complying with international best practice on Corporate Governance.
The Cromme Code was published in 2002 and is split into a number of sections, starting with a
section on shareholders and the general meeting. The Cromme Code also reflects some of the
latest developments in technology. The Cromme Code was amended in 2005.
Supervisory board:
It is important that the composition of the supervisory board reflects a suitable level of
knowledge, ability, and experience to be able properly to carry out the tasks relevant to the
business. There should be an adequate number of independent members.
‘Independence’ will mean no business or personal relations with the company or its
management board which cause a conflict of interest. To help maintain its independence, not
more than two former members of the management board should be members of the
supervisory board. The former management board chairman or a management board member
should not generally become supervisory board chairman or chairman of a supervisory board
committee. Supervisory board members should · not have director ships or similar positions or
indeed have advisory roles with important competitors of the enterprise.
The supervisory board carries out a number of important functions as follows:
1. It provides independent advice and supervision regularly to the management board on the
management of the business;
2. The management board and the supervisory board should ensure that there is a long-term
succession plan in place;
3. The supervisory board may delegate some duties to other committees, which include
compensation and audit committees;
4. The chairman of the supervisory board, who should not be the chairman of the audit
committee, co-ordinates work within the supervisory board and chairs its meetings and
attends to the affairs of the supervisory board externally.
It is worth elaborating on the committees that may be formed with a remit for various delegated
areas. These may include the audit committee (the chairman of the audit committee should not
be a former member of the management board of the company); the chairman of the audit
committee should have specialist knowledge and experience in the application of accounting
principles and internal control processes, and a compensation committee to look at the
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compensation of the management board. This committee may also look at the appointment of
members of the management board.
The Cromme Code also states that members of the management board of a listed company
should not be on more than five supervisory boards in non-group listed companies. The
compensation of members of the supervisory board is specified either by a resolution of the
general meeting or in the articles of association. Members of the supervisory board may receive
performance-related compensation as well as fixed compensation. The compensation of the
supervisory board members should be disclosed in the Corporate Governance Report.
An interesting disclosure required by the Cromme Code is that if a supervisory board member
takes part in less than half of the meetings of the supervisory board in a financial year, then this
will be noted in the report of the supervisory board. Any conflicts of interest should be reported
to the supervisory board and the supervisory board would then inform the general meeting of
any conflicts of interest together with how these conflicts have been treated.
Question 24:
(a) Discuss about the following reports on Corporate Governance:

1. Higgs Report
2. Smith Report and Guidance
3. Combined Code, 2003 and 2006
(c) Discuss about the importance of Financial Reporting council.
Answer:
(a)
1. Higgs Report:
The Higgs Review, chaired by Derek Higgs, reported in January 2003 on the role and
effectiveness of non-executive directors. Higgs offered support for the Combined Code whilst
making some additional recommendations. These recommendations included : stating the
number of meetings of the board and its main committees in the annual report, together with
the attendance records of individual directors; that a chief executive director should not also
become chairman of the same company; non-executive directors should meet as a group at
least once a year without executive directors being present, and the annual report should
indicate whether such meetings have occurred; chairmen and chief executives should consider
implementing executive development programmes to train and develop suitable individuals in
their companies for future director roles; the board should inform shareholders as to why they
believe a certain individual should be appointed to a non-executive directorship and how they
may meet the requirements of the role; there should be a comprehensive induction programme
for new non-executive directors, and resources should be available for ongoing development of
directors; the performance of the board, its committees and its individual members, should be
evaluated at least once a year, the annual report should state whether these reviews are being
held and how they are conducted; a full time executive director should not hold more than one
non-executive directorship or become chairman of a major company; no one non-executive
director should sit on all three principal board committees (audit, remuneration, nomination).
There was substantial opposition to some of the recommendations but they nonetheless helped
to inform the Combined Code. Good practice suggestions from the Higgs Report were
published in 2006.
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Following a recommendation in chapter 10 of the Higgs Review, a group led by Professor Laura
Tyson, looked at how companies might utilize broader pools of talent with varied skills and
experience, and different perspectives to enhance board effectiveness. The Tyson report was
published in 2003.
2. Smith Report and Guidance:
The Smith Review of Audit Committees, a group appointed by the Financial reporting council,
reported in January 2003. The review made clear the important role of the audit committee:
‘While all directors have a duty to act in the interests of the company, the audit committee has
a particular role, acting independently from the executive, to ensure that the interests of
shareholders are properly protected in relation to financial reporting and internal control’. The
review defined the audit committee’s role in terms of a high-level overview-it needs to satisfy
itself that there is an appropriate system of controls in place but it does not undertake the
monitoring itself .
A new edition of the guidance was issued in October 2008. The main changes to the guidance
as detailed on the FRC website are:
Audit committees are encouraged to consider the need to include the risk of the withdrawal of
their auditor from the market in their risk evaluation and planning; companies are encouraged
to include in the audit committee’s report information on the appointment, reappointment or
removal of the auditor, including supporting information on tendering frequency, the tenure of
the incumbent auditor and any contractual obligations that acted to restrict the committee’s
choice of auditor; a small number of detailed changes have been made to the section dealing
with the independence of the auditor, to bring the guidance in line with the Auditing Practices
Board’s Ethical Standards [2004, revised 2008) for auditors, which have been issued since the
guidance was first published in 2003; and an appendix has been added containing guidance
on the factors to be considered if a group is contemplating employing firms from more than one
network to undertake the audit.
3. Combined Code, 2003 and 2006:
The revised Combined Code, published in July 2003, incorporated the substance of the Higgs
and Smith reviews. However, rather than stating that no one non-executive director should sit on
all three board committees, the Combined Code stated that ‘undue reliance’ should not be
placed on particular individuals. The Combined Code also clarified the roles of the Chairman
and the Senior Independent director (sid), emphasizing the Chairman’s role in providing
leadership to the non-executive directors and in communicating shareholders’ views to the
board; it also provided for a ‘formal and rigorous annual evaluation’ of the board’s, the
committees’, and the individual directors’ performance. At least half the board in larger listed
companies was to be independent non-executive directors.
The findings of the Financial Reporting Council (FRC) Review of the Impact of the Combined
Code were published in December 2007. The overall findings indicated that the Combined
Code (2006) had general support and that the FRC would concentrate on improving the
practical application of the Combined Code.
In June 2008, the FRC published a new edition of the Combined Code which introduced two
changes. These changes were (i) to remove the restriction on an individual chairing more than
one FTSE 100 company; and (ii) for listed companies outside the FTSE 350, to allow the company
chairman to sit on the audit committee where he or she was considered independent on
appointment.
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The FRC stated on their website that the revised Code took effect at the same time as new FSA
Rules implementing EU requirements relating to corporate governance statements and audit
committees. The revised code and new rules will apply to accounting periods beginning on or
after 29 June 2008. In practice this means most companies will begin to apply them in 2009, and
will report against them for the first time in 2010.
(b) The Financial Reporting Council (FRC) has six operating bodies: the Accounting Standards
Board (ASB), the Auditing Practices Board (APB), the Board for Actuarial Standards (BAS), the
Professional oversight Board, the Financial Reporting Review Panel (FRRP), and the Accountancy
and Actuarial Discipline Board (AADB).
The importance placed on corporate governance is evidenced by the fact that, in March 2004,
the FRC set up a new committee to lead its work on corporate governance.
Overall, the FRC is responsible for promoting high standards of corporate governance. It aims to
do so by:
 Maintaining an effective Combined Code on Corporate Governance and promoting its

widespread application;
 Ensuring that related guidance, such as that on internal control, is current and relevant;
 Influencing EU and Global Corporate Governance developments;
 Helping to promote boardroom professionalism and diversity;
 Encouraging constructive interaction between company boards and institutional
shareholders.
The FRC has carried out several consultative reviews of the Combined Code which led to the
amended Combined Code in 2006, and subsequently in 2008 (discussed earlier). The latest
review took place in 2008. The frequency of the reviews are both an indicator of the FRC’s
responsibility for corporate governance of UK companies which involves leading public debate
in the area and its response to the global financial crisis which has, in turn, affected confidence
in aspects of corporate governance.
The FRC website mentions the independent review of the governance of banks and other
financial institutions carried out by Sir David Walker. The Walker Review published its draft
recommendations in July 2009, some of the recommendations could be taken forward through
amendments to the Combined Code. The FRC is considering the extent to which the Walker
Review recommendations may be applicable for some or all listed companies in other sectors.
Question 25:
(a) State the responsibilities that the Boards of state-owned enterprises must undertake.
(b) Discuss about the most important challenge in maintenance of good corporate governance
in state-owned enterprises.
(c) What is the importance of MoU in Public sector Enterprises?
Answer:
(a) The boards of state-owned enterprises should have the necessary authority, competencies,
and objectivity to carry out their function of strategic guidance and monitoring of
management. They should act with integrity and be held accountable for their actions.
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1. The boards of SOEs should be assigned a clear mandate and ultimate responsibility for the
company’s performance. The board should be fully accountable to the owners, act in the
best interest of the company, and treat all shareholders equally.
2. SOE boards should carry out their functions of monitoring of management and strategic
guidance, subject to the objectives set by the government and the ownership entity. They
should have the power to appoint and remove the CEO.
3. The boards of SOEs should be so composed that they can exercise objective and
independent judgment. Good practice calls for the chair to be separate from the CEO.
4. SOE boards should carry out an annual evaluation to appraise their performance.
(b) Conflicts of interest are a major challenge to the establishment and maintenance of good
governance practices, and can occur and exist irrespective of the ownership structures. While
some of the conflicts may be similar in nature, others may be typical to the type of ownership
structure.
Most of the conflicts of interest in PSUs occur because of the roles played by bureaucrats and
politicians in the running and management of the enterprise. For example, polticians or
bureaucrats may try to have their candidate as the chairman and/or managing director in
order to push through their private agendas rather than getting the best professional to run the
PSU. There have also been many instances where the chairman and/or managing director, or
other senior executives of the PSU has placed orders or awarded contracts at rates higher than
the best prices, and earned hefty commissions on these. Orders or contracts may also be given
to those who do not have the necessary capabilities to execute them. What is best for the PSU
usually gets neglected. There may also be issues such as ministers or politicians yielding to
recommendations of their cadre and sometimes even creating positions or designations that are
not at all needed, leading the PSU to have a bloated workforce and driving it into the sick
category. Politicians or bureaucrats may even harp on the flimsy reason that PSUs have
employment generation as one of their aims. Most of the conflicts of interest with regret to PSUs
dwell on the area of decision-making, which is very often not founded on merit.
(c) After Independence, Public Sector Enterprises (CPSEs) were set up in India with an
objective to promote rapid economic development through the creation and expansion of
infrastructure by the government. With different phases of development, the role of CPSEs has
changed and their operations have extended to a wide range of activities in manufacturing,
engineering, steel, heavy machinery, machine tools, fertilizers, drugs, textiles, pharmaceuticals,
petro-chemicals, extraction and refining of crude oil and services such as telecommunication,
trading, tourism, warehousing, etc. as well as a range of consultancy services. While there have
been many CPSEs that have performed very well in competition with private sector enterprises,
there are also many CPSEs that have performed very poorly. In an economic environment that
has changed considerably in the last two decades, the role of CPSEs has changed and they
have been increasingly guided to reduce their dependence on the Government. They have
been listed on the stock exchange and few of them have been privatized. The Government has
provided CPSEs the necessary flexibility and autonomy to operate effectively in a competitive
environment. However, there are a few issues with the operation and management of CPSEs
which still persist and need to be attended to. There is a need to develop a mechanism on how
government can get an efficient Indian presence in the sectors where the private sector
investments are not forthcoming especially in strategic areas where developing capabilities is
essential if India has to play its rightful role among the among the nations of the world.
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Question 26:
(a) Discuss about the major developments in governance in India in the last decade.
(b) “MoU in India‟. Comment.
Answer:
(a) The Indian economy, on the Twelfth Plan is characterized by strong macro-fundamentals
and good performance over the Eleventh Plan period, though clouded by some slowdown in
growth in the current year with continuing concern about inflation and a sudden increase in
uncertainty about the global economy. The objective of the Eleventh Plan was faster and
inclusive growth and the initiatives taken in the Eleventh Plan period have resulted in substantial
progress towards both objectives. Inevitably, there are some weaknesses that need to be
addressed and new challenges that need to be faced. Some of the challenges themselves
emanate from the economy’s transition to a higher and more inclusive growth path, the
structural changes that come with it and the expectations it generates. There are external
challenges also arising from the fact that the global economic environment is much less
favourable than it was at the start of the Eleventh Plan. These challenges call for renewed efforts
on multiple fronts, learning from the experience gained, and keeping in mind global
developments.
The focus on the backdrop of target setting and areas of focus of the Eleventh Plan. India
entered the Eleventh Plan period (2007-2012) with an impressive record of economic growth. The
vision for the Eleventh Plan prominently included an improvement in governance. Over the
years, the governments at the Centre and the States have launched a large number of
initiatives at substantial public expense to achieve the objectives of growth with poverty
alleviation and inclusiveness. Experience suggests that many of these initiatives have floundered
because of poor design, insufficient accountability and also corruption at various levels.
Increasingly, there is demand for effective implementation without which expanded
government intervention will be infructuous. The strategy for the Eleventh Plan was therefore
aimed at bringing about major improvements in governance which would make government-
funded programmes in critical areas more effective and efficient. The best possible way of
achieving this objective may be by involving communities in both the design and
implementation of such programmes, although such involvement may vary from sector to
sector. For achieving the vision of the Eleventh Plan, it is extremely important to experiment with
programme design to give more flexibility to decision making at the local level. It is especially
important to improve evaluation of the effectiveness of how government programmes work and
to inject a commitment to change their designs in the light of the experience gained. Evaluation
must be based on proper benchmarks and be scientifically designed to generate evidence-
based assessment of different aspects of programme design. Along with greater transparency
and feedback from community participation, this is particularly important in the case of
programmes delivering services directly to the poor. Accountability and transparency are
critical elements of good governance. The Right to Information Act (RTI) enacted in 2005
empowers people to get information and constitutes a big step towards transparency and
accountability.
(b) Notwithstanding the spectacular performance of CPSEs in several areas, there has been a
sense of disillusionment with some aspects of CPSE performance such as low profitability and
lack of competitiveness. The extensive regulation of CPSEs by government had stifled the
initiative and growth of public sector. The Economic Administration Reforms Commission
(Chairman: L. K. Jha) had dwelt on issue of autonomy and accountability. The Commission had
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recommended a careful re-consideration of extant concepts and instrumentalities relating to

the accountability of public enterprises with a view to ensuring (a) that they do not erode the
autonomy of public enterprises and thus hampers the very objectives and purposes for which
these enterprises have been set up and given corporate shape and for which they are to be
accountable; and (b) accountability has to be secured in the wider sense of answerability for
the performance of tasks and achievements of results (EARC-II/Report No. 4, p. 22). The
adoption of MoU system in India could be seen as an attempt to operationalize this very vital
recommendation.
STUDY NOTE 9 – SOCIAL, ENVIRONMENTAL AND ECONOMIC RESPONSIBILITIES OF BUSINESS:
Question 27:
(a) State with reasons -whether the following statements are correct or incorrect:
“Corporate Social Responsibility is closely linked with the principles of sustainable
development.”
(b) “In a highly competitive and surcharged environment, family-owned concerns are
changing for the better.”
In view of the above statement, discuss some of the factors responsible for such a change.
Answer:
(a) World Business Council for Sustainable Development defines Corporate Social Responsibility
as follows:
"Corporate social responsibility is the continuing commitment by business to behave ethically
and contribute to economic development while improving the quality of life of the workforce
and their families as well as of the local community and society at large."
CSR advocates moving away from a 'shareholder alone' focus to a 'multi-stakeholder' focus.
Sustainable Development is 'development that meets the needs of the present without
compromising the ability of future generations to meet their own needs'.
A business organisation which employs eco-friendly business practices is, no doubt, socially
responsible as it takes into account the interest of its stakeholders, viz. the environment and the
society at large. As a corollary, a business organisation which is socially responsible would, no
doubt, employ eco-friendly business practices.
Only a business organisation which is conscious of its duty towards the environment would
employ eco-friendly business practices and adopt the principles of sustainable development.
Thus, it is correct to say that "Corporate Social Responsibility is closely linked with the principles of
sustainable development".
(b)
1. Market forces and competition force professionalisation:
Family concerns will turn professional in order to face successfully competition and market
forces. This does not imply that family-owned business will come to an end, but the demarcation
between ownership andcontrol, on the one hand, and management on the other, will be much
more evident.
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2. Independent directors will have a say:
Members of the board will be persons with technical and managerial capabilities "Who can
guide and oversee operating management in the discharge of their functions". The boards will
have a number of (upto 50 per cent) independent external directors who can advise, admonish
and control operating management, without fear or favour, on issues of policy and
performance.
3. The topmen will not wear two hats:
The practice of one person combining in himself both the positions of Chairman and CEO will
sooner rather than later, come to an end.
4. Emergence of board committees:
Boards delegating specific tasks such as audit, remuneration and appointments to committees
with members having professional expertise will be a normal phenomenon.
5. Transparency in reporting and full financial disclosures:
Transparency in reporting and full disclosures will be norms. The board has to ensure adoption of
appropriate accounting standards in the preparation of company's accounts and material
changes during the financial year are fully discussed and justified.
6. Independent and competent auditors will do their jobs:
Guidelines on corporate governance all over the world insist on independence of audit, and this
will be observed by boards in India too. Boards will have to ensure unattached and
professionally competent auditors to audit the company's accounts.
7. Long term stakeholder interests will be ensured:
The highest priority of the boards would be to ensure long-term maximisation of shareholder
value and wealth. Better corporate performance through legitimate and transparent policies will
enrich shareholders. Accountability to shareholders does not mean, however, that other
stakeholders such as customers and employees would have to be excluded, as the respective
objectives are not naturally exclusive.
8. Board’s members' commitment ensured through adequate compensation:
Since boards will have to shoulder greater responsibility, bear risk and manage uncertainty with
a great deal of pressure on them to perform, both from internal and external sources, their
members would have to be compensated adequately and appropriately.
9. Boards will be committed to corporate social responsibility:
Corporate social responsibility would become part and parcel of the duties of boards of
directors. They who draw so much from the society in terms of resources, trained manpower, law
and order, public health, infrastructure and well-developed markets to do their business and
make profits, have a moral and social responsibility to share with the society at least a part of
what they earn and gain, by their ethical practices and catering to the basic needs of
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communities they operate-in, supplementing wherever possible, the efforts of public authorities.
"Corporates would have to provide demonstratable evidence of their concern for the issues that
confront those constituencies.
10. Whistle blower policy will be in place:
Companies would in due course put in place an appropriate whistle blower policy enabling
both the board and senior management takes corrective measures to stem the rot, if any, in
good time. Through SEBI under listing agreement (LA) with stock exchanges made whistle blower
policy in the revised clause 49 non-mandatory, corporate governance advocates point out that
sooner than later the Indian regulator would be prompted to make mandatory the whistle
blower policy through which a company might establish a mechanism for employees to report
to the management concerns about unethical behavior, actual or suspended fraud, or violation
of the company‘s code of conduct or ethics policies.
Question 28:
(a) Explain briefly the key strategies which can be used at the time of implementation of
Corporate Social Responsibility policies and practices in a company.
(b) State the relationship between globalization and CSR.
Answer:
(a) The various strategies which may be used at the time of implementation of CSR policies and
practices in a company are:
1. Top management initiative:
 The attitude of top management towards CSR can determine whether or not an entity
would actually carry out CSR measures. The top management can provide strong and visible
support for the entity's commitment towards CSR by incorporating CSR measures in entity's
Mission, Vision and Values statements.
 The Mission, Vision and Values statement of a socially responsible business should go beyond
'making profit' and specify that the entity will -
1. engage in ethical and responsible business practices; and
2. Promote the interests of all the stakeholders.
2. Integration of CSR in decision making:
 CSR is viewed as a comprehensive set of policies, practices and programs that are
integrated into decision-making processes throughout the organisation. Therefore, an entity
should incorporate CSR initiatives in its core business operations and strategies.
 The organisation should set specific goals for CSR.
 At the stage of planning, the organisation should lay down the measures for evaluating the
progress from time to time.
 As far as possible, the goals should be laid down in quantifiable terms.
3. Management Structure:
 To promote the achievement of its CSR objectives in a more effective manner, an entity
should integrate CSR measures in all its operations and business decisions.
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 An entity may establish a CSR Committee and other related or sub-committees for
promotion and enforcement of CSR. The functions of the CSR Committee should be to
identify and evaluate the key CSR issues, and to integrate the key CSR issues in all the
functions of management.
 The issues that represent a company's CSR focus vary by nature of business, by size, by sector
and even by geographic region. Therefore, there cannot be a universally accepted
management structure for promotion of CSR Thus, it has been rightly said, and ―Creating a
CSR structure is not a ‘one size fits all’ exercise.
4. Accountability for CSR in job profiles:
 An entity should clearly fix the responsibilities of its managers and employees for promotion
and achievement of CSR objectives.
 The job profiles and job descriptions of each manager and employee should be customised
to include the guidelines, examples and tools that fit his level of commitment and
involvement in CSR.
5. Employee recognition and rewards:
 Employees tend to engage in behaviour that is recognized and rewarded and avoid
 behaviour that is penalised.
 An entity should implement a 'Reward Program' for recognising and rewarding those
managers and employees who have contributed towards successful implementation of CSR
measures or activities. This would act as a strong motivating force for the workforce to
contribute towards entity's CSR objectives.
 The Reward Program may be in the nature of publication of a magazine periodically,
including therein the highlights of CSR measures undertaken by the employees, or awarding
the employees with letters of appreciation, certificates for excellent performance or small
gifts like T-Shirts, mugs, pens, or giving them direct or in direct financial assistance.
 Also, the entity should participate in the award ceremonies organised at State and National
level for recognising and rewarding those entities and individuals who have contributed
towards CSR
6. Recruitment and promotion policies:
 The recruitment and promotion policies of the entity should clearly highlight the entity's
commitment towards CSR.
 The CSR activities undertaken by the managers and employees should carry appropriate
weightage at the time of recruitment, selection and promotion.
7. Training programs:
 The entity should regularly conduct comprehensive training and development programs
emphasising the importance of CSR.
 The employees should be trained about their roles in implementation of CSR measures and
attainment of CSR objectives.
 The training program should serve as a vehicle for sharing experiences and a source for
learning and developing best practices throughout the entity. It should serve as an
inspiration for continuous improvement.
 Proposals and initiatives by the employees should be welcome and the entity should provide
necessary facilities for implementation of all such CSR measures or activities that are in line
with entity's CSR objectives.
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8. Implementation of CSR:
 CSR requires an entity to integrate social, environmental and ethical concerns into its
business process. Therefore, just like any other business function, CSR performance and
compliance should also be subject to review and control.
 If CSR performance is neither measured nor rewarded, the employees commitment towards
CSR would come down, and the stakeholders would conclude that CSR is of secondary
importance.
9. Influencing others to be socially responsible:
 An entity which is, and is recognised by others as, socially responsible, is in a position to
influence the behaviour of others, from business partners to industry colleagues to
neighbouring businesses. Such entity should play a leadership or pioneer role by sharing its
experiences with others and, encouraging others, to be socially responsible.
 An entity, by influencing others to be socially responsible, performs CSR as it is in everyone's
best interest to have as many persons as possible honouring the requirements and
expectations of CSR.
10. CSR reporting and audit:
 An entity should regularly publish CSR Reports. It would help the entity to build and reinforce
trust with all the stakeholders. The CSR Reports should be aimed at increasing the awareness
and importance of CSR.
 CSR reports should highlight the CSR activities undertaken by the entity, the employees who
played a key role in achievement of CSR initiatives.
 CSR reporting reflects that the top management is serious about its commitment towards
CSR, and that CSR is not used just for name sake, or for building image.
 An entity may also decide to obtain an independent third party verification of the CSR
report. Alternatively, it may get CSR Audit done by external auditors and publish the results of
such audit.
(b) Globalisation and CSR:
As a consequence of cross-border trade, multinational enterprises and global supply chains,

there is an increased awareness on CSR concerns related to human resource management
practices, environmental protection, and health and safety, among other things. Reporting on
the CSR activities by corporates is therefore increasingly becoming mandatory.
In an increasingly fast-paced global economy, CSR initiatives enable corporates to engage in

more meaningful and regular stakeholder dialogue and thus be in a better position to anticipate
and respond to regulatory, economic, social and environmental changes that may occur.
There is a drive to create a sustainable global economy where markets, labour and communities
are able to function well together and companies have better access to capital and new
markets.
Financial investors are increasingly incorporating social and environmental criteria when making
decisions about where to place their money, and are looking to maximise the social impact of
the investment at local or regional levels.
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Question 29:
(a) Discuss the steps involved in the whole life-cycle risk process for each stage of the project.
(b) How do asset characteristics influence computation of WLCC?
Answer:
(a) The framework, integrating the five iterative steps, is explained in the following sections:
1. Whole life risk identification:
The process starts with a qualitative stage that focuses on identification of risks related to each
of the whole life-cycle processes. Risks that are unidentified and not quantified are unmanaged
risks that can have a significant negative outcome on projects and organisations. If any of the
unidentified risks occur at any stage of the project life-cycle, this may have serious
consequences on stakeholders‟ financial status. Hence, perhaps the most important step in the
whole life-cycle risk process is the process of risk identification. The quality of this process has a
direct effect on the quality and accuracy of risk analysis, quantification, and development of risk
strategy responses, and on the management of risk throughout the life span of projects. The
output of risk identification will inform the second quantitative analysis process that focuses on
evaluation and assessment of risks associated with each aspect of the life-cycle span of
projects.
2. Whole life risk analysis:
Several methodologies are available to deal with WLCC risk analysis. The techniques that can be
used in WLCC risk assessment decision making might be summarised as deterministic,
probabilistic and AI. Deterministic methods measure the impact on project outcomes of
changing one uncertain key value or a combination of values at a time. In contrast, probabilistic
methods are based on the assumption that no single figure can adequately represent the full
range of possible outcomes of a risky investment (Fuller & Petersen 1996). Rather, a large number
of alternative outcomes must be considered and each possibility must be accompanied by an
associated probability from a probability distribution, followed by a statistical analysis to measure
the degree of risk. Using a deterministic approach, the analyst determines the degree of risk on
a subjective basis. All methods differ from the above approaches and use historical data to
model cost and uncertainty in WLCC analysis. None of these techniques can be applied to
every situation. The best method depends on the relative size of the project, availability of data
and resources, computational aids and skills, and user understanding of the technique being
applied.
3. Whole life risk responses:
Developing responses to reduce WLCC risks is the third step in the integrated WLCC risk
management framework. Once the building assets and the many different risks and threats to
which they are exposed are identified and quantified and the related life-cycle vulnerabilities
assessed, necessary steps should be taken to ensure that the entire investment is protected from
all sources of external and internal threats. Thus, the third stage is concerned with the
identification of strategies that mitigate the effect of anticipated threats to the greatest extent
possible. This should be based on the following universal rules: risk avoidance, risk reduction, risk
absorption and risk transfer.
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4. Whole life risk management plan:
Following the identification, quantification and development of risk responses, the related
vulnerabilities of building assets need to be determined and planned for. This provides the basis
on which risk management plans and decisions are made. The risk management planning
process is concerned with putting in place the procedure for:
 What response actions are needed?

 When these response actions are needed?
 How these actions are implemented?
 Who is responsible for the implementation, control and monitoring of the actual progress of
risk responses and management strategies that have been developed to deal with the
identified risk?
5. Whole life risk monitoring and feedback:
The issue of risk monitoring is essential for ensuring effective implementation of risk control
measures. Active risk monitoring ensures that effective response measures to manage the risks
are appropriately implemented. Since we are dealing with the life-cycle of projects, the initial
decision conditions may change over time, which could lead to the change of risks. Hence, a
feedback and continuous assessment of risk through the entire life span of the project is very
important in the process of whole life-cycle costing. This process should include tracking the
effectiveness of the planned risk responses, reviewing any changes in priority of response
management, monitoring the state of the risks, updating the whole life-cycle analysis
accordingly and reviewing the economic performance indicators to check whether the
investment decision is still valid or otherwise. In this way risk monitoring not only evaluates the
performance of risk response strategies but also serves as a continuing feedback or audit
mechanism.
The application of the above framework should take place during the early stages of asset
development as well as at every project milestone, and should continue throughout the whole
life of the asset. The information generated from the WLCC risk management framework should
inform decision makers on which input data has the most impact on the
WLCC result and how robust the final decisions are.
(b) The characteristics (i.e. physical and functional) of new or existing facilities are very
important aspects of WLCC computation. The research community has largely ignored this
aspect of WLCC. For example, a relationship may exist between building function and
mechanical services costs, a particularly important feature of modern facilities. Little research
has been published with regard to the impact of building characteristics on WLCC. Experience
shows that an indirect link exists through many aspects, including energy costs for example. A
poorly insulated building will consume more energy, thus increasing WLCC and possible
downtime costs in maintenance (Department of Industry 1977). The characteristics that should
be assessed and included in the computation of WLCC include:
 Layout and location

 Functionality
 Construction technology
 Gross floor area
 Number of storeys and storey height
 Glazing area
 Occupancy (m2/person)
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 Shape of the facility

 Aesthetics
 Energy-saving measures
 Quality of components
 Type and quality of public health systems
 Type and quality of superstructure building fabric
 Type and quality of internal fabric
 Type and quality of electrical and mechanical services
 Extent of site works.
Question 30:
(a) Why should Corporate Social Responsibility (CSR) look beyond the concept of philanthropy?
(b) “Corporate Citizenship: A new way to market CSR?” Comment.
Answer:
(a) Corporate Social Responsibility (CSR) is a management concept where good business is
not only seen as maximization of shareholder value but also of stakeholder value. It is about the
management of a company’s impact on its stakeholders, the environment, and the community
in which it operates. It is more than just a philanthropic activity for some charitable causes. It is
about the integrity with which a company governs itself, how it fulfills its mission, the values it has,
what it wants to stand for, and how it engages with transparency. Here, the corporations have
to move beyond the financial bottom-line to the social and environmental bottom line.
Corporate philanthropy is certainly a piece of the CSR puzzle. The thing to understand here is
that it is just that: a piece. CSR and corporate philanthropy are often viewed as interchangeable
terms because many of the most basic CSR efforts are philanthropic in nature. However, CSR
encompasses more than corporate giving. CSR programs take a proactive approach to reduce
negative impacts and increase positive impacts on the people and environment the
corporation touches. For eg., a partnership with a non-profit organization can mean more than
giving a hefty annual donation, joining as a corporate member, or sponsoring events. In a CSR
program, a true partnership might mean encouraging employees to volunteer their time, hosting
public awareness and educational events, or contributing services that are useful to the
organization.
Corporate Social Responsibility looks beyond the interests of traditional stakeholders and
considers impacts on employees, customers, vendors, suppliers, communities, and the natural
environment. This approach to business strategy takes the minimum expected efforts, such as
compliance with regulations and managing obvious risks, and goes a step further all within a
thoughtfully developed and well organized program that aligns with the company’s strategic
plan.
CSR goes beyond philanthropy. It has to take into account integrity and accountability in the
long-run process of sustainability. For a better understanding of this concept, it has been divided
into four broad aspects of CSR:
 Responsibility
 Accountability
 Sustainability
 Social contact
Responsibility:
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William Frederick (1994) has taken the concept of CSR to a higher level by discussing about
corporate responsiveness. According to him, corporate social responsiveness refers to the
capacity of a corporation to respond to social pressures. Ethically accepted corporate activity
and profit-making are not mutually exclusive. Sustainable growth and success demands
ethicality in the process of dealing with stakeholders. Often, CSR has been challenged on the
grounds of relativity, which means that what may be considered right by one may be
considered wrong by another. Arriving at a consensus for CSR checklists may not be easy.
Accountability:
The easiest way to understand the different levels of accountability is to adhere to the report on
Social Responsibilities of Business Corporations issued by the Committee for Economic
Development (CED) in 1971. The report consists of the three concentric circles: Inner Circle,
Intermediate Circle and Outer Circle. CSR includes integrity and accountability because it
demands knowledge that goes beyond the traditional framework of business understanding,
i.e., profit-making and bottom line.
Sustainability:
Sustainability places an extended set of expectations on business. Such issues as layoffs, plant
closures, product quality, financial frauds, or industrial pollution demand the consideration of a
diverse and complex range of systematic solutions. The reason CSR has to promote beyond
philanthropy is because familiarity with unethical practices often makes society extremely
tolerant and insensitive. The objectives of a company’s CSR governance must be clearly defined
with respect to its different stakeholders. The business environment will always be in a continuous
state of flux due to the influence of socio-economic and political changes in the micro and the
macro level. Therefore, CSR needs a strategy that needs to uphold the ethical standards.
Social Contract:
CSR is related to the social contract between the business and the society in which it operates.
At any one time in any one society, there is a set of generally accepted relationships,
obligations, and duties between the major institutions and the people. Though business has the
bigger responsibility of going beyond philanthropy, one must also keep in mind that each
stakeholder also has reciprocal duties with others and the consuming community also has the
obligation to make the tradeoff between cost and sustainability and integrity. Different
stakeholders also cannot be driven by their selfish interests alone because each stakeholder has
an important role to play and one cannot be destroyed for the benefit of the other.
(b) A new terminology that has been gaining grounds in the business community today is
Corporate Citizenship. We need to understand the concept of corporate citizenship and how is
it fundamentally different from corporate social responsibility. Corporate citizenship is defined by
the Boston College Centre for Corporate Citizenship, as the business strategy that shapes the
values underpinning a company’s mission and the choices made each day by its executives,
managers and employees as they engage with society.
According to this definition, the four key principles that define the essence of corporate
citizenship are: (i) Minimise harm (ii) Maximise benefit (iii) Be accountable and responsive to key
stakeholders (iv) Support strong financial results.
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Thus, corporate citizenship, similar to its CSR concept, is focusing on the membership of the
corporation in the political, social and cultural community, with a focus on enhancing social
capital. Notwithstanding the different terminologies and nomenclature used, the focus for
companies today should be to focus on delivering to the basic essence and promise of the
message that embodies these key concepts – CSR and Corporate Citizenship.
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Suggested Answer_Syl12_Dec2014_Paper 13
FINAL EXAMINATION
GROUP III
(SYLLABUS 2012)
SUGGESTED ANSWERS TO QUESTIONS

DECMBER 2014
Paper-13 : CORPORATE LAWS & COMPLIANCE

Time Allowed : 3 Hours Full Marks : 100
The figures in the margin on the right side indicate full marks.
Please (1) Write answers to all parts of a question together.
(2) Open a new page for answer to a new question.
(3) Indicate in the front page of the answer book the questions attempted.
Where necessary, suitable assumptions may be made and disclosed by way of a Note.
SECTION A
Answer Question No. 1 which is compulsory (Carrying 20 Marks) and

also answer any four (Carrying 15 Marks each) from rest in this Section.
1. (a) M/S ANAND STEEL LTD. showed a net balance in the Profit and Loss Account for the last
five years as follows:
Financial Year 2009-10 Loss Rs. 125 Lakh (Dr.)
Financial Year 2010-11 Profit Rs. 180 Lakh (Cr.)
Financial Year 2011-12 Loss Rs. 110 Lakh (Dr.)
The Board of Directors of the Company propose to donate a sum of Rs. 25 Lakh to a
Social Organization (approved/bonafide) engaged in Education and Health Care of
Backward Community in the locality.
Examine with reference to the provisions of the Companies Act, 2013, whether the
proposed donation is within the powers of the Board of Directors of the Company. 2
(b) In case of application for oppression and mismanagement, how far the following
situations hold good under the provisions of companies Act, 1956.
(i) Application by minority shareholders holding majority beneficial interest.
(ii) Application by a group of shareholders against non-declaration of dividend. 2+1=3
(c) TREEZA LTD. declared dividend for the Financial Year 2013-2014 on 1st July, 2014 but did
not pay the same to the shareholders within the prescribed time. Explain with reference
to the provisions of Companies Act, 2013.
(I) What are the penal provisions against such violation?
(II) Under what circumstances no offence shall be deemed to have been committed?
2+2=4
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(d) Mr. Anuj is a director in State Bank of India. On the ground of his misconduct to the
interest of the depositors, the Reserve Bank of India terminates his service.
Decide whether the Reserve Bank of India can do so under the Banking Regulation Act,
1949. 3
(e) The shares of MNC LTD. were listed on a recognized stock exchange. The stock
exchange delists the shares of the company. Referring to the provisions of the Securities
Contracts (Regulation) Act, 1956, advise the company on the remedies available to the
company against the order of the stock exchange. 3
(f) (i) 'The German Corporate Governance system is based around a dual board system'.
Elucidate this statement. 3
(ii) Why does construction industry fail to embrace WLCC? 2
Answer:
1. (a) Section 181 of the Companies Act, 2013 states that the Board of Directors of a company
may contribute to bonafide charitable and other funds.
Provided that prior permission of the company in general meeting shall be required for
such contribution in case any amount the aggregate of which, in any financial year,
exceed five percent, of its average net profits for the three immediately preceding
financial years.
In the given case the Board of Directors is not empowered to contribute to Rs.
25 lakhs as it exceeds 5% of average profits of the preceding three years i.e.
Rs.(-110+180+190) x 5% = Rs.13 lakhs. Hence, prior permission of the shareholders are to be
obtained by the Board of Directors of Anand Steel Ltd.
(b) (i) Persons who hold majority of beneficial interest but minority of voting power can
complain of oppression which term includes not merely obtaining unfair pecuniary
advantage but also an overwhelming desire for power (Re Hammer Ltd. 109 L.J. 25
C.A.). The remedy is analogous to winding up but before seeking winding up, a
member must exhaust his remedy.
(ii) Non declaration of dividend when it does not lead to devaluation of shares is
not an act of mismanagement. (V.J Thomas Vetton Vs Kuttanad Rubber Co. Ltd.
(1964).
(c) (i) Sec. 127 of the Companies Act, 2013 states that where a dividend has been
declared by a company but has not been paid or the warrant in respect thereof has
not been posted within thirty days from the date of declaration to any shareholder
entitled to the payment of the dividend, every director of the company shall , if he is
knowingly a party to the default, be punishable with imprisonment which may extend
to two years and with fine which shall not be less than one thousand rupees for every
day during which such default continues and the company shall be liable to pay
simple interest at the rate of eighteen percent, per annum during the period for
which such default continues.
(ii) No offence under section 127 of Companies Act, 2013 shall be deemed to have
been committed:
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the
payment of the dividend and those directions cannot be complied with and the
same has been communicated to him;
(c) where there is a dispute regarding the right to receive the dividend ;
667
(d) where the dividend has been lawfully adjusted by the company against any sum
due to it from the shareholders; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant
within the period under section 127(1) was not due to default on the part of the
company.
(d) Under section 36AA of the Banking Regulation Act, 1949, RBI can terminate any
Chairman, Director, Chief Executive, other officials or any employee of the bank where it
considers desirable to do so particularly when RBI is of the opinion that conduct of such
persons is detrimental to the interest of the depositors or for securing proper
management of the banking company. Before such termination concerned person
should be given opportunity to be heard of. Such terminate officials can make appeal to
the Central Govt. within 30 days from the date of communication of such termination
order. The decision of the Central Govt. cannot be called into question. In case an order
is issued pursuant to this section the concerned person shall cease to hold his office for a
period of not exceeding 5 years as may be specified in the order. Contravention of the
above provision shall be punishable with a fine, which may extent to Rs. 250 per day.
(e) Section 21A of the Securities Contracts (Regulation) Act, 1956 describes the provisions
regarding delisting of securities by a recogmized stock exchange.
 A recognized stock exchange may delist the securities, after recording the reasons
therefore, from any recognized stock exchange on any of the ground or grounds as
may be prescribed under this Act. Provided that the securities of a company shall not
be delisted unless the company concerned has been given a reasonable opportunity
of being heard.
 A listed company or an aggrieved investor may file an appeal before the Securities
Appellate Tribunal against the decision of the recognized stock exchange delisting the
securities within fifteen days from the date of the decision of the recognized stock
exchange delisting the securities and the provisions of section 22Bto 22E of this Act shall
apply, as far as may be, to such appeals; Provided that the Securities Appellate
Tribunal may, if it is satisfied that the company was prevented by sufficient cause from
filling the appeal within the said period, allow it to be filled within a further period not
exceeding one month. MNC Ltd. may be advised accordingly.
(f) (i) The German Corporate Governance system is based around a dual board system
and essentially, the dual board system comprises a management board (vorstand)
and a supervisory board (Aufsichtsrat). The management board is responsible for
managing the enterprise. Its members are jointly accountable for the management
of the enterprise and the chairman of the management board co-ordinates the work
of the management board. On the other hand, the supervisory board appoints,
supervises, and advises the members of the management board and is directly
involved in decisions of fundamental importance to the enterprise. The chairman of
the supervisory board co-ordinates the work of the supervisory board. The members
of the supervisory board are elected by the shareholders in general meetings. The
co-determination principle provides for compulsory employees representation. So, for
firms or companies which have more than five hundred or two thousand employees
in Germany, employees are also represented in the supervisory board which then
comprises one third employee representative or one half employee representative
respectively. The representatives elected by the shareholders and representatives of
the employees are equally obliged to act in the enterprise's best interests.
(ii) The reasons why construction industry fails; to embrace WLCC are:
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 The lack of universal methods and standard formats for calculating whole life
costs.
 The difficulty in integration of operating and maintenance strategies at the
design phase.
 The scale of the data collection exercise, data inconsistency.
 The requirement for an independently maintained database on performance
and cost of building components
2. (a) Mr. Abir, a Cost Accountant and an Independent Director of Gurgaon Auto Ancillaries
Ltd. will be abroad for three months from 10-11-2014. The Company wants to appoint Mr.
Rahul as an alternate Director in place of Mr. Abir.
Draft a Board Resolution authorising the appointment. 4
(b) HILTON LTD. was incorporated on 1st January, 2012. On 1st July, 2014 a political party
approaches the company for a contribution of Rs.12 lakh for political purpose.
Advise in respect of the following under Companies Act, 2013,
(i) Is the company legally authorised to give this political contribution?
(ii) Will it make any difference, if the company was incorporated on 1st December,
2010?
(iii) Can the company be penalized for defiance of rules in this regard? 2+2+2=6
(c) MODERN INSURANCE LTD. has issued a policy on 25th March, 2014 for Fire Risk favouring
one of the leading Corporate House in the country without the actual receipt of premium
and it was reflected as premium receivable as at 31st March, 2014. The company
maintained that it is a usual practice in respect of big customers and the money was
collected on 5th April, 2014. There was a fire accident in the premises of the insured on
31st March, 2014 and a claim was lodged for the same. The Insurance Company also
made a provision for claim. Please respond. 3
(d) Write a note on disclaimer of onerous property as per Companies Act, 1956. 2
Answer:
2. (a)
GURGAON AUTO ANCILLARIES LTD.
Meeting of the Board of Directors.
Resolution on Agenda Item 102.3 Date: 06.11.2014
RESOLVED THAT in pursuance of Sec.161 (2) of the Companies Act, 2013 read with Article
No.……………… of the Articles of Association of the Company, MR. RAHUL who is not a
Director/Alternate Director of the company, be and is hereby appointed as an Alternate
Director of the Company in place of MR. ABIR, an Independent Director for a period of,
three months commencing from 10.11.2014 or such further period till the return of Mr. Abir
from abroad but not longer than that permissible to Mr. Abir for his tenure as a Director in
the company.
FURTHER RESOLVED THAT the Board endorses the recommendation of the Appointment
and Remuneration Committee of the Board approving on verification the eligibility of Mr.
Rahul to be appointed as an Independent Director and who is otherwise not disqualified
for appointment.
RESOLVED FURTHER THAT the Company Secretary be and is hereby authorized to file
returns and issue notice for appointment of Mr. Rahul in various committee of the Board.
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(b) According to Section 182 of the Companies Act, 2013:

(i) Notwithstanding anything contained in any other provision of this Act, a company
may contribute any amount directly or indirectly to any political party. Here 'political
party' means of political party registered under Section 29A of the Representation of
the People Act, 1951;
(ii) The following companies are not allowed to contribute to any political party:-
(a) a Government company
(b) a company which has been in existence for less than three financial years.
In the given case:
(1) HILTON LTD. cannot make any political contribution because the company is not
in existence for a period of 3 financial years.
(2) If Hilton Ltd. were incorporated on 01.12.2010 it may make a political contribution
as on 01.07.2014 because in such a case it would have been in existence for 3
financial years. However, it shall comply with the following conditions:
(a) The aggregate of the amount which may be so contributed by the company
in any financial year shall not exceed seven and a half percent of its average
net profits during the three immediately preceding financial years.
(b) No such contribution shall be made by a company unless a resolution
authorising the making of such contribution is passed at a meeting of the
Board of Directors and such resolution shall be deemed to be justification in
law for the making and the acceptance of the contribution authorized by it.
(c) The company shall disclose in its profit and loss account any amount or
amounts contributed by it to any political party during the financial year to
which that account relates, giving particulars of the total amount contributed
and the name of the party to which such amount has been contributed.
[Section 182 (3)]
(3) If a company makes any contribution in contravention of the provisions in this
section, the company shall be punishable with fine which may extend to five
times the amount so contributed and every officer of the company who is in
default shall be punishable with imprisonment for a term which may extend to six
months and with fine which may extend to five times the amount so contributed.
(c) No risk can be assumed by the insurer unless the premium is received. According to
section 64VB of the Insurance Act, 1938, no insurer should assume any risk in India in
respect of any insurance business on which premium is ordinarily payable in India unless
and until the premium payable is received or is guaranteed to be paid by such person in
such manner and within such time, as may be prescribed, or unless and until deposit of
such amount, as may be prescribed, is made in advance in the prescribed manner. The
premium receipt of insurance companies carrying on general insurance business
normally arise out of three sources, viz., premium received from direct business, premium
received from reinsurance business and the share of co-insurance-premium.
In view of the above, the insurance company is not liable to pay the claim and hence
no provision for claim is required.
(d) Disclaimer of onerous property (Section 535)

Where any part of the property of a company which is being wound up consists of
(i) land of any tenure, burdened with onerous covenants ;
(ii) shares or stock in companies ;
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(iii) any other property which is un-saleable or is not readily saleable, by reason of its
binding the possessor thereof either to the performance of any onerous act or to the
payment of any sum of money ; or
(iv) unprofitable contracts ;
the liquidator of the company, notwithstanding that he has endeavored to sell or has
taken possession of the property, or exercised any act of ownership in relation thereto, or
done anything in pursuance of the contract, may, with the leave of the Court and
subject to the provisions of this section, by writing signed by him, at any time within
twelve months after the commencement of the winding up or such extended period as
may be allowed by the Court, disclaim the property : Provided that, where any such
property has not come to the knowledge of the liquidator within one month after the
commencement of the winding up, the power of disclaiming the property may be
exercised at any time within twelve months after he has become aware thereof or such
extended period as may be allowed by the Court.
3. (a) MANTOP LTD. is a London based Company having several business units all over the
world. It has a unit for manufacturing laptop, with its headquarters in Pune. It has a
branch at Seoul, South Korea which is controlled by the Headquarters in Pune.
What would be the residential status under the Foreign Exchange Management Act, 1999
of laptop units in Pune and that of Seoul branch? 4
(b) Mr. Samart, an officer of PUNE TEXTILE MILLS LTD. was in possession of Rs. 1 lakh and
occupation of the quarter of the said Mills even after his retirement and neglected the
notice of the Company to return back the properties.
State the punishment prescribed under the Companies Act, 2013 for wrongful withholding
of property. 3
(c) The board meeting of MANO LTD. was held on 10th June, 2014 at Lucknow at 10.30 a.m.
At the time of starting the board meeting, the number of directors present were 8. The
total number of directors in the company were 10. The board transacted eight items in
the board meeting on that day. At 12 noon after the completion of four items in the
agenda, 5 directors left the meeting.
Examine the validity of all these transactions explaining the relevant provisions of the
Companies Act, 1956. 4
(d) Honest Limited, a company incorporated in India has six members in its Audit
Committee. Due to recessionary conditions in India the revenue of the company is going
down and there is slow down in other activities of the company. Therefore, it was
expected that there would not be significant work for members of the Audit
Committee. Considering the overall recession in the company and the economy, the
members of the Committee decided unanimously to meet once in a year only on March
31, 2014. They reviewed monthly information system of the Company and found no
errors.
Would you consider the decision taken by the Audit Committee is in line with the Clause
49 of the (SEBI) Listing Agreement? 4
Answer:
3. (a) Section 2(u) of the Foreign Exchange Management Act (FEMA) 1999,defines a 'person'.
As per this definition, the following shall be covered in the definition of a 'person'.
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(i) A company
(ii) Any agency, office or branch owned by a 'person'.
Section 2 (v) defines a 'person resident in India'. As per this definition, the following shall
be covered in the definition of a 'person resident in India’:
(i) An office, branch or agency in India owned or controlled by a person resident
outside India.
(ii) An office, branch or agency outside India owned or controlled by a person resident
in India.
In the given case, Mantop Ltd. (London) its headquarters in Pune as well as Seoul Branch
is a 'person'. Therefore, residential status under FEMA shall be determined for each of
them separately.
 Mantop Ltd. (London) does not fall under any of the clauses of the definition of a
'person resident in India'. Therefore, Mantop Ltd. (London) is a person resident outside
India.
 The Pune headquarters of Mantop Ltd. (London) 'a person resident in India' since it
falls under the clause 'an office, branch or agency in India owned or controlled by a
person resident outside India'.
 The Seoul Branch of Mantop Ltd. (London), though not owned, is controlled by the
Pune headquarters. The Seoul Branch is a person resident in India since it falls under
the clause 'an office, branch or agency outside India owned or controlled by a
person resident in India.
(b) The punishment for wrongful withholding of property as stated in Section 452 of the
Companies Act, 2013 states that
(1) If any officer or employee of a company—
(i) wrongfully obtains possession of any property, including cash of the company; or
(ii) having any such property including cash in his possession, wrongfully withholds it
or knowingly applies it for the purposes other than those expressed or directed in
the articles and authorised by this Act, he shall, on the complaint of the company
or of any member or creditor or contributory thereof, be punishable with fine
which shall not be less than one lakh rupees but which may extend to five lakh
rupees.
(2) The Court trying an offence under sub-section (1) may also order such officer or
employee to deliver up or refund, within a time to be fixed by it, any such property or
cash wrongfully obtained or wrongfully withheld or knowingly misapplied, the benefits
that have been derived from such property or cash or in default, to undergo
imprisonment for a term which may extend to two years.
(c) Section 287 of the Companies Act, 1956, provides for the quorum for meeting. The
quorum for a meeting of the Board of Directors of a company shall be one third of its
total strength (any fraction contained in the said one third being rounded off as one), or
two directors, whichever is higher. Where at any time the number of interested directors
exceeds or is equal to two thirds of the total strength, the number of remaining directors,
that is to say, the number of directors who are not interested present at the meeting
being not less than two shall be the quorum during such time. In this case, the quorum is 4
(i.e. 1/3rd of 10 = 3 1/3 rounded off as 4).
Hence, the quorum was present at the time of commencement of meeting. As a rule, in
the case of a meeting of the Board of Directors, the meeting cannot transact any
business, unless a quorum is present at the time of transacting the business. It is not
enough that a quorum was present at the commencement of the business. The quorum
of the Board is required at every stage of the meeting and unless a quorum is present at
every stage, the business transacted is void. (Balakrishna V. Balu Subudhi AIR 1949 Pat
672
184).
In the given situation four items were transacted with the quorum and thus they are valid.
Other four items were transacted after 5 directors left the meeting resulting in the
reduction of quorum as only 3 directors were present as against the required quorum of 4
directors. Hence, such four transactions are void.
(d) One of the following additional requirement as stipulated under clause 49 on which
Section 292A of Companies Act, 1956 (relating to audit committee ) is silent is - The audit
committee shall meet at least four times in a year. The gap between two meetings
should not be more than four month.
Besides, there is a mandatory review requirement and to review only monthly information
system is not sufficient. Here the audit committee members reviewed only monthly
information system of the company and the same is not sufficient as per clause 49.
The Audit Committee shall mandatorily review the following information as per Clause 49
1. Management discussion and analysis of financial condition and the results of
operations;
2. Statement of significant related party transactions (as defined in the audit
committee) submitted by the management
3. Management letters/letters of internal control weaknesses issued by the statutory
auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief Internal auditor
shall be subject to review by the Audit Committee.
Applying the above, the decision taken by the audit committee is not in line with the
clause 49 of the (SEBI) Listing Agreement.
4. (a) M PRIVATE LTD. had taken overdrafts from two Banks with a limit of Rs. 10 Lakhs each
against the security of Fixed Deposit it had with those Banks and an unsecured overdraft
from a financial institution of Rs. 9 Lakhs. The said loans were outstanding as at 31st
March, 2014. The paid up capital and reserves of the company as at that date was Rs. 40
Lakhs and its turnover during the financial year ended on 31st March, 2014 was Rs. 3
Crores. The management of the company is of the opinion that CARO, 2003 is not
applicable to it, because turnover and paid-up capital were within the exemption limits
prescribed and loans taken against the fixed deposits cannot be considered. The
company further contended that loan limit is to be reckoned per Bank or Financial
Institution and not to be aggregated.
Comment with reference to the provisions of Companies Act, 1956. 3
(b) Under what circumstances a Managing Director or whole time Director is not entitled to
compensation for loss of office under the Companies Act, 2013? 5
(c) What is e-Governance? What are the advantages of e-Filing? 2+2=4
(d) Explain the "Majority" required for approving the scheme of amalgamation in a meeting
of members of a company called as per directions of the Court.
Examine further whether the scheme should be approved by the preference share
holders under Companies Act, 1956. 2+1=3
Answer:
4. (a) The Companies (Auditor's Report) Order (CARO), 2003, exempts private limited
companies from its application which fulfils ail the following conditions:
(i) its paid-up capital and reserves are rupees fifty lakh or less;
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(ii) its outstanding loan from any bank or financial institution are rupees twenty five lakh
or less: and
(iii) its turnover does not exceed rupees five crore.
In the case of M Private Ltd., its paid-up capital less than Rs. 50 lakhs, turnover is less
than Rs. 5 crores but its outstanding loan from banks and financial institution is Rs. 29
Lakhs. Loans against Fixed deposits are to be taken into consideration to compute
the outstanding loan from any bank or financial institution. For the limit of Rs. 25 lakhs
as loans from banks and financial institutions, all loans from banks and financial
institutions are to be taken cumulatively. Hence, the contention of the company is
not correct. Here, M Private Ltd. does not satisfy all conditions and CARO, 2003.
therefore, will be applicable.
(b) Sec 202 (1) of the Companies Act, 2013 states that a company may make payment to a
managing or whole-time director or manager, but not to any other director, by way of
compensation for loss of office, or as consideration for retirement from office or in
connection with such loss or retirement.
(2) No payment shall be made under sub-section (1) in the following cases, namely:—
(a) where the director resigns from his office as a result of the reconstruction of the
company, or of its amalgamation with any other body corporate or bodies
corporate, and is appointed as the managing or whole-time director, manager
or other officer of the reconstructed company or of the body corporate resulting
from the amalgamation;
(b) where the director resigns from his office otherwise than on the reconstruction of
the company or its amalgamation as aforesaid;
(c) where the office of the director is vacated under sub-section (1) of section 167;
(d) where the company is being wound up, whether by an order of the Tribunal or
voluntarily, provided the winding up was due to the negligence or default of the
director;
(e) where the director has been guilty of fraud or breach of trust in relation to, or of
gross negligence in or gross mismanagement of, the conduct of the affairs of the
company or any subsidiary company or holding company thereof; and
(f) where the director has instigated, or has taken part directly or indirectly in
bringing about, the termination of his office.
(c) Electronic Governance is the application of information technology to the Government

functioning in order to bring about Simple, Moral, Accountable, Responsive and
Transparent (SMART) Governance. E-Governance is a highly complex process requiring
provision of hardware, software, networking and re-engineering of the procedures for
better delivery of services.
Traditionally, the interaction between citizens or business and Government agency takes
place in a Government office. In E-Governance, the interaction takes place virtually
using Internet based technology, thus reducing time and cost involved. Even better, E-
Governance enhances the citizens and business access to Government information and
services and provides new ways to increase citizen participation in the democratic
process.
Advantages of e-Filing
 Business shall be enabled to register a company and file statutory documents quickly
and easily.
 Public to get easy access to relevant records and get their grievances redressed
effectively.
 Professionals to be able to offer efficient services to their client companies.
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 Financial Institutions to find registration and verification of charges easy.
 Government to ensure proactive and effective compliance of relevant laws and
corporate governance.
 MCA employees shall be enabled to deliver best of services.
(d) Majority in number representing three-fourths in value of members or class of members,

as the case may be, present and voting either in person or by proxy, where proxies are
allowed under the rules made under Section 643 must approve the scheme or
arrangement providing for amalgamation of companies [Section 391(2)] Any member
who though present at the meeting, does not vote for or against, but remains neutral, is
not to be taken under consideration.
As the expression used is member, not only holders of equity shares but also preference
shares and equity shares are ordered by the court to be held separately, the three-
fourths majority of each class will have to be ascertained separately.
5. (a) Explain the conditions for order of winding up of the sick Industrial company under
section 424G(1) of the Companies Act, 1956. 2
(b) AKSHAY LTD. has advanced a loan of Rs. 1,00,000 to one of its Directors in contravention
of the provisions of Sec. 185 of the Companies Act, 2013.
State the consequences of such contravention. 3
(c) Explain the different tools of corporate restructuring. 5
(d) Explain 'Competition Advocacy' under the Competition Act, 2002. 3
(e) A Housing Society started banking business which was ultra vires the regulations
governing the said society. On its winding up, the assets were composed partly of the
shareholders' money and partly of the ultra vires depositor's money.
Discuss the rights of the shareholders and depositors. 2
Answer:
5. (a) Where the Tribunal, after making inquiry under section 424 B and after consideration
of all the relevant facts and circumstances and after giving an opportunity of being
heard to all concerned parties, is of the opinion that the sick industrial company is not
likely to make its net worth exceed the accumulated losses within a reasonable time
while meeting all its financial obligations and that the company as a result thereof is no
likely to become viable in future and that it is just and equitable that the company
should be wound up, it may record its findings and order winding up of the company.
(b) If any loan is advanced or a guarantee of security is given or provided in contravention

of the provisions of sub-section (1) of Section 185 of the Companies Act, 2013, the
company shall be punishable with fine which shall not be less than five lakh rupees but
which may extend to twenty-five lakh rupees, and the director or the other person to
whom any loan is advanced or guarantee or security is given or provided in connection
with any loan taken by him or the other person, shall be punishable with imprisonment
which may extend, to six months or with fine which shall not be less than five lakh rupees
but which may extend to twenty-five lakh rupees, or with both.
(c) Corporate Restructuring Tools: In India, the concept has caught on like wildfire, with a
merger or two reported frequently. The process of restructuring through mergers and
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amalgamations has been a regular feature in the developed and free economy nations
like USA and European countries, particularly in the UK, where hundreds of mergers take
place every year. There are many tools and strategies by which or through which
Corporate Restructuring can be processed: such as amalgamations, mergers, demergers
reverse mergers, takeovers, acquisitions, joint ventures, disinvestment, buyback of shares
etc.
• Amalgamation
It is the process of combining or uniting multiple entities into one form. The term
amalgamation is not defined under the Companies Act, 1956. Generally speaking
amalgamation is a legal process by which two or more companies are joined
together to form a new entity or one or more companies are to be absorbed or
blended with another.
• Reverse Merger
It is when a private company purchases control of a public company and then
carries out a merger with a private company. With a reverse merger, the private
company shareholders receive most of the shares of the public company and
control of the Board. A reverse merger is a quick way of going public with the
timetable being only a couple of weeks.
• Normal Merger
Merger is an arrangement whereby the assets of two or more companies become
vested in or under the control of one company, which may or may not be one of the
original two companies, which has as its shareholders, all or substantially all, the
shareholders of the two companies.
• Demerger
The act of splitting off a part of an existing company to become a new company,
which operates completely separately from the original company. Shareholders of
the original company are usually given an equivalent stake of ownership in the new
company.
• Take-over
It is the purchase of one company by another. The term refers to the acquisition of a
public company whose shares are listed on the Stock Exchange, in contrast to the
acquisition of a private company.
 Joint Venture:
Two parties (individuals or companies), incorporate a company in India. The business
of one party is transferred to the company and, as a consideration for such a
transfer; shares are issued by the company and subscribed by that party. The other
party subscribes to the shares in cash. The parties subscribe to the shares of the Joint
venture Company in agreed proportion in cash and start a new business.
 Disinvestment:
It means to sell off certain assets, such as a manufacturing plant, a division or
subsidiary, or product line.
 Buyback:
The repurchase of outstanding shares by an company, in order to reduce the
number of shares on the market. Companies will buyback shares either to increase
the value of shares still available or to eliminate any threats by shareholders who may
be looking for controlling powers.
(d) Competition Advocacy [Section 49]

The Central Government may, in formulating a policy on competition (including review
of laws related to competition), or any other matter, and a State Government may, in
formulating a policy on competition or on any other matter, as the case may be, make a
reference to the Commission for its opinion on possible effect of such policy on
676
competition and on receipt of such a reference, the Commission shall, within sixty days of
making such reference, give its opinion to the Central Government or the State
Government as the case may be, which may thereafter take further action as it deems
fit.
The opinion given by the Commission under sub-section (1) shall not be binding upon the
Central Government or the State Government as the case may be in formulating such
policy.
The Commission shall take suitable measures for the promotion of competition
advocacy, creating awareness and imparting training about competition issues.
(e) When the lender's money and that of the company have become mixed up and the
two can't be separated from each other, the lender may claim parri passu distribution of
the assets with shareholders in the event of the winding up of the company. Hence, the
entire remaining amount should be apportioned between the shareholders and ultra
vires depositors in proportion to the amount paid up by them respectively.
(6) (a) Examine with reference to the provisions of the Companies Act, 1956 whether winding up
can be ordered by the Court in case the Board of Directors of the Company decide to
discontinue one of its business. Would your answer differ in case the company suspends
the entire business? Explain. 2+1=3
(b) Under section 603 of the Companies Act, 1956, what are the particulars required to be
included in a prospectus to be issued by an existing Foreign Company? 3
(c) Which is the apex body to ensure integrated operation of the power system in a state?
What are the duties of this authority? 1+3=4
(d) Explain the objective of the prevention of Money Laundering Act (PMLA), 2002. 3
(e) How disputes are resolved under the SARFAESI Act, 2002? 2
Answer:
(6) (a) Section 433(c) of Companies Act, 1956 lays down that if the company does not
commence its business within a year from its incorporation or suspends its business for a
whole year, the company may be wound up by the court.
Where a company having many business discontinues one of them, it cannot be said to
have suspended business. The suspension must of the entire business and not of a part of
it. Even if the work of all the business has been suspended, then too it will still be open to
the court to examine whether it will be possible for the company to continue its business.
(Paramjit Lal Badhwar v. Prem Spg. & Wvg. Mills Ltd (1983) 3 Comp. LJ 237.
Therefore, in the present case since the company in question has decided to discontinue
only one of its businesses, it cannot be said to be a ground for winding up by the court.
The answer would certainly differ in case the company suspends the entire business and
the court in its opinion find that there is no possibility of continuation of the business by
the company. The court may order winding up on the above ground.
(b) Under section 603, of Companies Act, 1956, the prospectus to be issued by an existing or
intended foreign company in India must be dated and contains particulars with respect
to the following matters:
(i) the instrument constituting or defining the constitution of the company;
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(ii) the enactments or provisions having the force of enactments, by or under which
the incorporation of the company was effected;
(iii) an address in India where the said instrument, enactments, or provision, or copies
thereof, and if the same are not in English, a translation thereof certified in the
prescribed manner, can be inspected;
(iv) the date on which and the country in which the company was incorporated;
(v) whether the company has established a place of business in India, and, if so, the
address of its principal office in India.
(c) The State Load Despatch Centre as per sec. 32 of Indian Electricity Act shall be the apex
body to ensure integrated operation of the power system in a State.
The State Load Despatch Centre shall -
(a) be responsible for optimum scheduling and despatch of electricity within a State, in
accordance with the contracts entered into with the licensees or the generating
companies operating in that State;
(b) monitor grid operations;
(c) keep accounts of the quantity of electricity transmitted through the State grid;
(d) exercise supervision and control over the intra-state transmission system; and
(e) be responsible for carrying out real time operations for grid control and despatch of
electricity within the State through secure and economic operation of the State grid
in accordance with the Grid Standards and the State Grid Code.
(f) levy and collect such fee and charges from the generating companies and
licensees engaged in intra-State transmission of electricity as may be specified by
the State Commission.
(d) (1) Money Laundering actually refers to a process or system by which money is actually
generated from serious crimes, but they are given such shape (by disguising its origin
into a series of transactions) that it looks Ike it has originated from legitimate sources.
PMLA has been enacted as part of India's commitment to fight all forms of economic
crimes.
(2) Date and extent: PMLA, 2002 came into force w.e.f. 1st July 2005. It extends to the
whole of India.
(3) Objectives of PMIA:
(i) To prevent money laundering, and to provide for confiscation of property derived
from or involved in money laundering and for matters connected therewith or
incidental thereto.
(ii) To avoid channelising of money into illegal activities and providing for
attachment and seizure of property and records, stringent punishment, including
rigorous imprisonment of upto 10 years and fine of upto Rs. 5 Lakhs.
(e) As per section 11 of SARFAESI Act, 2002 where any of dispute relating to securitisation or
reconstruction or non-payment of any amount due including interest arises amongst any
of the parties, namely, the bank, or financial institution or securitisation company or
reconstruction company or qualified or institutional buyer, such dispute shall be settled
by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996, as
if the parties to the dispute have consented in writing for determination of such dispute
by conciliation or arbitration and the provisions of that Act shall apply accordingly.
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Section B
Answer any two Questions from Question No. 7(a) to 7(c).

10x2=20
(7) (a) (i) State the factors influencing Corporate Social Responsibility. (C.S.R.) 5
(ii) Why whole life risk monitoring is essential for ensuring effective implementation of risk
control measures? 5
(b) (i) State OECD guidelines for corporate Governance of State owned Enterprises. 6
(ii) Explain corporate citizenship as a new way to market CSR. 4
(c) (i) "Corporate Social Responsibility is not Charity". Discuss. 6

(ii) Explain the role of subjectivity in WLCC. 4
Answer:
7. (a) (i) Many factors and influences, including the following, have led to increasing attention
being devoted to CSR:
 Globalization- coupled with focus on cross-border trade, multinational enterprises
and global supply chains - is increasingly raising CSR concerns related to human
resources management practices, environmental protection, and health and
safety among other things.
 Governments and intergovernmental bodies, such as the United Nations, The
OECD and the ILO have developed compacts, declarations, guidelines,
principles and other instruments that outline social norms for acceptable
conduct.
 Advances in communications technology, such as the Internet, Cellular phones
and personal digital assistants, are making it easier to track corporate activities
and disseminate information about them. Non-governmental organization now
regularly draw attention through their websites to business practices they view as
problematic.
 Consumers and investors are showing increasing interest in supporting responsible
business practices and demanding more information on how companies are
addressing risks and opportunities related to social, and environmental issues.
 Numerous serious and high-profile breaches of corporate ethics have contributed
to elevated public mistrust of corporations and highlighted the need for
improved corporate governance, transparency, accountability, and ethical
standards
 Citizens in many countries are making it clear that corporations should meet
standards of social and environmental care, no matter where they operate.
 There is increasing awareness of the limits of government legislative and
regulatory initiatives to effectively capture all the issues that CSR addresses.
 Businesses are recognizing that adopting an effective approach to CSR can
reduce risk of business disruptions, open up new opportunities, and enhance
brand and company reputation.
(ii) Whole life risk monitoring and feedback

The issue of risk monitoring is essential for ensuring effective implementation of risk
control measures. Active risk monitoring ensures that effective response measures to
manage the risks are appropriately implemented. Since we are dealing with the life-
cycle of projects, the initial decision conditions may change over-time, which could
lead to the change of risks. Hence, a feedback and continuous assessment of risk
679
through the entire life span of the project is very important in the process of whole
life-cycle costing. This process should include tracking the effectiveness of the
planned risk responses, reviewing any changes in priority of response management,
monitoring the state of the risks, updating the whole life-cycle analysis accordingly
and reviewing the economic performance indicators to check whether the
investment decision is still valid or otherwise. In this way risk monitoring not only
evaluates the performance of risk response strategies but also serves as a continuing
feedback or audit mechanism.
The application of the above framework should take place during the early stages of
asset development as well as at every project milestone, and should continue
throughout the whole life of the asset. The information generated from the WLCC risk
management framework should inform decision makers on which input data has the
most impact on the WLCC result and how robust the final decisions are.
(b) (i) OECD Guidelines for Corporate Governance or State-owned Enterprises

Many of the developing countries still continue to have a dominant presence of
state-owned enterprises .Hence, OECD thought it appropriate to evolve a set of
governance guidelines for the state-owned enterprises as it did for the private
enterprises in member countries. According to OECD, A major challenge is to find a
balance between the State's responsibility for actively exercising its owneirship
functions, such as, the nomination and election of the board, while at the same time
refraining from imposing undue political interference in the management of the
company. Another important challenge is to ensure that there is a level playing field
in markets where private sector companies can compete with the State owned
enterprises, and that governments do not distort competition in the way they use
their regulatory or supervisory powers.
According to OECD, the guidelines suggest that the state should exercise its
ownership functions through a centralized ownership entity, or effectively
coordinated entities, which should act independently and in accordance with a
publicly disclosed ownership policy. The guidelines also suggest the strict separation
of the state's ownership and regulatory functions. If properly implemented, these and
other recommended reforms would go a long way to ensure that state ownership is
exercised in a professional and accountable manner, and that the state plays a
positive role in improving corporate governance across all sectors of our economies.
The result would be healthier, more competitive, and transparent enterprises.
The major recommendations in OECD guidelines are as discussed below:
1. There should be a clear separation between the states ownership function and
other state functions
2. SOEs should not be exempt from the application of general laws and regulations.
3. SOEs should face competitive conditions regarding access to finance.
(ii) Corporate Citizenship: a new way to market CSR

A new terminology that has been gaining grounds in the business community today is
Corporate Citizenship. So what is Corporate Citizenship and is this fundamentally
different from corporate social responsibility? Corporate Citizenship is defined by the
Boston College Center for Corporate Citizenship, as the business strategy that shapes
the values underpinning a company's mission and the choices made each day by its
executives, managers and employees as they engage with society.
The major recommendations in OECD guidelines are as follows:

1. Ensuring an effective legal and regulatory framework for state –owned
enterprises
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2. State acting as an informed and active owner and establish a clear and
consistent ownership policy.
3. Equitable treatment of shareholders- The SOEs should recognize rights of all
shareholders and in accordance with the OECD principles of corporate
governance ensure their equitable treatment and equal access to corporate
information.
4. The state ownership policy should fully recognize the state-owned enterprises’
responsibilities towards stakeholders and report their relations with them.
5. Transparency and disclosure - State owned enterprises should observe high
standards of transparency and disclosure as per OECD principles of corporate
governance.
(c) (i) Corporate Social Responsibility is not charity

There have been evidences that record a paradigm shift from charity to a long-term
strategy, yet the concept still is believed to be strongly linked to philanthropy. There is
a need to bring about an attitudinal change in people about the concept.
By having more coherent and ethically driven discourses on CSR, it has to be
understood that CSR is about how corporates place their business ethics and
behaviors to balance business growth and commercial success with a positive
change in the stakeholder community.
Several corporates today have specific departments to operationalize CSR. There are
either foundations or trusts or a separate department within an organization that
looks into implementation of practices.
Being treated as a separate entity, there is always a flexibility and independence to
carry out the tasks.
But often these entities work in isolation without creating a synergy with the other
departments of the corporate. There is a need to understand that CSR is not only a
pure management directive but it is something that is central to the company and
has to be embedded in the core values and principles of the corporate.
Whatever corporates do within the purview of CSR has to be related to core business.
It has to utilize things at which corporates are good; it has to be something that takes
advantage of the core skills and competencies of the companies. It has to be a
mandate of the entire organization and its scope does not simply begin and end with
one department in the organization.
While there have been success stories of short term interventions, their impact has
been limited and have faded over a long period of time. It is essential for corporates
to adopt a long term approach rather than sticking to short term interventions,
involving the companies and employees in the long-term process of positive social
transition. A clearly defined mission and a vision statement combined with a sound
implementation strategy and a plan of action firmly rooted in ground realities and
developed in close collaboration with implementation partners, is what it takes for a
successful execution of CSR.
An area that can be looked upon is the sharing of best practices by corporates. A
plausible framework for this could be bench-marking. While benchmarking will help
corporates evaluate their initiatives and rank them, it will also provide an impetus to
others to develop similar kind of practices. Credibility Alliance, a consortium of
voluntary organizations follows a mechanism of accreditation for voluntary sector.
Efforts have to be directed towards building a similar kind of mechanism for CSR as
well.
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(ii) Subjectivity in WLCC
The issue of subjectivity and vagueness is also a very important facet of WLCC.
Subjectiveness, vagueness and ambiguity (used interchangeably) are different from
randomness. Randomness deals with uncertainty (In terms of probability) concerning
occurrence or non-occurrence of an event. Subjectivity, on the other hand, has to
do with the imprecision and inexactness of events and judgments including
probability judgments. Many WLCC decision problems involve variables and
relationships that are difficult, if not possible, to measure precisely. For example,
probability judgments about issues like inflation, operation costs, etc. are not always
precise in WLCC and often cost analysts use subjective expression to express their
probability judgments. This applies to probability judgments as well as the costs and
benefits in many WLCC decision problems. The requirement for high levels of
precision may cause WLCC models to lose part of their relevance to the real world
by ignoring some of the relevant decision attributes because these variables are in
capable of precise measurement or because their inclusion may increase the
complexity of the models. Hence, the key to successful WLCC and risk assessment is
to build models that require little information-no more than the users can provide.
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Suggested Answer_Syl12_Jun2014_Paper_13
FINAL EXAMINATION
GROUP III
(SYLLABUS 2012)

JUNE 2013
Please answer all parts of a question at one place. Wherever necessary,
the students can make suitable assumption and state them clearly in the answer.
SECTION A
Answer Question No. 1 which is compulsory and any four

from rest in this section.
1. (a) What is the effect of the registration of the Memorandum of Association of a company on
(i) the subscribers of the Memorandum;
(ii) such other persons as may from time to time become members of the company;
(iii) the company and
(iv) outsiders dealing with the company? 4
(b) A Private Limited Company reports the following position as on 31st March, 2014.
Paid up capital `30 Lacs
Revaluation Reserve ` 10 Lacs
Capital Reserve `11 Lacs
P & L A/c. (Dr. Balance) ` 2 Lacs
The management of the company contends that CARO 2003 is not applicable to it.
Comment. 4
(c) An Audit Committee of a Public Limited Company constituted under section 292A of the
Companies Act, 1956 submitted its report of its recommendation to the Board. The Board however
did not accept the recommendations. In the light of the situation, State whether ;
(i) The Board is empowered not to accept the recommendations of the Audit Committee.
(ii) If so, what alternative course of action, would be Board resort to?
(iii) As a chairman of the Audit Committee, how would you respond to the situation? 3
(d) The Vewar Rural Financial Corporation, Udaipur, established under a special statute issued 7
years bonds to public directly and not through any stock exchange. Decide whether the said
act of the Vewar Rural Financial Corporation is in violation of the provisions of the Securities
Contracts (regulation) Act. 1956. 2
(e) A producer company wants to issue bonus shares. You are required to state the relevant
provisions of the Companies Act, 1956 in this regard. 2
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Answer:
1. (a) When the Memorandum of Association of a company has been registered, it has the
following effect: -
1) The signatories become members of the company, the entry of their names in the
register of members not being legally necessary, and they are bound to observe all the
provisions of the memorandum.
2) Such other persons as may from time to time become members of the company are
bound by the memorandum, as if it had been signed by them, to observe all the
provisions thereof.
3) The company is bound to observe all the provisions of its memorandum of association,
as if it had been signed by the company.
4) The memorandum of association of a company is a public document, and every
person dealing with the company is deemed to have notice of its contents. If a person
deals with a company in a way contrary to its memorandum, he must take its
consequences.
(b) According to the Guidance Note on Terms Used in Financial Statements, the term
―capital reserve‖ means ―a reserve of a corporate enterprise which is not available for
distribution as dividend‖. The said Guidance Note defines the term ―revenue reserve‖ as
―any reserve other than capital reserve‖. For determining the applicability of the Order to
a private limited company, both capital as well as revenue reserves should be taken into
consideration while computing the limit of rupees fifty lakhs prescribed for paid-up
capital and reserves. Revaluation reserve, if any, should also be taken into consideration
while determining the figure of reserves for the limited purpose of determining the
applicability of the Order. The credit balance in the profit and loss account should also
be considered as a part of reserve since the balance in the profit and loss account is
available for general purposes like declaration of dividend. The debit balance of the
profit and loss account, if any, should be reduced from the figure of revenue reserves
only. Therefore, if the company does not have revenue reserves, debit balance of profit
and loss account cannot be reduced from the figures of paid-up capital, capital
reserves and revaluation reserves. However, miscellaneous expenditure to the extent not
written off should not be deducted from the figure of reserves for the purpose of
computing the above limit.
Accordingly, the profit and loss account (Dr. Balance) of `2 lacs cannot be deducted
and hence CARO, 2003 is applicable to the company.
(c) (i) As per section 292A, a recommendations of the audit committee on any matter
relating to financial management, including the audit Report, shall be binding on the
Board.
(ii) The Board does not accept the recommendation of the Audit committee, it shall
record the reasons therefore and communicate such reasons to the shareholders.
(iii) The chairman of the Audit committee shall attend the Annual general Meeting(s) of
the company to provide any clarifications on matters relating to Audit.
(d) Since the Vewar Rural financial corporation is a corporations established under a special
statute enacted by competent legislature the provisions of Sec 28 of securities contracts
(Regulation) Act 1956 shall not apply to it.
Therefore, Vewar rural financial corporation can issue 7 years Bonds to the public directly
without requiring any permission of any stock exchange.
(e) As per provisions of sec 581 ZJ of the Companies Act,1956, any producer company may,
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upon recommendation of the Board and passing of Resolution in the general meeting,
issue bonus shares by capitalization of amounts from General Reserves. Referred to in
Section 581ZJ, Bonus shares should be issued in proportion to the shares held by the
members on the date of issue of such shares.
2. (a) In what way does the Reserve Bank of India regulate the determination of the loans and
advances which can be made by a banking company under the Banking Regulation Act,
1949? 4
(b) The Directors of Welldone Company Limited are required to file declaration of solvency as
they desire to proceed for voluntary winding up of the company. Advise them about the
requirements to be followed for the said purpose. 6
(c) What provisions has been made under section 15G of the SEBI Act, 1992 in connection with
penalty for insider trading? 3
(d) Mr. Kabir is an exporter of goods and services. Explain his duties under Foreign Exchange
Management Act, 1999 regarding realization and repatriation of Foreign Exchange on such
exports. 2
Answer:
2. (a) Power of RBI to regulate determination of loans and advances by banking companies:
By virtue of provisions of Banking Regulations Act, 1949 as contained in Section 21 the RBI is
empowered to issue directives to a banking company to determine the policy in relation
to loans and advances. Such direction may relate to:
(1) Purpose for which loan may or may not be made.
(2) Margin stipulation.
(3) Maximum amount of advances to any company, firm individual or association of
persons (at present 15% for individual borrower without infrastructure project, if
infrastructure project go by additional 10%, 40% for group borrower and for
infrastructure project of group borrower it may be up to 50% of bank's capital and
reserve (presently tier-l & tier-ll capital from capital adequacy point of view.)
(4) Maximum amount of guarantee liability on behalf of any individual firm/company.
(5) The rate of interest and other terms and conditions on which such advances are
made or guarantee given.
It may further be mentioned that in accordance with the provisions of Section 21A, rate of
interest charged by banking company on the basis of loan contract between the bank
and debtor is not to be subject to scrutiny by the court.
(b) Members‘ voluntary winding up- Declaration of solvency (section 488):

Where the company is solvent, a Declaration of solvency is made by the directors and
consequently, winding up proceedings remain in the control of the members of the
company. The provisions relating to declaration of solvency are explained as follows:
Requirements of a valid declaration of solvency.

To be effective, the declaration of solvency must fulfill the following conditions:
(a) Made by whom? It shall be made by a majority of the directors or all the directors if
there are only two directors.
(b) Verification, it shall be verified by an affidavit.
(c) No inability to pay debts. The declaration must specify, that the directors have made
a full enquiry into the affairs of the company. The declaration shall further state-
(I) that the company has no debts., or
(II) the period not exceeding three years, within which, in the opinion of directors, the
company will be able to pay its debts in full.
(d) Date of declaration of solvency. It shall be made within five weeks immediately
685
preceding the date of passing of the resolution for voluntary winding up.
(e) Filing with the registrar. It shall be registered with the registrar before the date of
passing of the resolution for voluntary winding up.
(f) Auditor's report. The declaration shall be accompanied by a copy of the auditor's
report on the profit and loss account and balance sheet of the company. The report
shall also contain a statement of assets and liabilities of the company as on the
latest practicable date immediately before the date of the declaration of solvency.
The report on the profit and loss account and balance sheet shall relate to a period-
(I) commencing from the date upto which the last profit and loss account was
prepared: and
(II) ending with the latest practicable date immediately before the making of the
declaration of solvency.
(c) Section 15G of the Securities and Exchange Board of India (SEBI) Act, 1992 deals with
penalty for Insider Trading. According to this any insider
(i) either on his own behalf or on behalf of any other person, deals in securities of a
body corporate on any stock exchange on the basis of any unpublished price
sensitive information; or
(ii) communicates any unpublished price sensitive information to any person, with or
without his request for such information except as required in the ordinary course for
business or under any law, or
(iii) counsels or procures for, any other person to deal in any securities of anybody
corporate on the basis of unpublished price sensitive information, shall be liable to a
penalty of twenty- five crore rupees or three times the amount of profits made out of
insider trading, whichever is higher.
(d) As per the provisions of FEMA Act, 1999, every exporter of goods shall; -
 Furnish to the Reserve Bank or to such other authority a declaration in such form and in
such manner as may be specified, containing true and correct material particulars,
including the amount representing the full export value or, if the full export value of the
goods is not ascertainable at the time of export, the value which the exporter, having
regard to the prevailing market conditions, expects to receive on the sale of the
goods in a market outside India;
 Furnish to the Reserve Bank such other information as may be required by the Reserve
Bank for the purpose of ensuring the realization of the export proceeds by such
exporter.
 Every exporter of services shall furnish to the Reserve Bank or to such other authorities a
declaration in such form and in such manner as may be specified, containing the true
and correct material particulars in relation to payment for such services.
3. (a) What are the qualifications of appointment of members of State Commission as per Indian
Electricity Act, 2003? 3
(b) Indian citizens incorporated a company in London for the purpose of carrying on business
there. Examine with reference to the relevant provisions of the Companies Act, 1956 whether
it is a "Foreign Company". What would be your answer in case the London Company was
incorporated by a company registered in India. 4
(c) X Ltd. has accumulated losses of `12 crores. The reserves and surplus of the said company
also include "Securities Premium Account" of `15 crores. The company intends to adjust the
accumulated losses against the "Securities Premium Account". Is the company permitted to
do so under the provision of the Companies Act, 1956? 4
(d) Somex Ltd. having paid up capital of `99 Lacs, entered into an agreement for purchase of raw
686
materials worth `50 Lacs with ABC Private Ltd., in which 2 Directors of the company are the
Directors. With the prior approval of the board but before material could be supplied, the
paid up capital of the company became ` 1.50 crores. The company did not obtain
approval of the Central Govt. even after the increase of paid up capital. Decide whether
there is any violation of sec. 297. 2
(e) What are Non performing Asset under the Sarfaesi Act, 2002? 2
Answer:
3. (a) Qualifications of Appointment of Members of State Commission (Section 84):
(i) The Chairperson and the Members of the State Commission shall be persons of ability,
integrity and standing who have adequate knowledge of, and have shown capacity
in, dealing with problems relating to engineering, finance, commerce, economics,
law or management.
(ii) Notwithstanding anything contained in sub-section (1), the State Government may
appoint any person as the Chairperson from amongst persons who is, or has been, a
judge of a High Court: is or has been, a judge of a High Court:
Provided that no appointment under this sub-section shall be made except after
consultation with the Chief Justice of that High Court.
(iii) The Chairperson or any other Member of the State Commission shall not hold any
other office.
(iv) The Chairperson shall be the Chief Executive of the State Commission.
(b) As per Section 591, a company shall be foreign company if –

(i) It is incorporated outside India; and
(ii) If has established a place of business in india
Thus, for deciding as to whether a company is a foreign company or not, the criterion is to
see as to whether the company has established a place of business in India or not, and
not the persons who have incorporated the company.
In this case, Indian citizens have formed a company outside India. Since, the company
has not established any place of business in India, the company cannot be said to be a
foreign company. The fact that Indian citizens have formed a company in a foreign
country is immaterial in deciding whether the company is a foreign company or not.
The answer have remained same even if the London company had been incorporated
by a company registered in India for the same reason as stated above.
(c) Section 78 of the Companies Act, 1956 deals with the application of premium received on
issue of securities. Sub-section (1) of the said section provides that where a company
issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate
amount or value of the premiums on those shares shall be transferred to an account, to
be called "the securities premium account"; and the provisions of this Act relating to the
reduction of the share capital of a company shall, except as provided in this section,
apply as if the securities premium account were paid-up share capital of the company.
Sub-section (2) of the said section provides that notwithstanding anything in sub-section
(1), be applied by the company—
(a) in paying up unissued shares of the company to be issued to members of the
company as fully paid bonus securities;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares or debentures of the company; or
(d) in providing for the premium payable on the redemption of any redeemable
687
preference shares or of any debentures of the company.
In view of the above provisions of the Companies Act, 1956, the company is not
permitted to adjust its accumulated loss against the Securities Premium Account.
(d) Language of Section 297 clearly suggests that the paid up capital of the Company is to
be seen as on the date of making of contract and not when Contract is executed.
In the given case when contract is made out, paid up Capita! of the Company is `99 Lacs
only and for that prior approval of the Board is sufficient. Therefore, there is no violation of
Sec 297.
(e) ‗Non-performing asset‘, means an asset or account of a borrower, which has been
classified by a bank or financial institution, as sub-standard, doubtful or loss asset –
 In case such bank or financial institution is administered or regulated by any authority
or body established, constituted or appointed by any law for the time being in force in
accordance with the directions or guidelines relating to asset classification issued by
such authority or body
 In any other case, in accordance with the directions or guidelines relating to asset
classification issued by RBI.
4. (a) State briefly the composition of Competition Commission of India. Examine whether the
chairperson of the competition commission shall be only a person, who has been or is
qualified to be a Judge of a High Court. 3
(b) On 24th January, 2014, the Board of Directors of BUL Limited appointed Mr. A as the company's
sole selling agent for a period of 5 years. At the first general meeting of the company, held after
the board meeting, on April 10, 2014, the above appointment was disapproved. Referring to
the provisions of the Companies Act, 1956.
(i) State the date from which the above appointment comes to an end.
(ii) What would be your answer in case a conditon in the above appointment that "The
appointment must be made by the company in general meeting" was not attached
thereto? 4
(c) "In an Audit of an Insurance Company, the Receipts and Payments account is also
subjected to Audit." Justify. 3
(d) Examine with reference to the provisions of the Companies Act, 1956 whether the following
Act, of the company is valid :
The Board of Directors of a company has made a bonafide decision not to declare any dividend
for the year ended 31st March, 2013. A group of shareholders complain to the company law
board against the above decision of the Board of directors on the ground of mismanagement
and wants the company to declare dividend. 3
(e) DHP LTD. wants to make the liability to its directors unlimited. You are required to state with
reference to the provisions of the Companies Act, 1956 whether this can be done. 2
Answer:
4. (a) Competition Commission of India:
The Competition Commission of India shall consist of a Chairperson and not less than two
and not more than six other members to be appointed by the Central Government
(Section 8) while the appointment is made by the Central Government, the Chairperson
and other members shall be selected in the manner as may be prescribed (Section 9).
The Chairperson and every other member shall be a person of ability, integrity and'
standing and who has special knowledge of, and such professional experience of not
less than 15 years in international trade, economics, business, commerce, law, finance
accountancy, management, industry, public affairs or competition metters including
competition law and policy and which, in the opinion of the Central Government may
688
be useful to the commission [Section 8(2)]. As the qualification prescribed in the Act is the
same for chairperson and other members, chairperson of commission may or may not be
a judicial person.
(b) The legal position:

(a) Where the Board of directors of a company appoints a Sole Selling Agent, such
appointment shall be subject to the condition that the appointment shall cease to
be valid if it is not approved by the shareholders in the first general meeting held after
the date of the appointment.
(b) If the shareholders in the general meeting disapprove the appointment, the
appointment shall cease to be valid with effect from the date of that general
meeting.
(c) The provisions regarding incorporation of this condition are mandatory. If there is no
such condition, the agreement will be void ab initio even if the appointment is
approved by the general meeting [Arantee Manufacturing Corporation v Bright Bolts
Pvt. Ltd. AIR (1967) 37 Comp Cas 758; Department Circular No. 12(11)-CL-VI/68,
dated 6.11.1968].
(i) Thus the appointment of Mr. A as the sole-selling agent will come to an end on
10th April, 2014.
(ii) Again as discussed above, in absence of the above clause, the appointment of
Mr. A as a sole-selling agent of the company would be void ab-initio.
(c) The IRDA (Preparation of Financial Statements and Auditor's Report of Insurance
Companies) Regulations, 2002 require that the auditor of an insurance company should:
(i) report whether the receipts and payments account of the insurer is in agreement with
the books of account and returns;
(ii) express an opinion as to whether the receipts and payments account has been
prepared in accordance with the provisions of the relevant statutes; and
(iii)express an opinion whether the receipts and payments account give a true and fair
view of the receipts and payments of the insurer for the financial year/period under
audit.
It may hence be said that auditor is required to audit the Receipts and Payments
Account of the insurer and also express an opinion on the same.
(d) The term ‗mismanagement‘ has not been defined under the Act. Normally,
mismanagement means gross mismanagement of affairs of company. It may include
a. drawing of funds for personal expenses,
b. gross negligence in managing the affairs,
c. inaction can also be mismanagement
Hence, Directors' bona fide decision not to declare dividend and to accumulate
available profits into reserves is not mismanagement. (Thomas Vettom (V.J.O V. Kutlanad
Rubber Co. Ltd (1984) 56 Com. Cases 284 (kER)(DD).
Thus in the present case the group of shareholders who complain to CLB against the
decision of the Board not to declare any dividend and to accumulate available profits
into Reserves, would not succeed, as the act of directors does not amount to
mismanagement. Furthermore, the shareholder cannot compel the Board to
recommend the dividend. The Board's recommendations arc placed in the general
meeting. The general meeting can reduce the dividend but cannot increase the
dividend as recommended by the Board. Therefore, the shareholder cannot compel the
company to declare dividend and cannot charge the directors for the mismanagement
under Sections 397 and 398.
689
(e) Section 323(1) Of the Companies Act, 1956 states that a limited company may, if so
authorized by its Articles of Association, by special resolution, alter is Memorandum of
Association so as to render unlimited the liability of its directors or of any director or
manager. Hence, by amending the Memorandum of Association of the company by
way of passing a special resolution in a general meeting, DHP Ltd. can make the liability
of directors unlimited.
5. (a) State your views on the following with reference to the provision of the Companies Act,
1956:
(i) Complex Ltd, a well reputed manufacturing Public Limited Company has made a
contribution of `2.5 Lacs during the financial year ended, 31-03-13 to a political party for
running a school, situated in the village, where most of the workers of the company reside.
It is admitted that the benefit of the school is mostly for the children of the workers of the
company. The company has not made any profits in the last four years.
(ii) The statutory Auditor of a Government company have issued a qualified Audit report on the
accounts of the company. In his supplementary Audit, the Comptroller and Auditor
General of India (C&AG) has also made further qualifications on the accounts of the
company.
But the report of the board of directors of the company is silent on the comments of
statutory Auditors and those of C&AG. 3+3=6
(b) Mr. Prasad is Managing Director of Bapi Ltd. He gave his resignation letter to the Chairman of
the Board of Directors on 31st December, 2013, and requested that he should be relieved
immediately. When does the resignation of Mr. Prasad take effect? 3
(c) Advise the Board of Directors of a Limited Company regarding validity and extent of their
powers, under the provisions of the Companies Act, 1956 in relation to the following
matters:
(i) Buy-Back of the shares of the company, for the first time up to 10% of the paid up equity
share capital without passing a special resolution.
(ii) Delegation of power to the Managing Director of the company to invest surplus funds of
the company in the shares of some companies. 2+2=4
(d) X Ltd. Issued Bonds to the tune of ` 100 Lacs and provided security to the tune of `80 Lacs for
the same. It insists that it will disclose the Bonds as "Secured" in the balance sheet of the
company. Comment. 2
Answer:
5. (a) (i) Section 293A of the Companies Act,1956 deals with prohibitions and restrictions
regarding political contributions. A non Government company which has been in
existence for not less than three years may contribute any amount or amounts directly
or indirectly to any political party or for any political purpose to any person provided
that the aggregate of the amounts which may be so contributed by a company in
any financial year shall not exceed 5% of its average net profits determined in
accordance with the provisions of Sections 349 and 350 during the three immediately
preceding financial years. The company in question has not made any profit in last
four years and contributed ` 2.5 lacs during the year to a political party for running a
school. This is violation of the provisions of Section 293-A of the Companies Act
although the children of its workers are benefited. The auditor would have to qualify
his report stating the contravention of the provision of the Companies Act.
(ii) Board‘s report and Qualifications in the Auditor‘s Report:

Section 217(3) of the Companies Act, 1956 imposes a duty on the Board of directors of
a company to give the fullest information and explanations in the Directors' report
690
regarding every reservation, qualification or adverse remarks contained in the
auditors‘ report. The remarks of the Board on the auditors‘ report are to be given as
addendum to the report and are to form part of the main body of the report as per
section 217(3). Hence there is failure on the Board of directors in not having offered its
explanation on the reservations qualifications adverse remarks made in the auditors‘
report.
So, Section 217(3) of The Companies Act, 1956 imposes a duty on the Board of
Directors of a company to give the fullest information and explanations in the
Directors‘ Report regarding every reservation, qualification or adverse remarks
contained in every Auditor‘s report (including supplementary audit). Hence, there is
failure on the board of Directors in not having offered its explanation on the
reservation, qualification, adverse remarks made in the Statutory Auditors and C&AG‘s
report.
(b) A director can resign from his office by serving a notice of his resignation upon the
Company or the Board. There is no need for its acceptance by the Board or the
Company.
However, if a Managing Director resigns, he cannot give up his office at his pleasure
simply by serving the notice. This is because he occupies two positions i.e., of a director
and an employee. In case of Managing Director, the notice or letter of resignation is
required to be approved or accepted by the company and he has to be relieved of his
duties and responsibilities attaching to his office from which he has resigned. Similar views
were accepted in the case of Achutha Pal vs. Registrar of Companies,(1956) 36 Comp.
Cases 598.
Accordingly, in the given case, the resignation of Mr. Prasad, the Managing Director shall
be effective when approved or accepted by the company and he is relieved of his
duties and responsibilities attaching to his office within a reasonable time.
(c) (i) Section 292 (i) (aa) of the Companies Act, 1956 facilitates buy-back of shares upto 10
% of the total paid up equity capital and free reserves. Hence, special resolution in
general meeting of the company is not required. The proposed buy-back of shares is in
order provided other conditions laid down in Section 77A of the Companies Act, 1956
are fulfilled.
(ii) Section 292 of the Companies Act, 1956 empowers the Board of Directors to delegate
to the Managing Director the power to invest in general terms. But Section 372A (2) of
the said Act provides that no investment shall be made unless it is sanctioned by a
resolution passed at a meeting of the board with the consent of all Directors present.
Section 372A does not provide for delegation. Hence the proposed delegation of
power to the Managing Director to invest is not in order
(d) Prima facie, the Bonds to the tune of `100 lacs are provided security to the tune of `80
lacs i.e. they are neither fully secured nor unsecured. Guidance Note (GN) on the 'Terms
used in Financial Statements" issued by ICAl, states "Secured Loans" as Loan secured
wholly on partly against an asset. Hence, the Bonds should be classified under "Secured
Loans" for the purpose of disclosure in the Balance sheet. However, the nature of security
should be clearly specified.
6. (a) What are the provisions available in the Companies Act, 1956 for protection of employees
during investigation? 3
(b) Write a brief note on personal expenses of Directors. 3
(c) Examine with reference to the provisions of the Companies Act, 1956 whether notice of a
Board Meeting is required to be sent to the following persons :
691
(i) Alternate Director;
(ii) An interested Director;
(iii) A Director who has expressed his inability to attend a particular Board Meeting;
(iv) A Director who has gone abroad. 4
(d) State the distinction between a Mandatory provision and a Directory provision. 2
(e) State the powers of the Court about the matters that would be considered while
sanctioning the scheme of amalgamation under the provisions of the Companies Act,1956. 3
Answer:
6. (a) Protection of employees during investigation:
Section 635B of the Act protects against dismissal, discharge, removal, etc., of the
employees of the company under investigation, who make disclosure during the course
of investigation. The section provides that if during the course of investigation, under
sections 235, 237 239 and 247 the company proposes to discharge any employee from
service or punish him by way of dismissal, removal or reduction in rank, then the company
must send to the CLB a previous intimation in writing of the action proposed to be taken,
against the employee. If the CLB has any objection, it must send a notice thereof to the
employer. The CLB is not bound to hear the company or any other person before issuing
the notice- Ashoka Marketing Ltd. v. Company Law Board [1968] 38 Comp. Cas. 519
(Cal.). If the company does not receive any notice of objection from the CLB within thirty
days of sending of the previous intimation of the action proposed against the employee,
then the company may proceed to take the proposed action against the employee.
If the company is dissatisfied with the objection raised by the CLB, it may, within thirty days
of the receipt of the notice of the objection, prefer an appeal to the Court in the
prescribed manner and on payment of the prescribed fee. The decision of the court on
such appeal shall be final and binding on the CLB and on the company.
The aforesaid provisions of section 635B are without prejudice to the provisions of any law
for the time being in force.
(b) Reimbursement of personal expense of Director:

All payments to Directors as remuneration or perquisites whether in the case of a public or
private company are required to be authorized both in accordance with the Companies
Act and Articles of Association of the company. Articles may provide that such
remuneration require sanction of the shareholders either by ordinary or special resolution
while in some cases it may require only approval of Directors. If the terms of appointment
of a Director include payment of expenses of a personal nature, then such expenses can
be incurred by the company, otherwise, no such expense can be incurred or reimbursed
by the company. In the instant case the auditor has to ensure that the above is complied
with, without which, if such expenses are paid, he has to disclose the fact in his report, as
also in the accounts. In this regard attention is invited to section 227 (1A) (e) of the
Companies Act wherein auditor has to inquire into whether personal expenses have been
charged to revenue. However, reporting requirements " the requirement of identifying
and reposting on personal expenses" has been dispensed with in CARO, 2003.
(c) Notice of Board meeting:
(i) Alternate Director: Where a director goes abroad for a period of more than 3 months
and an alternate director has been appointed in his place under Section 313, the
notice should be served to the alternate director as well as on the original director
who is outside India for the time being although there is no legal precedence in this
regard, it would be a prudent practice on strictly construing Section 286.
(ii) An Interested Director: Notice must be given to a director even though he is
692
precluded from voting at the meeting on the business to be transacted [John Shaw &
Sons (Salford) Ltd. v Peter Shaw & John Shaw [1935] 2 KB 1132].
(iii) A Director who has expressed his inability to attend a particular Board Meeting: If a
director states that he will not be able to attend the next Board meeting, notice must
be given to that director [Re Portuguese Consolidated Coffee Mines Steel's Case 42
Ch. D. 160].
(iv) A Director who has gone abroad: A director is entitled to a notice even though he is
outside India provided he has made sufficient arrangement with the company for
sending such notice to him. The right to receive notice cannot be waived. [H.M.
Ebrahim Sait v. South Indian Industrial Ltd., (1938) 8 Com Cases 308: AIR 1938 Mad 962
and Young v. Ladies Imperial Club, (1920) All ER Rep 223 (CA)].
(d) Distinction between a mandatory and directory provision:

The distinction between a provision which is mandatory and one which is 'directory' is
that when it 'mandatory', it must be strictly complied with, when it is 'directory', it would
be sufficient that it is substantially complied with. Non-observance of mandatory
provisions involves the consequences invalidating. But non-observance of directory
provision does not entail the consequence of invalidating, whatever other
consequences may occur.
(e) While sanctioning the scheme of amalgamation, the Court under Section 394 of the
Companies Act, 1956 may make provision for all or any of the following matters:
(i) The transfer to the transferee company of the whole or any part of the undertaking
property or liabilities of the transferor company.
(ii) The allotment by the transferee company of any shares, debenture etc. in that
company which under the scheme are to be allotted by that company to any
person.
(iii) The continuation of any legal proceedings by or against any transferor and transferee
company.
(iv) The dissolution, without winding up of any transferor company.
(v) The provisions to be made for any persons who within such time and in such manner
as the court directs, dissent from the scheme of amalgamation.
(vi) Such incidental matters as are necessary to secure that the amalgamation shall be
fully and effectively carried out.
SECTION B
Answer any five Questions from Question No. 7(a) to 7(f).
5x5=25
7. (a) Discuss various reasons for Corporate Social Responsibility (CSR)?
(b) Enumerate the principles of corporate Governance as evolved by OECD?
(c) Explain the need of corporate Governance in Banks.
(d) CSR is an integral part of sustainable development. Explain.
(e) "The development of corporate Governance in the U. K. was initially the findings of a trilogy
of codes". Discuss in brief.
(f) What are the pros and cons of adopting Corporate Social Responsibility?
Answer:
7.(a) The rationale for CSR has been articulated in a number of ways. In essence, it is about
building sustainable businesses, which needs healthy economies, markets and
communities. The major reasons for CSR can be outlined as:
693
(i) Globalisation:
As a consequence of cross-border trade, multinational enterprises and global supply
chains, there is an increased awareness on CSR concerns related to human resource
management practices, environmental protection, and health and safety, among other
things. Reporting on the CSR activities by corporates is therefore increasingly becoming
mandatory.
In an increasingly fast-paced global economy, CSR initiatives enable corporates to
engage in more meaningful and regular stakeholder dialogue and thus be in a better
position to anticipate and respond to regulatory, economic, social and environmental
changes that may occur.
(ii) International legal instruments and guidelines
In the recent past, certain indicators and guidelines such as the SA 8,000, a social
performance standard based on International Labour Organisation Conventions have
been developed. International agencies such as United Nations and the Organisation for
Economic Co-operation and Development have developed compacts, declarations,
guidelines, principles and other instruments that set the tone for social norms for
organisations, though these are advisory for organisations and not mandatory. One of
the United Nations Millennium Development Goals calls for increased contribution of
assistance from country states to help alleviate poverty and hunger, and states in turn
are advising corporates to be more aware of their impact on society. In order to catalyze
actions in support of the MDGs, initiatives such as Global Compact are being put in
place to instrumentalise CSR across all countries.
(iii) Changing public expectations of business
Globally companies are expected to do more than merely provide jobs and contribute
to the economy through taxes and employment. Consumers and society in general
expect more from the companies whose products they buy. This is coherent with
believing the Idea that whatever profit is generated is because of society, and hence
mandates contributing a part of business to the less privileged.
Further, separately in the light of recent corporate scandals, which reduced public trust
of corporations, and reduced public confidence in the ability of regulatory bodies and
organisations to control corporate excess. This has led to an increasing expectation that
companies will be more open, more accountable and be. prepared to report publicly
on their performance in social and environmental arenas .
(iv) Corporate Brand
In an economy where corporates strive for a unique selling proposition to differentiate
themselves from their competitors, CSR initiatives enable corporates to build a stronger
brand that resonates with key external stakeholders, customers, general public and the
government.
Businesses are recognizing that adopting an effective approach to CSR can open up
new opportunities, and increasingly contribute to the corporates' ability to attract
passionate and committed workforces.
Corporates in India are also realizing that their reputation is intrinsically connected with
how well they consider the effects of their activities on those with whom they interact.
Wherever the corporates fail to involve parties, affected by their activities, it may put at
risk their ability to create wealth for themselves and society.
(b) The Organisation for Economic Co-operation and Development (OECD) was one of the
earliest non-governmental organisations to work on and spell out principles and practices
that should govern corporates in their goal to attain long term shareholder value. They
include the following elements :
(i) The rights of shareholders: The rights of shareholders include a set of rights to secure
694
ownership of their shares, the right to full disclosure of information, voting rights,
participation in decisions on sale or modification for corporate assets, mergers and new
share issues. The guidelines go on to specify a host of other issues connected to the
basic concern of protecting the value of the corporation.
(ii) Equitable treatment of shareholders: The OECD is concerned with protecting minority
shareholders' rights by setting up systems that keep insiders, including managers and
directors, from taking advantage of their roles. Insider trading, for example, is explicitly
prohibited and directors should disclose any material interest regarding transactions.
(iii) The role of stakeholders in corporate governance: The OECD recognizes that there are
other stakeholders in companies in addition to shareholders and workers, for example,
are important stakeholders in the way in which companies perform and make decisions.
The OECD guidelines lay out several general provisions for protecting stakeholder's
interests.
(iv) Disclosure and transparency: The OECD lays down a number of provisions for the
disclosure and communication of key facts about the company ranging from financial
details to governance structures including the board of directors and their remuneration.
The guidelines also specify that independent auditors in accordance with high quality
standards should perform annual audits.
(v) The responsibilities of the board: The OECD guidelines provide a great deal of details
about the functions of the board in protecting the company and its shareholders. These
include concerns about corporate strategy, risk, executive compensation and
performance as well as accounting and reporting systems.
(c) If we examine the need for improving corporate governance in banks, two reasons
stand out: (i) Banks exist because they are willing to take on and manage risks. Besides,
with the rapid pace of financial innovation and globalisation, the face of banking
business is undergoing a sea-change. Banking business is becoming more complex and
diversified. Risk taking and management in a less regulated competitive market will have
to be done in such a way that investors' confidence is not eroded, (ii) Even in a
regulated set-up, as it was in India prior to 1991, some big banks in the public sector and
a few in the private sector had incurred substantial losses. This, along with the massive
failures of non-banking financial Companies (NBFCs), had adversely impacted investors'
confidence.
Moreover, protecting the interests of depositors becomes a matter of paramount

importance to banks. In other corporates, this is not and need not be so for two reasons:
(i) The depositors collectively entrust a very large sum of their hard-earned money to the
care of banks. It is found that in India, the depositor's contribution was well over 15.5
times the shareholders' stake in banks as early as in March 2001. This is bound to be much
more now. (ii) The depositors are very large in number and are scattered and have little
say in the administration of banks. In other corporates, big lenders do exercise the right to
direct the management. In any case, the lenders' stake in them might not exceed 2 or 3
times the owners' stake.
Banks deal in people's funds and should, therefore, act as trustees of the depositors. A
regulator the worlds over have recognised the vulnerability of depositors to the whims of
managerial misadventures in banks and, therefore, have been regulating banks more
tightly than other corporates.
To sum up, the objective of governance in banks should first be protection of depositors'
interests and then be to "optimise" the shareholders' interests. All other considerations
would fall in place once these two are achieved.
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As part of its ongoing efforts to address supervisory issues, the Basel Committee on
Banking Supervision (BCBS) has been active in drawing from the collective supervisory
experience of its members and other supervisors in issuing supervisory guidance to foster
safe and sound banking practices. The committee was set up to reinforce the
importance for banks of the OECD principles, to draw attention to corporate
governance issues addressed by previous committees, and to present some new topics
related to corporate governance for banks and their supervisors to consider.
Banking supervision cannot function effectively if sound corporate governance is not in

place and, consequently, banking supervisors have a strong interest in ensuring that
there is effective corporate governance at every banking organisation. Supervisory
experience underscores the necessity of having the appropriate levels of accountability
and checks and balances within each bank. Put plainly, sound corporate governance
makes the work of supervisors infinitely easier. Sound corporate governance can
contribute to a collaborative working relationship between bank management and
bank supervisors.
(d) CSR is an integral part of Sustainable Development (SD). Exactly where it fits in is vigorously
debated, mainly because the concept of sustainable development also has many
different interpretations.
The basic idea to incorporate the sustainability aspect into business management should
be grounded in the ethical belief of give and take to maintain a successful company in
the long-term. As the company is embedded in a complex system of interdependences in-
and outside the firm, this maintaining character should be fulfilled due to the company's
commitment in protecting the environment or reducing its ecological footprint and due to
the general acceptance of its corporate behavior by society in and outside of the firm. It is
recommended that CSR is to be used as social strand of the SD-concept which is mainly
built on a sound stakeholder approach. CSR focus especially on the corporate
engagement realizing its responsibilities as a member of society and meeting the
expectations of all stakeholders.
CSR is an integral part of sustainable development. Exactly where it fits in is vigorously
debated, mainly because the concept of sustainable development also has many
different interpretations.
The basic idea to incorporate the sustainability aspect into business management should
be grounded in the ethical belief of give and take to maintain a successful company in
the long-term. As the company is embedded in a complex system of interdependences in-
and outside the firm, this maintaining character should be fulfilled due to the company's
commitment in protecting the environment or reducing its ecological footprint and due to
the general acceptance of its corporate behavior by society in and outside of the firm. It is
recommended that CSR is to be used as social strand of the Sustainable Development -
concept which is mainly built on a sound stakeholder approach. CSR focus especially on
the corporate engagement realizing its responsibilities as a member of society and
meeting the expectations of all stakeholders.
CSR advocates moving away from a 'shareholder alone' focus to a 'multi-stakeholder'

focus. Sustainable Development is 'development that meets the needs of the present
without compromising the ability of future generations to meet their own needs'.
A business organisation which employs eco-friendly business practices is, no doubt, socially
responsible as it takes into account the interest of its stakeholders, viz. the environment and
the society at large. As a corollary, a business organisation which is socially responsible
would, no doubt, employ eco-friendly business practices.
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Only a business organisation which is conscious of its duty towards the environment, would
employ eco-friendly business practices and adopt the principles of sustainable
development.
Thus, it is correct to say that "Corporate Social Responsibility is closely linked with the
principles of sustainable development".
(e) As in other countries, the development of Corporate Governance in the UK was initially the
findings of a trilogy of codes: the Cadbury Report (1992), the Greenbury Report (1995), and
the Hampel Report (1998). The recommendations of these reports, which helped in
development of corporate governance in U.K. are explained as under:
Cadbury Report (1992)

The recommendations covered: the operation of the main board; the establishment,
composition, and operation of key board committees; the importance of, and contribution
that can be made by, non-executive directors; the reporting and control mechanisms of a
business. The Cadbury Report recommended a code of Best Practice with which the
boards of all listed companies registered in the UK should comply, and utilized a ―comply
or explain‖ mechanism. This mechanism means that a company should comply with the
code but, if it cannot comply with any particular aspect of it, then it should explain why it is
unable to do so. This disclosure gives investors‘ detailed information about any instances of
non-compliance and enables them to decide whether the company‘s non-compliance is
justified.
Greenbury Report (1995)

Central to the Greenbury report recommendations were strengthening accountability and
enhancing the performance of directors. These two aims were to be achieved by (i) the
presence of a remuneration committee comprised of independent non-executive
directors who would report fully to the shareholders each year about the company‘s
executive remuneration policy, including full disclosure of the elements in the remuneration
of individual directors; and (ii) the adoption of performance measures linking rewards to
the performance of both the company and individual directors, so that the interests of
directors and shareholders were more closely aligned.
Since that time (1995), disclosure of directors‘ remuneration has become quite prolific in UK
company accounts.
Hampel Report (1998)

The Hampel Report, like its precursors, also emphasized the important role that institutional
investors have to play in the companies in which they invest (investee companies). It is
highly desirable that companies and institutional investors engage in dialogue and that
institutional investors make considered use of their shares, in other words, institutional
investors should consider carefully the resolutions on which they have a right to vote and
reach a decision based on careful thought, rather than engage in ‗box ticking‘
(f) Corporate social responsibility refers to a method of running a company that seeks to
address not only profitability, but also the environmental and social consequences of the
business. While most corporate social responsibility concerns are directed at very large
businesses, even small and medium-sized businesses that employ a large number of local
residents or participate in environmentally problematic industries can face pressure to
adopt corporate social responsibility.
Costs - Cons
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Cost represents one of the biggest arguments against adopting corporate social
responsibility as a policy. Programs to reduce environmental impact often require
expensive changes in equipment or ongoing costs without any clear way to recoup those
losses. The decision to maintain domestic production facilities or call centers or to buy from
domestic producers rather than outsource or move production overseas can drive up
costs for a business. Additionally, there is no clear evidence that adhering to a policy of
corporate social responsibility generates a significant increase in sales or profit.
Improved Company Reputation - Pros

Embracing a policy of corporate social responsibility, paired with genuine action, can
serve to build or improve the reputation of a business. If a company‘s behavior creates a
negative backlash that leads to lost profitability -over environmental issues, for example --
corporate social responsibility becomes a method to repair reputation damage and
restore profitability. In other cases, adopting such a policy works as part of a business‟
essential brand, and consumers often demonstrate more loyalty to brands that can
demonstrate a commitment to environmental concerns.
Shareholder Resistance - Cons

Some investors do look to acquire stock in socially responsible corporations, but, on the
whole, investors purchase stock on the expectations of turning a profit. While some
companies, such as Toyota and GE, have profited from corporate social responsibility,
companies that adopt such policies often prove as likely to lose money. Given the spotty
track record of corporate social responsibility in demonstrating profit increase, investors
may resist attempts by executives to move a company in that direction.
Better Customer Relations - Pros

One of the hallmarks of corporate social responsibility is staying involved in the
communities where the business operates. This community involvement goes a long way
toward building trust between customers and the business. If a business builds trust with its
customers, they tend to give the business the benefit of the doubt if something goes
wrong, rather than assuming malicious intent or raw negligence. Customers also tend to
stick with businesses they trust, rather than actively seeking out new companies, which
helps keep a business profitable over the long haul.
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FINAL EXAMINATION
GROUP III
(SYLLABUS 2012)

DECEMBER 2013
Please answer all parts of a question at one place. Wherever necessary,
the students can make suitable assumption
and state them clearly in the answer.
SECTION A
Answer Question No. 1 which is compulsory and any four from rest in this section.
1. (a) A group of promoters approach you for advice regarding the formation of a
guarantee company. Advise them briefly about the types of organizations for which it is
suitable to form a guarantee company and the advantages that can be derived by
registering a guarantee company. 4
(b) The capital of Sigma Ltd. is ` 80 Lakhs, consisting of equity share capital of ` 50 Lakhs and
redeemable preference share capital of ` 30 Lakhs. The preference share capital is to
be redeemed before 31st March 2013. The company is running in losses and its total
accumulated losses amount to ` 20 Lakhs. The company wants to borrow ` 30 Lakhs
from financial institution to improve its working and also to redeem the preference
share capital. Advise. 3
(c) Sec. 253 of The Companies Act, 1956 provides that no body Corporate, Association or Firm
can be appointed Director of a company. Only an individual can be appointed as
director. Explain briefly the reasons as to why it is necessary that only an individual
should be a Director of a company. 3
(d) Draft a Directors responsibility statement to be attached in Director‟s report under The
Companies Act, 1956. 5
Answer
1. (a) A guarantee company is like any other limited company with separate legal entity.
Further the liability of the members is limited. In the case of a company having share
capital, it is limited by the nominal amount of shares held by each member and in the
case of a company not having share capital, by amounts of guarantee undertaken by
Board of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
699
the members i.e., the amounts they shall contribute in the event of the company
being wound up for repayment‘s of its debts.
Formation of Guarantee Company is a convenient for association such as clubs,

chamber of commerce, trade associations, societies setup for carrying on charitable
work etc.
The advantages of a guarantee company are:
It has a separate legal entity and can own property, enter into contracts, sue or be sued
in regard to its contracts and transactions.
(ii) In respect of the transaction of the company, no personal liability is incurred by the
members or director and if at all their liability arises only on winding up.
(b) According to sec 80, redemption of preference share capital is permitted only out of
(I) Profits of a company or (II) Out of fresh issue of shares made for the purposes of
redemption.
Thus borrowing from financial institution for redemption of preference shares shall not
be permissible.
The amount, may however be raised for improving its working.
The limit to deposits do not apply to borrowing from financial institutions since the
same is excluded from the expression deposit as per rule 2(b)(ll) of the companies
acceptance of deposit rules 1975.
(c) In oriental metal pressing works (P) LTD v B.KTHAKOOR, the Supreme Court pointed out
the reasons as to why it is necessary that only an individual should be director of a
company.
It was held that the office of the director being to some extent an office of trust, There
should be somebody readily available who can be held responsible for the failure to
carry out the trust, And it might be difficult to fix that responsibility if the director was a
corporation or an association of person.
(d) DIRECTOR‘S RESPONSIBILITY STATEMENT
Your Directors wish to inform that the Audited Accounts containing Financial
Statements for the financial year ended 31 st March 2013 are in full conformity with
requirements of the Act, 1956. Your Directors believe that the Financial Statements
reflect fairly the form and substance of transactions carried out during the year and
reasonably present the Company‘s financial condition and result of operations.
As stipulated in Section -217 (2AA) of the Companies Act, 1956, your Directors
subscribe to the Director‘s Responsibility statement and confirm that:
(i) in the presentation of the Annual Accounts, applicable accounting standards

have been followed;
(ii) the accounting policies have been consistently applied and reasonable, prudent
judgment and estimates are made so as to give a true and fair view of the state
700
of your Company as at 31st March 2013 and of the profit for the financial year
ended 31st March 2013;
(iii) proper and sufficient care has been taken for the maintenance of adequate
accounting records in accordance with the provision of the Companies Act, 1956
for safeguarding the assets of your Company and for preventing and detecting
frauds and other irregularities ;
(iv) the annual accounts of your Company have been prepared on a going concern
basis ;
(v) The Company‘s Internal Auditors had conducted periodic audits to provide
reasonable assurance that the Company‘s established policies and procedures
have been followed.
2. (a) Mr. Ajit was a member of The Competition Commission of India. He retired on 31st
March 2012. He was offered the post of Chairperson in Supriya Ltd. with appropriate
remuneration and perquisites. Discuss whether he can accept the job. What will be the
position if Mr. Ajit joins Gail Ltd., a Government company with effect from 1st April 2013?4
(b) Explain with reference to the provisions of The Companies Act, 1956, whether the
following companies are covered under the definition of “foreign companies”.
(i) Indian citizens incorporated a company in Dubai for the purpose of carrying on
business there.
(ii) A company incorporated in New York, U.S.A., which has a share transfer office at
Chennai? 4
(c) State the rules for disposal of non-banking assets under The Banking Regulation Act,
1949. 4
(d) A Director claims that he may leave the company any time merely by submitting his
resignation without waiting for its acceptance. Discuss whether it is acceptable and
valid? 3
Answer
2. (a) As per section 12 of the Competition Act 2002, a member of competition commission of
India shall not, for a period of two years from the date on which he ceased to hold
office, accept any employment in any enterprise. However these provisions will not
apply to be any employment in government company or government or local authority
or any corporation established under any central or state act. Accordingly MR. AJIT
cannot join SUPRIYA LTD. However, there is no restriction for him to join GAIL on 1 st April
2013 as it is a government company.
(b) As per section 591 of the companies Act 1956, foreign company means a company
incorporated outside India but having a place of business in India. Accordingly, to qualify
as foreign company. A company must have both the Following features:
(i) It should be a company incorporated outside India and
(ii) It should have a place of business in India:
701
As to what amount to having a place of business in India. Section 602(e) provides
that the expression place of business includes a share transfer or share registration
office.
The company incorporated in Dubai for the purpose of carrying on business there is
not a foreign company. Its incorporation by Indian citizen is immaterial. In order to be
a foreign company it has to have a place of business in India.
A company incorporated in Newyork which has a share transfer officer at Chennai is

a foreign company.
(c) Disposal of non-banking assets [Section 9]
Notwithstanding anything contained in section 6, no banking company shall hold any

immovable property howsoever acquired, except such as is required for its own use,
for any period exceeding seven years from the acquisition thereof or from the
commencement of the Banking Regulation Act, whichever is later or any extension of
such period as in this section provided, and such properly shall be disposed of within
such period or extended period, as the case may be.
Exceptions are:
(i) The banking company may, within the period of seven years as aforesaid deal or
trade in any such property for the purpose of facilitating the disposal thereof.
(ii) The Reserve Bank may in any particular case extend the aforesaid period of
seven years by such period not exceeding five years where it is satisfied that such
extension would be in the interests of the depositors of the banking company.
(d) A resignation once communicated to the company need not be accepted by the
Board of Directors. There is misconception that any resignation has to be accepted.
The resignation is effective of the date if any date is specified in his letter of
resignation. If no date is specified, it becomes effective only from the time when the
letter of resignation is received by the company.
But a whole-time director being an employee, Resignation cannot be effective unless

the resignation is accepted.
3. (a) Explain with reference to decided cases, what constitute and what do not constitute
oppression of members. 5
(b) A company declared dividend at an Annual General Meeting for the financial year
ended 31st March 2013 without providing for depreciation on certain immovable
properties on the ground that these assets were acquired as investment for the purpose
of the earning supplementary income, though shown in the balance sheet under the
head “Fixed Assets”, and not for the purpose of any business carried on by the
company. If the company had provided depreciation on the said immovable properties,
the company would have suffered loss for the financial year ended 31st March 2013.
Answer the following in the context of the above and with reference of The Companies
Act, 1956: 6
(i) Is it in order for the company to declare dividend for the financial year ended
31st March 2013 without providing for depreciation on certain immovable
properties?
702
(ii) Is it possible for the Board of Directors of the company to revoke the dividend
which has been declared at the Annual General Meeting?
(iii) Is it possible for the company to claim that depreciation has not been provided in
the accounts as the company is not entitled to any depreciation under The
Income Tax Act.
(c) Distinguish between member‟s voluntary winding up and creditors‟ voluntary winding
up. 4
Answer
3. (a) In Shanti Prasad Jain V. Kalinga Tubes Ltd. The Supreme Court defined ―oppression‖
as conduct which is burdensome, harsh and wrongful, it involves an element of
lack of probity or fair dealing with regard to a member with respect to his
proprietary rights as a member.
Illustrations of ―oppression‖:
(a) not holding AGMs.

(b) deliverately not giving notices of general body meetings to some members.
(c) not giving balance sheets and profit and loss accounts to members.
(d) Carrying on the company‘s business after substratum of the company has
disapperared.
(e) Usurping powers which one does not possess and using them against members
who have beneficial interests.
(f) not paying declared dividends.
(g) Refusing illegally, transfer or transmission of shares.
(h) directors taking more than permissible remuneration.
Illustrations of ―no oppression‖:
(a) change of management is not necessarily oppression - Shanti prasad Jain‘s case.
(b) trying to get majority or trying to retain majority provided unfair means are not
used
(c) not allowing members to inspect books of account.
(d) all directors being members of the same family.
(e) not declaring dividends according to profits.
(f) oppression as a director and not as a member (in Five Minutes Car wash service
Ltd.)
(g) explanatory statement not annexed to notice calling meetings.
(b) According to section 205 of the companies Act, a company cannot declare or pay
dividend for any financial year except out of profits of the company for that year
arrived at after providing for depreciation in accordance with Section 205(2) or out of
the profits of the company for any previous financial year or years arrived at after
703
providing depreciation. It is immaterial whether the assets are used for the purpose of
business of the company or as investment for earning supplementary income so long
as these assets are not intended for resale i.e. stock-in-trade. As the provisions of
section 205 (1) and (2) are mandatory in nature, it is net in order for the company to
declare dividend for the financial year ended 31st March 2013 without providing for
depreciation on certain immovable properties. Further the balance sheet and profit
and loss account for the financial year ended 31st March 20l3 cannot be said to
show a true and fair view of the State of affairs or if its profit and loss as contemplated
in section 211(1) and (2 ).
(ii) ordinarily a dividend once declared cannot be revoked except with the consent of
the shareholders, for the declaration of dividend creates a debt a debt to the
shareholders in whose favour it is declared. But where a dividend has been declared
illegally as in this case, the Board of directors will be justified in revoking the
declaration of dividend.
(iii) For the purpose of determining the amount of depreciation to be provided under
section 205 read with section 350 it is immaterial whether depreciation in respect of
any assets is actually admissible under the income Tax Act and the rules made
thereunder. Further, section 205 was amended in 1988 requiring a company to
provide for depreciation at the rates specified in schedule XIV and thus delinking the
depreciation under the companies Act from that under the income Tax Act. Hence
the company‘s contention is not correct.
(c) Difference between Members‘ winding up and Creditors‘ winding up:
Member‟s Winding up Creditors‟ Winding up
1. Directors have to file Declaration of 1. No declaration of solvency by

solvency To prove that the comp -any Directors, company is unable to pay
is able to pay its Liabilities in full. its liabilities in full.
2. Proceedings controlled by members 2. Proceedings are controlled by

Liquidator appointed by members. creditors. Creditors‘ nominee to be
the liquidator.
3. It requires the calling of a meeting of 3. It requires the calling of separate

members only. meetings of members and creditors.
4. No committee of Inspection. 4. There is an option to appoint a

committee of Inspection.
4. (a) Write a brief note on Conglomerate merger. 5

(b) In a limited liability partnership (LLP), what are the requirements relating to minimum
and maximum number of partners, designated partners and identification numbers
for the designated partners? 4
(c) State the minimum limits for annuities and other benefits secured by policies of life
insurance under The Insurance Act, 1938. 4
(d) Is it legally necessary for the every producer company to appoint a whole-time
secretary under the provision of The Companies Act, 1956. 2
704
Answer
4. (a) Conglomerate merger
A conglomerate merger is a merger where two or more companies carrying different

businesses are acquired and merged to diversify the products marketed. The
companies may not be related to each other horizontally. In a ―pure conglomerate‖
there are no important common factors between the companies in production,
marketing, research and development or technology.
Conglomerate merger is quite often the result of desire
(i) to obtain greater stability of earnings through spreading activities in different
industries with different business cycles or to diversify out of static or dying industry;
(ii) to employ spare resources, whether of capital or management;
(iii) where there are some common factors, to obtain benefit of economies of scale,
particularly to ―staff functions (such as personnel, advertising, accounting and
financial);
(iv) defensive diversifications, designed to make the company too large to be likely,
to be the object of a take-over, or perhaps to make it a less attractive object;
(v) to provide an outlet for the ambitions of management, where anti-monopoly laws
make further acquisitions (or perhaps even growth) in the company‘s own field
impracticable.
(b) Partners and designated partners in LLP
In the case of a LLP there must be a minimum of two partners.

There is no maximum number prescribed.
Every limited liability partnership shall have at least two designated partners who are
individuals and at least one of them shall be a resident in India. The term ‗resident‘
means a person who has stayed in India for a period of not less than one hundred
and eighty two days during the immediately preceding one year.
However, in case of a limited liability partnership in which all the partners are bodies
corporate or in which one or more partners are individuals and bodies corporate, at
least two individuals who are partners of such limited liability partnership or nominees
of such bodies corporate shall act as designated partners.
There is also the requirement that each designated partner must have a Designated
Partner Identification Number (―DPIN‖). This would mean before making the
application for registration the person proposing to act as a designated partner must
have obtained the DPIN, In this regard, the provisions of the CA 1956 relating to
Director Identification Number (―DIN‖) would apply.
(c) Minimum limits for annuities and other benefits secured by policies of life Insurance
[Section 4]
(1) No insurer, not being a Co-operative Life Insurance Society to which Part IV of this
Act applies, shall pay or undertake to pay on any policy of life insurance issued
after the commencement of the Insurance (Amendment) Act, 1946 (6 of 1946),
an annuity of less than one hundred rupees or a gross sum of less than one
705
thousand rupees, exclusive of any profit or bonus provided that this shall not
prevent an insurer from converting any policy into a paid-up policy of any value
or payment of surrender value of any amount.
(2) Nothing contained in this section shall apply to any policy of the description
known as a group policy, where the number of persons covered by the policy is
not less than fifty or such smaller number as may be approved by the Authority
and a standard form of the policy has been certified in writing by the Authority to
be a policy of such description or to any policy undertaking to pay a gross sum of
more than five hundred rupees or an annuity of more than fifty rupee, issued-
(a) by an insurer to any person in his permanent employed respect of the life of
that person, or
(b) under any scheme, approved by the Authority and complying with such
conditions, if any, as he may think fit to impose, whereby premiums due from
persons employed under any employer are collected by or under the
supervision of the employer, or to any policy issued by a Mutual insurance
Company to which Part IV applies and which the Authority may by order in
writing exempt from the provisions of this section, for so long as the company
complies with such conditions, if any, as may be prescribed.
(d) Under Section 581X of the Companies Act 1956, every producer company having an
average turnover exceeding `5 crores in each of the three consecutive financial
years shall have a whole time secretary who is a member of ICST.
5. (a) Mrs. Kavita, an Indian National desires to obtain foreign exchange for the following
purpose:
(i) Remittance of US Dollar 30000 for payment for goods purchased from a party
situated in Japan.
(ii) Remittance of US Dollar 50000 out of winnings on a lottery ticket.
(iii) Payment to be made for securing insurance for health from a company abroad.
Advise her if she can get the foreign exchange and under what condition? 6
(b) Explain briefly what type of defaults by the stock brokers come within the purview of
Section 15F of SEBI Act, 1992. 3
(c) State the functions of the regional load dispatch center as per SEC 28 of The Electricity
Act, 2003. 4
(d) Decide under the provision of The Companies Act, 1956, whether notice of a board
meeting is required to be sent to an interested director. 2
Answer
5. (a) As per section 5 of the Foreign Exchange Management Act 1999, certan rules have
been made for drawal Of foreign exchange for current account transactions. As per
these rules, drawal of foreign exchange for some of the current account transactions
is prohibited. As regards some other current account transactions, foreign exchange
can be drawn with prior permission of the central government, while in case of some
current account transactions prior permission of R.B.I, is required.
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(i) Remittance to JAPAN, such remittance is prohibited and the same is Included in
first schedule to the Foreign Exchange Management rules 2000. Hence MRS
KAVITA cannot withdraw Foreign Exchange for this purpose.
(ii) Remittance out of lottery winnings, such remittance is prohibited and the same is
included in first schedule to the foreign exchange management rules 2000. MRS
KAVITA cannot withdraw the foreign exchange for this purpose.
(iii )The payment required to be made for securing insurance for health from a
company abroad as referred in item 1 can be made after obtaining permission
from central government of India, as prescribed in second schedule to Foreign
Exchange Management rules 2000. Hence MRS KAVITA cannot drew foreign
exchange after obtaining such permission.
(b) The following defaults by stock brokers come within the purview of SEBI Act:
(a) Any failure on the part of the stock broker to issue contract notes in the form and in the
manner specified by the Stock Exchange.
(b) Any failure on the part of the broker to deliver any security or to make payment of the
amount due to the investor in the manner or within the period specified in the
regulations.
(c) Any collection of charges by way of brokerage in excess of the brokerage as specified
in the regulations. (Section 15 F, SEBI Act, 1992)
(c) Functions of Regional Load Despatch Centre [Section 28]
(1) The Regional Load Despatch Centre shall be the apex body to ensure integrated
operation of the power system in the concerned region.
(2) The Regional Load Despatch Centre shall comply with such principles, guidelines
and methodologies in respect of the wheeling and optimum scheduling and
despatch of electricity as the Central Commission may specify in the Grid Code.
(3) The Regional Load Despatch Centre shall -
(a) be responsible for optimum scheduling and despatch of electricity within the
region, in accordance with the contracts entered into with the licensees or
the generating companies operating in the region;
(b) monitor grid operations;
(c) keep accounts of the quantity of electricity transmitted through the regional
grid;
(d) exercise supervision and control over the inter-State transmission system; and
(e) be responsible for carrying out real time operations for grid control and
despatch of electricity within the region through secure and economic
operation of the regional grid in accordance with the Grid Standards and the
Grid Code.
(4) The Regional Load Despatch Centre may levy and collect such fee and charges
from the generating companies or licensees engaged in inter-State transmission
of electricity as may be specified by the Central Commission.
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(d) Section 286 requires that notice must be given to every director.
Therefore, notice must be given to a director even if he is precluded from voting on a

proposed business. [John Shaw & Sons (Salford) Ltd v. Peter Shaw & John Shaw]
6. (a) (i) What are the disclosure requirements under The Companies Act, 1956 for making
political contribution?
(ii) A mere distributor of company‘s product cannot become a Sole Selling Agent.—
Justify. 4
(b) Examine whether the following transactions can be considered as a loan to a
director requiring approval of
the Central Government under SEC 295 of The Companies Act. 4
(i) A public company secures residential accommodation for the use of its
managing director by entering into an arrangement under which the company
has to deposit a certain amount with the landlord to secure compliance with the
terms of the agreement.
(ii) A public company purchases a flat which is subsequently sold to a director at the
prevailing market price out of which the director pays 50% immediately and
contracts to pay the balance in 10 equal annual instalments.
(c) A was appointed director of the company in its annual general meeting. He took
over the office and started acting on behalf of the company as its director.
Subsequently it was found that the appointment of the director was not valid
because in the meeting where he was appointed certain members who had voted
were not qualified to vote and certain members had voted twice by mistake. There
were also certain mistakes in the counting of the votes. As such, the appointment of
the director was held to be invalid. Would the acts of A, done by him as director be
valid and binding upon the company? 3
(d) The liability of audit fees has been outstanding since last two years. This year after
completion of audit, the auditor informs to the secretary of the company over phone
to bring the cheque of all the three years and take delivery of the audit report.
Discuss briefly the above statement in the context of the right of the auditor to
receive remuneration. 4
Answer
6. (a) (I) As per sec 293 A of the companies Act, 1956, the company shall disclose the
following particulars in its profit & loss Account
(a) Total Amount of political contribution, and
(b) Name of the political party or person(s) to whom such amount has been
contributed.
Contravention of sec 293 A shall give rise to the following:
(a) The company shall be punishable with a fine upto 300% of the amount
contributed.
(b) Every officer in default is punishable with imprisonment upto 3 years and shall
also be liable to fine.
(II) A mere distributor of company‘s product cannot become a SSA unless such
distributor is given exclusive rights to sell the company‘s product.
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(b) (I) The deposit of the cost of purchase of the property cannot be regarded as a loan
or advance to the M.D. or book debt attracting the provisions of section 295 or
section 296 of the Companies Act. It is no concern of the M.D. on what terms the
company secures premises for residential accommodation for him.
(II) In a petition in Dr. Fredie Ardeshir Mehta v. Union of India seeking quashing of a
prosecution launched under Section 295, the Bombay High Court came to the
conclusion that a company selling one of its flat to one of its directors on receiving
half price in cash and agreeing to accept the balance in installments does not
give a loan to the director. It is a credit sale. It cannot continued be described
even as an indirect loan. In view of this decision, the transaction in question does
not amount to a loan to a director requiring approval of the Central Government.
(c) Yes. According to Sec. 290, all the acts of a director are valid notwithstanding the fact
that his appointment is afterward discovered to be invalid, by reason of any defeat in his
appointment. This is to protect outsiders as well as member dealing with the company.
In this case the defects in the appointment of the director were found out subsequent
to his appointment.
The director had no knowledge of the defects until he had started acting as a director.
He validity of the acts of the director cannot be questioned just on the basis of
irregularities subsequently discovered in the appointment of the director.
(d) Section 224 (8) of the Companies Act, 1956 deals with fixation of remuneration of an
auditor. However, the Act is silent on the mode of recovery of remuneration by an
auditor. Normally speaking, an auditor has right to receive his remuneration after
completing his work, that is, submission of the audit report.
As per Research Committee of the Institute, the auditor may also recover his fees on
progressive basis] In the instant case, perhaps, the auditor has linked the delivery of
audit report only on audit fees being received since the payment has been
outstanding for last two years. But as a matter of professional ethics, it would not be
proper on the part of the auditor and moreover he would not be performing his duties
under the companies Act, 1956 if he finks delivery of the audit report conditional upon
receipt of audit fees.
As such, it would be better on the part of the auditor to enforce his right to receive
remuneration through Court of Low only after submitting his audit report.
SECTION B
Answer any five questions from Q. No. 7(a) to 7(f). 5×5=25
7. (a) What is meant by the corporate governance as per renowned exponents in this field?
How far do you agree with their views (agree/strongly agree/disagree etc.)?
(b) As per the revised corporate governance code published in Japan in 2001, discuss
the mission and role of (i) Board of Directors and (ii) Committees established within
the board.
(c) What are the possible stages in family firm‟s governance?
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(d) What are the core elements of the CSR policy as per the CSR voluntary guide lines
2009?
(e) What do you mean by „whole life cycle costing‟? Explain the role of risk assessment in
whole life costing.
(f) Write short note on:
(i) Corporate citizenship.
(ii) Role of independent directors in corporate governance.
Answer
7. (a) Corporate governance

Corporate governance is...
• The process of supervision and control intended to ensure that the company‘s
management acts in accordance with the interests of shareholders (Parkinson,
1994). -Strongly agree
• The governance role is not concerned with the running of the business of the
company per se, but with giving overall direction to the enterprise, with
overseeing and controlling the executive actions of management and with
satisfying legitimate expectations of accountability and regulation by interests
beyond the corporate boundaries (Tricker, 1984).-Agree
• The governance of an enterprise is the sum of those activities that make up the
internal regulation of the business in compliance with the obligations placed on
the firm by legislation, ownership trusteeship of assets, their management and
their deployment (cannon, 1994). – Agree
• The relationship between shareholders and their companies and the way in which
shareholders act to encourage best practice (e.g., by voting at AMs and by
regular meetings with companies‘ senior management). Increasingly, this includes
shareholder ‗activism‘ which involves a campaign by a shareholder or a group of
shareholders to achieve change in companies (the Corporate Governance
Handbook, 1996). -Some agreement
• The structures, process, cultures and systems that engender the successful
operation of the Organization (Keasey and Wright, 1993). -Some agreement
• The system by which companies are directed and controlled (The Cadbury
Report, 1992) - slight agreement.
(b) Mission and role of the board of directors
This first chapter contained five principles relating to: the position and purpose of the
board of directors; the function and powers of the board of directors; the
organization of the board of directors; outside directors and their independence; the
role of the leader of the board of directors.
The board should be comprised of outside directors (someone who has never been a
full-time director, executive, or employee of the company)- preferably a majority-
and inside directors (executives or employees of the company). Independent
directors are outside directors who can make their decisions independently. The
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board of directors‘ role is seen as one of management supervision including
approving important strategic decisions, nominating candidates for director positions,
appointment and removal of the CEO, and general oversight of accounting and
auditing, the board of directors may also be required to approve certain decisions
made by the CEO.
Mission and role of the committees established within the board of directors
The board is recommended to establish various committees including an audit

committee, compensation committee, and nominating committee. Each committee
established should comprise at least three directors, and an outside director
appointed as chair of each committee. The majority of directors on the audit
committee should be independent directors, whilst the majority of directors on the
audit committee should be independent directors, whilst the majority of directors on
the other two committees should be outside directors, of whom at least one should
be an independent director.
The roles of the various committees are broadly defined and cover the usual areas
that one would expect for each of these committees.
(c) Possible stages in a family firm‟s governance
or a particular knowledge or functional specialism of relevance to the firm, which will

enable them to ‗add value‘ and contribute to the strategic development of the
family firm.
Cadbury (2000) sums up the three requisites for family firms to manage successfully the
impacts of growth: They need to be able to recruit and retain the very best people
for the business, they need to be able to develop a culture of trust and transparency,
and they need to define logical and efficient organisational structures‘. A good
governance system will help family firms to achieve these requisites.
Bammens and Voordeckers (2009), in a study of family firms in Belgium, find that
‗contrary to traditional agency wisdom, family firm boards devote substantial
attention to controlling the management team... those family firms that employ trust
and control in a complementary manner will be most effective‘.
In the context of succession planning, Bennedsen et at (2006), in a study of family firms

in Denmark, report that their empirical results demonstrate that professional, non-family
CEOs provide extremely valuable services to the organizations they head. On the other
hand, they report that family CEO underperformance is particularly large in fast-
growing industries, industries with a highly skilled labor force and relatively large firms.
[Study Note 8.30]
(d) CSR Policy covers following core elements

1. Care for all stakeholders
The company shall a) respect the interest of and be responsive towards all stake
holders including shareholders, employees, customers, suppliers project affected
people, society at large & others (b) create value for all of them. They should
develop mechanism to actively engage with all stock holders, inform them of
inherent risk and mitigate them where they occur.
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2. Ethical functioning
Their government should be under pinned by Ethics, Transparency and
Accountability. They should not engage in business practice that are abusive,
unfair, corrupt or anti competitive.
3. Respect for workers‘ right and welfare.
Company should provide (a) work place environment that is safe, hygienic and
humane and which upholds the dignity of employees (b) provide all employees
with access to training and development of skills for career advancement on an
equal and non-discrimatory basis (c) should uphold the freedom of association
and the effective recognition of the right to collective bargaining have an
effective grienence redressed systems should not employ child or forced labour.
Provide and maintain equality of opportunities without any discrimination on any
grounds in recruitment and during employment.
4. Respect for human rights
5. Respect for environment
6. Activities for social and economic development should take social & economic
development of communities and geographical area - these could include
education, skill building, health, cultural & social welfare.
(e) Whole Life Cycle - In practice, we refer to WLC as the total operating costs of the
building, including energy/utilities costs and facilities management elements that
relate to the building, such as maintenance and cleaning. LCC refers to replacement
building components within the building such as windows fan coil units etc. Over and
above these are facilities management costs, such as security and catering.
Role of whole life cycle costing
Combined with WLCC, risk assessment should form a major element in the strategic
decision making process during project procurement and also in value analysis,
especially in today‘s highly uncertain business environment. WLCC decisions are
complex (the complexity level is usually determined by the scale, funding and
financial environment surrounding the scheme amongst other factors), and usually
comprise an array of significant factors affecting the ultimate cost decisions. WLCC
decisions generally have multiple objectives and alternatives, long term impacts,
multiple constituencies in the procurement of construction project, generally involve
multiple disciplines and a numerous decision makers, and always involve various
degrees of risk and uncertainty. Project cost, design and operational decision
parameters are often established very early in the life of a given building project
often these parameters are chosen based on owner‘s and project team‘s personal
experiences or on an adhoc static economic analysis of the anticipated project
costs. While these approaches are common they do not provide a robust framework
for dealing with the risk and decision that are taken in the evaluation process. Nor do
they allow for they for a systematic evaluation of all the parameters impact of many
quantitative and qualitative parameters.
Capital costs and future costs must be quantified analysed and present as part of the
strategic decision making process in today‘s business environment cost analysis and
712
value analysis techniques are used to quantity and assess the economic implications
of investment in building facilities in general. These techniques have typically
concentrated on utilizing life cycle and comparative cost procedures to determine
either the lowest initial cost alternative or the highest investment return alternative
while these techniques do provide a basis for making project cost decision, they most
often do not account for many of the parameters which may affect the actual
project value of cost. The existing methods also do not use formal decision making
processes and risk assessment methods in performing cost benefit analysis.
(f) (i) Corporate Citizenship
A new terminology that has been gaining grounds in the business community today is
corporate citizenship. So what is corporate citizenship and is this fundamentally
different from corporate social responsibility? Corporate citizenship is defined by the
Boston college centre for corporate citizenship, as the business strategy that shapes
the value underpinning a company‘s defined mission and the choices made each
day by its executives managers and employees as they engage with society.
According to the definitions the four key principles that define the essence of
corporate citizenship are (i) minimize harm (ii) maximize benefit (iii) Be accountable
and responsive to key stakeholders (iv) support strong financial result.
Thus corporate citizenship‘s similar to its CSR concept‘s is focusing on the member
ship of the corporation in the political social and cultural community with a focus on
enhancing social capital. Notwithstanding the different terminologies and
nomenclature used, the focus for companies to day should be to focus on delivering
to the basic essence and promise of the message that embodies these key concepts
CSR and corporate citizenship.
(ii) Independent directors and corporate governance
The independent directors also have an important role to play in CG all the
committees and the listing agreement have emphasized the position of
independent directors. The name independent director itself suggests that these are
the directors not attached or related to the promoter group of the company. These
directors may be considered as true representatives of the shareholders and other
stakeholders. These directors are capable of exercising independent judgement
and opinions. The independent directors are instruments of ensuring that BoD takes
decisions keeping in view the interest of the relevant stakeholders and without
prejudice to any particular group.
Independent directors create a trust confidence the BoD and the stakeholders. They
help steward the company towards maximization of stakeholders value and in
formulation of strategic policies of the company. However in order to take a pure
independent view, these directors should be professionally qualified and having
sufficient background of company management competence and integrity, both
are required on the part of independent directors. Independent directors have to
operate within the code of conduct as applicable to other members of the BoD.
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Suggested Answer_Syl2008_Jun2015_Paper_P11
SECTION B (40 Marks)
(Corporate Laws)
Answer Question No. 5 (carrying 10 marks) which is compulsory and answer any two (carrying
15 marks each) from the remaining three questions in this section.
5. (a) Choose the most appropriate one from the stated options and write it down (only indicate
A or B or C or D as you think correct).
JUNE 2015 1× 5= 5
(i) In case of a public company, how many members personally present required as
quorum, if the number of member as on the date of the meeting exceeds five thousand
as per Companies Act, 2013?
(A) Five
(B) Twenty five
(C) Fifteen
(D) Thirty
(ii) Every Bench of Competition Commission shall consists of at least one judicial member
means a person who is
(A) A Judge of a High Court
(B) A Judge of a District Court
(C) A Judge of Supreme Court of India
(D) A Judge of a Lower Court
(iii) Every buyback of share shall be completed within a period of 12 months from the date of
(A) Issue of prospectus
(B) Passing of special resolution
(C) Allotment of shares
(D) None of the above
(iv) A public information officer shall as expeditiously as possible provide information from
the date of receipt of request but in any case within
(A) 15 days
(B) 30 days
(C) 45 days
(D) 60 days
(v) In the context of classification of Risks, SYSTEMS RISKS fall under:

(A) Obsolescence risks
(B) War Risks
(C) Tax Risks
(D) Contact Risks
5. (b) Fill in the blanks in the following sentences by using appropriate word(s)/phrase(s)/
numbers(s): 1×5 = 5
(i) Share means a share in the Share Capital of a company and includes ______________.
(ii) ______________ is not a linear process; it is the balancing of a number of interwoven
elements.
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(iii) As per RTI Act, a person other than the person making a request for information and
includes a public authority is known as ______________.
(iv) The liquidator shall within ______________ of the expiry of each year from the
commencement of winding up, file a statement duly audited by a qualified auditor of
the company.
(v) The possibility that an event, action or inaction will not positively affect the
organisation's ability to increase shareholder value is called ______________ risks.
Answer:
5. (a)
(i) – D (ii) – A (iii) – B (iv) – B (v) – A
5. (b)
(i) Stock (ii) Risk Management (iii) Third party (iv) Two months
(v) Business
6. (a) MR. M. K. JANAKIRAMAN is director of MEGLOW LTD. He intends to construct a residential

building for his own use. The Cost of Construction is estimated at `1.80 Crore which Mr.
Janakiraman proposes to finance partly from his own sources to the tune of `80 Lakh and
the balance `1.00 Crore from housing loan to be obtained from BDF HOUSING FINANCE
COMPANY LTD, a housing finance company. For the purpose of obtaining the loan, he
has approached the BDF Housing Finance Company which has in principle agreed to
grant the loan, but has put a condition. The condition put by the BDF HOUSING FINANCE
COMPANY is that the Company Meglow Ltd. of which Mr. M. K. Janakiraman is a director
should provide the guarantee for repayment of the loan and interest as per terms of the
proposed agreement for granting the loan to Mr. M. K. Janakiraman.
You are required to advice MR. M. K. JANAKIRAMAN on the matter keeping in view the
relevant provisions of the Companies Act, 2013. 7
(b) Following is data pertaining to MAXWEL LTD.

(` in crore)
Authorised Capital (Equity Shares) 200
Paid up Share Capital 80
General Reserve 40
Debenture Redemption Reserve 20
Provision for Taxation 10
Loan (Long Term) 20
Short-Term Creditors 6
The Board of Directors of the Company by a resolution passed at its meeting held on
15.01.2015 decide to borrow an additional sum of ` 180 Crore from Central Bank of India
a banker of the Company.
You being a FINANCIAL ADVISER of the Company, advise the Board of Directors the
procedure to be followed as required under the Companies Act, 2013. 5
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(c) MEGLOW LTD. constituted an Audit Committee as required under Sec-177 of the
Companies Act, 2013. The Committee in its report dated 30th April, 2015 has pointed out
various irregularities in the Financial transactions entered into by the Company. The
management of Meglow Ltd. does not agree with the contents of the Audit Committee
Report.
Explain the action that can be taken in this regard. 3
Answer:
6. (a)
According to Sec. 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.
Contravention
If any loan is advanced or a guarantee or security is given or provided in contravention of the
provisions of sub-Sec. (1), the company shall be punishable with a fine which shall not be less
than ` 5 lakhs but which may extend to ` 25 lakhs and the directors or the other person to whom
any loan is advanced or guarantee or security is given or provided in connection with any loan
taken by him or the other person, shall be punishable with' imprisonment which may extend to six
months or with fine which shall not be less than five lakh rupees but which may extend to twenty-
five lakh rupees, or with both.
Present Case:
In view of the provision of Sec. 185 of the Companies Act 2013 Company Meglow Ltd. shall not
provide guarantee for repayment of loan and interest thereon.
6. (b)
The share capital & free reserves of Maxwell Ltd. is `120 crores (80+40) and the present
borrowings of the company are `20 crores long term loans. Sec 180(1) (c) of Companies Act,
2013 restricts the board to borrow money, where the money to be borrowed together with the
money already borrowed by the company will exceed aggregate of its paid up share capital
and free reserves, apart from temporary loans obtained from the company's banker in the
ordinary course of business.
As a financial advisor, I can propose the Board of Directors to borrow Additional sum of ` 180
crores, by passing a special resolution which will be excess of paid-up share capital & free
reserves, as the amount is to be borrowed from company's bankers and is thus assumed to be of
temporary nature and in the ordinary course of business. If the borrowed money, if not in terms of
temporary nature i.e. exceeds a period of 6 months, or is not in the ordinary course of business, I
will advice the company not to borrow such money without prior raising of paid-up share capital
or free reserves.
6. (c)
Course of action in case of differing with the content of the audit committee report of Megalow
Ltd.
1. Where the Board does not accept any recommendations of the Audit Committee, the same
shall be disclosed in the Board’s report along with the reasons there for [Sec 177(8) of
Companies Act, 2013]
2. The Companies Act, 2013 does not compulsorily require attendance of chairman of the
audit committee to attend general meetings. The auditors of a company and the key
managerial personnel shall have a right to be heard in the meetings of the Audit Committee
when it considers the auditor’s report but shall not have the right to vote. [Sec 177(7) of
Companies Act, 2013]
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7. (a) MR. AMRUT is an unsecured creditor and has to recover a sum of ` 7 Lakhs from ALLEN &
ALLWAN COMPANY LTD. The said company has become financially insolvent and hence
unable to pay its debts. With the object of recovery of the said amount MR. AMRUT is
willing to proceed for compulsory winding up of the company.
Advise the steps and procedure in this relation under the provisions of the Company Act,
1956. 5
(b) SEBI has introduced 'CORPORATE GOVERNANCE' in a comprehensive manner to protect
the Shareholders' interest as well as provide teeth in monitoring companies' performance
through Independent Directors.—Discuss. 6
(c) Can any fine or Penalty be imposed on the Public Information Officer of a Government
Department, where he has deliberately delay the furnishing of information sought for
properly under The RTI Act, 2005?
(i) Is such levy automatic?
(ii) How can the Fine or Penalty imposed be recovered from him? 1+2+1= 4
Answer:
7. (a)
Procedure in case of compulsory Winding Up –
MR. AMRJIT has to take the following steps to put the company into compulsory winding up:
(i) A petition for winding-up of the company is to be filed in the high court where the registered
office of the company is located U/S 439 (1)(b) read with section 433 (e) and (f) of the
Companies Act, 1956. A copy of the petition should be served on the company.
(ii) The petition should be filled along with an affidavit showing sufficient ground for the
appointment of a provisional liquidator till an order is passed by the High Court appointing
an official liquidator [Rule 106 of the companies (court) rules 1959].
(iii) After obtaining the winding up order from the high court he same should be advertised
within 14 days in a newspaper in English language and in the regional language of the state
where the company is registered [Rule 113 of the company (Court) Rules, 1959)].
(iv) A certified copy of the winding up order passed by the Court should be filed with the
concerned registrar of companies along with the prescribed fees within 30 days from the
date of the winding up to order [Section 445 (i)].
(v) The winding up proceedings will be carried out by the official liquidator till dissolution of the
company.
7. (b)
An outline provided by the Confederation of Indian Industry (Cll) was given concrete shape in
the Birla Committee Report of SEBI, SEBI implemented the recommendations of Birla Committee
and the Narayana Murthy Committee worked for further refining the rules of SEBI. These
recommendations were implemented through the enactment clause 49 of the listing
agreements.
The Committees which were created for the purpose were:
1. Audit Committee
2. Share holders grievance Committee
3. Remuneration Committee
4. Share Transfer Committee
717
Audit Committee
Audit Committee has been empowered to discuss the performance of the company both from
the point of view of interest of shareholders and efficiency. This Committee also discussed in
detail quarterly performances taking care for proper disclosures and transparency. The annual
report is included a report on a corporate Governance, Corporate Social responsibility, and
Management discussions on future plans.
Shareholders Grievance Committee:
The interests of the shareholders regarding dividend payments, changes of addresses, any
grievance against the company were discussed and disposed of every quarter and the status is
indicated in the quarterly report.
Remuneration Committee:
Remuneration of whole time Managing Directors was recommended after application of mind
as well as the relevant sections of the companies Act, approval in the General Meetings of the
Share holders.
Share transfer Committee
With dematerialization, transfer of shares have become more transparent. However, the
Committee looks into the aspects of insider trading and any possibilities and malpractices.
7. (c)
As per section 12(4) of the RTI Act, 2005 subject to sub-section (3), where any Public Information
Officer has, without any reasonable cause, failed to supply the information sought, within the
period specified under section 7(1), penalty can be levied.
Such levy of penalty is not automatic. The relevant Information Commissioner shall, on appeal,
impose a penalty of rupees two hundred fifty, which amount must be increased by regulation at
least once every five years, for each day's delay in furnishing the information, after giving such
Public Information Officer a reasonable opportunity of being heard.
Any fines imposed under sub-sections (1), (2) and (3) shall be recoverable from the salary of the
concerned officer, including the Public Information Officer, or if no salary is drawn, as an arrears
of land revenue, recoverable within a maximum of six months of the order imposing the fine.
8. (a) Can it be said that Management Audit incorporates in itself, an efficiency Audit?
What are the main objects of Efficiency AUDIT? 1+5=6
(b) The Central Government without referring the matter to the Supreme Court of India for
enquiry, removed MR. GOMEX, a member of the Competition Commission of India (CCI)
on the ground that he has become physically or mentally incapable of acting as a
member.
Decide, under the provisions of the Competition Act, 2002, whether removal of Mr.
Gomex a member of CCI by the Central Government is lawful? 4
(c) The General norm is that after the risk identification takes place, the actions involved in
pinpointing suitable responses to the RISK are broadly of Five types.
Sketch these five types of action. 5
Answer:
718
8. (a)
Management Audit incorporates in itself an efficiency audit. Efficiency audit ensures
"application of the basic economic principle so that resources flow into the most remunerative
channels".
The main object of efficiency audit is to ensure that:
1. Every rupee invested in capital or in other fields give the optimum returns and
2. The planning of Investment between the different functions and aspects is designed to give
optimum results.
The parameters for measuring efficiency with its concomitant details are
1. Overall rate of return on capital employed
2. Better capacity utilization
3. Better utilization of raw material, power, labor, equipments, and finance
4. Effective incentive system
5. Better export performance and import substitution
6. Cost control
It is necessary to make study activity wise so as to identify areas of deficiency in particular
activity.
To conclude we can infer saying that Investor in order to protect his investment in any company
expects proper exhibition of corporate governance which is taken care by Management Audit.
As Management Audit would encompass compliance audit, efficiency audit, propriety audit
and systems audit as well as management audit is concerned with the overall objectives of an
organization.
8. (b)
Removal of member As per section 11(2) of the Competition Act, 2002, the Central
of competition Government is empowered to remove by an order, the chairperson or
commission of India: any other member of the competition commission of India from his
office if such chairperson or member has become physically or mentally
incapable of acting as a member.
Restrictions As per Sec. 11(3), of the same Act, the Central Government has to
make a reference to the Supreme Court of India under the two
conditions:
i) Where the member has acquired such financial or other interest as is
likely to affect prejudicially his functions as a member.
ii) Where a member has abused his position as to render his
continuance in office prejudicial to the public interest.
Present case: Thus, under present circumstance under Sec. 11(2) and Sec.11(3), the
action of Central Govt. is in order and removal of member is valid
8. (c)
Identifies suitable responses to risk:
The actions break into broadly five types, as-shown below,
1. Prevention: Terminate the risk- by doing things differently and thus removing the risk where it
is feasible to do so. Countermeasures are put in place that either stop the threat or problem
from occurring or prevent it having any impact on the project or business.
719
2. Reduction: Threat the risk- take action to control it in some way where the actions either
reduce the likelihood of the risk developing or limit the impact on the project to acceptable
levels.
3. Transference- This is a specialist form of risk reduction where the management of the risk is
passed to a third party via, for instance, an insurance policy or penalty clause, such that the
impact of the risk is no longer an issue for the health of the project. Not all risk can be
transferred in this way.
4. Acceptance- Tolerate the risk - perhaps because nothing can be done at a reasonable cost
to mitigate it or likelihood and impact of the risk occurring are at an acceptable level.
5. Contingency- These are actions planned and organized to come into force as and when
the risk occurs.
Any given risk could have appropriate actions in any or all these categories.
There may be no cost-effective actions available to deal with a risk, in which case the risk must
be accepted or the justification for the project revisited (to review whether the project is too
risky), possibly resulting in the termination of the project. The results of the risk evaluation activities
are documented in the Risk Log. If the project is part of a programme, project risk should be
examined for any impact on the programme (and vice versa). Where any cross-impact is found,
the risk should be added to the other Risk Log.
720
Suggested Answer_Syl2008_Dec2014_Paper_11
call is a more realistic estimate, because then the security with a call option will be
exercise and called back. Thus, YTC is a relevant measure.
4. (c)
MS ARTHITI (AN INVESTOR)
(Amount in `)
(i) Buying price of 600 shares in futures including brokerage :
[1,610 + (0.045% of 1610)] × 600 966434.70
(ii) Selling price of 600 shares in Futures including brokerage
[1,652-(0.045% of 1652)]× 600 990753.96
(A) Profit on Futures [(ii) - (i)] 24319.26
Premium earning on call writing (600 × 14) 8400.00
Less : Brokerage [0.045 % of (1666-14) × 600 446.04
(B) : 7953.96
Premium paid on call buying (600 × 22) 13200.00
Add : Brokerage : [0.045% of (1666-22) × 600 443.88
(D) DECEMBER
Net (loss)in option trading (B-C) [7953.96 - 12756.12] 2014
(C) : 12756.12
(4802.16)
Profit/(Loss) of the Investor in Derivative trading (A+D) (24319.26 - ` 19517.10
4802.16)
SECTION B (40 Marks)

(Corporate Laws)
Answer Question No. 5 (carrying 10 marks) which is compulsory and answer any two
(carrying 15 marks each) from the remaining three questions in this section.
5. (a) Choose the most appropriate one from the stated options and write it down (only
indicate A or B or C or D as you think correct). 1×6=6
(i) Where an appeal is being preferred against an order made by the public
information officers under section 11 of the RTI Act to disclose third party information,
the appeal by the concerned third party must be made
(A) within 7 days of the order
(B) within 30 days of the order
(C) within 60 days of the order
(D) within 3 months of the order
(ii) In the context of classification of Risks, obsolescence Risks will fall under
(A) Management and Operation Risks
(B) Systems Risks
(C) Disaster Risks
(D) Industry and Services Risks
(iii) A merger of two or more firms operating in different and unrelated industries is
called
(A) Reverse marger
(B) Conglomerate merger
(C) Market extension merger
(D) Product extension merger
(iv) Which audit ensures application of the basics economic principles so that resources
721
flow into the most remunerative channels; in the context of Corporate Governance?
(A) Compliance audit
(B) Proprietary audit
(C) System audit
(D) Efficiency audit
(v) The sale of goods or provisions of services at a price which is below the cost, as
may be determined by regulations, of production of the goods or provisions of
services, with a view to reduce competition is known as
(A) Anticipatory price
(B) Predatory price
(C) Aggregate price
(D) Minimum rate price
(vi) State which of the following statement is not correct. According to the provisions of
the Companies Act, 2013
(A) dividend includes any interim dividend.
(B) share means a share in the share capital of a company and does not include
stock.
(C) body corporate or corporation includes a company incorporated outside India.
(D) Whole time director includes a director in the whole time employment of the
company.
(b) Fill in the blanks in the following sentences by using appropriate word(s) /phrase(s)/
number(s) : 1×4=4
(i) A person who fails to get appointed as a director in a general meeting cannot
be appointed as an……………director.
(ii) Under RTI Act where the information sought for concerns the life and liberty of a
person, the same should be provided within………………. of the receipt of the
request.
(iii) A deal that enables a private company to get publicly listed in a relatively short
time period is ……………….merger.
(iv) As per clause 49 of the listing agreement, if the chairman is a non-executive
director, at least one third of board should consists of………………...
Answer:
5. (a)
(i) B (ii) B (iii) B (iv) D (v) B (vi) B
(b) Fill In the Bank

(i) Additional Director
(ii) 48 hours
(iii) Reverse
(iv) Independent Director
6. (a) MULTISOFT LTD. (M.L.) was in corporated on April, 2012. On September 15, 2014 a
political party approaches the company (M.L.) for a contribution of `5 lakh for
political purpose.
Advise in respect of the following with reference to the provisions of the Companies
722
Act, 2013:
(i) Is the company legally authorised to give this political contribution?
(ii) Will it make any difference, if the company was in existence on March 30, 2011?
(iii) Can the company be penalized for defiance of Rules in this regard? 2+3+1=6
(b) RIMJHIM LTD. a Private Mobile Operator had furnished confidential information
relating to customer complaints lodged with the company during the quarter ended
June 30, 2014 to a public authority. On an application under the Right to Information
Act, 2004, the public authority wants to furnish the said information. The Authority
seeks the objections of RIMJHIM LTD.
Can RIMJHIM LTD. ask the Public Authority not to furnish the same on the grounds
that the said information is confidential and that it may endanger its image in the
Market?
What decision should the Public Authority take? 5
(c) The Board of Directors of SIDDHA LTD. in its meeting held on 10th June, 2014,
declared an interim dividend payable on paid up Equity Share Capital of the
company. In the Board Meeting scheduled for 25th June, 2014, the Board wants to
revoke the said declaration.
You are required to state with reference to the Provisions of the Companies Act,
2013, whether the Board of Directors of the Company can do so. 4
Answer:
6. (a) As per Section 182 of the Companies Act, 2013 the following companies are not
allowed to contribute to any political party:
(a) a Government company; and
(b) a company which has been in existence for less than three financial years.
Here “political party” means a political party, registered under Section 29A of
the Representation of the People Act, 1951.
In the Given case:
(i) Multisoft Ltd. cannot make any political contribution because the company is not in
existence for a period of 3 financial years.
(ii) If Multisoft Ltd. were incorporated on 30.03.2011, it may make a political contribution as
on 15.09.2014 because in such a case it would have been in existence for 3 financial
years. However, it shall comply with the following conditions:
(a) The aggregate of the amount which may be so contributed by the company in
any financial year shall not exceed seven and a half percent of its average net
profits during the three immediately preceding financial years.
(b) No such contribution shall be made by a company unless a resolution authorising
the making of such contribution is passed at a meeting of the Board of Directors
and such resolution shall be deemed to be justification in law for the making and
the acceptance of the contribution authorized by it.
(c) The company shall disclose in its profit and loss account any amount or amounts
contributed by it to any political party during the financial year to which that
account relates, giving particulars of the total amount contributed and the name
of the party to which such amount has been contributed [Section 182 (3)]
(iii) If a company makes any contribution in contravention of the provisions in this section,
the company shall be punishable with fine which may extend to five times the amount
723
so contributed and every officer of the company who is in default shall be punishable
with imprisonment for a term which may extend to six months and with fine which may
extend to five times the amount so contributed.
6. (b) Disclosure of Information treated as confidential by third party:

As per section 11 (1) of the Right to Information Act, 2005 where a public authority intends to
disclose any information or record, or part thereof on a request made under this Act which
relates to, or has been supplied by a third party and has been treated as confidential by that
third party, the Public Information Officer shall, within five days from the receipt of a request,
give written notice to such third party of the request and of the fact that the public authority
intends to disclose the information or record, or part thereof and invite the third party to
make a submission, in writing or orally, regarding whether the information should be
disclosed, which submission shall be taken into account when determining whether to
disclose the information.
Provided that except in the case of trade or commercial secrets protected by law, disclosure
may be allowed if the public interest in disclosure outweights in importance any possible
harm or injury to the interests of such party.
RIM JHIM LTD. cannot ask the public authority not to furnish the same on the grounds that
said information is confidential and that it may spoil its image in the market. This is not trade
or commercial secrets protected by law. Hence the public authority should overrule the
objections of RIM JHIM LTD. and furnish the information to the applicant under the RTI Act.
6.(c) As per section 2 (35) of the Companies Act, 2013, Dividend includes any interim dividend.
Therefore, all the provisions applicable to final dividend shall equally apply to interim
dividend. Thus, interim dividend once declared like final dividend, is a debt due from the
company. Accordingly, once declared, interim dividend cannot be revoked except under
the same circumstances in which the final dividend can be revoked.
As per Section 127 of the Companies Act, 2013, dividend must be paid within 30 days of its
declaration. Thus, interim dividend must also be paid within 30 days of its declaration i.e.
within 30 days of date of passing the Resolution of Board declaring the interim dividend.
In the instant case, on declaration of interim dividend by the Board in a Board Meeting held
on 10th June, 2014, the liability of the Company to pay the interim dividend has become
certain, and the payment of interim dividend must be made within next 30 days viz. on or
before 10th July 2014.
Therefore, revocation of interim dividend in the Board meeting held on 25 th June, 2014 is not
possible.
7. (a) Explain how the Provisions of the Companies Act, 1956, relating to Audit Committee will
help in achieving some of the objectives of Corporate Governance. 7
(b) Discuss the role of Nomination Committee in the context of the principle of Corporate
Governance.
What are the Principal functions and Responsibilities of the Governance and
Nomination Committee in this regard?
(Note: Answer to Question keeping in view the Provisions of the Companies Act,
1956.) 2+6=8
Answer:
7. (a) AUDIT COMMITTEE
724
For better corporate governance, the concept of Audit Committee for companies was
introduced by section 292A of the Companies Act, 1956. Every public company having paid
up capital of not less than Rs. 5 Crores must have an Audit Committee.
The auditors, the internal auditor, if any, and the director-in-charge of finance shall attend
and participate at meetings of the Audit Committee [Section 292A (5)]
As per section 292A (6) of the said Act, the functions of the Audit Committee include the
following:
(a) The Audit Committee should discuss with the auditors periodically about internal control
systems, the scope of audit including the observations of the auditors.
(b) The Audit Committee should review half yearly and annual financial statements before
submission to the Board.
(c) The Audit Committee should ensure compliance of internal‟ control systems.
The Audit Committee shall have authority to investigate into any matter in relation to the
items specified in this section or referred to it by the Board and for this purpose, shall have full
access to information contained in the records of the company and external professional
advice, if necessary [Section 292A (7) of the Companies Act, 1956].
The recommendations of the Audit Committee on any matter relating to financial
management including the audit report, shall be binding on the Board and if the Board does
not accept the recommendations of the Audit Committee, it shall record the reasons
therefore and communicate such reasons to the shareholders. [Section 292A (8) & (9) of the
Companies Act, 1956].
The above provisions of the Companies Act, 1956 relating to powers and functions of the
Audit Committee relating to financial statements will help in achieving one of the objectives
of corporate governance, i.e., accountability and avoidance of poor financial reporting. It
also ensures that the companies are managed in clean and transparent manner.
7 (b) : Nominating Committee: Role

The governance and Nominating Committee‟s role is to determine the slate of director
nominees for election to the Company‟s Board of Directors to identify and recommended‟
candidates to fill vacancies occurring between annual shareholder meeting, to review,
evaluate and recommend change to the Company‟s Corporate Governance Guidelines,
and to review the company‟s policies and programs that relate to matter of corporate
responsibility, including public issues of significance to the company and its stakeholders.
Responsibility and functions of the governance and Nominating Committee:
Subject to the provisions of the corporate Governance Guidelines, the principal
responsibilities and functions of the governance and Nominating Committee are as follows:-
1. Annually evaluate and report to the Board of the performance and effectiveness of the
Board to facilitate the directors fulfilling their responsibilities in a manner that serves the
interests of Corporation shareholders.
2. Annually present to the Board a list of individuals recommended for nomination for
election to the Board at the annual meeting of shareholders, and for appointment to
the committees of the Board (including this committee). Review and consider
shareholder recommended candidates for nomination to the Board.
3. Before recommending an incumbent, replacement or additional director, review his or
her qualifications, including capability, availability to serve, conflicts of interest, and
relevant factors.
4. Assist in identifying, Interviewing and recruiting candidates for the Board.
725
5. Annually review the composition of each committee and present recommendations for
committee memberships to the Board as needed.
6. Develop and periodically review and recommend to the Board appropriate revisions to
the Company‟s Corporate Governance Guidelines.
7. Monitor compliance with the Corporate Governance Guidelines.
8. Regularly review and make recommendation about changes to the charter of
Governance and Nominating Committee.
9. Regularly review and make recommendation about changes to the charter of other
Board committees after consultation with the respective committee chairs.
10. Obtain or perform an annual evaluation of the Committee‟s performance and make
applicable recommendations.
11. Assist the Chairman of the Board, if the Chairman is a non-management director, or
otherwise the Chairman of the Committee acting as Lead Independent Director, in
leading the Board‟s annual review of the Chief Executive Officer‟s performance.
12. Annually review the Company‟s policies and programs that relate to corporate
responsibility.
8. (a) Mr. SURAJIT G., an officer of MACLEODS PHARMACEUTICAL LTD. was in possession of `
1.25 lakh and occupation of the quarter of the company even after his retirement and
neglected the notice of the company to return back the properties.
What action can be taken by the company to return back the properties including cash
under the Companies Act, 2013? 5
(b) GANGETICA TEXTILE MILLS LTD. is of the view that MEGLOW LTD. is abusing its dominant
position in the Textiles Industry. It wishes to lodge a complaint against Meglow Ltd.
before the Competition Commission.
Explain briefly the factors that will be considered by the commission to ascertain
whether MEGLOW Ltd. enjoys a dominant position in the Industry. 5
(c) Discuss the Role of Independent Directors in Corporate Governance. 5
Answer:
8. (a)
The company (MACLEODS PHARMACEUTICAL LTD.) can take action under section 452 of the
Companies Act 2013, if the officer refuses to vacate the premises or return back the
properties including cash of the company.
According to section 452 of the Companies Act, 2013 it is an offence
(1) if any officer or employee of a company-
(a) wrongfully obtains possession of any property, including cash of the company; or,
(b) having any such property including cash in his possession, wrongfully withholds it or
knowingly applies it for the purposes other than those expressed or directed in the
articles and authorised by this Act, he shall, on the complaint of the company or of
any member or creditor or contributory thereof, be punishable with fine which shall
not be less than one lakh rupees but which may extend to five lakh rupees.
(2) The Court trying an offence under sub-section (1) may also order, such officer or
employee to deliver up or refund, within a time to be fixed by it, any such property or‟
cash wrongfully obtained or wrongfully withheld or knowingly misapplied, the benefits
that have been derived from such property or cash or in default, to undergo
imprisonment for a term which may extend to two years.
726
So the company can file a complaint under section 452 of the Companies Act,2013 as it
provides speedy relief. Section 452 covers either existing as well as past officers or employees.
8. (b):
The Competition Commission while inquiring whether the Company MEGLOW LTD. enjoys a
dominant position or not under Section 4 of the Competition Act, 2002 will take the following
factors into account:
(a) market share of the enterprise
(b) size and resources of the enterprise
(c) size and importance of the competitors
(d) economic power of the enterprise including commercial advantages over competitors.
(e) vertical integration of the enterprises or sale or service net work of such enterprises.
(f) dependence of consumers on the enterprise.
(g) monopoly or dominant position whether acquired as result of any statute or by virtue of
being a Government company or a public sector undertaking or otherwise.
(h) entry barriers including barriers such as regulatory barriers, financial risk, high capital cost
of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost
of substitutable goods or services for consumers.
(i) countervailing buying power.
(j) market structure and size of market.
(k) social obligations and size of market.
(I) relative advantage, by way of contribution to the economic development, by the
enterprise enjoying a dominant position having or likely to have an appreciable adverse
(m) any other factor which the commission may consider relevant for the inquiry.
8. (c) :
Role of Independent directors in corporate governance:
The independent directors have an important role to play in Corporate Governance. All the
committees and the listing agreement have emphasized the position of independent
directors. The name independent director itself suggests that these are the directors not
attached or related to the promoter group of the company. These directors may be
considered as true representatives of the shareholders and other stakeholders. These
directors are capable of exercising independent judgment and opinions. The independent
directors are instruments of ensuring that Board of Directors takes decisions; keeping in view
the interest of the relevant stakeholders and without prejudice to any particular group.
Independent directors, create a trust confidence the Board of Directors and the
stakeholders.
They help steward the company towards maximization of stakeholders value and in
formulation of strategic policies of the company. However in order to take a pure
independent view, these directors should be professionally qualified and having sufficient
background of company management competence and integrity, both are required on the
part of independent directors.
Independent directors have to operate within the code of conduct as applicable to other
members of the Board of Directors.
727
(1 + i)3 = 1.7032
i = 3 1.7032 1
i = 19.42%
Therefore, the Realized YTM : 19.42%
(iii) In case the investor does not reinvest the intermediate interest payments received during the
three-year period, his ending wealth would be:
`39 + `100 = `139.00
The realized YTM of NCD is calculated as:

85(1 + i)3 = 139
(1 + i)3 = 1.6353
i = 3 1.6353 1
i = 17.81%
Realized YTM of NCD: 17.81%

JUNE 2014
Section B (40 Marks)
(Corporate Laws)
(carrying 15 marks each) from the remaining three questions in this section.
5. (a) Fill in the blanks in the following sentences by using appropriate Word(s)/Phrase(s) Numbers(s):
1x5=5
(i) ___________________means a person other than the person making a request for information
and includes a public authority (Right to Information Act).
(ii) Any anti-competitive agreement entered into in contravention of provisions of section 3(1)
of The Competition Act, 2002 shall be ______________ .
(iii) _________________ Programme introduced by the Government of India to develop
Computerized Environment for Company Law.
(iv) Investor in order to protect his investment in any company expects proper exhibition of
Corporate Governance which is taken care by __________________ .
(v) The minimum number of member in a Nomination Committee is _________________ .
(b) Choose the most appropriate one from the stated options and write it down (only indicate A or B
or C or D as you think correct). 1x5=5
(i) Under RTI Act-2004, persons desirous of obtaining information, shall make a request in writing
or through electronic means in English or
A. in Hindi;
B. in the official language of the area;
C. in the local language of the area;
D. none of the above.
(ii) The Competition Commission of India shall consist of a chairperson and

A. not less than 2 other members;
B. not more than 10 other members;
728
C. not less than 2 and not more than 10 other members;
D. not less than 2 and not more than 8 other members.
(iii) An application to investigate the affairs of a public company where shareholders scattered
all over the country, can be made to the National Company Law Tribunal (NCLT) by
A. any one hundred members;
B. any two hundred members;
C. not less than one-fifth of the persons on that company's register of members;
D. not less than one-fourth of persons on that company's register of members.
(iv) In the context of classification of Risks, Business Dynamic Risks will fall under
A. Market Risks;
B. System Risks;
C. Industry and Services Risks;
D. Legal Risks.
(v) The office of the Directors becomes vacant if he fails to obtain the share qualifications, if any
required by the articles
A. within 2 months of appointment;
B. within 1 month of appointment;
C. within 1 year of appointment;
D. before appointment.
Answer:
5. (a) (i) Third party; (ii) Void; (iii) MCA 21; (iv) Management Audit; (v) Three.
(b) (i) A and B; (ii) The answer is – not less than 2 and not more than 6 other members;
(iii) B; (iv) C; (v) A.
6. (a) MR. ANKIT KUMAR was a member of the Competition Commission of India. He ceased to be such
member on March 31, 2014. Thereafter, he was offered the Post of Executive Director with
appropriate remuneration and perquisites in the following organizations to join his duties on and
from June 1, 2014.
(i) AMTECK LTD. a private sector public limited company, whose case was disposed off by the
Competition Commission under the provisions of the Competition Act, 2002 in the month of
February, 2014.
(ii) Life Insurance Corporation of India.

You are required to state with relevant provisions of the Competition Act, 2002, the option
available to MR. ANKIT KUMAR in respect of accepting the offers. 1+2+2=5
(b) GEMINI LTD., is a government undertaking. The undertaking has been in existence for the past
ten years and the company maintains a website wherein particulars last update on December
15, 2013 are available to the public.
Few important policy decisions were taken by the company in January, 2014 but these were not
posted in the company's website as on May 20, 2014.
MR. PEARSON, a general public, feels that the company has violated the provisions of the Right to
Information Act by not disclosing the important policy decisions affecting the general public.—
Is the aforesaid contention justified under the provisions of the RTI Act? 4
729
(c) What is meant by "Assessing Control Risk" in the context of Internal Control Policy and mis-
statements in the Financial Statements? How should the Auditor react, where the control risk is at
the maximum and where it is less than the maximum? 6
Answer:
6. (a) In accordance with the provisions of the Competition Act, 2002 as contained in section 12, the
Chairperson and other Members shall not, for a period of two years from the date on which they
ceased to hold office, accept any employment in, or connected with the management or
administration of, any enterprise which has been a party to a proceeding before the
Commission.
Provided that nothing contained in this section shall apply to any employment under the Central
Government or a State Government or local authority or in any statutory authority or any
corporation established by or under any Central, State or Provincial Act or a Government
company as defined in section 617 of the Companies Act 1956 (1 of 1956).
(i) Based on the above provisions of the Competition Act 2002 Mr. Ankit Kumar will not be
able to accept the offer of Amteck Ltd. for two years from the date of his cessation as
a member of the Competition Commission since the said company was a party to the
proceedings before the Commission.
(ii) However, since Life Insurance Corporation of India is a Corporation established under the
Central Act, the above restriction does not apply and Mr. Ankit Kumar can accept the
offer to join as the Executive Director of the said corporation with effect from June 1, 2014.
(b) Updating of particulars, as required under the RTI Act
The RTI Act casts an obligation to publish all relevant facts concerning important decisions and
policies that affect the public while formulating and announcing such decisions and policies.
The RTI Act requires that the necessary particulars are to be published and updated atleast
every 12 months.
In the given case, the company's website has been last updated on 15.12.2013. Hence, it will be
sufficient if the particulars are updated by 14.12.2014.
As a consequence, there is no violation of the applicable provisions of the RTI Act. So, the
contention of Mr. Pearson as given in the case are not justified under the provisions of the RTI
Act.
(c) Assessing Control Risk:
Control Risk-the risk that the client's internal control policy and procedures are not effective in
preventing or detecting material misstatement in the financial statements.
(i) Control risk at the maximum:

• Conclusion based upon the auditor's judgment that the client's internal control policies
and procedures do not reduce to a low level the potential that the financial
statements are free of material errors and or irregularities.
• After reaching this assessment the auditor would only be required to document in his /
her work papers the fact that control risk is at the maximum and not the basis for
reaching this conclusion.
730
• The auditor may decide control risk is at the maximum based upon management
accounting technique called cost benefit decisions.
(ii) Control risk at less than the maximum:

• Based upon his/her initial understanding of the internal control components, the
auditor may conclude that control risk may be less than the maximum.
• The auditor in this situation must evaluate the cost / benefit of extending his / her
understanding of internal controls to make a final decision concerning control risk.
• The cost / benefit decision is based upon the auditor time involved in extending the
auditor's understanding of internal controls, including tests of control, versus the time
that may be saved with the possible reduction of substantive auditor tests
Tests of the controls - Audit tests designed to determine whether specific control procedures that
the auditor plans to rely on are actually in place and operating effectively in the entity under
audit.
Substantive Tests - Auditor tests designed to substantive one or more financial statement
assertions.
The auditor should decide whether or not to extend his / her understanding of internal controls
because of cost/ benefit considerations and the control risk would then be assessed at the
maximum for all financial statement assertions.
7. (a) MR. ADHIRAJ holds the office of Managing Director of a Private Company for life. The Company's
Article of Association empower him to appoint a person to be the Managing Director in
succession to him. Mr. Adhiraj, therefore, in the exercise of his power appoints, by will MR.
SACHIN as the Managing Director to hold office after the former's death. Some members of the
company challenge the provisions of the Articles of Association and question the validity of the
appointment of MR. SACHIN on the ground that MR. ADHIRAJ'S action amounts to 'Assignment of
Office'.
Examine the validity of the contention of the members. 3
(b) ASHIKA LTD. has been running in losses and has defaulted payment to its creditors. On 1st August
2013 the company mortgaged its plant and Machinery to MR. ANUP, a close friend of the MD of
the company, against payment of amount due to him ` 21 lakhs. The other creditors were left in
lurch. In the meantime, MR. SOHAN (who has not paid by the company for supply of Raw
Material of the value of `105 lakh.) presented a petition for winding-up the company before the
High Court on 31.10.2013. The company was ordered to be wound up by the court on 31.3.2014.
The official liquidator wants to declare the transaction of mortgage with Mr. Anup as invalid.
Will he succeed? 5
(c) State the CII (Confederation of Indian Industries) Codes for desirable Corporate Governance with
its key aspects. 7
Answer:
7. (a) Section 312 of the Companies Act, 1956 prohibits assignment of office by a director. However, in
Oriental Metal Pressing V. Bhasker Kashinath Thakoor [1961]. 31 Comp Case.143 (SC) on which
the facts of the given problem are based, the Supreme Court made a distinction between
'assignment' and 'appointment' and held appointment by will as valid, if the Articles contained
such a provision. Thus, the appointment of Mr. Sachin as the managing director is valid and it
does not amount to an assignment of office by Mr. Adhiraj.
731
(b) In case of a winding up by the Court, the, winding up shall be deemed to have commenced at
the time of presentation of the petition for the winding up. Thus, where a petition is made to the
court and the court orders the winding up, the order relates back to the date of the presentation
of the petition. As per Section 531 of he Companies Act, 1956, a fraudulent preference is invalid,
if it satisfies the following conditions:
(i) that the transaction took place within six months before the commencement of the winding-
up.
(ii) that the dominant motive in the mind of the company acting through its directors was to
prefer one creditor in preference to other creditors.
In the given case, the winding up of the company commenced on 31 st October, 2013 that is the
date of presentation of petition of winding up. The company had mortgaged its machinery in
favour of Mr. Anup the creditor on 1st August, 2013 within the 6 months before the
commencement of winding up. The mortgage was made voluntarily by the company, without
any consideration, and not under any pressure. Thus, the dominant motive behind the
transaction was to give the preference to Mr. Anup the creditor over the others. Since all the
requirements of Section 531 are satisfied in the given case, the mortgage of the machinery
made in the favour of the creditor amounts to fraudulent preference, and is hence invalid.
Therefore, the Official Liquidator can declare the mortgage in favour of creditor Mr. Anup as
invalid.
(c) CII (Confederation of Indian Industries) code for corporate Governance:

The CM code has recommended the following 14 keys aspects which should be shared with
the Board:
(i) Annual operating plans and budgets together with updated long-term plans,
(ii) Capital budgets, manpower and overhead budgets,
(iii) Quarterly results for the company as a whole and its operating divisions for business
segments,
(iv) Show cause, demand, and prosecution notices received from the revenue
authorities which are considered to be materially important,
(v) Internal audit reports, including cases of theft, and dishonesty of a material nature,
(vi) Fatal or serious accidents, dangerous occurrences, and any affluent or pollution
problems,
(vii) Default in payment of interest or non-payment of the principal on any public deposit
and/or to any secured creditors or financial institutions,
(viii) Defaults such as non-payment of inter-corporate deposits by or to the company or
materially substantial non-payments for goods sold by the company,
(ix) Any issue which involves possible public or product liability claims of a substantial
nature, including any judgment or order which may have either passed, strictures on
the conduct of the company, or taken an adverse view regarding another
enterprise that can have negative implications for the company,
(x) Details of any joint venture or collaboration agreement,
(xi) Transactions that involve substantial payment towards goodwill, brand equity , or
intellectual property,
(xii) Recruitment and remuneration of senior officers just below the board level, including
appointment for removal of the Chief Financial Officer and the Company Secretary,
(xiii) Labour problems and their proposed solutions,
(xiv) Quarterly details of foreign exchange exposure and the steps taken by
management to limit the risk of adverse exchange rate movement, if material.
732
These issue can be classified into financial issues and non - financial issues which are not
required to be presented to the Board Statutorily.
8. (a) A group of shareholders of MULTISOFT LTD. has filed a petition before the Company Law Board
alleging various Acts of Oppression and Mismanagement by the majority shareholders. The
petitioner group holds 15% of the issued share capital of the company. During the course of
hearing before CLB, some of the petitioner group of shareholders holding about 6% of the issued
share capital of the company have withdrawn their consent by stating that they were misled by
the group to sign the petition and after coming to know of the true facts they have disassociated
themselves with the petition and they along with the other majority shareholders have submitted
that the petition should be dismissed on the ground of non-maintainability.
Examine their contention having regard to the provisions of the Company Act. 7
(b) Discuss the Powers and Role of the Audit Committee as per clause 49 of the
listing Agreement.
2+6= 8
Answer:
8. (a) The contention of the majority shareholders is not correct and the company Law Board will
continue to proceed with the petition filed against oppression and mismanagement by minority
shareholders.
It has been held by the Supreme Court in Rajahmundry Electric Corporation -V- A. Nageshwara
Rao that if some of the consenting members have subsequent to the presentation of the
application, withdrawn their consent, it would not affect the right of the applicant to proceed
with the application.
Thus the validity of the petition must be judged on the facts as they were at the time of its
presentation.
Neither the right of the applicant to proceed with the application, nor the jurisdiction of the
company law board to dispose it off on its own merits can be affected by events happening
subsequent to the presentation.
(b) As per clause 49 of the Listing Agreement:
Powers of Audit Committee —

The audit committee shall have powers, which should include the following:
(i) To investigate any activity within its terms of reference.
(ii) To seek information from any employee.
(iii) To obtain outside legal or other professional advice.
(iv) To secure attendance of outsiders with relevant expertise, if it consider necessary.
Role of Audit Committee —
The role of the audit committee shall include the following:

(i) Oversight of the company's financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.
(ii) Recommending to the Board, the appointment, re-appointment and, if required the
replacement or removal of the statutory auditor and the fixation of audit fees.
(iii) Approval of payment to statutory auditors for any other services rendered by the statutory
733
auditors.
(iv) Reviewing, with the management, the annual - financial statements before submission to the
board for approval, with particular reference to:
 Matters required to be included in the Director's Responsibility Statement to be included
in the Board's report in terms of clause (2AA) of section 217 of the Companies Act, 1956.
 Changes, if any, in accounting policies and practices and reason for the same .
 Major accounting entries involving estimates based on the exercise of judgment by
management.
 Significant adjustments made in the financial statements rising out of audit findings.
 Compliance with listing and other legal requirements relating lo financial statements.
 Disclosure of any related party transactions.
 Qualifications in the draft audit report.
(v) Reviewing —
- with the management, the quarterly financial statements before submission to the board
for approval.
- with the management, the statement of uses / application of funds raised, through an issue
(public issue, rights issue, preferential issue etc.), the statement of funds utilized for purposes
other than those stated in the offer document/prospectus/notice and report submitted by
the monitoring agency, monitoring the utilization of proceeds of a public or rights issue, and
making appropriate recommendations to the Board to take up steps in this matter.
(vi) Reviewing, with the management, performance of statutory and internal auditors,
adequacy of the internal control systems.
(vii) Review the adequacy of internal audit function, if any, including the structure of the internal
audit department, staffing and seniority of the official heading the department, reporting
structure coverage and frequency of internal audit.
(viii) Discussion with internal auditors any significant findings and follow up there on.
(ix) Review the findings of any internal investigations by the internal auditors into matters where
there is suspected fraud or irregularity or a failure of internal control systems of a material
nature and reporting the matter to the board.
(x) Discussion with statutory auditors before the audit commences, about the nature and scope
of audit as well as post-audit discussion to ascertain any area of concern.
(xi) To look into the reasons for substantial defaults in the payment to the depositors, debenture
holders, shareholders (in case of non-payment of declared dividends) and creditors.
(xii) To review the functioning of the whistle Blower mechanism, in case the same is existing.
(xiii) Approval of appointment of CFO (i.e. the whole-time Finance Director or any other person
heading the finance function or discharging that function) after assessing the qualifications,
experience and background, etc. of the candidate.
(xiv) Carrying out any other function as is mentioned in the terms of reference of the Audit
Committee.
734
[Students can answer any 12 points from the above.]
735
4 Unit NAV at 31.03.2013 (`) 10.40 10.30 9.90
5 Total NAV 31.03.2013 (`) 1485714.26 502439.05 294059.40
6 Increase / Decrease of NAV (1- 4) (`) (14285.74) 2439.05 (5940.60)
7 Dividend Received (`) 25000.00 8000.00 NIL
8 Total yield Change in NAV + Dividend 10714.26 10439.05 (5940.60)
9 Number of DAYS 121 90 31
10 Effective Yield (% P.A) 2.15% 8.47% (23.32%)
[(Total Yield / Investment) x (365 / No of days) x
100]
Answer to question No 4 (c):

MR. M. KOTARI
Initial margin = 4,585 x 100 x 8/100 = `36,680

Maintenance margin = 4,585 x 100 x 6/100 = `27,510
The initial margin and maintenance margin are same for both long and short positions. Margin
Account of Investor who has gone long.
Day Settlement price Opening Mark to market Margin call Closing balance
balance C/F
1 4,690 36,680 ( + )10,500* - 47,180
2 4,760 47,180 ( + ) 7,000 - 54,180
3 4,550 54,180 (-) 21,000 - 33,180
4 4,480 33,180 (-) 7,000 10,500 36,680
5 4,570 36,680 ( + ) 9,000 - 45,680
* (4,690 - 4,585) x 100 = ( +) 10,500
Profitability of Investor who has gone long
At the end of the 4th day Margin account will show (33,180 - 7,000) = 26,180 (less than
maintenance margin). Hence Margin call,
Net Profit (Loss) on the Contract :
= 10,500 + 7 ,0 0 0 -2 1 ,0 0 0 -7 ,0 0 0 + 9,000 =(-) 1,500
-------------------
Margin Account of Investor who has gone short (`)
Day Settlement price Opening Mark to market Margin call Closing
balance C/F balance
1 4,690 36,680 (-)10,500* 10,500 36,680
2 4,760 36,680 (-) 7,000 - 29,680
3 4,550 29,680 ( + ) 21,000 - 50,680
4 4,480 50,680 ( + ) 7,000 - 57,680
5 4,570 57,680 (-) 9,000 - 48,680
* (4,585 - 4,690) x 100 = (-) 10,500

Profitability of Investor who has gone short
At the end of the 1st day Margin account will show (36,680 - 10,500) = 26,180 (less than
maintenance margin). Hence Margin call,
Net Profit / (Loss) on the Contract:

= -1 0 ,5 0 0 -7 ,0 0 0 + 21,000 + 7,000 - 9,000 = `1,500
DECEMER 2013
SECTION II (40 Marks)
(Corporate Laws)
736
(carrying 15 marks each) from the rest in this Section.
5. (a) Choose the most appropriate one from the stated options and write it down (only indicate A or
B or C or D as you think correct): 1x6=6
(i) MR. AVISEK, a director of ARIHANT LTD. died in train accident. The Board of Directors would like
to appoint MR. ANAND in place of MR. AVISEK. Which of the following statement(s) is/are
true?
A. The company has to call for extra-ordinary general meeting.
B. The company has to continue with existing number of Directors till the next Annual
General Meeting.
C. The Board can fill up the vacancy at the Board Meeting.
D. Both (A) and (C)
(ii) Corporate Governance was introspected in 2001 by the Advisory Group Constituted by
the Standing Committee on international finance standards and Codes of Reserve
Bank of India under the Chairmanship of
A. Naresh Chandra
B. Narayana Murthi
C. Dr. Y. V. Reddy
D. Narasimham
(iii) In the context of classification of Risks, R&D risks will fall under:
A. System Risks
B. Management & Operation risks
C. Market Risks
D. Service Risks
(iv) "Shelf Prospectus" u/s 60A of the Companies Act, 1956, means a prospectus issued by
A. Trading companies;
B. Manufacturing companies;
C. Financial institutions and banks;
D. None of the above
(v) When a person seeks information under the RTI Act with an eligible company, the
same shall be dealt with by the following officer of the company:
A. CEO
B. Public Information Officer
C. HR Manager
D. None of the above
(vi) The key features of Corporate Governance are given in Section……….of the
companies Act, 1956, (Fill in the gap from the below):
A. 292A
B. 246
C. 249A
D. None of (A), (B) (C)
(b) Fill in the Blanks in the following sentences by using appropriate

word(s)/phrase(s)/number(s): 1x4=4
(i) Under Competition Act, 2002, penalty for offences in relation to furnishing of
737
information is…………..
(ii) The information sought for by an applicant under the RTI Act shall be furnished
within…….
(iii) As per clause 49 of the Listing Agreement, all existing listed entities with a paid-up
capital of…………..and above are required to setup an audit committee in a
phased manner.
(iv) The membership of the Nomination Committee in a listed company consists of at

least……… directors.
SECTION - II
Answer to Question No. 5(a)
(i) …..C (ii) ……C (iii)…..B (iv) …..C (v) …..B (vi) ….A
Answer to Question No. 5(b)
(i) `10 lakhs (ii) 30 days (iii) `3 crores (iv) Two
6.
6. (a) The Audit Committee of RENUKA TEXTILES LTD. constituted under section 292A of the companies
Act, 1956, submitted to the Board of Directors a report containing its recommendations. These
recommendations were however not accepted by the Board. In this scenario state your views
on the following:
(i) Can the Board adopt the stand of not accepting the audit committee's recommendations?
(ii) If yes, that the Board does not accept the recommendations what should the Board do?
(iii) How should the chairman of the Audit Committee respond? 6
(b) An application was filed by MRS VASUDHA under section 403 of the Companies Act, 1956 seeking
direction by the CLB to convene an annual general meeting scheduled to be held on 10th June,
2012, at the factory premises instead of the registered office of the company, which had recently
been shifted. In the meeting it is proposed to adopt the accounts and consider
reappointments of auditors.
The company submitted that the applicant was a party to the meeting held for the amendment of
Articles 15 and 16 and to substitute a new Article 16, that the petitioner had signed the Minutes
and that the necessary Form 23 was filed with the Registrar of companies for shifting the
registered office to its new location.
Is the claim of the applicant tenable? 4
(c) There are 9 Directors in NATHAN TEXTILES LIMITED, besides the Managing Director (MD), who is
authorized by the Articles to act as Chairman for the Board meetings and also have a casting
vote. In a Board meeting, relating to a matter put to vote, the MD did not cast his own vote as
director. After the voting there are 4 votes for and 5 votes against. Now the MD wants to exercise
his own vote as director and casting vote as Chairman, and move the resolution as passed.
Is this proper? 5
Answer to Question No .6 (a)

(i) As per Section 292A (8) the recommendations of the Audit Committee shall be binding on
738
the Board of Directors, in so far as relating to the Financial Management including audit
report. In respect of other matters, the recommendations are not binding on the board.
(ii) Section 292A(9) enjoins that if the Board does not accept the recommendations of the Audit
Committee; it shall record the reasons therefore and communicate such reasons to the share
holders.
(iii)As per Section 292A(10) of the Companies Act 1956, the chairman of the Audit Committee
shall attend the Annual General Meeting(s) of the company to provide any clarifications on
matters relating to audit; Beyond this, the Chairman of the Audit Committee cannot do
anything in the case of non-listed companies. It may be noted that in case of listed
companies, clause 49 of the listing Agreement gives more power to the Audit Committee in
this context.
Answer to Question No .6 (b)

Tenability of the applicant’s contentions
No. Mrs. Vasudha, the applicant/petitioner is not correct in her claim, since all the formalities for
shifting the registered office of the company were undertaken duly taking the approval of the
shareholders in a properly convened meeting in which the petitioner/applicant also had
participated and signed in the Minutes for the alteration of Articles of Association, her present
request for changing of venue of AGM is not tenable.
As per Sec. 166(2), the Company has to hold the AGM only at its Registered Office and there is
no reason to shift the proposed meeting to a new location.
It was so held by the Company Law Board in MYLSAMY Vs. GAJENDIRA PAPER AND BOARDS P.
LTD. (2009) 153 Comp Cas2 (CLB) and the application was dismissed.
Answer to Question No .6 (c)

Voting by chairman in Board meeting
As per Guidance Note on Meetings of the board of Directors issued by ICSI, a chairman does
not have an inherent right to the casting vote nor it is a right given by the statute. It has to be
conferred on the chairman by the Articles. In the given case, the Articles of the company
authorize the chairman to cast his casting vote.
However, the guidance note provides that where the chairman chooses to exercise his vote
as a director, he should do so before the voting is conducted. It also provides that a casting
vote is a second or deciding vote. If the votes are divided unequally, the question of using a
casting vote does not arise. It is only in the event of equality of votes, for and against, that the
question of a casting vote assumes relevance.
Therefore, in the given case, the chairman cannot cast his own vote which he had not
exercised earlier as the voting has concluded. Again, he cannot cast his casting vote as the
votes are not divided equally.
7. (a) Can any fine or penalty be imposed on the Public Information Officer of a Government
Department where he has deliverately delayed the furnishing of information sought for properly,
under the RTI Act, 2004?
Is such levy automatic?
How can the fine or penalty imposed be recovered from him? 5
(b) The Central Government has formed as opinion that MR. RAJESH. B (a member of the competition
commission of India) has acquired such financial interest that it may affect prejudicially his
functions as a member of the competition commission and it wants to remove him from his
office.
You are required to state with reference to the provisions of the competition Act, 2002, whether
the Central Government can do so and if yes, how? 4
739
(c) Outline the key roles in the context of PROJECT GOVERNANCE. 6

As per section 12(4) of the RTI Act, 2004 subject to sub-section (3), where any Public Information
Officer has, without any reasonable cause, failed to supply the information sought, within the
period specified under section 7(1), penalty can be levied.
Such levy of penalty is not automatic. The relevant Information Commissioner shall, on appeal,
impose a penalty of rupees two hundred fifty, which amount must be increased by regulation
at least once every five years, for each day's delay in furnishing the information, after giving
such Public Information Officer a reasonable opportunity of being heard.
Any fines imposed under sub-sections (1), (2) and (3) shall be recoverable from the salary of the
concerned officer, including the Public Information Officer, or if no salary is drawn, as an arrears
of land revenue, recoverable within a maximum of six months of the order imposing the fine.

Provisions of Section 11(2) of the Competition Act, 2002 empower the Central Government to
remove, by an order, a member of the Competition Commission of India from his office if such
member has acquired such financial interest as is likely to affect prejudicially his functions as a
Member of the Competition Commission.
However, provisions of Section 11(3) of the said Act put some restrictions on such powers of the
Central Government. According to this section, in case as stated in the question, the Central
Government wants to remove a member of the Competition Commission from his office, it has
to make a reference to the Supreme Court. The Supreme court shall hold an enquiry in
accordance with the procedure formulated by it and then report that the member in question
ought to be removed from his office.
Thus, the Central Government can remove a member of Competition Commission from his
office by following the above procedure.
Answer to Question No. 7(c)

PROJECT GOVERNANCE – Key Roles
1) Establish the bases for project governance, approval and measurement -including defining
roles and accountabilities, policies and standards and associated process.
2) Evaluate project proposals to select those that are the best investment of funds and scarce
resources and are within the firm's capability and capacity to deliver.
3) Enable through resourcing of projects with staff and consultants, harnessing and managing
of business support and the provision of the governance resources.
4) Define the 'desired business outcomes' (end states), benefits and value - the business
measures of success and overall value proposition.
5) Control the scope, contingency funds, overall project value and so on.
6) Monitor the project's progress, stakeholder's commitment, results achieved and the leading
indicators of failure.
7) Measure of the outputs, outcomes, benefits and value - against both the plan and
measurable expectations.
8) Act to 'steer' the project into the organization, remove obstacles, manage the critical
success factors and remediate project or benefit-realization shortfalls.
9) Develop the organization's project delivery capability - continually building and enhancing
its ability to deliver more complex and challenging projects in less time and for less cost
while generating the maximum value.
8. a) State some of the procedures which an auditor has to follow in order to evaluate going
concern uncertainties. 6
740
b) Directors of MOULIN LTD. are not holding any shares in SPARK LTD. Similarly directors of SPARK LTD.
are not holding any shares in MOULIN LTD. But wife of Director 'S' of Moulin Ltd. holds 40% of the
paid up share capital of Spark Ltd. Board of Directors of Moulin Ltd. entered into a contract with
Spark Ltd. for purchase of goods and director 'S' did not disclose his indirect interest in Spark
Ltd.
Examine whether Director 'S' has violated any of the provisions of the companies Act, 1956
and also the validity of the contract. 6
(c) Critically discuss the role of stakeholders in CORPORATE GOVERNANCE. 3

Evaluating the going concern uncertainties
In Order to evaluate various going concern uncertainties an Auditor needs to follow certain
procedures which may include :
1) Analyze and discuss cash flow, profit and other relevant forecasts with management
2) Review events occurring after the balance sheet date for items affecting the entity's
ability to continue as a going concern.
3) Analyze and discuss the entity's latest available interim financial statements.
4) Review the terms of debentures and loan agreements and determine whether any have
been breached.
5) Read minutes of the meeting of shareholders, the board of directors and important
committees for reference to financing difficulties.
6) Review the status of matters under litigation and claims
7) Confirm the existence legality and enforceability of arrangements to provide or maintain
financial support with related and third parties and assess the financial ability of such
parties to provide additional funds.
8) Consider the entity's position concerning unfilled orders.

Section 297 does not apply to a contract between two public companies and therefore the
present case is outside the purview of section 297. However, as per section 299, every director
who is anyway, directly or indirectly, interested in a contract or arrangement shall disclose the
nature of his interest. Following must be noted in this regard.
• Relationship of husband and wife, or father and son is capable of influencing the judgment
of a person so that it is prima facie a matter of interest which must be disclosed. The interest
need not be direct [Pydah Venkatachalapathi v. Guntur Cotton, Jute and Paper Mills Co.
Ltd. AIR 1929 Mad 353]
• If to the knowledge of a director, his relative is concerned or interested in a contract or
arrangement, the director must disclose the same to the Board (Fateh Chand Kad v. Hind
Sons (Patiala) Ltd. (1957) 27 Comp Cas 340].
Therefore, in view of the above judicial rulings, 'S' should disclose his interest since he is indirectly
interested in the contract, as his wife is holding 40% of the paid up share capital of SPARK LTD.
Failure to disclose the interest by 'S' amounts to non-compliance of section 299 and the
following consequences shall follow:
• 'S' shall vacate the office of director held by him (Section 283)
• He shall be punishable with fine which may extend to `50,000 (Section299)
• If 'S' acts as a director when he knows that the office of director held by him has become
vacant on account of non-disclosure of interest, he shall be punishable with fine which may
extend to `5,000 for each day on which he acts as a director (Section 283)
The contract is not illegal, void or unenforceable. However, the company has an option to
avoid the contract [Amritsar Rayon and Silk Mills Ltd. v. Arirchand Saideh (1988) 64 Comp Cas
762]
741
Answer to Question No. 8(c)
The corporate governance framework should recognize the rights of stake--holders as
established by law and encourage active co-operation between corporations and
stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises.
(i) The corporate governance framework should assure that the rights of stakeholders that
are protected by law are respected.
(ii) Where stakeholder interests are protected by law, stakeholders should have the
opportunity to obtain effective redress for violation of their rights.
(iii) The corporate governance framework should permit performance-enhancing
mechanisms for stakeholder participation.
(iv) Where stakeholders participants in the corporate governance process, they should
have access to relevant information.
742
Suggested Answers to Question —CMC
For the first Case = 1.30 x 1000 x 1900 x 1.00 = ` 24.70 Lakh
Stock Original Beta No. of Price Hedge Hedge Futures Strategy

Position Shares (`) Needed Position (`) in Lakh
SBI Long 1.30 1000 1900 Full Short Short 24.70
RIL Long 1.20 1000 800 Full Short Short 9.60
BHEL Short 1.10 1000 300 90% Long Long 2.97
TSL Short 0.80 1000 400 80% Long Long 2.56
Infosys Long 1.00
JUNE 2013
1000 1700 120% Short Short 20.40

(Corporate Laws)
(carrying 15 marks each) from the rest in this Section.
5. (a) Choose the most appropriate one from the stated options and write it down (only
indicate A or B or C or D as you think correct). 1x5=5
(i) There are 11 directors in GROW WELL LTD. a Public Limited Company. It has a
Managing Director and a nominee of IDBI. How many directors are liable to retire
by rotation?
(A) Four
(B) Six
(C) Seven
(D) Eight
(ii) The concept of Corporate Governance was initiated on the recommendation of
the report by
(A) Mr. Narayana Murthy
(B) Mr. Kumar Mangalam Birla
(C) Dr. Y.V. Reddy
(iii) The nationality of a company is decided by:
(A) Place of residence of the directors in charge of management of the company
(B) Place of registered office of the company
(C) Place where the books of accounts of the company are kept
(iv) Prospectus is not required to issued by/in respect of:
(A) Private limited company
(B) Sweat equity shares
(C) Rights issue
(D) For all of the above
(v) Under the RTI Act, A second appeal against the decision of Public Information
Officer shall lie within ___________ from the time by which the decision should have
been made or receipt of a decision, prefer an appeal to the relevant Information
Commissioner, (Fill in the gap from the below):
(A) 30 days
(B) 60 days
(C) 90 days
(b) Fill in the Blanks in the following sentences by using appropriate word(s)/phrase(s)/
number(s): 1x5=5
(i) The key features of Corporate Governance are given in section ____________of the
INSTITUTE OF COST ACCOUNTANTS OF INDIA (Statutory Body under an Act of Parliament) Page 12
743

(ii) The Competition Commission of India was established in the year _____ .
(iii) The minimum number of subscribers sign in the memorandum of Association of a
public limited company at the time of its formation is.
(iv) An applicant for access to information ________ (shall/shall not) be required to
give any reason for requesting access to that information.
(v) As per clause 49 of the listing agreement, independent directors should account
for atleast ________% of board of directors of listed companies.
Answer:
5. (a) (i) C
(ii) B
(iii) B
(iv) D
(v) C
(b) (i) 292A

(ii) 2003
(iii) 7
(iv) Shall not
(v) 50%
6. (a) JUPITERTEXTILES LTD. was incorporated on 1st June, 2009. On 1st March, 2012 a political
party approaches the company for a contribution of `12 lakhs for political purpose.
Your advice is sought in respect of the under mentioned issues:

(i) Is the company legally authorized under the Companies Act, 1956 to give this
political contribution?
(ii) Will it make any difference, if the company was in existence on 1st April, 2009?
(iii) Can the company be penalised for violation of the applicable provisions relating
to political contribution?
(iv) What are the disclosure requirements in this regards? 2+1+2+2=7
(b) State the importance of going Concern Concept in preparation of Corporate

Financial Statements in India. How is the term' Foreseeable future' defined in this
context? 6+2=8
Answer:
6. (a) POLITICAL DONATIONS:

(i) Only a company which had been inexistence for 3 years can make contribution to
political parties. Since in the given case, the company has not completed three
years of existence on 1st March, 2012, it is not eligible to give political contribution.
(ii) Yes, because in the case, Jupiter Textiles Ltd. shall complete three financial years of
its existence, therefore, will be eligible to give political contribution subject to the
condition that such a political contribution should not exceed 5 per cent of the
Average Net profits and a resolution authorizing such contribution is passed at a
meeting of the Board of Directors.
(iii) A company will be eligible to give political contribution subject to the condition that
such a contravention of the provisions of this section will make a company liable to
fine which may extend to three times the amount so contributed.
744
Further every officer of the company in default would be liable to imprisonment for a
term which may extend to three years & also to fine.
(iv) The amended Section 293A Seeks to impose an obligation to disclose in its profit and
loss account contributions made by it to any political party or for any political
purpose. Contravention of the provisions of this section will make a company liable
of fine which may extend to three times the amount so contributed. Further every
officer of the company in default would be liable to imprisonment for a term which
may extend to three years and also to fine.
(b)
Management may not prepare financial statements applying going concern basis in
case there exists significant doubt about the going concern status of the enterprises. The
point has not been taken care of in Section 217 (2AA).
In India preparation and presentation of Corporate financial statements are governed

by accounting policies stated in the companies Act and any other status that govern
the reporting entity, accounting standards and other documents stating accounting
policies, measurement and disclosure issued by the institute of Chartered Accountants
of India or any other regulatory authority like SEBI, RBI, IRDA etc. they together form
Indian GAAP. In fact while preparing Financial Statements it is necessary to follow Indian
GAAP.
Corporate financial statements are prepared following ―going concern‖ assumption

which implies that the reporting entity is expected to continue operations in the
foreseeable future and it has neither the intention nor necessity of liquidation or of
curtailing the scale of operations. In India the Corporate management is not required to
make explicit disclosure as regards the validity of going concern assumption. The term
foreseeable future is also not defined in the accounting standard. Considering the
uncertainties involved in the predication of business continuity, foreseeable future should
not taken as distant future.
Parameters of identifying going concern uncertainty:

Forecasts and budgets
Borrowings requirement
Liability management
Contingent liabilities
Product and markets
Financial risk management
Other factors including consistency of earning, stability of cost base, recurring operating
losses, arrears of dividends, work stoppage, etc.
The Institute of Chartered Accountants of India has issued SAP – 16 Going Concern. This
audit standard attempts to capture going uncertainty in the line of ISA – 23. Generally,
financial statements are prepared on the basis of fundamental assumption of going
concern. It is necessary for the auditors to consider the appropriateness of the going
concern assumptions. The auditors should consider the existence of the following
indications which risks the going concern Assumption:
Financial Indications
1. Negative net worth or negative working capital

2. Fixed term borrowing approaching maturity without realistic prospects of renewal or
repayment or excessive reliance on short term borrowings to finance long term assets.
3. Adverse key financial ratios
745
4. Substantial operating losses

5. Substantial negative cash flow from operations
6. Arrears or discontinuance of dividends
7. Inability to pay creditors on due dates
8. Difficulty in complying with the terms of long agreements
9. Change from credit to cash on delivery transaction with suppliers.
10. Inability to obtain financing for essential new product development or other essential
investments.
11. Entering into scheme of arrangement with Creditors for reduction of Liability.
Operating Indications:
1. Loss of key management without replacement.

2. Loss of a major market, franchise, License, or principle Supplier.
3. Labour difficulties or shortage of important supplies.
Other Indications:
1. Non Compliance with Capital or other Statutory requirements.

2. Pending legal proceedings against the entity may if successful result in Judgments
that could not be met.
3. Changes in Legislation or Government policy.
4. Sickness of the entity under any statutory definition.
5. The Significance of such dedications can often be mitigated by other factors.
To resolve the doubt about the appropriateness of the going concern assumption the
auditor should gather sufficient audit evidence.
7. (a) The Public Information Officer of KOLKATA MUNICIPAL CORPORATION has turned
down the request for information lodged by MS MITRIKA ROY on the grounds that the
request was sent through an e mail and on the ground that the same was in Bengali
and not in English.
Are his contentions correct in law as per the Right to Information (RTI) Act, 2004? 4
(b) Hon’ble Justice Mr. H. JALAN, a retired High Court Judge, attained the age 61 years
on 31st December, 2011. The Central Government appointed him as the Chairperson
of the Competition Commission of India with effect from 1st January, 2012. You are
required to state with reference to the provisions of the Competition Act, 2002, the
term for which he may be appointed as Chairperson of the Competition Commission
of India.
Whether he can be reappointed as such and till when he can remain as Chairperson
of the Competition Commission of India? 4
(c) Briefly sketch the requirements of Section 292A of the Companies Act, 1956 relating to
Audit Committee. 7
Answer:
7. (a)
Section 6(1) of the RTI Act 2004 enjoins that a person desirous of obtaining information
shall make a request in writing or through electronics means in English or in the official
Language of the Area in which the Application is being submitted, to the Public
Information Officer. The Section makes two things clear:
746
(a) The request can be through electronic Media. E-mail is an accepted from of
Electronic Communication.
(b) The request can be in English or in the official language of the Area in which the
application is being submitted.
In KOLKATA, Bengal is the official language of the Area.
Therefore, the refusal on the grounds that the request was not in English and that the
same was sent through e-mail, is not justified.
(b)
According to Section 10(1) of the Competition Act, 2002, the Chairperson and every
other Member shall hold office as such for a term of five years from the date on which he
enters upon his office and shall be eligible for reappointment.
Provided that no Chairperson or other Member shall hold office as such after he has
attained-
(a) In the case of the Chairperson, the age of sixty-seven years;

(b) In the case of any other Member, the age of sixty-five years.
Based on the above provisions of the Competition Act, 2002, it can be concluded that
Hon’ble retired Justice Mr. H. JALAN can be appointed as the Chairperson of the
Competition Commission of India by the Central government initially for a period of five
years and he can also be reappointed after his initial term of five years is over. But since
he shall be attaining the age of 67 years as on 31st December, 2017, he will have to step
down from the post on his attaining the age of 67 years.
(c)
Audit Committee
 Every public company having paid-up capital of not less than five crores of rupees
shall constitute a committee of the Board known as ―Audit Committee‖ which shall
consist of less than three directors and such number of other directors other than
managing or whole-time directors.
 Every Audit Committee constituted under sub-section(I) shall act in accordance
with times of reference to be specified in writing by the Board.
 The members of the Audit Committee shall elect a chairman from amongst
themselves.
 The annual report of the company shall disclose the composition of the Audit
Committee.
 The auditors, the internal auditor, if any, and the director-in-charge of finance shall
attend and participate at meetings of the Audit Committee but shall not have the
right to vote.
 The Audit Committee should have discussions with the auditors periodically about
internal control systems, the scope of audit including the observations of the
auditors and review the half-yearly and annual financial statements before
submission to the Board and also ensure compliance of internal control systems.
 The Audit Committee shall have authority to investigate into any matter in relation
to the items specified in this section or referred to it by the Board and for this
purpose, shall have full access to information contained in the records of the
company and external professional advice, if necessary.
 The recommendation of the Audit Committee on matter relating to Financial
Management including the audit report shall be binding on the Board.
 If the Board does not accept the recommendations of the Audit Committee, it
shall record the reasons therefor and communicate such reasons to the
shareholders.
747
 The Chairman of the Audit Committee shall attend the annual general meetings of
the company to provide any clarification on matters relating to audit.
 If a default is made complying with the provision of this section, the company and
every officer who is in default, shall be punishable with imprisonment for a term
which may extend to one year, or with fine which may extend to fifty thousand
rupees or with both.
8. (a) At the time of winding up of SIMON HOTEL LTD. (SHL), a supplier of company named
MKG LTD., presents to the official liquidator, a Court decree in their favour ordering
payment of certain sum. The claim of MKG LTD. is that they should be paid in
preference over the claims of the workmen for their dues. The same is not accepted
by the workmen.
Examine the validity of the rival claims in the light of the provisions of the Companies
Act, 1956. 6
(b) " A good CORPORATE GOVERNANCE should have certain basic principles"—
Enumerate them. 6
(c) VKS TEXTILES PVT. LTD., which is a private company which is not a subsidiary of any
public company, does not furnish the details of its investments in Indian companies as
required by note (1) Schedule VI to the Companies Act, 1956. The company is of the
view that Section 372 of the Companies Act, 1956 is not applicable in its entirety to all
the companies, i.e. public and private.
Is the said view of VKS TEXTILES PVT. LTD. in accordance with law? 3
Answer:
8. (a) Preferential dues during winding up proceedings

The situation given in the question is covered by the provisions of Section 529A of
Companies Act, 1956 read with Section 529 and 523 of the said Act. The effect of
combined reading of these sections is that the workmen of the company become
secured creditors by operation of law to the extent of the workmen’s dues and are
entitled to proportional payment along with other secured creditors.
If there is no secured creditor, in such an event, to the extent of workmen’s dues, the
workmen of the company become unsecured preferential creditors under Section 529A.
the object of section 529A is to ensure that the
(a) Workmen should not be deprived of their legitimate claims in the event of the
liquidation of the company.
(b) The assets of the company would remain charged for the payment of workmen’s
dues, and
(c) Such charge will be pari passu with the charge of other secured creditors.
There is no other statutory provision overriding the claim of the secured creditors except
the said Section 529A.
Thus, the law is very much clear in this respect and the Hon’ble Supreme Court of India
held in the case of UCO Bank [(1994) 81 Comp. Case 780] that the provisions of Section
529A of the Companies Act, 1956 will override all other claims of the creditors even
where a decree has been passed by a court.
In view of the above stated legal position, the contention of the-workmen of SUMON
HOTEL LTD. is valid and the Official Liquidator will have to pay their dues as provided in
Section 529A of the Act.
748
(b) Principles of corporate governance:

A good governance should include the following principles:
(i) Review of operation – There should be review of operations of the company at a
regular interval. It may include comparison of monthly/quarterly production and
sales targets with actual, cash flow analysis, etc.
(ii) Compliance with Statutory and Regulatory requirements – the Board Should ensure
compliance with various statutory and regulatory requirements. It may include
clearance of statutory dues, compliance with FERA regulations, following suitable
accounting policies and standard, etc.
(iii) Appointment of various committees – There should be appointment of various
committee to look after different matters. There can be following committees – (a)
Audit Committee, (b) Grievance Committees, (c) Remuneration Committee and (d)
Investment Committee etc.
(a) Audit Committee – It should meet periodically to review the effectiveness of the
system of internal controls and reports to shareholders.
(b) Grievance Committee – It should look after the grievances from customers,
suppliers, creditors in respect of price, quality, discount, etc. It should also look
after the problems of executives/employees of the organization.
(c) Remuneration committee – Its role should be to fix remuneration of non-executive
directors. It may be fixed in relation to company performance.
(d) Investment committee – It should look after the investment decisions. It should be
in accordance with the guidelines approved by the Board. Shareholders expect
that investment decisions are judicious and do not incur any losses, which affect
shareholder’s interest.
(iv) Contribution of employees’ Union – Employees’ or worker’s union should also

contribute significantly to good corporate behaviour by promoting work culture. In
this case, inclusion of employees or worker’s representative on the board may be
thought of.
(v) Contribution to community Development – A good corporate governance should
help community development programme by active participation. It should adopt
measures for pollution control, and follow fair and ethical business practices.
Good corporate governance calls for accountability for all Concerned. The
Shareholders, Directors, auditors, executives, advisers and other staff who are associated
with the working of the corporate should combined their efforts to improve the system
and ensure good management practices.
(c) Disclosure of investments by a private company
Section 211 of the Companies Act, 1956 states that balance sheet of a company shall,
subject to the provision of this section, be in the form set out in Part I of Schedule VI or as
near thereto or as per central government directions in a particular case.
No exemption is given for private company as such. The exemption from compliance
with any of the requirements in Schedule VI can be granted to any company by the
central government when it is in the public interest.
In the given case the contention of the private company is not in accordance with law.
749
750
12  Suggested Answers to Question — CMC

(Corporate Laws )
Answer Question No.5 (carrying 10 marks) which is compulsory and answer any two (carrying 15 marks
DECEMBER 2012
each ) from the rest in this Section.
5. (a) Choose the most appropriate one from the stated options and write it down ( only indicate A or B
or C or D as you think correct).
(i) Any anti-competitive agreement entered into in contravention of the provisions contained in
the Competition Act, 2002 will be:
(A) Void
(B) Voidable at the option of the public
(C) Voidable at the option of the State Government
(D) Voidable at the option of the Central Government
(ii) As per Clause----- of the Listing Agreement, a listed company is required to obtain a certificate
from the auditors of the entity as regards compliance of conditions of corporate governance as
stipulated in that clause. ( Fill in the gap from the below)
(A) 45
(B) 46
(C) 49
(iii) MR. SHARMA is a director of ANKRIT LTD. which failed to file its annual return from the year
2009-10. The maximum period for which Mr. Sharma will be disqualified from becoming a
director in any public limited company is
(A) 3 years
(B) 5 years
(C) 7years
(D) 10 years
(iv) The Government has allowed foreign institutional investors such as pension funds, mutual
funds investment trust etc. to invest in the Indian Capital Market provided they are registered
with
(A) RBI
(B) SEBI
(C) Central Government
(D) Registrar of the companies
(v) In the context of classification of risk, cash/reserve management risk will fall under ----------------
-- ( Fill in the gap from the below)
(A) Liquidity Risks
(B) Legal Risks
(C) System Risks
(D) Credit Risks [ 1x5 = 5]
(b) Fill in the Blanks in the following sentences by using appropriate word(s)/phrase(s)/number(s):
(i) All existing listed entities with a paid up Capital of ------------------------- and above are required
to set up an Audit Committee in a phased manner as per schedule of implementation specified
in clause 49.
(ii) The competition Act was passed in the year-----------------------.
(iii) All clauses in the memorandum of Association of a company can be altered following the
procedures laid down, except------------------- clause.
(iv) The disclosure requirement relating to “ Accounting for fixed assets” is governed by AS -----------
----.
(v) Management may not prepare financial statements applying going concern basis in case there
exists significant doubt about the going concern status of the enterprise. The point has not
been taken care of in section ------------- of the Companies Act, 1956. [1x5=5]

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3. Answer any two questions: 10×2 = 20

Paper-13: CORPORATE LAWS AND COMPLIANCE

STUDY NOTE 1 – THE COMPANIES ACT:

(a) The consequence in case of a private Company are:

Total ESC of Asha Pvt. Ltd. - is ` 80,00,000.

Noble Meters Ltd. not entitled to commence business:

Conditions to be satisfied for obtaining certificate of commencement of business:

(b) The stated case relates to section 35 of Companies Act, 2013.

 Mr. X is entitled to repudiate the allotment:

 An expert is not liable if:

Rights of the true owner:

Capital and Liabilities ` Assets `

1. Unanimous approval of Board is required. The approval shall be obtained by passing a

Step 1: Determine the paid up share capital

Step 2. Determine the 'free reserves'

Step 4. Determine inter-corporate loans and investments already made

Step 6. Determine inter-corporate loans and investments proposed to be made

Step 7. Determine whether special resolution is required

Therefore, Sarah Ltd. can make the proposed investment as follows:

(b) The provisions of section 234A are explained as follows:

1. Application by registrar for seizure of books and papers

3. Return of books and papers

Legal requirements for giving guarantee by Super Chemicals Limited

(ii) Temporary protection of employees

(a) The legal position:

The given case:

(a) Number of members making the application:

3. When it is proved that the company is unable to pay its debts.

(c) As per section 5810 -

The answer to the given problem is as follows:

(1) Transfer of shares to be void after the commencement of winding up

(2) Disclosure of continuance of liquidation (Section 547)

(3) Submission of information as to pending liquidation (Section 551)

(b) The legal position

1. A director of a public company shall be disqualified from being appointed as a director in

3. The disqualification under section 274(l)(g) shall apply if -

4. Defaults under section 274(l)(g) results in incurring a disqualification. However, a director is

The Given Case

The legal position

The given case

Analysis of the case

The given problem is answered as under:

(i) The company is not a Government company.

The given problems are answered as under:

STUDY NOTE 2 – LAWS AND PROCEDURES FOR CORPORATE RESTRUCTURING:

(b) Explain the term 'arrangement‟.

The legal position

Where the scheme of compromise of arrangement is required to be approved by the members,

The given case

Members who attended the meeting 200 members

(i) Issue of fully paid up shares to pay off debentures.

member can enforce any right under the scheme.

1. Requirements of section 517:

The provisions of section 517 are explained as under:

2. Procedure under section 517:

(b) On an application made to the Court for sanctioning a scheme of amalgamation or

STUDY NOTE 3 – SEBI LAWS AND REGULATIONS: