GUIDELINE ANSWERS

PROFESSIONAL PROGRAMME

DECEMBER 2012

MODULE I
GUIDELINE ANSWERS
PROFESSIONAL PROGRAMME

DECEMBER 2012

MODULE I

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These answers have been written by competent persons
and the Institute hopes that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.

The Guideline Answers contain the information based on the

Laws/Rules applicable at the time of preparation. However,
students are expected to be well versed with the amendments
in the Laws/Rules made upto six months prior to the date of
examination.

C O N T E N T S
Page
MODULE I

1. Company Secretarial Practice 1

2. Drafting, Appearances and Pleadings 23

 (i)

NOTE : Guideline Answers of the last Four Sessions need to be updated in the light of
changes and references given below :

PROFESSIONAL PROGRAMME
UPDATING SLIP

COMPANY SECRETARIAL PRACTICE

MODULE – I – PAPER 1

Examination Question No. Updation required in the answer

Session

Dec. 2010 to June 2012 — The Ministry of Corporate Affairs has issued
a number of circulars and notifications
amending the Act, rules and e-forms.
These are placed at the website of Ministry
at the following address :
http : //www.mca.gov.in/Ministry/
Companies_act.html.
Students are advised to go through each
and every circular and notification to update
themselves.
 1 PP–CSP–December 2012
PROFESSIONAL PROGRAMME EXAMINATION
DECEMBER 2012

COMPANY SECRETARIAL PRACTICE

Time allowed : 3 hours Maximum marks : 100
NOTE : 1. Answer SIX questions including Question No. 1 which is COMPULSORY.
2. All references to sections relate to the Companies Act, 1956 unless stated
otherwise.

Question 1
Draft any four of the following. In case of a resolution, state the type of meeting to
consider such resolution and the nature of the resolution together with any special
requirement attached to it. In respect of the rest, mention (a) who can issue the
same; and (b) the basis for the issuance :
(i) Investment in the equity of MNO Ltd., which is a subsidiary of the investing
company where the investing company already holds 68% of the equity of the
investee company and wants to bring it to 85% of the equity by acquisition of
the equity shares of other holders of such shares by private agreement. This
acquisition will take the investing company's inter-corporate investment, loan,
guarantee, etc., to a level exceeding 150% of the paid-up share capital and free
reserves of the investing company whose free reserves constitute 30% of the
paid-up capital representing equity and preference shares issued by the company.
(ii) Resolution for variation of rights of preference shareholders extending the period
of redemption by three years.
(iii) A specimen of (a) objectives; and (b) employee coverage that may appear in an
Employee Stock Option Scheme (ESOS) of a listed company.
(iv) Notice from an unlisted public company for holding an extra-ordinary general
meeting for consideration of the Board's proposal to buy-back 15% of the paid-
up equity share capital (no explanatory statement is required).
(v) Dematerialisation request as per National Securities Depository Ltd. (NSDL)
Business Rules. (5 marks each)
Answer 1(i)
Type of Meeting : General Meeting
Type of Resolution : Special Resolution as this investment is not falling in
category of exempted investment under section 372A(8)(e)
and is exceeding the limits specified in section 372A(1) of
the Act.
Resolution
“Pursuant to section 372A read with section 292 of the Companies Act, 1956 and
any other applicable provision of law in the country, the Board of directors of the company

1
PP–CSP–December 2012 2
is hereby authorized to acquire ……………………….equity shares of `10 each,
aggregating of `………….at an amount of `……….. with a premium of 20% in MNO Ltd.,
a subsidiary of the company, from MNO Ltd., which held these shares, by a private
purchase agreement, which held these shares, by a private purchase agreement, a draft
of which was placed before the meeting.
The Board of directors of the company is hereby authorized to do all such things
including acts, deeds, etc. as would be considered by it as necessary/expedient in the
circumstances of the investment.”
Explanatory Statement : This is intended to be a process of greater lateral integration
as MNO Ltd. is a leading manufacturer of the components required by our company for
manufacture of heavy electrical equipment. The negotiation for the acquisition was on
for quite sometime and only recently it has been concluded. We hope to get your
support for the consolidation both in terms of decision making in MNO Ltd. and bring
greater smoothness of our production process which envisages further expansion of
our capacity to cater to our increased export programme in developing countries. The
proposed acquisition is at an arms length price. None of the directors are interested
except as shareholders.
Answer 1(ii)
Type of Resolution : Special Resolution
Type of Meeting : Meeting of Holders of Redeemable Preference Shares
Special Resolution for consent by ¾ of the holders of ……% Redeemable Preference
shares of `100 each.
“RESOLVED THAT pursuant to the provisions of section 106 and all the other
applicable provisions, if any; of the Companies Act, 1956 and subject to the
Memorandum and the Articles of Association of the company in terms of issue
of………….% Redeemable cumulative preference shares (1st series) of `100 each,
as mentioned in the prospectus dated…………., consent of the holders of…………….%
Redeemable cumulative preference shares of `100 each falling due for redemption on
30th December, 2012 be and is hereby accorded to the company for redemption on
30th December, 2015, extending the date of redemption by three years and also for
increasing the fixed preferential dividend on these preference shares by 2% with
effect from 31st December, 2012 till the date of redemption so extended to 30th
December, 2015 and the Board of directors of the company be and is hereby authorized
to do all such acts, deeds, matters and things for giving effect to this Resolution.”
Answer 1(iii)
Who can issue : The Board of the company concerned with approval of shareholders
by way of Special Resolution.
Basis : Employee Stock Option Scheme (ESOS) of a listed company is regulated
by SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme),
Guidelines 1999.
Draft of the Scheme –
(a) Objectives – It is to provide an ongoing mechanism for rewarding merit, loyalty
 3 PP–CSP–December 2012
and tangible contribution made by employees and executives of the company
for their continued and valuable services. This mechanism is intended for
select classes of employees and executives as may be determined by the
management from time to time. The ESOS will be implemented on a yearly
basis.
(b) Employee coverage – Only bona fide full time employees and executives of the
company in confirmed service are eligible to this ESOS. The selection shall be
based upon the performance appraisal, minimum period of service of seven
years, the status of the employee/executive in the company and the current
and potential contribution of eligible persons to the growth and success of the
company and other factors deemed relevant by Compensation Committee. This
ESOS will not cover promoter directors of the company.
Answer 1(iv)
Who can issue – The notice can be issued by the Secretary of the company, if so
authorized by the Board or by a director authorized by the Board.
Basis – Section 77A of the Companies Act, 1956.
SPECIMEN OF NOTICE OF GENERAL MEETING
NOTICE
Notice is hereby given that the Extraordinary General Meeting of the XYZ limited will
be held on __________, 2013 at 11.00 a.m. at the registered office of the Company at
Mumbai to consider and if thought fit, to pass the following resolution as a SPECIAL
RESOLUTION, with or without modification:
“RESOLVED THAT in accordance with the provisions contained in the Articles of
Association and Sections 77A, 77B and all other applicable provisions, if any, of the
Companies Act, 1956, and the provisions contained in the Private Limited Company and
Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999 prescribed by
the Ministry of Corporate Affairs including such modifications or re-enactment of the Act
or the Rules and subject to such other approvals, permissions and sanctions as may be
necessary and subject to such conditions and modifications as may be prescribed while
granting such approvals, permissions and sanctions which may be agreed by the Board
of Directors of the Company, the consent of the Company be and is hereby accorded to
the Board to purchase its own equity fully paid–up equity shares of `100/- each upto a
maximum of 20,082 equity shares of `100/- each being 15% of the paid –up equity share
capital of the Company to be bought back from the existing shareholders of the Company
at a price of `625/- per share payable in cash.
RESOLVED FURTHER THAT the Company may implement the Buy-back in one or
more tranche/tranches, from out of its free reserves and/or securities premium account
and/or the proceeds of an earlier issue of shares other than equity shares made
specifically for buy-back purposes, and the Buy-back may be made in such manner as
may be prescribed under the Act and the Buy-back Rules and on such terms and
conditions as the Board may in its absolute discretion deem fit.
RESOLVED FURTHER THAT nothing contained hereinabove shall confer any right
on the part of any shareholder to offer, or any obligation on the part of the Company or
PP–CSP–December 2012 4
the Board to buy-back, any shares and/or impair any power of the Company or the board
to terminate any process in relation to such buy-back, if so permissible by law
RESOLVED FURTHER that the Directors of the Company be and are hereby
authorized to carry out the aforesaid buying back of securities and to take every step
that may be necessary in connection therewith or incidental thereto to give effect to the
above resolution or to accept any change or modification as may be suggested by the
appropriate authorities or Advisors.”
By Order of the Board
Mumbai Mr.A
_______, 2013 Director

Answer 1(v)
Who can issue – The sole owner of share / joint shareholders.
Basis – NSDL Business Rules.
Annexure D of National Securities Depository Limited (NSDL) Business Rules provides
the Dematerialization Request Form (DRF). DRF is used by the shareholders for putting
a request for dematerialization.
The details contained in the DRF include the following :
— Name(s) of the First Holder, Second holder and Third Holder
— Company Name
— Type of Security
— Face Value
— Details of Securities like Folio No., Certificate No., Distinctive No.
— Whether the securities are free or locked in
— Total No. of Certificates
— Details of locked in securities specifying the lock-in reason and lock-in release
date.
— Declaration by the security holders that the securities as detailed in the form are
registered in their names and that they are unencumbered and free from any
lien.
The DRF should be accompanied for surrender by the duly defaced securities which
are sought to be dematerialized.
Question 2
(a) State, with reasons in brief, whether the following statements are true or false:
(i) Every member of a producer company having individuals and institutions
as members shall have one vote irrespective of the number of shares held
by such member.
 5 PP–CSP–December 2012
(ii) Chairman can exercise 'casting vote' only if the articles of association of
the company contain a provision to that effect.
(iii) Resolution for availing of a term loan sanctioned by the banker of the company
can be passed by circulation.
(iv) Tenure of an auditor of a company is up to the end of the adjourned annual
general meeting when the original meeting could not complete its agenda.
(2 marks each)
(b) In relation to e-form 23C, state the :
(i) Reasons for filing this form
(ii) Particulars required to be filled in the form
(iii) Documents required to be enclosed with the form
(iv) Person who is to sign and certify the form. (1 mark each)
(c) Distinguish between any two of the following :
(i) 'Ordinary business to be transacted at the AGM of a company' and 'special
business to be transacted at the AGM of a company'.
(ii) 'Clean audit report' and 'qualified audit report'.
(iii) 'Interim dividend' and 'final dividend'. (2 marks each)
Answer 2(a)(i)
True
Section 581Z of the Companies Act, 1956 states that subject to the provisions of
sub-sections (1) and (3) of Section 581D, every member shall have one vote and in the
case of equality of votes, the Chairman or the person presiding shall have a casting vote
except in the case of election of the Chairman.
Answer 2(a)(ii)
True
A chairman does not have inherent right to the casting vote. The Companies Act
1956 (CA) is silent on the right to ‘casting vote’ by the chairman. It has to be conferred
on the chairman by the articles of association of the company. However, in case of
producer company, Section 581Z provides that a Chairman shall have a casting vote
except in case of election of chairman.
Answer 2(a)(iii)
False
As per clause (c) of sub-section (1) of section 292 of the Companies Act, 1956, the
Board of Directors of a company shall exercise the power to borrow money otherwise
than on debentures by passing of resolution at a duly convened meeting. It can not be
passed by circulation.
Answer 2(a)(iv)
True
As per provisions of the Companies Act, 1956 as contained in Section 224(1), an
PP–CSP–December 2012 6
auditor appointed by a company at its AGM shall hold office from the conclusion of that
AGM until the conclusions of the next AGM. Since the adjourned meeting is the
continuation of the original meeting, the tenure of auditor continues till the conclusion of
adjourned AGM.
Answer 2(b)(i)
Reasons for filing this form
This is a form of application to the Central Government for appointment of cost
auditor.
Answer 2(b)(ii)
Particulars required to be filled in the form
— Corporate Identity Number (CIN) or Foreign Company Registration Number (FCRN)
of the company;
— Name of the company;
— Category of cost audit order;
— Details of the cost auditor proposed to be appointed;
— Proposed remuneration of the cost auditor; and
— Date of meeting of Board of directors proposing the name of the cost auditor.
Answer 2(b)(iii)
Documents required to be enclosed with the form
(i) Copy of the board resolution of the company sanctioning the proposal for which
the Government approval has been sought.
(ii) Copy of the certificate obtained from cost auditor regarding compliance of Section
224(1B) of the Companies Act, 1956.
(iii) Optional attachment(s) – if any.
Answer 2(b)(iv)
Person who is to sign and certify the form
The form is required to be digitally signed by managing director or director or manager
or secretary of the company (in case of Indian company) or an authorized representative
(in case of a foreign company).
Answer 2(c)(i)
In the case of an annual general meeting, all business to be transacted at the
meeting shall be deemed special, with the exemption of business relating to : (i) the
consideration of the accounts, balance sheet and the reports of the Board of directors
and auditors, (ii) the declaration of a dividend, (iii) the appointment of directors in the
place of those retiring, and (iv) the appointment of, and the fixing of the remuneration of
 7 PP–CSP–December 2012
the auditors. Therefore, these matters are ordinary business to be transacted at the
AGM. Other business shall be special business to be transacted at the AGM. For
example, Alteration of MOA and AOA.
In the case of any other meeting, all business shall be deemed special.
Ordinary business is transacted by passing ordinary resolution, while special business
may be transacted either by passing an ordinary resolution or special resolution, depending
upon the requirements of provisions of the Companies Act, 1956.
Answer 2(c)(ii)
Clean Audit Report is that where the report does not contain any objections, i.e.
where the auditors are satisfied with the Balance Sheet and Profit and Loss Account as
presented to them for audit and they are further satisfied that these have been prepared
in conformity with the provisions of the Companies Act, 1956.
When the auditors are not satisfied in any respect with the above, they qualify the
report stating the areas where they are not satisfied, e.g. adequate depreciation as
required under the Act has not been provided, assets have not been valued in terms of
accounting principles and do not exhibit a true and fair picture of the affairs of the
company.
Answer 2(c)(iii)
Interim Dividend
Section 2(14A) defines 'Dividend' to include interim dividend. The Board of directors
may declare interim dividend. The interim dividend is paid between two annual general
meetings of the company.
Final Dividend
Final dividend is recommended by the Board of Directors in its report to the
shareholders, as per the requirements of Section 217 of the Companies Act, which is
attached to the balance sheet for the relevant financial year. It is declared by the
shareholders at the annual general meeting. Usually articles of association of companies
provide that the shareholders cannot increase the rate or amount of dividend than the
one recommended by the Board. The shareholders may, however, declare the payment
of dividend on equity shares at a rate lower than the one recommended by the directors
in their report.
Question 3
(a) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) When a company fails to receive minimum subscription of ______________
in respect of a rights issue, the entire subscription will have to be refunded
to the applicants within ______________ from the date of closure of the
issue.
(ii) Duties of debenture trustees have been described in detail in Regulation
______________ of the SEBI ( ______________ ) Regulations, 1993.
PP–CSP–December 2012 8
(iii) Share transfer deed in the case of a listed company is valid for
______________ months from the date of presentation of the form to the
prescribed authority or till its next book closure under section 154, whichever
is ______________ .
(iv) Casual vacancy caused by the resignation of an auditor can be filled by
passing a resolution at the ______________ meeting of the company by its
______________.
(v) Section 313 empowers the Board of directors to appoint an alternate director,
if the ______________ provide for it or the resolution passed
in______________ meeting authorise it.
(vi) As per clause 49 of the Listing Agreement, an independent director is one,
who is not related to ______________ or persons occupying management
positions at the Board level or at ______________ level below the Board.
(2 marks each)
(b) As the Company Secretary of a company, explain to the Chairman of the
company the meaning of the term 'adjournment' of a validly constituted (where
quorum is present) general meeting of the members. To what extent the Chairman
is empowered to adjourn the meeting ? What shall be the implications if the
Chairman vacates the chair and leaves after commencement of the meeting ?
State your views. (4 marks)
Answer 3(a)
(i) When a company fails to receive minimum subscription of ninety percent in
respect of a rights issue, the entire subscription will have to be refunded to the
applicants within seventy days* from the date of closure of the issue.
(ii) Duties of debenture trustees have been described in detail in Regulation 15 of
the SEBI (Debenture Trustees) Regulations, 1993.
(iii) Share transfer deed in the case of a listed company is valid for 12 months from
the date of presentation of the form to the prescribed authority or till its next
book closure under section 154, whichever is later.
(iv) Casual vacancy caused by the resignation of an auditor can be filled by passing
a resolution at the general meeting of the company by its members.
(v) Section 313 empowers the Board of directors to appoint an alternate director, if
the articles provide for it or the resolution passed in general meeting authorise
it.
(vi) As per clause 49 of the Listing Agreement, an independent director is one, who
is not related to promoters or persons occupying management positions at the
Board level or at one level below the Board.

*Note : It is presumed that it is an underwritten issue. Students may write fifteen days, in case
of a non-underwritten issue.
 9 PP–CSP–December 2012
Answer 3(b)
Adjournment : Meaning & Chairman’s Powers
Adjournment means to defer or suspend the meeting to a future time, either at an
appointed date or indefinitely or as decided by the members present at the scheduled
meeting. For a valid adjournment of a General Meeting, the holding of the meeting at its
scheduled time is necessary. A duly convened meeting should not be adjourned arbitrarily
by the Chairman. The Chairman may adjourn a meeting with the consent of the members
and shall adjourn a meeting if so decided by the members. The meeting may, however,
be adjourned at any time. It may be adjourned after some items of business have been
transacted and the remaining items can be transacted at the adjourned meeting.
Regulation 53(1) of Table A of Schedule I to the Companies Act, 1956, provides that
the Chairman may, with the consent of any meeting at which a quorum is present, and
shall, if so directed by the meeting, adjourn the meeting from time to time and from
place to place. Once a meeting is called, the Chairman cannot adjourn it arbitrarily. Its
continuance or adjournment rests entirely on the will of the members.
If a Chairman vacates the Chair or adjourns the meeting regardless of the view of
the majority, those remaining, even if a minority, can appoint a Chairman and conduct
the business left unfinished by the former Chairman.
Question 4
(i) "Directors cannot usurp the powers vested by the articles in the general body of
shareholders and the shareholders cannot usurp the powers vested by the articles
in the directors." Discuss in the context of the scheme of the Companies Act,
1956 and applicable case law, if any. (4 marks)
(ii) Who are the persons required/obliged to use digital signature for filing/certifying
e-forms ? (4 marks)
(iii) "The Companies Act, 1956 does not contain any provision for surrender of
shares or forfeiture of shares." Is this statement correct ? Answer with reasons.
(4 marks)
(iv) "Allowing alteration of Registered office address from one State to another State
involves exercise of balanced discretion by the concerned authority." Elucidate
this statement with reference to the provisions of the Companies Act, 1956 and
applicable case law, if any. (4 marks)

Answer 4(i)

Powers relating to the officers of the company are divided between the Board and
the shareholders of the company. The shareholders have power to elect the directors of
the company and the powers to be exercised by the directors in a Board meeting are
clearly demarcated by the Articles of Association and Memorandum of Association of
the company and also under the Companies Act.
General powers of the Board are outlined in section 291 and the manner in which
certain of those powers are to be exercised are provided in section 292, and the powers
which can be exercised within the limits granted by shareholders by passing necessary
PP–CSP–December 2012 10
resolutions in accordance with the provisions of section 293 of the Act are indicative of
the boundaries within which Directors can exercise their powers.
As such, shareholders even though they are the owners of the company, cannot
interfere with the powers of the Board.
Emphasizing this point, while delivering the judgement in John Shaw & Sons (Salford)
Ltd. v. Shaw (1935) 2 KB 113 Green L J said the only way in which the shareholders can
control the exercise of the powers vested by the Articles in the directors is by altering
the Articles or by refusing to re-elect the directors whose action they disapprove. They
cannot usurp the powers vested in the directors nor the directors can usurp the powers
vested in the shareholders.
Answer 4(ii)
Like physical documents are signed manually, electronic documents, for example
e-forms are required to be signed digitally using a Digital Signature Certificate (DSC).
Anyone engaged in signing or attestation of e-forms will need to obtain a DSC from
any of the agencies authorized by the Government.
For the purpose of uploading any form in the MCA21 portal, the following four types
of persons are authorized and identified as users of digital signatures and are required to
obtain DSC :
1. MCA (Government) employees.
2. Professionals (Company Secretaries, Lawyers, Chartered Accountants and Cost
Accountants).
3. Authorised signatories of the company including managing director, manager or
secretary.
4. Representatives of Banks and Financial Institutions.
Answer 4(iii)
The statement that “the Companies Act, 1956 does not contain any provision for
surrender of shares or forfeiture of shares” is partly correct.
The provisions on forfeiture of shares are provided in the Articles 29 to 35 of Table
A of Schedule I to the Companies Act, 1956.
Shares can be forfeited only if authorised by Articles of Association.
Table A of the Companies Act, 1956 does not contain any clause empowering any
Company to accept surrender of shares.
A Company cannot exercise wide powers of accepting a surrender. It can only
accept a surrender under conditions and limitations under which shares can be forfeited.
(In Re: Mirza Ahmed Namazi; In Re: ... v. Unknown on 14 March, 1924 Equivalent
citations: 83 Ind Cas 94).
Collins, M. R. quotes with approval the following observation of the learned Master
of the Rolls in In Re: Dronfield Silkstone Coal Co. (1881) 17 Ch. D. 76 at p. 85 : 50
 11 PP–CSP–December 2012
L.J.Ch. 387 : 44 L.T. 36l : 29 W.R. 768: There is no reference in the Acts to surrenders
of shares; but these have been admitted by the Courts, upon the principle, as I understand
it that they have practically the same effect as forfeiture, the main difference being that
the one is a proceeding in invitum, and the other a proceeding taken with the assent of
the shareholder, who is unable to retain and pay future calls on the shares.

Answer 4(iv)

Shifting of registered office from one state to another

Section 17 of the Companies Act, 1956 provides that a company is to obtain the
consent of its shareholders by way of a special resolution to shift the address of its
registered office from one state to another. This is conditioned by (1) the shift will
enable to company to operate move economically or more efficiently, (2) enlarge or
change in the local area of its operation and (3) obtaining confirmation of the Regional
Director, amongst others. In turn, the Regional Director has to satisfy itself (a) every
debenture holder and every other person whose interests are likely to be affected have
been given sufficient notice for the change and (b) every creditor has either consented
to the change or his claim has been met if he has dissented, to Regional Director's
satisfaction. The Regional Director would also require that concerned ROC has been
given notice of the change to enable him to present his objection, if any. Person likely
to be affected by the change, apart from debenture holders and creditors, include
dissenting shareholders, lenders (like banking) and tax government (centre and state).
The task of the Regional Director in this matter is highly sensitive and delicate.
Even retired employees who have existing dispute with the company has the right to
object. However, even here, the supremacy of the intent of majority of existing
shareholders would prevail unless the injury to dissenting voices including public interest
is overwhelming [vide K.G. Khosla Compressors Ltd., in re (1997) 27 CLA 139 (CLB)].
In Upper Ganges Sugar and Industries Ltd., in re (2000) 273 CL 369, it was held that the
CLB has to ensure that all the formalities of the statute have been complied with,
safeguarding the interests of the concerned parties. Section 17 confers CLB with
discretionary powers and that includes the power to impose conditions before according
confirmation. The stated objections, however, on loss of revenue or loss of employment
etc. were not sustained in Court of law – vide Minerva Mills Ltd. v. Government of
Maharashtra (1975) 45 Comp Cas 1 (Bom) and Rank Film Distributors of India Ltd. v.
ROC, West Bengal AIR 1969 (Cal) 32.
In conclusion, it may be said that majority rule in democratic functioning of a company
has to prevail, not prejudicing or inquiring public interest and bona fide concern of other
stakeholders. The exercise by Regional Director is extremely delicate.
Question 5
(a) Discuss the Insider Trading Regulations in United Kingdom and United States
of America. (8 marks)
(b) Discuss the action taken by SEBI under the SEBI (Prohibition of Insider Trading)
Regulations, 1992 with reference to Hindustan Lever Ltd. (HLL) vs. SEBI (1998)
3 Comp. L.J 473 (AP). (4 marks)
(c) In what way is the appointment of a Company Secretary of a company having
PP–CSP–December 2012 12
paid-up share capital of ` 10 crore is regulated under the provisions of the
Companies Act, 1956 and the Rules thereof ? Explain. (4 marks)
Answer 5(a)
USA
The USA as far back as in 1934, enacted the Securities Exchange Act, 1934 imposing
statutory curbs on insider trading, requiring public disclosure of insiders’ transactions in
the shares of their companies and providing for recovery of ‘shortswing’ profit by them.
The Act provides the remedial measures for protection of investors against sharp practices
and fraudulent schemes by insiders in making short-term, speculative profit. Accordingly,
a corporation or issuer of a registered security can recover profits realised by an insider,
by unfair use of information which he must have obtained by virtue of his relationship
with the issuer, from any purchase or sale of the securities. The quantum of compensation
is determined by the Federal Court.
The insider trading law in USA is part of the general law relating to fraud. Under the
federal system prevailing in the USA, there were state laws known as “blue sky” laws
which contained anti-fraud provisions which are used to deal with insider trading.
The Supreme Court and Courts of Appeals of every State have issued guidelines on
the subject to maintain proper ‘fiduciary standards’ to ensure justice and equity for
insider trading and for protection of interest of investing public. The Securities and
Exchange Commission has been empowered under the Insider Trading Sanctions Act,
1984, to seek imposition of civil penalties, besides criminal proceedings, upto three
times the profits gained or losses avoided, in cases involving use of unpublished price
sensitive information or material.
The US court in Shapiro v. Merrill Lynch 495 5 F 2d.235, propounded the theory of
“disclose or abstain” stating that this is to protect the investing public and to secure fair
dealing in the securities market by promoting full disclosure of insider information so
that an informed judgment can be made by the investors.
UK
In UK, the first legislative measure to curb insider trading was made in 1980 by
inserting the provisions in the Companies Act, 1980. By virtue of such provisions, the
insider trading became a criminal offence under certain eventualities. The relevant
provisions on insider trading under Companies Act, 1980 were shifted in 1985 to a
separate piece of legislation, namely, the Company Securities (Insider Dealing) Act,
1985. The Financial Services Act, 1986 also contain provisions for prevention of insider
trading.
Market abuse is prohibited under the U.K. Financial Services and Markets Act,
2000. Under Section 118(2) of FSMA, market abuse includes where "an insider deals or
attempts to deal, in a qualifying investment or related investment on the basis of inside
information relating to the investment in question." An "insider" is any person who has
inside information, inter alia, as a result of having access to the information through the
exercise of his professional duties. "Inside information" is information of a precise nature
that (a) is not generally available, (b) relates, directly or indirectly, to one or more issuers
of the qualifying investments and (c) would, if generally available, be likely to have a
 13 PP–CSP–December 2012
significant effect on the price of the qualifying investments. Information is "precise" if,
inter alia, it indicates circumstances that may reasonably be expected to come into
existence or occur, and is specific enough to enable a conclusion to be drawn as to the
possible effect of those circumstances.
Answer 5(b)
Hindustan Lever Ltd. (HLL) and Brooke Bond Lipton India Ltd. (BBLIL) were companies
controlled by Uniliver Inc. of U.K. and were under the same management; HLL purchased
8 lac shares of BBLIL from U.T.I. on 25th March, 1996 @ `350.35 per share; 25 days
after the said transaction viz. on 19th April, 1996, HLL announced its merger with BBLIL
and notified the stock exchanges; After the announcement of the merger, BBLIL’s price
shot up to `400 and even beyond that; SEBI after 15 months of investigation came to a
conclusion that HLL, BBLIL and its common directors were liable for insider trading and
causing a huge loss to UTI. SEBI’s charges were based on the following factors:

— On the date of acquisition of shares HLL and BBLIL had full knowledge of the
impending merger and this knowledge was in fact unpublished price sensitive
information under the insider trading Regulations and hence the Directors were
in an advantageous position as compared to public investors;

— HLL made misuse of this unpublished price sensitive information since it did not
disclose the fact of impending merger to U.T.I. and neither did it make the same
public before the deal to acquire 8 lac shares of BBLIL;
— U.T.I. suffered a loss of `3.04 crore due to the concealment of the information
since it sold the shares at a price of `350.35 per share, whereas after the public
disclosure of the merger the share price of BBLIL shot up beyond `400. U.T.I
could have got a better price for its shares had the disclosure been made by
HLL.

Accordingly, HLL was directed to compensate the U.T.I. to the extent of `3.04 crore
and also ordered the launching of prosecution against HLL and the five directors of HLL
and BBLIL.

On appeal by HLL to the Appellate Authority, SEBI’s charge was demolished on the
ground that there was no unpublished price sensitive information involved since prior to
the announcement of the merger, leading financial newspapers had reported the possibility
of the merger and hence it was public knowledge. U.T.I could not allege that the information
was undisclosed since it had the best of market analysts and experts who were fully
familiar with the market trends. As a fall out of this case SEBI amended its Regulations
in 2002 to specifically provide that speculative reports in the media would not be treated
as publication of price sensitive information, as referred to in definition 2(k) of amended
regulations.

Answer 5(c)

Section 383A of the Companies Act, 1956 provides that every company having
such paid-up share capital as may be prescribed shall have a whole time secretary, and
where the Board of directors of any such company comprises only two directors, neither
of them shall be the secretary of the company.
PP–CSP–December 2012 14
As per sub-rule (1) of rule 2 of Companies (Appointment & Qualifications of
Secretary) Rules, 1988, every company having paid up share capital of not less than
rupees five crore shall have a whole-time company secretary. Further, sub-rule (2) of
rule 2 provides that no person shall be appointed as whole-time secretary under sub-rule
(1) unless he is a member of the Institute of Company Secretaries of India constituted
under the Company Secretaries Act, 1980. Therefore, a company having a paid up
share capital of `10 crore or more is compulsorily required to appoint a whole-time
company secretary.
Question 6
(a) State the purpose of filing e-forms Nos. 24A and 24B along with mention of
three attachments needed in the respective cases. (4 marks)
(b) Enumerate the scope and functions of Secretarial Standards Board of the Institute
of Company Secretaries of India. (4 marks)
(c) Lakshmi Trading Ltd. to whom 4,50,000 was due and payable by ABC Pvt. Ltd.
against their supply of material in the year 2010 was shocked to find that the
name of ABC Pvt. Ltd. has been struck off by the Registrar of Companies under
section 560.
Advise Lakshmi Trading Ltd., an unpaid creditor, as to how it can recover its
dues. (4 marks)
(d) "The Institute of Company Secretaries of India has responded positively to the
need and impact of non-financial information in the annual report." State in brief
the growing importance of non-financial information in the annual report in the
changing scenario of the society. (4 marks)
Answer 6(a)
E-form 24A [Pursuant to sections 22, 25, 224(3), 224(7) and 297 of the Companies Act,
1956] :
Purpose
Form for filing application to Central Government for :
• Approval for entering into contract under section 297
• Appointment of auditor under section 224(3)
• Issue of license under section 25
• Removal of auditor under section 224(7)
• Rectification of name.
Attachments
- Memorandum of Association (MoA)
- Articles of Association (AoA)
- Declaration as per annexure of Companies Regulation Act, 1956
- Future annual income and expenditure estimates
 15 PP–CSP–December 2012
- Assets and liabilities statement with their estimated value as on seven days
before making the Application
- Declaration by advocate of Supreme Court or High Court, attorney or pleader
entitled to appear before a High Court, or a company secretary or chartered
accountant in whole time practice that the MoA and AoA have been drawn in
conformity with provisions of the Act
- Details of the promoters and of the proposed directors of the company
- A list of the names, addresses, descriptions and occupations of its directors
and of its managers or secretary, if any, together with the names of companies,
associations and other institutions, in which the directors of the applicant
company are directors or hold responsible positions, if any with the descriptions
of the positions so held
- If association is already in existence, then last two years' accounts, balance
sheet and report on working of the association as submitted to the members of
the association
- Statement of brief description of the work, if already done by the association
and the work proposed to be done
- Statement of the grounds on which application is made
- If any of the above documents not in English or Hindi, then a translation of such
document in English or Hindi
- Copy of agreement containing particulars of contract
- Copy of ordinary resolution
- Copy of board resolution.
E-form 24B [Pursuant to section 314(1B) of the Companies Act, 1956]:
Purpose : Form of application to the Central Government for obtaining prior consent
for holding of any office or place of profit in the company by certain persons
Attachments
1. Copy of the resolution passed by the board of directors, relating to the proposed
appointment
2. Copy of members' special resolution approving the proposal alongwith notice
and explanatory statement relating there to
3. Copy of rules of the company relating to the terms and conditions in regard to
perquisites as applicable to its employees.
4. Certificate from secretary or director of the company to the effect that similar
perks at the same rate(s) are being paid to the other employees of the company
in the equivalent grade
5. An undertaking from the appointee that he or she will be in exclusive employment
of the company and will not hold a place of profit in any other company
6. Copy of the minutes of selection committee in case of public limited company
(including composition of selection committee)
PP–CSP–December 2012 16
7. Particulars of employees in receipt of remuneration of Rs. 50,000 or more per
month
8. Optional attachment(s) - if any
Answer 6(b)
Scope and Functions of the Secretarial Standards Board
The scope of SSB is to identify the areas in which Secretarial Standards need to be
issued by the Council of ICSI and to formulate such Standards, taking into consideration
the applicable laws, business environment and best secretarial practices. SSB will also
clarify issues arising out of such Standards and issue guidance notes for the benefit of
members of ICSI, corporates and other users.
The main functions of SSB are:
(i) Formulating Secretarial Standards;
(ii) Clarifying issues arising out of the Secretarial Standards;
(iii) Issuing Guidance Notes; and
(iv) Reviewing and updating the Secretarial Standards / Guidance Notes at periodic
intervals.
Answer 6(c)
The striking off the name of a company does not materially affect the creditors of
the company, because such creditors may-
(i) enforce their claims against every director, secretaries and treasurer, manager
or any other officer of the company and against every member of the company
as if the name of the company had not been struck off;
(ii) apply to the court, at any time within 20 years from the date of publication of the
notice intimating that the name of the company has been struck off, for the
restoration of the name of the company to the Register of Companies and on
such application being made, court may order the name of the company to be
restored to the register.
Lakshmi Trading Corporation is in the position of an unpaid creditor. As such striking
off the name of ABC Ltd. by the Registrar of Companies under section 560 of the Act
would not affect the supplier for goods. As such they can enforce their claim for payment
of their dues against every directors, manager, officer and also against every member of
the company, as if the name of the company had not been struck off. Since the goods
were supplied only in 2010, the debt is not barred by the law of limitation. If they fail to
recover the dues in the above manner, they may approach the Court to seek winding up
of the company.
Answer 6(d)
Non financial disclosures can be seen as a way to communicate the corporate
activities that impact our society and the environment. One of the principal underpinnings
of good corporate governance is to ensure that shareholders and other stakeholders are
provided with disclosure on financial and operating results in order to understand the
 17 PP–CSP–December 2012
current state of affairs. Traditionally, boards used the audited, historical financial accounts
to tell the shareholders about their stewardship. Today, corporates are expected to say
far more, not only about how the company has been performing but also about the how
it achieved its current performance and to anticipate its future. Non-financial reporting
has become an integral and important aspect of corporate governance practices in which
the stakeholders are interested.
The Ministry of Corporate Affairs (MCA), Government of India in July 2011, released
the ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities
of Business’. These Guidelines, inter alia, suggest a credible reporting and disclosure
framework. Although, these guidelines are voluntary in nature, more and more corporate
are realizing that it is in their interest to measure and report on their non-financial
performance in addition to financial performance and therefore are voluntarily reporting
on their non-financial performance.
In this regard, the ICSI has also issued a Guidance Note on Non-financial disclosures.
Question 7
(a) State the broad requirements of the Companies Act, 2006 of United Kingdom as
regards 'Directors' Remuneration Report'. (6 marks)
(b) A general meeting of a company has been called by the Board of directors upon
the requisition of its members. On the scheduled date and time, the quorum as
required is not present. Advise the Board whether it can still hold the meeting or
adjourn it at a future date. (2 marks)
(c) (i) A director of a company vacates his office under section 283 and this vacation
in general takes an automatic effect as soon as the event for the vacation
stated in the aforesaid section occurs. However, there are three grounds of
vacation which do not get immediate effect. State these grounds and explain
when they may get effect. (6 marks)
(ii) Is a private limited company exempt from the operation of section 283 ?
What is its position under this section ? (2 marks)
Answer 7(a)
Directors’ remuneration report (Section 420 & 422)
The directors of a quoted company shall for each financial year prepare a directors’
remuneration report which shall contain the information specified in the Schedule to Act
and comply with any requirement of that Schedule as to how the information is to be set
out in the report. The directors’ remuneration report shall be approved by the Board of
directors and signed on behalf of the Board by a director or the secretary of the company.
Every copy of said report which is laid before the company in general meeting or which
is otherwise circulated, published or issued, shall state the name of the person who
signed it on behalf of the Board. The copy of the directors’ remuneration report which is
delivered to the registrar shall be signed on behalf of the Board by a director or the
secretary of the company.
Members’ approval of directors’ remuneration report
The company must, prior to the meeting, give to the members of the company
PP–CSP–December 2012 18
notice of the resolution to be moved at the meeting, as an ordinary resolution for approving
the directors’ remuneration report for the financial year. Notice shall be given to each
such member in any manner permitted for the service on him of notice of the meeting.
The business that may be dealt with at the meeting includes the resolution. The existing
directors must ensure that the resolution is put to vote at the meeting. No entitlement of
a person to remuneration is made conditional on the resolution being passed by reason
only of the provision made. If the resolution is not put to the vote at the meeting, each
existing director is guilty of an offence and liable to a fine.
Answer 7(b)
As per provisions of Section 174(3) of the Companies Act, 1956, in a Meeting called
upon the requisition of Members, if the Quorum is not present within half an hour from
the time appointed for holding a meeting of the Company, the Meeting stands dissolved.
In any other case, the meeting shall stand adjourned. Therefore, in this case, since the
meeting has been called by Board upon requisition of its members, the meeting shall
stand dissolved.
Answer 7(c)(i)
Section 283 of the Companies Act, 1956 provides the circumstances in which the
office of a director shall stand vacated. The vacation under this section takes an automatic
effect on the occurrence of any of the event detailed in the Section.
However, if the disqualification to hold office of director occurs due to the following
events :
• he is adjudged an insolvent [section 283(1)(d)]
• he is convicted by a Court of an offence involving moral turpitude and sentenced
in respect thereof for not less than six months [Section 283(1)(e)]
• he becomes disqualified by the order of Court under Section 203, Section 283
(1)(j)
Section 283(2) provides that disqualification shall not take effect :
(a) for thirty days from the date of the adjudication, sentence or order;
(b) where any appeal or petition is preferred within the thirty days aforesaid against
the adjudication, sentence or conviction resulting in the sentence, or order until
the expiry of seven days from the date on which such appeal or petition is
disposed of; or
(c) where within the seven days aforesaid, any further appeal or petition is preferred
in respect of the adjudication, sentence, conviction, or order, and the appeal or
petition, if allowed, would result in the removal of the disqualification, until such
further appeal or petition is disposed of.
Answer 7(c)(ii)
Section 283 of the Companies Act, 1956 deals with vacation of office by directors.
The section is applicable to a private company also. Further, sub-section (3) of section
283 provides that a private company, which is not a subsidiary of a public company
 19 PP–CSP–December 2012
may, by its articles, provide additional grounds for vacation of office of director. However,
a public company cannot, add any disqualification other than those mentioned in section
283.
Question 8
(a) The Board of directors of Delight Ltd. decides to call the 15th annual general
meeting (AGM) of the company at its registered office. Assuming your own
figures/names, etc., draft a notice calling the meeting. The agenda should contain
two matters/items, beyond the items transacted as ordinary business but do
not involve adoption of a special resolution. (4 marks)
(b) Write a note on satisfaction of a registered charge. (4 marks)
(c) Classify the following items into ‘ordinary business’ and ‘special business’ going
to be transacted at the annual general meeting of a company and also state the
type of resolution through which these businesses can be carried on :
(i) Declaration of dividend;
(ii) Amalgamation of company with another company;
(iii) Consideration of annual accounts and auditor's report;
(iv) Issue of bonus shares;
(v) Alteration of articles of association;
(vi) Alteration of objects as stated in the memorandum of association;
(vii) Appointment of auditors; and
(viii) Appointment of directors and fixation of their remuneration.
(4 marks)
(d) What procedure would you adopt for payment of dividend without providing for
depreciation ? (4 marks)

Answer 8(a)
NOTICE OF ANNUAL GENERAL MEETING
XYZ LIMITED
Registered Office : ________________________________
NOTICE is hereby given that the Second Annual General Meeting of the Members
of XYZ Limited will be held on ___day, the 20th August, 2013, at 3:30 p.m.
at________________ (address) to transact the following business:
Ordinary Business
1. To receive, consider and adopt the Audited Balance Sheet as at March 31,
2012, the Profit & Loss Account for the year ended on that date together with
the Schedules and Notes attached thereto, alongwith the Reports of the Auditors
and Directors thereon.
PP–CSP–December 2012 20
2. To declare a dividend.

3. To appoint a Director in place of Mr A, who retires by rotation and being eligible,

offers himself for reappointment.

4. To appoint a Director in place of Mr B, who retires by rotation and being eligible,

offers himself for reappointment.

5. To appoint Auditors and to fix their remuneration.

Special Business

Appointment of Director

6. To consider and, if thought fit, to pass, with or without modifications, the following
Resolution as an Ordinary Resolution:

“RESOLVED that Mr D, who was appointed as an Additional Director by the

Board of Directors of the Company pursuant to Section 260 of the Companies
Act, 1956 and Article ______ of the Articles of Association of the Company and
who holds office only upto the date of this Annual General Meeting and in respect
of whom the Company has received a Notice in writing, under Section 257 of the
Companies Act, 1956, from a Member signifying his intention to propose Mr. D
as a candidate for the office of a Director of the Company, be and is hereby
appointed a Director of the Company liable to retire by rotation.”

7. To mortgage immovable properties of the company to obtain a term loan of `45

Crore from XYZ Bank under section 293(1)(a) of the Act.

Place : Mumbai By the Order of the Board of Directors

Date : July 15, 2013 PCR
Company Secretary
Answer 8(b)
Satisfaction of a registered charge means payment in full of the obligation in respect
of which the charge is created. As per the provisions of Section 138 of the Companies
Act, 1956, on payment or satisfaction of any charge in full, the company must notify the
fact to the ROC within 30 days of such payment. The ROC on receipt of such notification,
send a notice to the concerned charge holder to show cause within a time specified in
the notice (not exceeding 14 days) as to why satisfaction of the charge should not be
recorded by the ROC. If no cause is shown, the memorandum of satisfaction of the
charge shall be recorded by the ROC in the register of charges. When a cause is
shown, the ROC shall record a note on such negative/reserved intimation and inform the
company. If no further intimation is received from the company, the ROC may record
full/partial satisfaction of the charge based on evidence with him. The ROC, then send
intimation to that effect to the company. ROC has no power to extend the time frame
beyond 30 days as stated in section 138 of the Act.
 21 PP–CSP–December 2012
Answer 8(c)

Business Type of Business Type of Resolution

(i) Declaration of dividend Ordinary Ordinary Resolution in all

these cases
(ii) Amalgamation of company Special Special Resolution in all
with another company these cases
(iii) Consideration of annual Ordinary Ordinary Resolution in all
accounts and auditor’s these cases
report
(iv) Issue of bonus shares Special Special Resolution in all
these cases
(v) Alteration of articles of Special Special Resolution in all
association these cases
(vi) Alteration of objects as Special Special Resolution in all
stated in the memorandum these cases
of association
(vii) Appointment of auditors Ordinary Ordinary Resolution in all
these cases
(viii) Appointment of directors Ordinary Ordinary Resolution in all
and fixation of their these cases
remuneration

Answer 8(d)
Procedure
1. Hold a board meeting after giving notice as per Section 286 of the Companies
Act, 1956 and take the decision of applying to the Central Government for
approval for payment of dividend without providing for depreciation. [section
205(1)(c)].
2. Make an application to the Central Government in e-form 23AAC giving reasons
for not providing depreciation along with the following attachments:
(a) Certificate from the Company Secretary or director certifying that no relevant
facts material to the proposal have been concealed or misrepresented.
(b) An undertaking that the company will not come up with any public issue or
invite any fresh deposits in the next 18 months.
(c) Copy of the Board’s resolution in support of the company’s proposal.
(d) Shareholding pattern of promoters and their relatives.
(e) Copy of concurrence of Administrative Ministry.
3. Send a copy of the application to the concerned Registrar of Companies along
with a copy of each document annexed to it.
PP–CSP–December 2012 22
4. After obtaining approval of the Central Government rest of the procedure is the
same as in the case of payment of final dividend. That means convene the
Board meeting to recommend the rate of dividend to decide date of book closure,
to fix the date, time and place for convening of AGM/EGM.
5. Ensure that the required percentage of profits is transferred to company’s
reserves.
6. Hold and convene General Meeting and pass ordinary resolution for declaring
dividend.
 23 PP–DAP– December 2012
DRAFTING, APPEARANCES AND PLEADINGS
Time allowed : 3 hours Maximum marks : 100
NOTE : Answer SIX questions including Question No. 1 which is COMPULSORY.

Question 1
(a) The Board meeting agenda item No.5 of the Caueltex Petroleum Co. Ltd.,
reads as under :
"To consider and approve the draft of dealership allotment letter to ten
petroleum dealers of Andhra Pradesh; and to treat it as modified dealership
contract between the company and dealers." In the meeting, Rohit, Director
(Marketing) explained that finalising the dealership contracts as per standard
format is detrimental to expansion of company's business in Andhra Pradesh.
A simple letter of dealership allotment will boost marketing prospects for
the company in this area which has been stung by fierce competition from
rival companies. But, Pranav, Director (Legal) opposed this move on the
ground that it may involve legal complications at a later stage. After some
discussion, the Chairman-cum-Managing Director (CMD) decided to call for
legal expert's advice in this matter.
As the legal consultant, draft a note highlighting :
(i) Basic precautions involved in drafting such deeds; and
(ii) Ways and means to balance the approaches of Director (Marketing) and
Director (Legal) as to dealership contracts. (10 marks)
(b) Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s) :
(i) Recitals carry __________ importance in a deed. It is an evidence
against the parties to the __________ and those claiming under it.
(ii) The term 'force majeure' relates to excuses for __________ .
(iii) Draftsmen should avoid the use of words 'less than' or 'more than' ;
instead they should use __________ .
(iv) Section 129 of the Indian Contract Act, 1872 lays down that a guarantee
which extends to a series of __________ is called a __________
guarantee.
(v) The term 'deed' normally refers to all the instruments by which two or
more persons agree to effect any __________ or __________ .
(2 marks each)

Answer 1(a)
From : M/s KYZ & Associates Legal, Consultants & Solicitors
To : Mr. PQR, Chairman & Managing Director, Caueltex Petroleum Co. Ltd.
23
PP–DAP–December 2012 24
Sir,
Sub. : Dealership allotment to petroleum dealers of Andhra Pradesh.
Manufacturers, barring a very few, do not have their own retail sale outlets.
They sell their products through a network of sole selling agents, selling agents,
distributors, dealers, co-operative stores, super bazars, fair price shops etc. In this
chain of sellers and distributors, dealer is a very important link. He is not an agent
to the manufacturer as he functions in his own independent capacity and not as
an agent or a representative of the manufacturer. He purchases goods either against
specific orders from the prospective ultimate users or consumers or keeps stocks
of goods of one or more manufacturers in anticipation of the sale orders. The
manufacturer extends to him certain facilities like the supply of goods on credit
for an agreed period based on the custom in the market, capacity of the manufacturer,
demand of the goods, quality image and goodwill of the goods and other relevant
factors; facility of sales returns in the event of the dealer not being able to sell
the goods within a specified period of time; advertisement and publicity charges;
partial or whole of sale outlet and or godown rent; display expenses and the like.
Both the manufacturer and the dealer enter into an agreement known as
Dealership Agreement, which incorporates the important terms and conditions of
their relationship so as to avoid any ambiguity and resultant dispute in order to
maintain lasting cordial business relationship.
Ingredients of a Dealership Contract
Such an agreement or contract must be drawn in accordance with the provisions
of the Indian Contract Act, 1872. All the essential ingredients of a contract, such
as, a proposal, its acceptance, its due communication to the proposer, lawful
consideration, lawful purpose and competence of parties to the contract etc.
must be duly satisfied and ensured while drafting such contracts.
It is essential to ascertain not only the legal position or condition of each of
the parties to the contract, e.g. an individual, a firm or partnership, a company,
or as the case may be, but also that each person signing the document has capacity
to contract. The contract should clearly state the full names, addresses (The
addresses being that to which all communications, including notices and judicial
processes, should be sent), and capacities of each of the contracting parties and,
in the case of firm, partnership or company, the name or complete style of the
firm, partnership or company, its legal status, the date and place of its incorporation,
Registered office, and so on.
In the title (or introductory part) of the contract, care should be taken clearly
to state that it is a commercial agency or dealership contract, so as to avoid any
doubt as regards the legal nature of the contract and the position of the parties
thereunder.
For M/s XYZ & Associates.
Sd/-
(Partner)
 25 PP–DAP– December 2012
Answer 1(b)
(i) Recitals carry evidentiary importance in a deed. It is an evidence against
the parties to the instrument and those claiming under it.
(ii) The term ‘force majeure’ relates to excuses for non-performance.
(iii) Draftsmen should avoid the use of words ‘less than’ or ‘more than’; instead
they should use not exceeding.
(iv) Section 129 of the Indian Contract Act, 1872 lays down that a guarantee
which extends to a series of transactions is called a continuing guarantee.
(v) The term ‘deed’ normally refers to all the instruments by which two or more
persons agree to effect any right or liability.
Question 2
(a) Explain the following :
(i) Consent orders.
(ii) Provisions relating to appeal to the Securities Appellate Tribunal under
the Securities and Exchange Board of India Act, 1992. (4 marks each)
(b) State the provisions under the Foreign Exchange Management Act, 1999
relating to compounding of offences committed under the Act. (8 marks)
Answer 2(a)
(i) Consent Orders
SEBI has brought the concept of Consent Order into force for resolving the
disputes in more smooth manner through negotiations and discussions instead
of lengthy litigation.
Consent Order means “an order settling administrative or civil proceedings between
the regulator and a person (Party) who may prima facie be found to have violated
securities laws.” Here, Administrative/Civil enforcement actions include issuing
directions, suspension or cancellation of certificate of registration, imposition of
monetary penalty, pursuing suits and appeals in courts and Securities Appellate
Tribunal (SAT). It may settle all issues or reserve an issue or claim, but it must
precisely state what issues or claims are being reserved. A Consent Order may
or may not include a determination that a violation has occurred.
Consent Order provides flexibility of wider array of enforcement and remedial actions
which will achieve the twin goals of an appropriate sanction, remedy and deterrence
without resorting to litigation, lengthy proceedings and consequent delays.
(ii) Provisions relating to appeal to the Securities Appellate Tribunal under
the Securities and Exchange Board of India Act, 1992
Section 15T of the SEBI Act lays down that any person aggrieved:
(1) (a) by an order of SEBI made, under this Act, or the rules or regulations
made thereunder; or
PP–DAP–December 2012 26
(b) by an order made by an adjudicating officer under this Act;
may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in
the matter.
(2) No appeal shall lie to the Securities Appellate Tribunals from an order made
(a) by SEBI;
(b) by an Adjudicating Officer, with the consent of the parties.
(3) Every appeal under sub-section (1) shall be filed within a period of 45 days from
the date on which a copy of the order made by SEBI or the Adjudicating Officer,
is received by him and it shall be in such form and be accompanied by such
fee as may be prescribed. These details have been prescribed in the Rules.
Provided that the Securities Appellate Tribunal may entertain an appeal after
the expiry of the said period of 45 days if it is satisfied that there was
sufficient cause for not filing it within that period.
(4) On receipt of an appeal, the Securities Appellate Tribunal may, after giving
the parties to the appeal, an opportunity of being heard, pass such orders
thereon as it thinks fit, confirming, modifying or setting aside the order
appealed against.
(5) The Securities Appellate Tribunal shall send a copy of every order made by
it to SEBI and the parties to the appeal and to the concerned Adjudicating Officer.
(6) The appeal filed before the Securities Appellate Tribunal shall be dealt with
by it as expeditiously as possible and endeavour shall be made by it to
dispose of the appeal finally within six months from the date of receipt
of the appeal.
Answer 2(b)
Provisions under the Foreign Exchange Management Act, 1999 relating to
compounding of offences
Persons who have flouted the Foreign Exchange Management Act (FEMA) will
be allowed to settle the offence by paying monetary penalty and will not have to
go for litigation if such a person acknowledges having committed the contravention.
Section 15 of the FEMA Act dealing with power to compound contravention stipulates
that:
(1) Any contravention under Section 13 may, on an application made by the
person committing such contravention, be compounded within one hundred
and eighty days from the date of receipt of application by the Director of
Enforcement or such other officers of the Directorate of Enforcement and
Officers of the Reserve Bank as may be authorised in this behalf by the
Central Government in such manner as may be prescribed.
(2) Where a contravention has been compounded under sub-section (1), no
proceeding or further proceeding, as the case may be, shall be initiated
or continued, as the case may be, against the person committing such
contravention under that section, in respect of the contravention so
compounded.
 27 PP–DAP– December 2012
The Government has, in consultation with the Reserve Bank of India, reviewed
the procedures for compounding of contravention under FEMA. The procedures have
been reviewed to provide comfort to the citizens and corporate community by
minimising transaction costs, while taking severe view of wilful, malafide and
fraudulent transactions. Accordingly, the responsibility of administering compounding
of contravention cases under FEMA has been vested with the Reserve Bank with
the exception of hawala transactions. The Directorate of Enforcement would continue
to deal with these cases.
As per the new norms announced on 1st February 2005, the RBI is required
to conclude case proceedings within 180 days from the receipt of application for
compounding, and the sum worked out after compounding has to be paid within
15 days from the order of compounding.
The order passed by RBI will be applicable for a period of three years. If a
second offence is committed after the expiry of three years, it will be deemed
as a fresh contravention and not a repetition of the earlier one.
Question 3
(a) Draft a specimen of underwriting contract. (6 marks)
(b) With reference to section 76 of the Companies Act, 1956 distinguish between
'underwriting agreement' and 'underwriting contract'. (2 marks)
(c) State, with reasons in brief, whether the following statements are true or
false :
(i) Since Wakfs are trusts, the Indian Trusts Act, 1882 applies to Wakfs
floated under the Muslim Law.
(ii) The fundamental rules of pleadings as provided in the Code of Civil
Procedure, 1908 are applicable in cases of petitions/applications under
other statutes.
(iii) The absence of prayer for relief in an appeal does not appear to be
fatal to the case.
(iv) 'Drafting' and 'conveyancing' are inter-changeable terms.
(2 marks each)
Answer 3(a)
Underwriting contract
An agreement made the………… day of………… 20…… between…....…………
of………… (hereinafter called the underwriters) of the one part, and ………………Ltd.
whose registered office is situate at…………… (hereinafter called 'the company')
of the other part:
Whereas the company is about to offer for public subscription as issue
of……………… shares of……………… each in accordance with the terms of the
draft prospectus a copy of which is annexed hereto, or with such modifications
therein as may be mutually agreed upon between the company and the underwriters:
PP–DAP–December 2012 28
Now it is hereby agreed as follows:
1. If the said………..............………shares shall on or before the………………day
of……………… 20………. (or such later date as shall be mutually agreed
upon by the parties hereto not after than the……………… day of………………
20….....) be offered by the company for subscription by the public at par
on the terms of such prospectus as aforesaid, the underwriters shall on
or before the closing of the subscription list apply at par for the
said……………… shares.
The said prospectus shall be issued in the form already approved by the
underwriters or with such modification, if any, as shall mutually be agreed
between the company and the underwriters.
2. If on the closing of the lists under the said prospectus the said………………
shares shall be allotted in respect of applications from the public the
responsibility of the underwriters is to cease and no allotment is to be made
under this agreement but if the said……………… shares shall not be allotted
to the public but any smaller number of such shares is so allotted, the
undertaking of the underwriters is to stand for the difference between the
said……………… shares and the number of the shares allotted to the public.
3. The company shall pay to the underwriters in cash within…… days from
the allotment of the said……………… shares a commission at the rate
of………. p.c. on the nominal value of the shares.
4. This agreement is to be irrevocable on the part of the underwriters and
is to be sufficient in itself to authorise the company in the event of the
underwriters not applying for the said……………… shares to cause
application to be made for such shares or any part thereof in the name
and on behalf of the underwriters in accordance with the terms of the said
prospectus and authorise the directors of the company to allot the
said………………shares of the company or any part thereof to the underwriters
(but subject to the provisions of this agreement) and in the event of the
company causing an application to be made for such shares in the name
of the underwriters, the underwriters shall hold the company and the said
applicants harmless and indemnified in respect of such application.
Answer 3(b)
As per Section 76 (1) of the Companies Act, 1956 a company may pay a
commission to any person who agrees to subscribe or procure subscription for an
agreed number of shares or debentures of the company. Such commission may
be paid to the underwriters who offer guarantee to procure applications for certain
number of shares and guarantee to purchase the unsubscribed capital.
An ‘underwriting agreement’ is delivered to the Registrar at the time of filing
of the draft prospectus or statement in lieu of prospectus with the Registrar. Once
the terms of the ‘underwriting agreement’ are approved by the Registrar along with
the draft prospectus or statement in lieu thereof the company enters into an
‘underwriting contract’ with the underwriters which is irrevocable on the part of the
underwriters.
 29 PP–DAP– December 2012
Answer 3(c)(i)
False
Though wakfs are trusts, the Indian Trust Act does not apply to Wakfs under
the Muslim Law. However, it is open to a Muslim to create a secular trust of a public
and religious character. Such a trust would be governed by the Indian Trust Act, 1882.
Answer 3(c)(ii)
True
The fundamental rule of pleadings as provided in the Civil Procedure Code
remains the same vis-à-vis petitions /applications under other statutes. They ought
to be so framed as not only to assist the party in the statement of his case,
but the court in its findings of the truth between the litigants. While drafting a petition/
application, it should be borne in mind that the pleadings therein should contain:
(a) Facts only, then again material facts;
(b) Not law;
(c) Not evidence; and
(d) Immaterial facts should be discarded.
Answer 3(c)(iii)
True
The absence of prayer for relief in appeal does not appear to be fatal and
the court is bound to exercise its powers under Section 107 of the Code of Civil
Procedure and to give to the appellant such relief as it thinks proper. However,
it is established practice to mention in the memorandum of appeal, the relief sought
by the appellant.
Answer 3(c)(iv)
False
Both the terms "drafting and conveyancing" provide the same meaning although
these terms are not interchangeable. Conveyancing gives more stress on documentation
much concerned with the transfer of property from one person to another, whereas
"drafting" gives a general meaning synonymous to preparation of drafting of documents.
Question 4
Write notes on any four of the following :
(i) Affidavits
(ii) Surrender of lease
(iii) Arbitration agreements
(iv) Principles governing the construction of a power of attorney
(v) Court craft. (4 marks each)
PP–DAP–December 2012 30
Answer 4(i)
Affidavits
An affidavit being a statement or declaration on oath by the deponent, is an
important document and the consequences of a false affidavit are serious. Therefore,
great care is required in drafting it.
A Court may, at any time, for sufficient reason order that any particular fact
or facts may be proved by affidavit or that the affidavit of any particular witness
may be read at the hearing, provided that the Court may order the deponent to
appear in person in Court for cross-examination.
Affidavits to be produced in a Court must strictly conform to the provisions
of order XIX, Rule 1 of the Code of Civil Procedure, 1908 and in the verification
it must be specified as to which portions are being sworn on the basis of personal
knowledge and which, on the basis of information received and believed to be true.
In the latter case, the source of information must also be disclosed.
Answer 4(ii)
Surrender of lease
Surrender of lease is not a transfer but mere yielding up by the lessee of his
interest under the lease to the lessor by mutual agreement. It is in effect merger
of the estate of the lessee into the reversion. It is not a transfer or an assignment
of any right or estate within the meaning of Section 5 of the Transfer of Property
Act (Makhanlal v. Nagendranath, (1933) 60 Cal 379). The person who surrenders
is called the surrenderer and the person to whom surrender is made is called the
surrenderee. A surrender must be made with clear intention to yield up as mere
non-payment of rent for years together or abandonment of the site does not amount
to surrender (Misri Lal v. Durga Narain, AIR 1940 All. 317). A Requisition Order
by the Government does not amount to any surrender (Torabai v. Padan Chand,
62 CWN 176). It may be expressed or implied. Except in a case of some special
kinds of lease as required by special Act, no writing or registration is necessary.
A surrender may be oral, if accompanied by delivery of possession.
Answer 4(iii)
Arbitration agreements
The 'arbitration agreement' under the Arbitration and Conciliation Act, 1996 means
an agreement by the parties to submit to arbitration all or certain disputes which
have arisen or which may arise between them in respect of defined relationship
whether contractual or not. It may be in the form of an arbitration clause in a
contract or in the form of a separate agreement. It has to be in writing. It is in
writing if it is contained in a document signed by the parties, or in an exchange
of letters, telex telegrams or other means of telecommunication which provide a
record of the agreement, or in an exchange of statements of claim and defence
in which the existence of agreement is alleged by one party and not denied by
the other.

The important ingredient of the arbitration agreement is the consent in writing

 31 PP–DAP– December 2012
to submit dispute to arbitration. Consent in writing implies the application of mind
to the reference of dispute to arbitration in accordance with Arbitration and
Conciliation law and the binding nature of the award made thereunder.
Answer 4(iv)
Principles governing the construction of a power of attorney
The principles governing the construction of a power of attorney are:
(1) the operative part of the deed is controlled by the recitals;
(2) where an authority is given to do particular acts, followed by general words,
the general words are restricted to what is necessary for the performance
of the particular acts;
(3) the general words do not confer general powers, but are limited to the purpose
for which the authority is given and are construed as enlarging the special
powers only when necessary for that purpose;
(4) a power of attorney is construed so as to include all incidental powers
necessary for its effective execution [A.I.R. 1972 Gauhati 122 (125)].
Answer 4(v)
Court craft
Company Secretaries act as an authorized representative before various
Tribunals/quasi judicial bodies. It is necessary for them to learn the art of advocacy
or court craft for effective delivery of results to their clients when they act as an
authorized representative before any tribunal or quasi judicial body.
For winning a case, art of advocacy is important which in essence means to
convince the judge and others that my position in the case is the proper interpretation.
Advocacy/court craft is learned when we enter the practicing side of the profession.
The aim of advocacy is to make the judge prefer your version of the truth.

Apart from the legal side of the profession, advocacy is often useful and
sometimes vital, in client interviewing, in negotiation and in meetings, client seminars
and public lectures. It is a valuable and lifelong skill worth mastering.
Technical and legal knowledge about the area in which Company Secretaries
are acting is essential. Better their knowledge, the better their advocacy skills and
the greater their impact. Good advocacy or negotiating skills will not compensate
for lack of appropriate knowledge.
Question 5
(a) Draft a specimen of memorandum of mortgage by deposit of title deeds.
(8 marks)
(b) Match the following :
(i) To have the body (a) Force majeure
(ii) Command (b) Testatum
PP–DAP–December 2012 32
(iii) Witnessing clause (c) Deed pool
(iv) Extra remuneration to an agent (d) Cyrographum
(v) Excuses for non performance (e) Habeas corpus
(vi) Deed having two or more parties (f) Mandamus
(vii) Written between two or more copies (g) Del credere commission
(viii) For the benefit of (h) Cestui que trust.
(1 mark each)
Answer 5(a)
Memorandum of Mortgage by Deposit of Title Deeds
Memorandum that this……….. day of…….. 2012, 'AB' of, etc. (the mortgagor),
as beneficial owner, has deposited with 'CD' of, etc. (the mortgagee), the original
title deeds comprised in the Schedule A hereto, relating to the premises belonging
to the said 'AB' and situate at (etc. described in Schedule B with intent to create
a charge thereon for securing repayment to the said 'CD' of the sum of ` ………..
this day lent and advanced by the said 'CD' to the said 'AB' on demand with interest
for the same from this date at the rate of `…….. per cent per annum.
The said 'AB' do hereby undertake as and when required by the said 'CD' to
execute and register at the costs of the said 'AB' a legal mortgage in such form
and containing such covenants and provisions as he may reasonably require.
Dated this………….. day of………….. 2012.
The Schedule A above referred to
Description of the Title Deeds deposited.
The Schedule B above referred to
Description of the Property.
Signature of the Mortgagor.
Answer 5(b)
Match the following:
(i) To have the body (e) Habeas corpus
(ii) Command (f) Mandamus
(iii) Witnessing clause (b) Testatum
(iv) Extra remuneration to an agent (g) Del credre commission
(v) Excuses for non performance (a) Force majeure
(vi) Deed having two or more parties (c) Deed pool
(vii) Written between two or more copies (d) Cyrographum
(viii) For the benefit of (h) Cestui que trust
 33 PP–DAP– December 2012
Question 6
(a) What is meant by 'pre-incorporation contracts' ? Can a company ratify a
contract entered into by the promoters on its behalf before its incorporation?
Explain with reasons. (10 marks)
(b) Select the odd term out and briefly justify your answer :
(i) prohibition, mandatory injunction, habeas corpus, special civil application.
(ii) ratio, obiter, decree holder, issues.
(iii) dilatory pleas, memorandum of appeal, grounds of appeal, reliefs sought
for. (2 marks each)
Answer 6(a)
Pre-incorporation Contracts
The promoters of a company usually enter into contracts to acquire some
property or right for the company which is yet to be incorporated, such contracts
are called preliminary or pre-incorporation contracts. The promoters generally enter
into such contracts as agents for the company about to be formed. The legal position
is that since presence of two consenting parties is necessary for a contract, and
the company before incorporation is a non-entity, the promoters cannot act as agents
for the company, which has yet to come into existence. As such, the company
is not liable for the acts of the promoters done before its incorporation.
When the company comes into existence, it is not bound by the pre-incorporation
contracts even when it takes the benefit of the work done on its behalf. However,
specific performance of a contract between a third party and the promoters may
be successfully claimed by the third party against the company, when the company
enters into possession of the property on the faith of the promoters' contract.
Similarly, the company, after incorporation, cannot enforce any contract made
before its incorporation, which means the company cannot sue the other party to
the contract if the other party fails to carry out the contract. Promoters remain
personally liable on the contract.
A company also cannot ratify a contract entered into by the promoters on its
behalf before its incorporation. Therefore, it cannot by adoption or ratification obtain
the benefit of the contract purporting to have been made on its behalf before it
came into existence, as ratification by the company when formed is legally
impossible. The doctrine of ratification applies only if an agent contracts for a
principal who is in existence and who is competent to contract at the time of the
contract by the agent. Where a contract is made on behalf of principal known to
both parties to be non-existent, the contract is deemed to have been entered into
personally by the actual maker, i.e. the agent. A company may, if it desires, enter
into a new contract, after its incorporation, with the other party which is known
as novation of promoter's contracts; and if it makes a fresh contract in terms of
the preliminary contract, the liability of the promoters comes to an end and if it
does not make a fresh contract within a limited, period of time, either of the parties
may rescind the contract.
PP–DAP–December 2012 34
The essential feature of novation is that the right under the original contract
is relinquished and a new right referable to a new contract is created. The substituted
contract must, in order to effect a novation, be enforceable one.
The pre-incorporation agreements entered into by the promoters acting on behalf
of the intended company with third party cannot always be avoided for various
reasons. These agreements affect the operations of the incorporated company.
Answer 6(b)
(i) Special Civil Application – Prohibition, mandatory injunction and habeas
corpus are all forms of writs.
(ii) Decree holder – The terms ratio, obiter and issues are all related to plaint
and judgment.
(iii) Dilatory pleas – Dilatory pleas are a way to delaying the judicial process
all others are related to appeals.
Question 7
(a) What are the advocacy tips to be borne in mind by a Practising Company
Secretary while appearing before a tribunal ? (10 marks)
(b) Distinguish between the following :
(i) 'Registration of partnership firm under the Income-tax Act, 1961' and
'registration of partnership firm under the Indian Partnership Act, 1932'.
(ii) 'Public trust' and 'private trust'. (3 marks each)
Answer 7(a)
Advocacy tips to be borne in mind by a Practicing Company Secretary before
appearing before a Tribunal
(i) Clarity : The judge’s time is limited, so make the most of it.
(ii) Credibility : The judge needs to believe that what you are saying is true
and that you are on the right side.
(iii) Demeanour : We don’t have a phrase “hearing is believing”. The human
animal which includes the human judge, is far more video than audio. The
way we collect most of our information is through our eyesight.
(iv) Eye contact : While pleading, maintain eye contact with your judge.
(v) Voice modulation : Voice modulation is equally important. Modulating your
voice allows you to emphasize the points you want to emphasize. Be very
careful about raising your voice. Use your anger strategically. But use it
rarely. Always be in control of it.
(vi) Psychology : Understand judge’s psychology as your job is to make the
judge prefer your version of the truth.
(vii) Be likeable. At least be more likeable than your opponent. If you can convert
an unfamiliar Bench into a group of people who are sympathetic to you
personally, you perform a wonderful service to your client.
 35 PP–DAP– December 2012
(viii) Learn to listen.
(ix) Entertain your judge. Humour will often bail you out of a tough spot.
Answer 7(b)
(i) ‘Registration of partnership firm under the Income-tax Act, 1961’ and
‘registration of partnership firm under the Indian Partnership Act, 1932’
Registration of Partnership Firm
Registration of partnership firm has been made optional under the provisions
of Section 58 of the Indian Partnership Act, 1932. Consequences of non-
registration of a partnership firm are set out in Section 69 of the Partnership
Act. An unregistered firm cannot enforce a right or claim arising out of
a contract against any third party. However, if the firm obtains registration
on the date of institution of the claim against third person, the said claim
or right would be perfectly maintainable. Since the blow of the consequences
of non-registration is very severe, it is advisable to get the partnership
registered under the Partnership Act, 1932 immediately on its incorporation.
Registration of Partnership Firm under the Income-tax Law
Registration of partnership under the Income-tax Law is distinct from
registration of firm under the Partnership Act. Rule 22 of Income-tax Rules,
1962 provides that an application for registration of partnership firm should
be accompanied with an instrument of partnership specifying the apportionment
of shares of profit and loss of the business amongst the partners of the
firm. This registration is required to be renewed every year under the orders
of the concerned Income-tax Officer.
(ii) ‘Public trust’ and ‘private trust’
In a public trust the beneficiary is the general public or a specified section
of it. In a private trust the beneficiaries are defined and ascertained
individuals. In a public trust the beneficial interest is vested in an uncertain
and fluctuating body of persons. The nature of the trust may be proved
by the evidence of dedication or by user and conduct of parties. Where
a trust is created for the benefit of the members of the settlor's family,
it is a private trust and not a public trust. Every charitable trust is only
a public trust as benefit to the community at large or to a section of the
community is of the essence of a valid charitable trust. But a religious
trust need not necessarily be a public trust as there can be a private religious
trust also.
Question 8
(a) A partnership dissolution deed may be written on a plain paper. Its registration
is not compulsory. No format is prescribed for it. Illustrate through a
'specimen deed of dissolution' of a partnership firm. (10 marks)
(b) ABC Ltd. wishes to draw a note on duties for its newly appointed Company
Secretary with respect to court, client and opponent while representing the
PP–DAP–December 2012 36
company in a case before the Competition Commission of India, New Delhi.
Draw out a draft note of Company Secretary's duties along these lines for
consideration of the Chairman and Managing Director. (6 marks)
Answer 8(a)
A Partnership Deed / Deed of Dissolution of Partnership must be executed and
attested as a bond on Non-Judicial Stamp paper of proper value. But its registration
is not compulsory. Unless the transaction involves transfer of immovable property
worth Rs. 100/- or upwards. In such case the deed must be compulsorily registered.
No law requires attestation of partnership deed. But it is desirable that it should
be attested by at least two partners. Stamp duty on such deeds is payable under
Article 46 of Schedule I of the Indian Stamp Act, 1899.
Deed of Dissolution of Partnership
THIS DEED OF DISSOLUTION OF PARTNERSHIP made the ....... day
of........... 2012 between .........
WHEREAS the partners hereto under a deed of partnership dated ...... made
between them formed themselves into a business firm and carried on business
under the name and style of .......... in pursuance to the covenants, stipulations
and provisions contained in the said deed;
AND WHEREAS it has been mutually decided between the parties that the said
partnership shall be dissolved, and the said trade and business shall be wound
up and the stock-in-trade, assets and credits realized and called in, and the net
proceeds after payment and satisfaction of all debts and liabilities divided between
the partners according to the covenants in this behalf appearing in the deed of
partnership.

NOW THIS DEED WITNESSES that in pursuance of the said agreement it is

hereby declared and agreed by and between the parties thereto as follows, that
is to say:

1. The said partnership between the partners hereto under the deed,
dated………………… hereunto appended shall be determined and stand
dissolved as from the………………… day of………………… 2012. And the
parties hereto singly or jointly shall not carry on the business of the said
firm of………………… under the said name and style for a period
of………………… years hence.
2. The parties hereto shall on the aforesaid date of………………… sign notices
of the dissolution and forthwith advertise in the local Official Gazette the
fact of dissolution as required by Section 45 of the Indian Partnership Act
AND shall also intimate the fact of dissolution to the Registrar of Firms
under the provisions of Section 63 of the said Act.
3. Within………………… days after the dissolution of the partnership a full and
general account and balance sheet shall be taken and made of the property,
assets and liabilities of the partnership; and a full and particular inventory
and valuation of all the machinery, plants, tools, utensils, stock in hand,
 37 PP–DAP– December 2012
office equipment, materials and effects belonging to the firm shall be made
by the parties or such other person as the partners may choose to appoint,
whose decision shall be final and binding upon the partners, and all debts
owing to the firm shall be collected and got in by the parties or such other
persons as the parties may by instrument in his behalf appoint.

4. That as soon as may be, after the property, assets and liabilities have
been got in and disbursed the parties or such other person or persons whom
the parties may have appointed under the foregoing clause shall divide and
apportion the share of the parties, in the proportion of the contribution of
the parties towards the capital. In such division any amounts paid earlier
or due to the parties according to the books of the partnership shall be
taken into account. That the cost of liquidation proceedings shall also be
deemed to be a liability of the partnership and paid from the funds of the
partnership.

5. That in case the winding up shows a loss or the assets of the partnership
are insufficient to meet the liabilities and debts of the partnership then the
partners shall forthwith pay such losses in the proportion of their contribution
to the capital.

6. Each of the parties shall, so soon as the others or any of them, or their
or his representatives, shall have executed and done all the assurances,
acts or things hereby agreed to be done by them respectively and at the
request and cost of such other or others, or their or his representatives
execute to them or him such releases, indemnities, and assurances as may
be reasonable and proper.

IN WITNESS WHEREOF the said AB, CD and EF have hereto signed and
executed this agreement of dissolution and appended it to the said deed of partners,
dated…………………
WITNESSES:
1. Sd/- A.B.
2. Sd/- C.D.
3. Sd/- E.F.
Answer 8(b)
Duties of a Company Secretary
Duty to the Court
(i) A Company Secretary shall, during the presentation of his case and while
otherwise acting before a Court / Tribunal, conduct himself with dignity and
self-respect. He shall not be servile and whenever there is proper ground
for serious complaint against a judicial officer, it shall be his right and duty
to submit his grievance to proper authorities.
(ii) A Company Secretary shall maintain towards the Court a respectful attitude,
PP–DAP–December 2012 38
bearing in mind that the dignity of the judicial office is essential for the
survival of a free community.
(iii) A Company Secretary shall not influence the decision of a Court by any
illegal or improper means. Private communications with the judge relating
to a pending case are forbidden.
(iv) A Company Secretary shall use his best efforts to restrain and prevent
his client from resorting to sharp and unfair practices or from doing anything
in relation to the Court, opposing counsel or parties which the Company
Secretary himself ought not to do. A Company Secretary shall refuse to
represent the client who persists in such improper conduct. He shall not
consider himself a mere mouthpiece of the client, and shall exercise his
own judgment in the use of retrained language in correspondence, avoiding
scurrilous attacks in pleadings, and using intemperate language during
arguments in Court.
(v) A Company Secretary shall not enter appearance, act, plead or practice
in any way before a Court / Tribunal or any other Authority, if the sole
or any member thereof is related to the Company Secretary.
(vi) A Company Secretary shall not appear in or before any Court or Tribunal
or any other Authority for or against an organization or an institution, society
or corporation, if he is a member of the Executive Committee of such
organization or institution or society or corporation.
(vii) A Company Secretary should not act or plead in any matter in which he
is himself pecuniarily interested.
Duty to the Client
(i) A Company Secretary shall not ordinarily withdraw from engagements once
accepted, without sufficient cause and unless reasonable and sufficient
notice is given to the client.
(ii) A Company Secretary shall not accept a brief or appear in a case in which
he has reason to believe that he will be a witness and if being engaged
in a case, it becomes apparent that he is a witness on a material question
of fact, he should not continue to appear if he can retire without jeopardizing
his client’s interest.
(iii) A Company Secretary shall at the commencement of his engagement and
during the continuance thereof, make all such full and frank disclosures
to his client relating to his connection with the parties and any interest
in or about the controversy as are likely to affect his client’s judgment
in either him or continuing the engagement.
(iv) It shall be the duty of a Company Secretary to fearlessly uphold the interest
of his client by all fair and honourable means without regard to any unpleasant
consequences to himself or any other. He shall defend a person accused
of a crime regardless of his personal opinion as to the guilt of the accused,
bearing in mind that his loyalty is to the law which requires that no man
should be convicted without adequate evidence.
 39 PP–DAP– December 2012

(v) A Company Secretary shall not at any time, be a party to fomenting of

litigation. A Company Secretary shall not act on the instructions of any
person other than his client or his authorized agent.
(vi) A Company Secretary shall not do anything whereby he abuses or takes
advantage of the confidence reposed in him by his client.
Duty to Opponent
(i) A Company Secretary shall not in any way communicate or negotiate upon
the subject-matter of controversy with any party represented by an Advocate
except through that Advocate.
(ii) A Company Secretary shall do his best to carry out the legitimate promise/
promises, made to the opposite party.
17 PP–FTFM–December 2012
PP–FTFM–December 2012 18
 19 PP–CRI–December 2012
CORPORATE RESTRUCTURING AND INSOLVENCY
Time allowed : 3 hours Maximum marks : 100
NOTE : All references to sections relate to the Companies Act, 1956 unless stated
otherwise.
PART A
(Answer Question No.1 which is compulsory
and any three of the rest from this part)

Question 1
(a) "Section 394 contains reference to reconstruction of any company or companies
or amalgamation of any two or more companies." Comment on the relevant
provisions for facilitating reconstruction and amalgamation of companies.
(8 marks)
(b) State whether the following statements are true or false citing relevant provisions
of the law :
(i) The scheme of amalgamation is approved by shareholders holding more
than 75% of the shares who vote at the meeting of the members of the
company convened under the orders of the court.
(ii) Application for approval of scheme of compromise or arrangement can be
made by a creditor of the company.
(iii) Proxies cannot be counted for the purpose of quorum at the general meeting
convened in accordance with the directions of the court.
(iv) Copies of the order of the High Court sanctioning the scheme of arrangement
are required to be affixed to all copies of memorandum of association and
articles ofassociation of the transferee company. (2 marks each)
(c) As per the provisions of the Companies Act, 1956 and the Income-tax Act,
1961 there is no difference between de-merger and slump sale; though it results
in separation of a division or unit of an existing company to a potential buyer.
But in common parlance, it means rightward and leftward, i.e., totally different
approach from one to another. The first requires no payment but second requires
down payment. But the ultimate objective is to hive off some business which is
not compatible with the core business competency of the main company.
Discuss the eventuality in conjunction with the provisions of the Income-tax
Act, 1961. (5 marks)
(d) Explain the meaning of ‘strategic planning’ and the steps involved in strategic
planning. (4 marks)
Answer 1(a)
It is only in Section 394 of the Act there is reference to reconstruction of any company
or companies or amalgamation of any two or more companies. As per sub-section (1) of
Section 394, where the application is made to the Tribunal (Court) under Section 391
and it is shown to the Tribunal (Court) that the scheme involves reconstruction of any
19
PP–CRI–December 2012 20
company or companies or amalgamation of any two or more companies and that under
the scheme, the whole or substantially the whole of the properties or liabilities of any
company concerned in the scheme (Transferor Company) to another company (Transferee
company), the Tribunal (Court) may either by order sanctioning the scheme, or by
subsequent order make provision for the following matters also :

— Transfer to the Transferee Company of the whole or any part of the undertaking,
property or liabilities of any transferor company;

— The allotment or appropriation by the Transferee Company of any shares,

debentures to any person under the scheme.

— Continuation of proceedings by or against the Transferee Company of any legal

matters pending by or against any Transferor Company.

— The dissolution, without winding up, of any Transferor Company.

— Provision to be made for any person who does not agree to the scheme.

— Such incidental, consequential and supplemental orders passed by the court as

it may think fit so that the reconstruction or amalgamation could be fully and
effectively carried out.

Answer 1(b)(i)

False

As per Section 391(2), the majority required is the majority in number representing
three-fourths in value of the creditors or members or a class of them, as the case may
be, present and voting in the meeting so convened either in person, or by proxy, where
proxies are allowed under the rules made under Section 643. Thus, only 75% in value is
not sufficient, but majority in number is also required.

Answer 1(b)(ii)

True

As per Section 391(1), application for approval of scheme of compromise or

arrangement can be made by the Company, Creditor/Member or Liquidator in case of the
company being wound up.

Answer 1(b)(iii)

False

In terms of Section 391, the resolution relating to the approval of amalgamation has
to be approved by a majority of members representing three-fourths in value of the
creditors or class of creditors or 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. Accordingly proxies may be allowed at the meeting
convened in accordance with directions of the court.
 21 PP–CRI–December 2012
Answer 1(b)(iv)
True
Copies of the order of High Court sanctioning the scheme of arrangement are
required to be affixed to all copies of Memorandum and Articles of Association of the
transferee company issued, subsequent to filing of certified copy with Registrar of
Companies.
Answer 1(c)
As per Section 2(19AA) of Income Tax Act, 1961 “demerger”, in relation to companies,
means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of
the Companies Act, 1956 by a demerged company of its one or more undertakings to
any resulting company in such a manner as prescribed in this section.
As per Section 2(42C) of Income-tax Act, 1961, “slump sale” means the transfer of
one or more undertakings as a result of the sale for a lump sum consideration without
values being assigned to the individual assets and liabilities in such sales.
Both Demerger/slump sale result in hiving of a division or undertaking, but the following
are the differences.
(i) In slump sale values are not being assigned to individual assets and liabilities
and the sale of undertaking is for a lump sum consideration called slump price.
In demerger, valuation of individual assets and liabilities are mandatory.
(ii) In case of demerger, the shareholders of demerged company has to be issued
the shares of resulting company and in case of slump sale the issue of shares
does not take place.
(iii) Demerger results in reorganization of capital where as slump sale does not
result inreorganization of capital.
(iv) In case of demerger, the resulting company has to continue the business of
transferred undertaking of demerged company, where as in slump sale it is not
so.
Answer 1(d)
Strategic planning is a disciplined effort to produce fundamental decisions and actions
that shape and guide as to what an organisation is, what it does, and why it does, with
a focus on the future at the same time.
It involves the following :
(i) Vision and mission of the company and its revision at regular intervals.
(ii) Assessment of internal and external environment
(iii) Objective and strategy setting.
Question 2
(a) Wide Ltd. prepared a scheme of amalgamation and arrangement with Narrow
Ltd. and Small Ltd. and the same was duly approved by the Hon'ble High Court
concerned.
PP–CRI–December 2012 22
In the approved scheme, the swap ratio was as under :
Narrow Ltd. : Wide Ltd. will issue 1 equity share of `1 each in exchange of 3
equity shares of Narrow Ltd.
Small Ltd. : Wide Ltd. will issue 1 equity share of `1 each in exchange of 2
equity shares of Small Ltd.
The pre-amalgamation share capital were as follows :
Particulars Wide Ltd. Narrow Ltd. Small Ltd.
Face value of equity share (``) 1 1 1

No. of fully paid-up equity shares 10,00,000 5,00,000 4,00,000

Paid-up value ( `) 10,00,000 5,00,000 4,00,000

Reserves and surplus (` ) 5,00,000 5,00,000 5,00,000

Total (`) 15,00,000 10,00,000 9,00,000

The pre-merger investments were as follows —

No. of Shares
In Wide Ltd. :
Equity shares of Narrow Ltd. 1,00,000
Equity shares of Small Ltd. 1,00,000
In Narrow Ltd. :
Equity shares of Wide Ltd. 1,00,000
Equity shares of Small Ltd. 1,00,000
In Small Ltd. :
Equity shares of Wide Ltd. 1,00,000
Equity shares of Narrow Ltd. 1,00,000
As the Company Secretary of Wide Ltd., you are required to advise the Chief
Executive Officer :
(i) The quantum of new shares of Wide Ltd. to be issued to the shareholders of
transferor company (a) Narrow Ltd.; (b) Small Ltd.; and
(ii) What will be the post-issue share capital of Wide Ltd. after cancellation of
cross holding of equity shares of all companies ? (10 marks)
(b) State the different kinds of approvals required to be obtained in the scheme of
amalgamation. (5 marks)
Answer 2(a)
In the given case, transferor companies are : (i) Narrow Limited; (ii) small Limited
and the transferee company is wide Ltd.
 23 PP–CRI–December 2012
Quantum of shares to be issued to the shareholders of :
(a) Narrow Limited
No. of equity shares 500000
(-) Shares held by Wide limited - 100000
(-) Shares held by Small limited - 100000
300000
The Exchange ratio being 1 : 3, Wide Limited will issue 100000 shares to
shareholders of Narrow Limited.
(b) Small Limited
No. of shares 400000
(-) Shares held by Wide limited - 100000
(-) Shares held by Small limited - 100000
200000
The exchange ratio being 1 : 2, wide Ltd., will issue 100000 shares to Shareholders
of Small Limited.
Post issue capital of Wide Ltd. after cancellation of cross holdings :
Pre-issue Capital 1000000
(-) Shares by Small limited - 100000
(-) Shares by Narrow limited - 100000
800000
+ Issue of new shares to the shareholders of Narrow Ltd. + 100000
+ Issue of new shares to the shareholders of Small Ltd. + 100000
Post Issue capital ( ` ) 1000000
Answer 2(b)
The following types of approvals are required to be obtained in the scheme of
amalgamation :
— Approval of Board of Directors
— Approval of Shareholders
— Approval of Creditors/Financial Institutions/Banks
— Approvals of Respective High Court(s)
— Approval of Stock Exchanges
— Approval of Competition Commission of India in certain cases
— Approval of Reserve Bank of India in applicable cases
— Approval of land holders in case of leasehold land.
PP–CRI–December 2012 24
Question 3
(a) (i) In case of pricing of equity shares through 'red-herring prospectus', i.e.,
through book building process, what is the maximum gap between the floor
price and the ceiling in the price band ? Give example. (2 marks)

(ii) If the floor price/price band is not mentioned in the red-herring prospectus—

(a) What is the time limit to inform the same by the issuer for the initial
public offer (IPO) ?

(b) What is the time limit to inform the same by the issuer for the further
public offer (FPO) ? (2 marks)

(b) In the modern economic era, it is a well known fact that neither the government
nor the consumers allow the companies to insulate themselves through cartels
for an infinite period in order to restrict competition. So what options are left to
the companies with surplus capacities to mitigate the competition from its rival
firm(s), as the excess capacity increases competition, erodes profits and reduces
further growth. Write your answer with brief example. (5 marks)

(c) What is meant by partial demerger ? State the factors/features which differentiate
it from complete demerger. (6 marks)

Answer 3(a)(i)

As per regulation 30(4) of SEBI (ICDR) Regulations 2009, the cap on the price band
shall be less than or equal to one hundred and twenty per cent of the floor price.

For example, if the floor price is Rs.100, then the ceiling on the price band is ` 120.

Answer 3(a)(ii)

(a) The issuer shall announce the floor price or price band at least five working days
before the opening of the bid (in case of an initial public offer) and (b) at least one
working day before the opening of the bid (in case of a further public offer), in all the
newspapers in which the pre issue advertisement was released.

Answer 3(b)

With the increasing competition and the economy, heading towards globalization,
the corporate restructuring activities such as mergers, acquisitions, takeovers, demergers,
hive off etc. occurs at a much larger scale than at any time in the past. It also helps
corporates in enabling enterprises to achieve economies of scale, global competitiveness,
right size, and a host of other benefits including reduction of cost of operations and
administration. A merger or amalgamation is capable of offering various financial
synergies and benefits such as eliminating financial constraints, deployment of surplus
cash, enhancing debt capacity and lowering the costs of financing.

Example : Merger of a production giant and marketing giant, Merger of two competing
firms that may result in positive synergies.
 25 PP–CRI–December 2012
Answer 3(c)
In the case of partial demerger, the existing company also continues to maintain its
separate legal identity and the new company, a separate legal identity, carries on the
separated or spun off business and undertaking of the existing company.
In a complete demerger, an existing company transfers its various divisions,
undertakings etc. to one or more new companies formed for this purpose. The existing
company is dissolved by passing a special resolution for members’ voluntary winding
up and also authorizing the liquidator to transfer its undertakings, divisions etc. to one or
more companies as per the scheme of demerger approved by the shareholders of the
company by a special resolution. The shareholders of the dissolved company are issued
and allotted shares in the new company or companies, as the case may be, on the basis
of the pre-determined shares exchange ratio, as per the scheme of demerger.
In the case of complete demerger, the existing company disappears from the corporate
scene. It is voluntarily wound up and its entire business, undertakings etc. are transferred
to one or more new companies.
Question 4
(a) "Accounting Standard-14 is equally applicable whether it is a case of
amalgamation or demerger.'' Discuss the statement citing case law. (5 marks)
(b) It is well settled principle of the various High Courts that if the shareholders
approve a scheme of arrangement (whether it is amalgamation, demerger/hive
off, etc.) with required majority and is not against public policy or illegal, such
scheme of arrangement shall not be disallowed.
However, in rare cases High Courts reject a scheme on the ground of res judicata.
What are the circumstances where the High Courts are applying this principle ?
(5 marks)
(c) Draft a Board resolution for appointment of merchant banker by an acquirer
company under the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011. (5 marks)
Answer 4(a)
In Case of High Court of Gujarat, Gallops Realty (P) Ltd., In re v. K.A. PUJ, J.(2010),
under Section 391, read with sections 394 and 100, of the Companies Act, 1956 Petitioner-
companies, i.e., demerged company and resulting company, sought for sanction of
composite scheme of arrangement in nature of purchase of shares and demerger of
hotel business of demerged company to resulting company and consequent
reconstruction of share capital of demerged company under section 391, read with
sections 394, 78 and 100 consisting of reduction of paid-up share capital as well as
utilization of share premium account. Meetings of equity shareholders of both companies
and unsecured creditors of demerged company had been dispensed with in view of their
written consent.
Regional Director stated that as per scheme, capital profit on demerger would be
transferred to general reserve in books of resulting company which was not in consonance
with generally accepted accounting principles as also Accounting Standard - 14 which
provide that any profit arising out of a capital transaction, like merger or demerger, ought
PP–CRI–December 2012 26
to be treated as capital profit and, hence, would be transferred to capital reserve and not
to general reserve.
It was held that observation of Regional Director was not in consonance with
accounting principles in general and Accounting Standard-14 in particular, as Accounting
Standard-14 is applicable only in case of amalgamation and not in case of demerger, as
envisaged in instant scheme.
Answer 4(b)
Where a proposed scheme of compromise or arrangement has already been rejected
by the court and the same persons propose another scheme which is substantially the
same as the earlier one, the general principle of res judicata applies to bar the second
scheme.
Answer 4(c)
“RESOLVED THAT M/s ……………. being Category-I Merchant Banker be and is
hereby appointed as Merchant Banker, on the terms and conditions as contained in the
draft letter of appointment placed before the meeting duly initialed by the Chairman for
the purpose of identification, for making the public announcement of the takeover offer
in the newspapers, forward the same to the Securities and Exchange Board of India,
Stock Exchange(s) and to the target company and to draft the Letter of Offer to be sent
to the shareholders of ………, target company and other incidental matters relating
thereto, in accordance with the SEBI (Substantial Acquisition of Shares and Takeover)
Regulations, 2011”.
Question 5
(a) Draft a notice convening a meeting of creditors in the case of scheme of
amalgamation. (5 marks)
(b) What is the relevance of price-earnings ratio in a company ? (5 marks)
(c) What are the statutory forms required to be filed under the Companies (Court)
Rules, 1959 in respect of scheme of demerger ? Mention the purpose of these
forms. (5 marks)
Answer 5(a)
IN THE HIGH COURT OF JUDICATURE AT MUMBAI
ORIGINAL JURISDICTION
IN THE MATTER OF COMPANIES ACT, 1956
AND IN THE MATTER OF :
COMPANY APPLICATION No. …. of …….
[Under Sections 391/394 of the Companies Act]
IN THE MATTER OF SCHEME OF AMALGAMATION
BETWEEN
……………………… LIMITED
AND
…………………………… LIMITED
having their registered offices at …………………
........................................... APPLICANTS
 27 PP–CRI–December 2012
NOTICE CONVENING MEETING
To,
CREDITORS OF
…………….. LIMITED
Take notice that by an order made on …………….., 2012, the Hon’ble Court has
directed that a meeting of the CREDITORS of ……………… Ltd. be held at
………………..on ……………… at …………… P.M. for the purpose of considering, and
if thought fit, approving, with or without modification, the proposed Scheme of
AMALGAMATION AS named above.
Take further notice that in pursuance of the said order, a meeting of the Creditors of
the Company will be held at …………………… on ………………… at …………….., when
you are requested to attend.
Take further notice that you may attend and vote at the said meeting in person or by
proxy, provided that a proxy in the prescribed form, duly signed by you, is deposited at
the Registered Office of the Company at …………………………..), not later than 48
hours before the meeting.
This Court has appointed Shri …………………., to be the Chairman and
Shri………………………, to be the Alternative Chairman of the said meeting.
A copy each of the Scheme of AMALAMATION and a form of proxy is enclosed.
Shri……..…….......…….
(Chairman)
Dated this ……………………...
Answer 5(b)
Price earning ratio is the ratio between market price and earnings per share. It is an
Indicator to measure company’s market performance. The higher price earning ratio,
the more the market is willing to pay.
In takeovers, price earning ratios of both the offeror and offeree companies be
compared to judge relative growth prospects. Company with lower PER show a record of
low growth in earning per share which depresses market price of shares in comparison
to high growth potential company. Future growth rate of combined company should also
be calculated.
Answer 5(c)
Rules and Forms in respect of Scheme of Demerger
The procedure for convening, holding and conducting class meetings for affecting
demerger, is laid down in rules 67 to 87 of the Companies (Court) Rules, 1959. The
Rules also set out the following forms for various purposes:
Form No. 33 Summons for directions to convene a class meeting under
Section 391— Rule 67.
PP–CRI–December 2012 28
Form No. 34 Affidavit in support of summons — Rule 67.
Form No. 35 Order on summons for directions — Rule 69.
Form No. 36 Notice convening meeting — Rule 73.
Form No. 37 Form of proxy — Rule 73.
Form No. 38 Advertisement of Notice convening meeting of creditors/shareholders
etc. — Rule 74.
Form No. 39 Report by Chairman of the meeting — Rule 78.
Form No. 40 Petition to sanction the scheme of compromise or arrangement —
Rule 79.
Form No. 41 Order on petition Rule 81.
PART B
(Answer ANY TWO questions from this part.)
Question 6
(a) Section 35 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 provides that the provisions of the
Act shall have effect, notwithstanding anything inconsistent therewith contained
in any other law for the time being in force or any instrument having effect by
virtue of any such law. Further, in accordance with section 37, the provisions of
the Act or the rules made thereunder shall be in addition to and not in derogation
of any other law for the time being in force.
Write a note on the combined effect of these two provisions. (5 marks)
(b) Write a comprehensive note on the constitutional validity of the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 referring to decided
case law. (5 marks)
(c) What is meant by an 'unregistered company' ? What are the circumstances
under which an unregistered company is deemed to be unable to pay its debts?
(5 marks)
Answer 6(a)
The combined affect of Sections 35 and 37 is that in cases of any conflict, then the
SRFAESI Act, 2002 shall have the over riding effect over such Act or Acts. Therefore
the provisions of the SRFAESI Act, 2002 have the binding power and cannot be put on
hold because of conflict with any other legislation. Moreover as per the provisions of
Section 34 of SRFAESI Act, 2002, no civil court shall have any jurisdiction to entertain
any suit or proceeding in respect of any matter which a Debts Recovery Tribunal or the
Appellate Tribunal is empowered by or under this Act (i.e. SRFAESI Act, 2002) to
determine and no injunction shall be granted by any court or any other authority in
respect of any action taken or to be taken in pursuance of any power conferred by or
under this Act or under the Recovery of Debts Due to Banks and Financial Institutions
Act, 1993.
Answer 6(b)
In case of Union of India v. Delhi High Court Bar Association, (2002) 4 SCC 275, the
 29 PP–CRI–December 2012
petitioners challenged the constitutional validity of the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 on the ground that the Act is unreasonable and is
violative of Art. 14 of the Constitution and that it is beyond the legislative competence of
the Parliament to enact such a law. However, the Supreme Court held that there is no
such right that the dispute should be adjudicated only by a civil court, and the replacement
of the jurisdiction of civil courts by independent and specialized tribunals is completely
legal and constitutional
Answer 6(c)
Section 582 of the Companies Act specifies “unregistered companies”, which may
be wound up by the order of the Court under the provisions of Part X of the Act. By
virtue of that section, an “unregistered company” does not include the following :
(a) a railway company incorporated by any Act of Parliament or other Indian Law or
any Act of Parliament of the United Kingdom;
(b) a company registered under the Companies Act, 1956; or
(c) a company registered under any previous companies law and not being a
company the registered office whereof was in Burma, Aden or Pakistan
immediately before the separation of that country from India.
Except as aforesaid, any partnership, association or company consisting of more
than seven members at the time when the petition for winding up the partnership,
association or company, as the case may be, is presented before the Court, will be
deemed to be an unregistered company and may be wound up by the order of the Court.
It should be noted that if the number of members is not more than seven, the Court has
no jurisdiction to wind up such a company.
When unregistered company unable to pay its debts
An unregistered company shall be deemed to be unable to pay its debts:
(i) if a creditor, to whom the company owes more than ` 500 has served on the
company a demand under his hand requiring the company to pay the sum so
due, and the company has for three weeks after the service of demand,
neglected to pay the sum or to secure or to compound for it to the satisfaction
of the creditor; or
(ii) if any other suit or other legal proceeding has been instituted against any member
for any debt or demand due, or claimed to be due, from the company, or from
him in his character as member, and notice in writing of the institution of the suit
or other legal proceeding having been served on the company, the company has
not, within ten days after service of the notice, paid, secured or compounded for
the debt or demand or procured the suit or other legal proceeding to be stayed,
or indemnified the defendant to his satisfaction against the suit or other legal
proceeding; or
(iii) if execution or other process issued on a decree of Court is returned unsatisfied;
or
(iv) if it is otherwise proved that the company is unable to pay its debts (Section
583).
PP–CRI–December 2012 30
Question 7
(a) "Non-performing assets constitute a real economic cost to the nation because
they reflect the application of scarce capital and credit funds to unproductive
uses." Comment and discuss how securitisation has gained importance in India.
(5 marks)
(b) Define the following in brief in relation to the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 :
(i) Originator
(ii) Security receipt
(iii) Qualified institutional buyer. (2 marks each)
(c) You are the Company Secretary of an asset reconstruction company and allowed
to operate securitisation activities throughout India. To expand the business
horizon of the company, the present management wants to induct cash rich and
experienced businessman in the management by transfer of shares from the
promoters which entail a substantial change in the management of your company.
The new person also wants to shift the registered office from Delhi to Mumbai.
The present managing director has sought your views for formalities to be
completed in this regard. (4 marks)
Answer 7(a)
When a borrower, who is under a liability to pay to secured creditor, makes any
default in repayment of secured debt or any instalment thereof, the account of borrower
is classified as non-performing asset (NPA). NPAs constitute a real economic cost to
the nation because they reflect the application of scarce capital and credit funds to
unproductive uses. The money locked up in NPAs are not available for productive use
and to the extent that banks seek to make provisions for NPAs or write them off, it is a
charge on their profits. High level of NPAs impact adversely on the financial strength of
banks who in the present era of globalization, are required to conform to stringent
International Standards.
The public at large is also adversely affected because bank's main source of funds
are deposits placed by public continued growth in NPA portfolio threatens the repayment
capacity of the banks and erode the confidence reposed by them in the banks.
The banks had to take recourse to the long legal route against the defaulting borrowers
beginning from filling of claims in the courts. A lot of time was usually spent in getting
decrees and execution thereof before the banks could make some recoveries. In the
meantime the promoters could seek the protection of BIFR and could also dilute the
securities available to banks. The Debt Recovery Tribunals (DRTs) set up by the Govt.
also did not prove to be of much help as these get gradually overburdened by the huge
volume of cases referred to them. All along, the banks were feeling greatly handicapped
in the absence of any powers for seizure of assets charged to them.
All these issues gave the passage for evolution of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(SRFAESI Act, 2002). SRFAESI Act, 2002, is a unique piece of legislation which has
far reaching consequences.
 31 PP–CRI–December 2012
Answer 7(b)(i)
“Originator" means the owner of a financial asset which is acquired by a securitisation
company or reconstruction company for the purpose of securitisation or asset
reconstruction.
Answer 7(b)(ii)
"Security receipt" means a receipt or other security, issued by a securitisation
company or reconstruction company to any qualified institutional buyer pursuant to a
scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided
right, title or interest in the financial asset involved in securitization.
Answer 7(b)(iii)
“Qualified institutional buyer” means a financial institution, insurance company, bank,
State Financial Corpora¬tion, State Industrial Development Corporation, trustee or
securitisation company or reconstruction company which has been granted a certificate
of registration under sub-section (4) of section 3 or any asset management company
making investment on behalf of mutual fund or a foreign institutional investor registered
under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations
made thereunder, or any other body corporate as may be specified by the Board;
Answer 7(c)
Every securitisation company or reconstruction company is required to obtain prior
approval of the Reserve Bank for any substantial change in its management or change
of location of its registered office or change in its name and the decision of Reserve
Bank of India shall be final.
Question 8
(a) Can the court order winding-up of the company when a just and equitable ground
does not exist at the time of hearing though it might have existed at the time of
presenting the petition ? Explain. (7 marks)
(b) Write note on any one of the following :
(i) Corporate insolvency
(ii) Cross examination at the Debt Recovery Tribunal (DRT). (4 marks)
(c) Though UNCITRAL Model Law is not a substantive law, it recommends protection
to creditors and other interested persons. Briefly describe the protections provided
under the UNCITRAL Model Law. (4 marks)
Answer 8(a)
If the Court is of opinion at the time of hearing, that it is just and equitable that the
company should be wound up, it may be ordered to be wound up. In this case, the Court
has wide powers and has a complete discretion to decide when it is just and equitable
that the company should be wound up.
The word “just and equitable” are not confined to matters ejusdem generis (of the
same kind, nor to proved cases of mala fides. They are general words which must not
PP–CRI–December 2012 32
be reduced to the sum of particular instances, nor confined to circumstances affecting
the petitioner in his capacity as shareholder. They enable the Court to subject the exercise
of legal rights to equitable. This legal right exists at the time of hearing also.
The following are some of the cases in which winding up was not ordered under just
and equitable clause:
(i) Where the company was under a loss but there was a chance of its making
profit and the majority of shareholders were against winding up.
(ii) Where the directors in the exercise of their powers to do so, refused to register
the executors of the deceased shareholder even when this caused hardship to
the shareholders.
(iii) Where there is honest difference between the petitioner, a director and the other
directors and he has been outvoted.
(iv) Where the business of the company was temporarily suspended owing to trade
depression and was intended to be continued when conditions improved.
(v) Where there was a deadlock in management of a public company.
(vi) If the ‘just and equitable’ ground does not exist at the time of hearing the petition
though it might have existed at the time of presenting the petition.
Answer 8(b)(i)
Corporate insolvency is contained in the Companies Act, 1956 (1956 Act) under
which winding up of companies is carried out and Sick Industrial Companies (Special
Provisions) Act, 1985 (SICA) which deals with revival and rehabilitation of sick companies.
The Companies Act, 1956 provides for the law relating to corporate insolvency and
inter alia contains the provisions for winding up of companies.
A company can be wound up in one of the following ways :
— Compulsory winding up by order of court
— Voluntary winding up, which may be by members/creditors.
— Winding up subject to supervision of the court (Omitted by Companies
(Amendment) Act, 2002 and yet to be notified.
In addition, the Registrars of Companies are empowered under section 560 to strike
off the name of a defunct company from the register. An unregistered company or a
foreign company can also be wound up under the provisions of the Companies Act.
The process for rehabilitation, regulated by the Sick Industrial Companies (Special
Provisions) Act, 1985 is done through the institutional structure of Board of Industrial
and Financial Restructuring (BIFR).
Answer 8(b)(ii)
In March 2002, Supreme Court ruled that it was not necessary for DRTs to always
cross-examine a witness. Evidence could be taken by affidavits also on the pattern of
High Courts and Supreme Court where the cases can be decided merely on the basis of
 33 PP–CRI–December 2012
documents and affidavits filed before them, ordinarily. The court observed that it is
common knowledge that hardly any transaction with the bank would be oral and without
proper documentation. In such an event, the need for oral examination of a witness
would rarely arise. The Tribunal may at any time for sufficient reason, order that any
particular fact be proved by affidavit, on such conditions, as the tribunal thinks reasonable.
The Tribunal may at any time for sufficient reason, order that any particular fact be
proved by affidavit, on such conditions, as the tribunal thinks reasonable. The Tribunal
may at any time, for sufficient reason, order that the affidavit of any witness may be
read at the hearing, on such conditions, as the tribunal thinks reasonable.
Answer 8(c)
Protection of creditors and other interested persons
Foreign creditors have the same rights regarding the commencement of and
participation in a proceeding under the laws of the enacting state relating to insolvency
as creditors in the state.
The UNCITRAL (Model Law) contains following provisions to protect the interests of
the creditors (in particular local creditors), the debtor and other affected persons:
— availability of temporary relief upon application for recognition of a foreign
proceeding or upon recognition is subject to the discretion of the court; it is
expressly stated that in granting such relief the court must be satisfied that the
interests of the creditors and other interested persons,including the debtor, are
adequately protected (Article 22, paragraph 1);
— the court may subject the relief it grants to conditions it considers appropriate;
and
— the court may modify or terminate the relief granted, if so requested by a person
affected thereby (Article 22, paragraphs 2 and 3).
In addition to those specific provisions, the Model Law in a general way provides
that the court may refuse to take an action governed by the Model Law if the action
would be manifestly contrary to the public policy of the enacting State (Article 6).
GUIDELINE ANSWERS
PROFESSIONAL PROGRAMME

DECEMBER 2012

MODULE III
GUIDELINE ANSWERS
PROFESSIONAL PROGRAMME

DECEMBER 2012

MODULE III

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
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These answers have been written by competent persons
and the Institute hopes that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.

The Guideline Answers contain the information based on the

Laws/Rules applicable at the time of preparation. However,
students are expected to be well versed with the amendments
in the Laws/Rules made upto six months prior to the date of
examination.

C O N T E N T S
Page
MODULE III

1. Strategic Management, Alliances and International Trade 1

2. Advanced Tax Laws and Practice 17

 (i)

NOTE : Guideline Answers of the last Three Sessions need to be updated in the light of
changes and references given below :

PROFESSIONAL PROGRAMME
UPDATING SLIP

STRATEGIC MANAGEMENT, ALLIANCES

AND INTERNATIONAL TRADE
MODULE – III – PAPER 1

Examination Question No. Updating required in the answer

Session

Dec. 2010 to June 2012 Foreign Direct Investment Policy issued

by DIPP effective from April, 2012.
 (ii)

NOTE : Guideline Answers of the last Six Sessions need to be updated in the light of
changes & references given below :

ADVANCED TAX LAWS AND PRACTICE

MODULE – III – PAPER 2

Examination Question No. Updating required in the answer

Session

December 2009 & All questions The Income Tax, Central Excise and
June 2012 Customs Laws are subject to changes by
the Annual Finance Acts. In order to update
all the answers, the students are advised
to refer to the latest law keeping in mind
the following amendments/changes, for
June 2013 examination.
(i) All changes made by the Finance
Act, 2012 relevant to Assessment
Year 2013-14 or before for Direct Taxes
and all changes made by Finance Act,
2012 for Indirect Taxes.
(ii) All the circulars, clarifications/
notifications issued by the CBDT/
CBEC/Central Government which
became effective on or before six
months prior to the date of the
respective examination.
(iii) The levy of Gift Tax has been
suspended w.e.f. 1st October, 1998 by
insertion of clause (3) to Section 3 of
Gift Tax Act, 1958 by Finance (No.2)
Act, 1998. Therefore, Gift Tax Act has
been excluded from the scope of
examination unless otherwise
informed.
The questions based on case laws, in
conflict with the latest law be treated as of
academic interest only.
 1 PP–SMAIT–December 2012
PROFESSIONAL PROGRAMME EXAMINATION
DECEMBER 2012

STRATEGIC MANAGEMENT, ALLIANCES AND

INTERNATIONAL TRADE
Time allowed : 3 hours Maximum marks : 100
PART A
(Answer ANY TWO questions from this part.)
Question 1
(a) State, with reasons in brief, whether the following statements are true or false:
(i) Strategies are always the outcome of rational planning.
(ii) 'Corporate vision' is the same as 'corporate mission'.
(iii) Human capital includes predominantly explicit knowledge while knowledge
capital includes implicit knowledge.
(iv) 'Stars' are the products which have a high growth market standing and a
high industry growth potential.
(v) McKinsey framework shows that there is a multiplicity of factors which
influence an organisation's ability to change. (2 marks each)
(b) Define the following terms :
(i) Corporate level action plans
(ii) Knowledge management
(iii) Impact analysis
(iv) Focus strategies
(v) Environmental scanning analysis. (2 marks each)
Answer 1(a)
(i) False : According to Henry Mintzberg, strategies are not always the outcome of
rational planning rather they emerge from what an organization does without any
formal plan.
(ii) False : Corporate vision is not the same as corporate mission as a vision
statement answers the question “what do we want to become ?” and a mission
statement answers, “what is our business ?”
(iii) False: Human capital includes individual skills and knowledge obtained through
education, training, experience and learning. Human capital includes
predominantly implicit knowledge while knowledge capital includes explicit
knowledge.
(iv) True : Products or business units in quadrant III of the BCG model, have both
high market standing and high industry growth potential and are labeled as
stars.

1
PP–SMAIT–December 2012 2
(v) True : The 7-S McKinsey framework shows that there is a multiplicity of factors
which influence an organization’s ability to change and understand as to how
the 7-S model mechanism works.
Answer 1(b)(i)
Corporate level action plans
It is one of the substances of corporate-level goals and action plans. It discusses,
how to get from the present portfolio to that targeted in terms of—
(a) Business unit strategies to be retained.
(b) Additions of business units expressed as either growth strategy parameters or
merger and acquisition strategy.
(c) Business units to be divested.
Answer 1(b)(ii)
Knowledge management
Knowledge management is a process which helps the enterprises to identify, select,
arrange, extend and transfer important information and specialised knowledge.
Answer 1(b)(iii)
Impact analysis
Impact analysis is a brainstorming technique which helps the users to think through
the full impacts of a proposed change. This analysis identifies the existing requirements
in the baseline and other pending requirement changes where conflict with the proposed
change continuously happens.
Answer 1(b)(iv)
Focus strategies
Focus strategies are those which are designed to help an organization target a specific
niche such as a specific buyer group, a narrow segment of given product line, a geographical
or regional market or targeted market or a niche of consumers with distinctive special taste
and preferences within industry to develop competitive advantage.
Answer 1(b)(v)
Environmental scanning analysis
Environmental scanning analysis is concerned with identification and analysis of
environmental influences individually and collectively to determine their potential. It is a
holistic exercise which includes a view of environment i.e., 360 degree coverage.
Question 2
(a) "Strategic decision making is the core of management." In the light of this
statement explain in brief, various types of decision models that focus on factors
peculiar to the individual decision maker. (8 marks)
 3 PP–SMAIT–December 2012
(b) Distinguish between the following :
(i) 'Market value added (MVA)' and 'economic value added (EVA)'.
(ii) 'Data processing' and 'management information system (MIS)'.
(iii) 'Values' and 'ethics'. (4 marks each)
Answer 2(a)
Strategic decision making is the core of strategic management. In the light of this
statement, various types of decision models that focus on factors peculiar to the individual
decision maker are as given hereunder:
(a) Rational Decision Model Approach : Under this model, the decision maker is a
unique actor whose behaviour is rational and intelligent. He is fully aware of all
available feasible alternatives which maximize advantages. So, given the fixed
scale of preferences, after considering all available alternatives in all respects,
the decision maker chose the alternative that brings the maximum gain. A decision
is considered rational when it effectively and efficiently assures the achievement
of aims for which the means are selected.
(b) Intuitive Approach : Under this approach there are no explicit set of steps to
follow. The managers make decisions based on common sense and experience
about which strategy choice is the right one. Intuitive decisions generally apply
within the short-term future and tend to entail little distant forecasting and
planning.
(c) Adaptive Approach : The essence of this approach is on taking strategic decisions
on the basis of how a change is perceived at a given point of time. With the
changing circumstances, the decisions are also reviewed.
This approach results in adapting or changing one's strategy depending upon the
way existing circumstances are perceived. As one proceeds through the adaptive process,
certain rankings, payoffs, and probabilities can result in removing strategies from further
consideration, modifying remaining strategies, or creating new strategies.
Answer 2(b)(i)
Difference between 'Market value added and Economic value added'
Market Value Added (MVA) measures the share market; estimate of the net present
value of firm’s past and expected capital investment projects. The formula for MVA is:
MVA = V – K
(Where, V stands for the market value of the firm, including the value of the firm's
equity and debt and K is the capital invested in the firm).
Economic Value Added is a popular method of measuring corporate and divisional
performance. Thus, Economic Value Added measures the difference between the pre-
strategy and post-strategy value of the business. The formula for EVA is:
EVA = Net Operating Profit After Tax – Cost Charges for Capital Employed

Cost charges for the capital employed is the Weighted Average Cost of Capital
(WACC) which is what a company is expected to pay to finance its assets.
PP–SMAIT–December 2012 4
Answer 2(b)(ii)

Difference between 'Data processing and Management Information System (MIS)'

A data processing system processes transactions and produces reports. It represents
the automation of fundamental, routine processing to support operations.
A management information system is more comprehensive; it encompasses
processing in support of a wider range of organizational functions and management
processes. However, every MIS will also include transaction processing as one of its
functions.
One important aspect of the difference between MIS and routine data processing is
the capability to provide analysis, planning, and decision making support. An MIS
orientation means users have access to decision models and methods for querying the
database on an ad hoc basis; the database is also, of course, an essential part of
routing transaction processing and reporting. Furthermore, a MIS orientation means
information resources are utilized so as to improve decision-making and achieve improved
organizational effectiveness.
Answer 2(b)(iii)
Difference between 'Values and Ethics'
Values are basic convictions and a framework of philosophy of an individual on
the basis of which he judges what is good or bad. Values may be either terminal or
instrumental. The values are generally enduring in nature; an individual adapts new
values and refines the old ones in the light of new knowledge and experiences.
Ethics are concerned with moral principles or set of values about what conduct
ought to be. It specifies what is good or bad; right or wrong from social point of view.
Business ethics generates from value forming institutions; organizational values and
goals; and professional code of conduct.
Question 3
(a) Write a note on 'strategic audit'. (4 marks)
(b) Discuss enterprise resource planning (ERP) systems. (4 marks)
(c) Differentiate between 'internal check' and 'internal audit'. (4 marks)
(d) Explain the strategies for risk mitigation. (8 marks)
Answer 3(a)
Strategic Audit
Strategic audit refers to a checklist of questions, by area or issue which enables a
systematic analysis of various corporate functions and activities to be made. This is a
type of management audit and is useful as a diagnostic device to pin-point corporate wide
problem areas and to highlight organizational strengths and weaknesses.
The following are the common area in which a common strategic audit can be
undertaken:
(i) Evaluation of current performance
 5 PP–SMAIT–December 2012
(ii) Review of corporate governance
(iii) Scan and assess the external and internal environment
(iv) Analysis of strategic factors (SWOT)
(v) Strategic alternatives
(vi) Implementation of strategies
(vii) Evaluation and control

Answer 3(b)

Enterprise Resource Planning (ERP) systems

Enterprise Resource Planning (ERP) system is actually a process or approach which

attempts to consolidate all of a company’s departments and functions into a single
computer system that services each department’s specific needs. It is, in a sense, a
convergence of people, hardware and software into an efficient production, service and
delivery system which generates profit for the company.

The basic philosophy of ERP system is that business process are to be integrated
at all levels, treating all the resources of the enterprise as common resources primarily
meant to cater to the changing needs of customers. Recognizing that customer needs
keep changing, ERP system offers adaptability to the changing needs at an improved
speed of response.

Answer 3(c)

Difference between Internal check and internal audit

Internal control is a whole system of controls, of which internal check and internal
audit are two important constituents. However they differ from each other in the following
respects:

S.No. Internal Check Internal Audit

(i) It is an arrangement of duties It is an independent review of operations

allocated in such a way that the and records.
work of one person is automati-
cally checked by another.

(ii) The objective of internal check is The objective of internal audit is to

to reduce the errors and frauds. discover the errors and frauds, if any.

(iii) It represents a process under which The internal auditor has to see as to how
the work goes on uninterruptedly far the work is correct and done according
and checking too is more or less to the specified rules.
automatic.
PP–SMAIT–December 2012 6
Answer 3(d)
Strategies for Risk mitigation
Once risks have been identified and assessed, the strategies to manage the risk fall
into one or more of the following categories:
(i) Transfer Risk : The risk may be in the form of loss of reputation or sub quality
performance and this risk is taken care of through transfer.
(ii) Tolerate Risk : It is retention of the risk. It is accepting the loss when it occurs.
True self insurance falls in this category. Risk retention is a viable strategy for
small risks where the cost of insuring against the risk would be greater over
time than the total losses sustained.
(iii) Reduce Risk : By far the greater number of risks will belong to this category.
Modern software development methodologies reduce risk by developing and
delivering software incrementally.
(iv) Avoid Risk : This method results in complete elimination of exposure to loss
due to a specific risk. It can be established by either avoiding to undertake the
risky project or discontinuance of an activity to avoid risk.
(v) Combine Risk : When the business faces two or three risks the overall risk is
reduced by combination. This strategy is suitable mainly in the areas of financial
risk.
(vi) Sharing Risk : Insurance is a method of sharing risk for a consideration. For
example by paying insurance premium the company shares the risk with
companies and the insurance companies themselves share their risk by doing
re-insurance.
(vii) Hedging Risk : Exposure of funds to fluctuations in foreign exchange rates,
prices etc., bring about financial risks resulting in losses or gain. The downside
risk is often taken care.
PART B
(Answer ANY ONE question from this part)
Question 4
(a) Define the term 'strategic alliance'. Mention different forms of strategic alliance.
What are the key success factors to be kept in mind while managing a strategic
alliance ? (10 marks)
(b) What are the problems faced by the recipient companies in a foreign technology
transfer agreement ? (4 marks)
(c) State the important clauses which should be incorporated in the foreign
collaboration agreement ? (6 marks)
Answer 4(a)
Any arrangement or agreement under which two or more firms co-operate in order to
achieve certain commercial objectives is referred to as strategic alliance.
 7 PP–SMAIT–December 2012
A true strategic alliance is a written arrangement between two companies that
complement each other in a particular identified area. It is not a partnership, and neither
company has legal power to control or obligate the other. Instead, it is a commitment by
the two companies to provide capabilities or cross servicing in certain identified areas.
Different form of strategic alliance are as under:
— Management contract.
— Franchising.
— Supply or purchase agreement.
— Marketing or distribution agreement.
— Joint Venture.
— Agreement to provide technical services.
— Licensing of know-how, technology, design or patent.
Certain key success factors to be kept in mind while managing a strategic alliance
are as under:
— Mutual Trust : Mutual trust at senior management level carry ventures through
turbulent times.
— An ability to compromise : When there are two strong companies, the ability to
compromise is not easy to achieve. If you expect to receive some valuable
technology, production or marketing know how from a partner, you must be
willing to give something.
— Favourable business condition : Launching an alliance when favourable business
conditions exist makes a venture life considerably easier for its partners.
— Alliance Autonomy : The autonomy mandates a high degree of responsibility
and good judgement by the ventures management.
— Dynamic management structure.
— Encouragement of calculated initiatives.
— Systematic task setting.
— Equal distribution of authority.
— Streamlined communication channels.
— Development of multi-manager roles.
Answer 4(b)
The problems faced by recipient companies in a foreign technology transfer
agreements are as under:
— Identification of the required level of technology. For this purpose, the recipient
may have to depend on the information, product bulletin supplied by the technology
supplier company.
— No technology supplier will transfer the technology being used by him. Rather,
PP–SMAIT–December 2012 8
he may prefer to provide the second level of technology which has already been
exploited by him.
— After identification, defining technology transfer in the agreement poses certain
practical difficulties. Technology cannot be transferred in one lot through transfer
of documents. This may have to be done through transfer of designs and drawings,
supply of additions and improvements made by the technology supplier, providing
the services of its experts and for training of Indian staff at the works of the
technology supplier etc.
— The most difficult task in an imported technology is its indegenisation. While
the technology supplier desires the recipient company to achieve the same
level of quality to be able to compete in the National and Inter-national markets,
the achievement of this goal bristles with practical difficulties.
— The nature of technology transferred for the purposes of manufacture and sale
poses another problem.
— Technological support of an umbrella type is the emerging scenario in these
days of inter-nationalisation of business and this provides technology transfer
on a continuous basis.
— Long term business relationship can be built up provided that the technology
supplier has a stake in the technology recipient company.
Answer 4(c)
Important clauses be incorporated in the foreign collaboration agreement are as
under:
— Capability of the collaborator and the requirements of the party are clearly
indicated.
— Clear definitions of technical terms are given.
— Specify if the product shall be manufactured/sold on exclusive or non-exclusive
basis.
— Terms and conditions regarding nature of technical know-how, disclosure of
drawings, specifications and other documents, furnishing of technical information
in respect of processes with flow charts etc., plant outlay list of equipment,
machinery and tool with specification have to be provided.
— Provisions for making available the engineers and/or skilled workers of the
collaborator on payment of expenses relating to their stay per diem etc. are
given.
— Details regarding specification and quality of the product to be manufactured
are given.
— Quality control and trademarks to be used are also specified.
— Responsibility of the collaborator in establishing or maintaining assembly plants
should be clearly determined and provided for.
— If sub-contracting of the work is involved, clarify if there would be any restrictions.
— The rate of royalty, mode of calculation and payment etc. Also, make provision
as to who will bear the taxes/cess on such payments.
 9 PP–SMAIT–December 2012
— Use of information and industrial property rights should also be provided for in
the agreement.
— A clause on force majeure should be included.
— A clause that the collaborating company has to train the personnel of Indian
company within a specified period should be incorporated The clause should
also specify the terms and conditions of such assistance, place of training,
period of training and fees payable.
— A comprehensive clause on arbitration containing a clear provision as to the
kind of arbitrator and place of arbitration should be included.
— There should be provision in the agreement for payment of interest on delayed
payments.
Question 5
Write notes on the following :
(i) Cross-cultural alliances
(ii) Foreign direct investment (FDI) in India
(iii) Modes of joint venture
(iv) Methods of funding in an overseas joint venture. (5 marks each)
Answer 5(i)
Cross Cultural Alliances
In a global economy with shifting labour markets, worker migrates to wherever quality,
cost and efficiency can be managed so as to derive a better return on capital and time
invested. When an organization decides to enter the international market place, there
are certain strategic management capabilities that must be modified and introduced into
the corporate culture for the venture to be successful. The most important of these are
flexible organizational culture, political risk awareness, decentralized strategic planning,
multifaceted management structures and share authority/responsibility. Cross cultural
joint ventures can thus reap enormous benefits, for companies.
The important difference in developing a plan for a cross-cultural alliance is that the
‘key skill’ of the managers involved in building such alliances must be the ability to work
in ambiguous, unfamiliar, cross-functional and trans-cultural relationships. Understanding
the issue of cultural differences in the way information is communicated and applying
these understandings is critical to the success of such alliances. As most alliances are
cross organizational and cross-cultural, so, it is a challenge as to how to create and deal
with such alliances.
Answer 5(ii)
Foreign Direct Investment (FDI) in India
Foreign Direct Investment (FDI)’ means investment by non-resident entity/person
resident outside India in the capital of the Indian company subject to the compliance of
Foreign Exchange Management Act, 1999, FEM (Transfer or Issue of Security by a
Person Resident outside India) Regulations, 2000 and FDI policy issued by the
Government from time to time.
PP–SMAIT–December 2012 10
Foreign direct investment is freely allowed in all sectors including the services sector,
except certain prohibited sector and where the existing and notified sectoral policy does
not permit FDI beyond a ceiling. FDI can be brought in through the Automatic Route/
Approval Route. FDI beyond sectoral limits prior approval of the Foreign Investment
Promotion Board (FIPB) or Cabinet Committee on Economic Affairs (CCEA) as the case
may be.

An Indian company receiving investment from outside India for issuing shares/
convertible debentures/preference shares under the FDI Scheme, should report the details
of the amount of consideration to the Regional Office concerned of the Reserve Bank
not later than 30 days from the date of receipt.
Answer 5(iii)
Modes of Joint Venture
A joint venture is an association of two or more individuals or business entities who
combine and pool their respective expertise, financial resources, skills, experience, and
knowledge in the furtherance of a particular project or undertaking. There are two
fundamental types of joint venture, i.e., Equity Joint Venture and Contractual Joint Venture.
Their description is as follows:
Equity Joint Venture
The equity joint venture is an arrangement whereby a separate legal entity is created
in accordance with the agreement of two or more parties. The parties undertake to
provide money or other resources as their contribution to the assets or other capital of
that legal entity. The entity is generally established as a limited liability company and is
distinct from either of the parties which participate in its creation. The newly created
company, thus, becomes the owner of the resources contributed by the parties to the
joint venture arrangement. Each of the parties in turn becomes the owner of the company
having equity in the company.
Contractual Joint Venture
The contractual joint venture might be used where the establishment of a separate
legal entity is not needed or the creation of such a separate legal entity is not feasible in
view of one or the other reasons. The contractual joint venture agreement can be entered
into in situations where the project involves a narrow task or a limited activity or is for a
limited term or where the laws of the host country do not permit the ownership of property
by foreign citizens. For the purposes of contractual joint venture, the relationship between
parties is set forth in the contract or agreement concluded between them.
Answer 5(iv)
Methods of funding in an overseas joint venture
Investment in an overseas joint venture may be funded out of one or more of the
following sources:
— Drawal of foreign exchange from an authorized dealer bank in India
— Capitalization of exports
 11 PP–SMAIT–December 2012
— Swap of shares
— Utilization of proceeds of External Commercial Borrowings / Foreign Currency
Convertible Bonds
— Balances held in EEFC account of the Indian party and
— Utilization of proceeds of foreign currency funds raised through ADR/GDR issues.
PART C
(Answer ANY TWO questions from this part)
Question 6
Write notes on the following :
(i) Favourable balance of trade
(ii) Countervailing duties
(iii) Most Favoured Nation (MFN)
(iv) World Intellectual Property Organisation (WIPO). (5 marks each)
Answer 6(i)
Favourable balance of trade
Mercantilist writers argued that a key objective of trade should be to promote a
favourable balance of trade. A favourable balance of trade is one in which the value of
domestic goods exported exceeds the value of foreign goods imported. Trade with a
given country or region was judged profitable by the extent to which the value of exports
exceeded the value of imports, thereby resulting in a balance of trade surplus and adding
precious metals and treasure to the country's stock. Scholars later disputed the degree
to which mercantilists confused the accumulation of precious metals with increases in
national wealth. But without a doubt, mercantilists tended to view exports favorably and
imports unfavorably.
Answer 6(ii)
Countervailing duties
A countervailing duty shall remain in force only as long as and to the extent necessary
to counter subsidization, which is causing injury. The authorities shall review the need
for the continued imposition of the duty, where warranted, on their own initiative or,
provided that a reasonable period of time has elapsed since the imposition of the definitive
countervailing duty, upon request by any interested party, which submits positive
information substantiating the need for a review.
Interested parties shall have the right to request the authorities to examine whether
the continued imposition of the duty is necessary to offset subsidization, whether the
injury would be likely to continue or recur if the duty were removed or varied, or both. If,
as a result of the review, the authorities determine that the countervailing duty is no
longer warranted, it shall be terminated immediately.
Any definitive countervailing duty shall be terminated on a date not later than five
years from its imposition, unless the authorities determine, in a review initiated before
PP–SMAIT–December 2012 12
that date on their own initiative or upon a duly substantiated request made by or on
behalf of the domestic industry within a reasonable period of time prior to that date, that
the expiry of the duty would be likely to lead to continuation or recurrence of subsidization
and injury. The duty may remain in force pending the outcome of such a review.
Answer 6(iii)
Most Favoured Nation (MFN)
Most favoured nation suggests some kind of special treatment for one particular
country, but in the WTO it actually means non-discrimination — treating virtually everyone
equally. Each member treats all the other members equally as “most-favoured” trading
partners. If a country improves the benefits that it gives to one trading partner, it has to
give the same “best” treatment to all the other WTO members so that they all remain
“most favoured”.
Most favoured nation (MFN) status did not always mean equal treatment. In the
19th Century, when a number of early bilateral MFN treaties were signed, being included
among a country’s “most-favoured” trading partners was like being in an exclusive club
because only a few countries enjoyed the privilege. The MFN principle ensures that
each country treats its fellow-members equally.
Answer 6(iv)
World Intellectual Property Organization (WIPO)
The World Intellectual Property Organization (WIPO) is an international organization
dedicated to helping ensure that the rights of creators and owners of intellectual property
are protected worldwide and that inventors and authors are, thus, recognized and rewarded
for their ingenuity. In 1974, WIPO became a specialized agency of the United Nations
system of organizations, with a mandate to administer intellectual property matters
recognized by the member states of the UN. WIPO expanded its role and further
demonstrated the importance of intellectual property rights in the management of
globalized trade in 1996 by entering into a cooperative agreement with the World Trade
Organization.
WIPO seeks to:
— Harmonize national intellectual property legislation and procedures.
— Provide services for international applications for industrial property rights.
— Exchange intellectual property information.
— Provide legal and technical assistance to developing and other countries.
— Facilitate the resolution of private intellectual property disputes.
— Marshal information technology as a tool for storing, accessing, and using valuable
intellectual property information.
Question 7
(a) Doha declaration was in favour of the developing countries. Discuss.
(10 marks)
 13 PP–SMAIT–December 2012
(b) Discuss the major issues analysed at the Geneva Ministerial Conference, 2009.
(10 marks)
Answer 7(a)
The WTO Doha ministerial conference recognising that the majority of WTO members
are developing countries, Ministers urged to place their needs and interests at the heart
of the Work Programme adopted in Declaration and continue to make positive efforts
designed to ensure that developing countries and secure a share in the growth of world
trade commensurate with the needs of their economic development.
Ministers agreed that special and differential treatment for developing countries
shall be an integral part of all elements of the negotiations and shall be embodied in the
schedules of concessions and commitments and as appropriate in the rules and
disciplines to be negotiated, so as to be operationally effective and to enable developing
countries to effectively take account of their development needs, including food security
and rural development.

Ministers agreed to negotiations to reduce or as appropriate eliminate tariffs, including

the reduction or elimination of tariff peaks, high tariffs, and tariff escalation, as well as
non-tariff barriers, in particular on products of export interest to developing countries.
The negotiations to take fully into account the special needs and interests of developing
countries participants, including through less than full reciprocity in reduction
commitments and the provisions of this declaration.

The negotiations and the other aspects of the Work Programme shall take fully into
account the principle of special and differential treatment for developing countries. The
decision on Differential and More Favourable Treatment, Reciprocity and Fuller
Participation of Developing Countries.

Answer 7(b)

The major issues analysed at the Geneva Ministerial Conference, 2009 are given
below:

There was strong convergence on the importance of trade and the Doha Round to
economic recovery and poverty alleviation in developing countries and priority is being
given to Agriculture and NAMA, it is important to advance on other areas on the agenda,
including Services, Rules and Trade Facilitation.
LDC-specific issues were underlined as needing particular attention, including Duty-
Free Quota-Free market access, cotton, and the LDC Waiver for Services. The particular
needs of Small and Vulnerable Economies were also emphasized.
Capacity-building was seen as vital to addressing supply-side constraints. The
importance of keeping up the momentum of Aid for Trade, including the Enhanced
Integrated Framework, was stressed. There was wide agreement on the need to continue
actively mobilizing resources and to keep up monitoring implementation of commitments.
There was broad agreement that the growing number of bilateral and regional trade
agreements is an issue for the multilateral trading system. However, the idea of extending
to all Members benefits offered in a regional context was questioned by some.
PP–SMAIT–December 2012 14
There were suggestions that while the WTO RTA transparency mechanism had
worked quite well, there is still room for improvement, through making the mechanism
permanent, highlighting better the common elements in different RTAs and introducing
an annual review.
Ministers had a wide-ranging discussion on enhancing the institutional effectiveness
of the WTO. Its monitoring and analytical work was widely seen to have been of particular
value in helping to stave off protectionist responses to the crisis.
High value continues to be placed by members on transparency and inclusiveness
in the WTO. Improving the institution's effectiveness should not compromise this
principle.
The value of the Dispute Settlement System was underlined by many participants,
with some urging that it be made more responsive to the needs and circumstances of
poorer and smaller Members.
Climate change was raised by many. The contribution the WTO can make through
removing barriers to trade in environmental goods and services was widely endorsed.
There were also warnings against "green protectionism".
Food security and energy security were also highlighted. Other items suggested for
consideration included government procurement, competition and investment, though
reservations were also expressed.
There was broad agreement that the WTO must remain credible in the face of emerging
challenges. There were calls for deepening the WTO's relationship with other relevant
international organizations, while respecting the WTO's mandates.
Question 8
Write critical notes on any four of the following :
(i) Anti-dumping and Indian law
(ii) Non-actionable subsidies
(iii) WTO dispute settlement mechanism
(iv) Three boxes in agriculture agreement
(v) Tariff and non-tariff barriers. (5 marks each)
Answer 8(i)
Anti dumping and Indian law
Anti dumping, in common parlance, is understood as a measure of protection for
domestic industry. However, anti dumping measures do not provide protection per se to
the domestic industry. It only serves the purpose of providing remedy to the domestic
industry against the injury caused by the unfair trade practice of dumping. In fact, anti
dumping is a trade remedial measure to counteract the trade distortion caused by dumping
and the consequential injury to the domestic industry. Only in this sense, it can be seen
as a protective measure. It can never be regarded as a protectionist measure.
Anti-dumping action can be taken only when there is an Indian industry which
produces “like articles” when compared to the allegedly dumped imported goods. The
 15 PP–SMAIT–December 2012
article produced in India must either be identical to the dumped goods in all respects or
in the absence of such an article, another article that has characteristics closely
resembling those goods. Anti-dumping actions include imposition of anti-dumping duty
and countervailing duty.

In India, Sections 9A, 9B and 9C of the Customs Tariff Act, 1975 as amended in 1995 and
the Customs Tariff (Identification, Assessment and Collection of Anti-dumping Duty on Dumped
Articles and for Determination of Injury) Rules, 1995 framed thereunder form the legal basis for
anti-dumping investigations and for the levy of anti-dumping duties, Anti dumping Investigations
and Recommendations by Designated Authority, Ministry of Commerce, imposition and collection
of Anti –dumping duty by Ministry of Finance.

Answer 8(ii)

Non - actionable subsidies

The SCM Agreement creates three basic categories of subsidies, namely prohibited,
actionable (i.e., subject to challenge in the WTO or to countervailing measures), and non-
actionable. All specific subsidies fall into one of these three categories.

Non-actionable subsidies can either be non-specific subsidies, or specific subsidies

for industrial research and pre-competitive development activity, assistance to
disadvantaged regions, or certain types of assistance for adapting existing facilities to
new environmental laws or regulations. Non-actionable subsidies cannot be challenged
in the WTO’s dispute settlement procedure, and countervailing duty cannot be imposed
on subsidized imports.

Answer 8(iii)

WTO Dispute Settlement Mechanism

The WTO dispute settlement system is a rule-oriented system where

recommendations and rulings must aim at achieving a satisfactory settlement in
accordance with the rights and obligations of the Members under the WTO Agreement.
As a result, all solutions to matters formally raised under the consultation and dispute
settlement provisions of the WTO agreements must not nullify and impair benefits accruing
to any Member under those agreements. Under the Dispute Settlement Understanding ,
the “players” in a dispute settlement process are subject to certain rules aimed at ensuring
due process and unbiased recommendations and rulings. For instance, there must not
be any ex parte communications with the panel or Appellate Body members concerning
matters under consideration by the panel or the Appellate Body.

The WTO dispute settlement mechanism provides for three main ways of resolving
disputes: (i) bilateral consultations; (ii) good offices, conciliation and mediation; and (iii)
adjudication, including arbitration. The Dispute Settlement Mechanism contains rules
and procedures to be followed by WTO Members.
Answer 8(iv)
Three boxes in agricultural agreement
In WTO terminology, “boxes” which are given the colours of traffic lights in general
PP–SMAIT–December 2012 16
identify subsidies: green (permitted), amber (slow down — i.e. be reduced), red (forbidden).
The agriculture agreement has no red box, but there is a blue box for certain types of
subsidies, and exemptions for developing countries. Three boxes in agricultural agreement
are as under:
The ‘amber box’
For agriculture, all subsidies and other domestic support measures considered to
distort production and trade (with some exceptions) fall into the amber box. The total
value of these measures must be reduced.
The ‘green box’
In order to qualify for the “green box”, a subsidy must not distort trade, or at most
cause minimal distortion. They have to be government-funded (not by charging consumers
higher prices) and must not involve price support. They tend to be programmes that are
not directed at particular products, and include direct income supports for farmers that
are not related to (are "decoupled" from) production. “Green box” subsidies are therefore
allowed without limits, provided they comply with relevant criteria.
The ‘blue box’
The blue box is an exemption from the general rule that all subsidies linked to
production must be reduced or kept within defined minimal (“de minimis”) levels. It covers
payments directly linked to acreage or animal numbers, but under schemes, which also
limit production, by imposing production quotas or requiring farmers to set aside part of
their land. Countries using these subsidies say they distort trade less than alternative
amber box subsidies.
Answer 8(v)
Tariff and Non-Tariff Barriers
Free trade refers to the elimination of barriers to international trade. The most common
barriers to trade are tariffs, quotas, and non-tariff barriers. Customs duties on merchandise
imports are called tariffs. Tariffs give a price advantage to locally-produced goods over
similar goods which are imported, and they raise revenues for governments. Tariff barrier
also weaken international relation. One result of the Uruguay Round was countries’
commitments to cut tariffs and to “bind” their customs duty rates to levels which are
difficult to raise. The current negotiations under the Doha Agenda continue efforts in that
direction in agriculture and non-agricultural market access.
Non-Tariff Barriers are technical regulations and standards; import licensing, import
quota restriction; rules for the valuation of goods at customs; preshipment inspection;
investment measures; export subsidies and domestic support; service barriers; lack of
adequate protection to intellectual property rights.
 17 PP–ATLP–December 2012
ADVANCED TAX LAWS AND PRACTICE
Time allowed : 3 hours Maximum marks : 100

NOTE : All the references to sections mentioned in Part-A and Part-C of the Question
Paper relate to the Income-tax Act, 1961 and relevant Assessment Year 2012-
13, unless stated otherwise.
Part A
(Answer ANY TWO Questions from this part)
Question 1
(a) Discuss briefly the treatment of un-availed tax credit of minimum alternate tax
(MAT) in case of conversion of a private company or unlisted public company
into a limited liability partnership (LLP). (3 marks)
(b) Enumerate the conditions prescribed in the proviso to section 47(xiiib) in order
to avail of total exemption from capital gains tax upon transfer of capital assets
by a private company or an unlisted public company to a limited liability partnership
(LLP). (6 marks)
(c) Comment in brief on the allowability of depreciation under section 32 —
(i) Both the stipulated conditions under section 32 have been complied with
but assessee company has not claimed the depreciation.
(ii) A Ltd. and B Ltd. jointly owned plants in the proportion of 80% and 20%
respectively and put to use by both the companies during the previous year
2011-12.
(iii) X Ltd. acquired following assets during the previous year 2011-12, but could
not use them :
(a) High powered inverter costing ` 2,50,000; and
(b) Fire extinguisher costing ` 75,000. (2 marks each)
Answer 1(a)
Section 115JAA provides that where tax is paid by a company for any assessment
year in relation to deemed income under Section 115JA(1) or 115JB(1), a tax credit will
be allowed in subsequent years.
However, newly inserted Section 115JAA(7) w.e.f. 1.04.2011, Assessment Year
2011-12 and onwards, provides that in case of conversion of a private company or
unlisted public company into a Limited Liability Partnership Act, 2008, the provisions of
Section 115JAA shall not apply to the successor LLP, that is to say tax credit will not be
allowed to such LLP.
Answer 1(b)
The following conditions are prescribed in the proviso to section 47(xiiib) in order to avail
of total exemption from capital gains tax upon transfer of capital assets by a private company
or an unlisted public company to a limited liability partnership (LLP):
(i) All the assets and liabilities of the company immediately before the conversion
become the assets and liabilities of the LLP.
17
PP–ATLP–December 2012 18
(ii) All the shareholders of the company immediately before the conversion becomes
the partners of the LLP and their capital contribution and profit sharing ratio in
the LLP are in the same proportion as their shareholding in the company on the
date of conversion.

(iii) The shareholders of the company do not receive any consideration or benefit,
other than by way of share in profit and capital contribution in the LLP.

(iv) The aggregate of the profit sharing ratio of the shareholders of the company in
the LLP shall not be less than 50% at any time during the period of 5 years from
the date of conversion.

(v) The total sales, turnover or gross receipts in business of the company in any of
the 3 previous years preceding the previous year in which the conversion takes
place does not exceed `60,00,000/-.

(vi) No amount is paid to any partner out of balance of accumulated profit standing
in the accounts of the company on the date of conversion for a period of 3 years
from the date of conversion.

Answer 1(c)

(i) As per Explanation 5 of section 32(1) of the Income-tax Act, 1961, depreciation
will be allowed, if due, by the Assessing Officer, even when it was not claimed
by the assessee and compute the total income accordingly.

(ii) Both the basic conditions regarding allowability of depreciation under section 32(1) are
satisfied namely about ownership and its use, therefore, both the companies are
eligible to claim depreciation in the same fractional value of assets i.e., in the
proportion of 80% & 20%.

(iii) X Ltd. will be eligible for depreciation allowance under section 32(1), inspite of
non-fulfillment of condition of its use. In case of assets acquired for the business
and kept, ‘stand by’ tantamount ‘passive’ use and hence entitled for eligible
depreciation.
Question 2
(a) The Assessing Officer issued a notice under section 142(1) on the assessee on
18th December, 2011 calling him upon to file return of income for the assessment
year 2011-12. In response to the said notice, the assessee furnished a return of
loss and claimed carry forward of business loss and unabsorbed depreciation.
State whether the assessee would be entitled to carry forward as claimed in the
return. (9 marks)
(b) Whether minimum alternate tax (MAT) under section 115JB is payable in advance
and interest under sections 234B and 234C is payable on failure to pay such
advance tax ? Also explain whether MAT credit admissible under section 115JAA
has to be set-off against the assessed tax payable before calculating the interest
under sections 234A, 234B and 234C.
You may take help of decided case law, if any. (6 marks)
 19 PP–ATLP–December 2012
Answer 2(a)
The assessee has been issued a notice and he has furnished the return in
response to the said notice. It is, therefore, clear that the assessee has not filed the
return of loss voluntarily within the time allowed under section 139(1) read with
section 139(3). Section 80 provides that no loss will be allowed to be carried forward
and set off under section 72(1) unless such loss is determined in pursuance of a return
filed in accordance with the provision of section 139(3). Therefore, the assessee will
not be in a position to carry forward the business loss by virtue of the specific provisions
of section 80.

However, the assessee will be in a position to carry forward the unabsorbed depreciation.
The benefit of carry forward of depreciation is governed by section 32(2). Unlike section 80,
section 32(2) does not stipulate that the return should be filed within a particular time-limit in
order that the assessee may get the benefit of carry forward.

Answer 2(b)

It is clarified vide Circular No.13/2011, dated 9-11-2001, all companies are liable for payment
of advance tax having regard to the provisions contained in new section 115JB. Consequently,
the provisions of sections 234B and 234C for interest on defaults in payment of advance
tax and deferment of advance tax would also be applicable where facts of the case warrant.
Further, on this issue, the Supreme Court in the case of JCIT v. Rolta India Ltd., (2011) 330
ITR 470 observed that there is a specific provision in Section 115JB(5) providing that all
other provisions of the Income-tax Act, 1961 shall apply to MAT companies. So the liability
for payment of advance tax would be attracted. Therefore, interest under section 234B and
234C shall also be payable on failure to pay advance tax in respect of tax payable under
section 115JB.

The right to carry forward and set-off MAT credit under section 115JAA arises as
soon as the tax is paid by the assessee under section 115JB. The tax credit allowable
can be set-off by the assessee while computing advance tax/self assessment tax payable
for the year. Hon’ble Supreme Court in the case of CIT v. Tulsyan NEC Ltd. (2011) 330
ITR 226 decided that MAT Credit admissible under section 115JAA has to be set-off
against the Assessed tax payable, before calculating interest under section 234A, 234B
and 234C.

Question 3

(a) Discuss with the help of an example, the cascading effect of dividend distribution
tax and the remedial action taken by the government. (7 marks)

(b) Does the Income-tax Appellate Tribunal has the following powers —

(i) Power to recall its order in entirety under section 254(2); and

(ii) Power to grant indefinite stay in any proceeding relating to an appeal under
section 254(2A) ? (3 marks each)

(c) A company incorporated outside India is not liable to wealth-tax in India. Discuss.
(2 marks)
PP–ATLP–December 2012 20
Answer 3(a)
Section 115-O of the Act provides for taxation of distributed profits of domestic
company. It provides that any amount declared, distributed or paid by way of dividends,
whether out of current or accumulated profits shall be liable to be taxed at the rate of
15% plus surcharge plus education and secondary and higher education cess. The tax
is known as Dividend Distribution Tax (DDT). Such distributed dividend is exempt in the
hands of recipients. As per section 10(34), any income by way of dividends referred to
in section 115-O shall be exempt from income tax. However, this provision resulted in a
cascading effect in the case of holding company declaring dividend out of dividend
received from its subsidiary.
For Example :
X Ltd. Holds : 65% shares in S Ltd. X Ltd. received `30,00,000 dividend from S Ltd.
X Ltd. declares Final Dividend of `75,00,000 to its shareholders.
X Ltd. shall be liable to pay DDT of `12,16,688 @ 16.223% on full amount of
`75,00,000 including the amount received from S Ltd. Due to this the amount of
`30,00,000 is taxed twice once in the hands of S Ltd. and secondly in the hands of
X Ltd.
To mitigate cascading effect of DDT, Section 115-O of the Act provides that dividend
liable for DDT in case of a company is to be reduced by an amount of dividend received
from its subsidiary after payment of DDT if the following conditions are satisfied :-
(i) The amount of dividend is received from its subsidiary
(ii) Subsidiary has paid DDT on such dividend
(iii) Holding Co is not a subsidiary of another co.
Therefore, in the same example and as per the provisions of section 115-O X Ltd.
shall be liable to pay DDT on `45,00,000 (`75,00,000 – ` 30,00,000) @ 16.223% of
`7,30,013/-
Answer 3(b)(i)
The justification of an order passed by the Tribunal recalling its own order in entirety
is to be tested on the basis of the law laid down by the Apex Court in Honda Siel Power
Products Ltd. v. CIT (2007) 295 ITR 466. The Tribunal can recall its order in entirety if
it is satisfied that prejudice has resulted to the party which is attributable to the Tribunal’s
mistake, error or omission and the error committed is apparent. However, the power to
recall has to be distinguished from the power to review; it cannot review its own order.
Answer 3(b)(ii)
The tribunal can pass an order of stay only for a period not exceeding 180 days from
the date of such order. If appeal is not disposed of within 180 days and the delay is not
attributable to the assessee, the period of stay may be extended. The total period of
initial stay and extended period(s) can not be more than 365 days. If appeal is not
disposed of within the extended period(s), the order of stay shall stand vacated after the
expiry of such period-section 254(2A). Thus, the Tribunal cannot grant indefinite stay in
any proceeding relating to an appeal.
 21 PP–ATLP–December 2012
Answer 3(c)
No, the statement is not correct. Incidence of wealth tax in the case of a company
depends upon residential status. A company incorporated outside India, i.e., a foreign
company is liable for wealth-tax in India in respect of net wealth situated in India and if its
residential status will be of resident as per Income Tax Act, 1961.
PART B
(Answer Question No. 4 which is compulsory
and any two of the rest from this part.)

Question 4
(a) Write the most appropriate answer from the given options in respect of the
following :
(i) Section 61 of the Customs Act, 1962 provides for warehousing in the case
of capital goods intended for use in any 100% export oriented undertaking
(EOU) till the expiry of —
(a) One year
(b) Three years
(c) Five years
(d) None of the above.
`
(ii) Rule 2(b) of the Central Excise Rules, 2002 defines 'assessment' to include—
(a) Summary assessment
(b) Scrutiny assessment
(c) Self-assessment made by the assessee and provisional assessment
under Rule 7
(d) Ex-party assessment.
(iii) Section 11BB of the Central Excise Act, 1944 provides for the payment of
interest @ 6% per annum on refund of duty which is not paid to the applicant
within —
(a) 30 Days
(b) 1 Year
(c) Three months
(d) None of the above.
(iv) The Customs, Excise, Service Tax Appellate Tribunal (CESTAT) may in its
discretion, refuse to admit an appeal where the amount of fine or penalty
determined does not exceed —
(a) 1 lakh
(b) 2 lakh
(c) 50,000
(d) None of the above.
PP–ATLP–December 2012 22
(v) Fees for filing an appeal to the CESTAT under section 35B of the Central
Excise Act, 1944 when the amount of duty and interest demanded and
penalty levied is more than ` 50 lakh is —
(a) ` 1,000
(b) ` 10,000
(c) ` 5,000
(d) None of the above. (1 mark each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) There is no separate enactment for the levy of service tax. _____________
provides for the legal basis for the levy and collection of service tax in
India.
(ii) The authority for advance ruling is required to pronounce its advance ruling
in writing within _____________ days from the date of application.
(iii) A computer print-out is admissible _____________ in any proceeding under
the law relating to customs without further requirement of production of the
original document itself.
(iv) Every assessee is required to submit a monthly return in proper form of
production or removal of goods and other relevant particulars to the
Superintendent of central excise within _____________ days of the
succeeding month.
(v) Where the value of the export goods cannot be determined under Rules 4
and 5 of the Customs Valuation (Determination of Value of Export Goods)
Rules, 2007 the value shall be determined under Rule 6 by_____________
(1 mark each)
(c) Star Manufacturing Ltd. defaulted in payment of central excise duty of ` 1,00,000
in the month of April, 2012. The company wants to pay this amount of duty in
July, 2012 out of the CENVAT credit taken in the months of June and July,
2012. Advise Star Manufacturing Ltd. in this regard. (5 marks)
(d) Discuss whether a manufacturer of excisable goods is eligible to take the
CENVAT credit of excise duty paid on motor vehicles. (5 marks)
Answer 4(a)(i)
(c) Five Years
Answer 4(a)(ii)
(c) Self-assessment made by the assessee and provisional assessment under
Rule 7.
Answer 4(a)(iii)
(c) Three months
Answer 4(a)(iv)
(c) `50,000
 23 PP–ATLP–December 2012
Answer 4(a)(v)
(b) `10,000
Answer 4(b)
(i) There is no separate enactment for the levy of service tax. Finance Act, 1994
provides for the legal basis for the levy and collection of service tax in India.
(ii) The authority for advance ruling is required to pronounce its advance ruling in
writing within 90 days from the date of application.
(iii) A computer print-out is admissible Evidence in any proceeding under the law
relating to customs without further requirement of production of the original
document itself.
(iv) Every assessee is required to submit a monthly return in proper form of production
or removal of goods and other relevant particulars to the Superintendent of
central excise within 10 days of the succeeding month.
(v) Where the value of the export goods cannot be determined under Rules 4 and 5
of the Customs Valuation (Determination of Value of Export Goods) Rules,
2007 the value shall be determined under Rule 6 by Residual Method.
Answer 4(c)
As per the Proviso to Rule 3(4) of the CENVAT Credit Rules, 2004, while paying
excise duty, the CENVAT credit shall be utilized only to the extent such credit is available
on the last day of the month for payment of duty relating to that month.

The Central Board of Excise and Customs has clarified vide Circular No.962/05/
2012.Cx dated 28.03.2012 about payment of arrears from Cenvat Credit earned at a
later date clarifying that a harmonious reading of Rue 8 of the Central Excise Rules and
Proviso to Rule 3(4) of the CENVAT Credit Rules indicates that the restriction with
regard to the utilization of CENVAT Credit is relating to normal payment of duty under
Rule 8 where duty for a particular month is to be discharged by the 5th of the next month.

As per this proviso, the cenvat credit allowed to be used is what was in balance on
the last date of that month or quarter and not what accrued thereafter. Even in case of
duty paid late in terms of rule 8, the credit available for utilization will remain same i.e.
the credit in balance on the last date of month or quarter, as the case may be.

Star Manufacturing Ltd. wants, to pay arrears of excise duty (payment of duty under
Rule 8) out of the CENVAT Credit, therefore, the restriction imposed under proviso to
rule 3(4) shall be applicable. Hence, the Co. cannot pay this amount of duty in July 2012
out of the CENVAT credit taken in the months of June and July, 2012.
Answer 4(d)
The definition of capital goods has been amended with effect from 01.04.2012.
Motor vehicles are now included in the definition of Capital goods under Rule 2(a) of the
CENVAT Credit Rules, 2004.
CENVAT Credit of duty paid on motor vehicle is now available to a manufacturer
as capital goods used in the factory of the manufacturer of the final products. As per
PP–ATLP–December 2012 24
rule 2(a)(viii), the definition of capital goods includes, motor vehicles other than those
falling under tariff headings 8702, 8703, 8704, 8711 and their chassis but including
dumpers and tippers, used
(i) in the factory of the manufacturer of the final products, but does not include any
equipment or appliance used in an office; or
(ii) outside the factory of the manufacturer of the final products for generation of
electricity for captive use within the factory; or
(iii) for providing output services.
Question 5
(a) Superb Electronics Ltd. is a manufacturer of electronic transformers, semi-
conductor devices and other electrical and electronic equipments. During the
course of such manufacture, the assessee also manufactured machinery in
the nature of testing equipments to test their final products and stated in their
balance sheet that the addition to the plant and machinery included testing
equipments.
The department demanded excise duty on such testing equipments. The assessee
denied the liability contending that :
(i) Assembly of testing equipments from various parts and components bought
from outside didn't amount to manufacture. Moreover, these were assembled
for purely research and development purposes, but research being
unsuccessful, same were dismantled;
(ii) Even if manufacture was involved, the testing equipments were not
marketable; and
(iii) The said project was undertaken only to avoid import of such equipments
from the developed countries to save the foreign exchange.
Examine the veracity of the assessee's contentions with reference to a decided
case law. (5 marks)
(b) Sun Power Ltd. is registered under 'Project Import Regulations, 1986' for import
of power equipments at concessional rate to implement a project for setting-up
of a power plant. It imported a gas turbine and generator under the Project
Import Regulations, 1986, but before these could reach the project site, these
were lost/destroyed in the sea within India.
The department denied project import concession under the heading 9801 and
demanded full duty, as the goods were not used in the project. Discuss in the
light of decided case law, whether the demand made by the department is tenable
in law. (5 marks)
(c) In an appeal proceeding, the Customs, Excise, Service Tax Appellate Tribunal
(CESTAT) looked into shareholding pattern and arrived at a conclusion that the
assessee and the buyer were inter-connected companies and also held that
appointment of department's cost accountant for the purpose of valuation audit
 25 PP–ATLP–December 2012
under section 14A of the Central Excise Act, 1944 was valid in law. On an
application of the assessee for rectification, the CESTAT in the same evidence
and arguments, altogether changed its conclusion and held that the assessee
and the buyer were not inter-connected companies and also that the cost
accountant should be a cost accountant in practice.
The department alleged that CESTAT rectification order amounted to review,
which was not permissible in view of section 35C(2) of the Central Excise Act,
1944.
Examine whether the CESTAT's order of rectification is bad in law. Cite relevant
case law also. (5 marks)

Answer 5(a)

No, the assessee’s contention is not valid in law. The facts of the given case are
similar to the case of Usha Rectifier Corpn., (I) Ltd. v. CCEx., New Delhi (2011) 263 ELT
655 (SC). The Supreme Court observed that assembly of various parts and components
so as to make testing equipments there from, having different name, character and use,
amounts to manufacture. Once the assessee had themselves admitted regarding the
development of testing equipments in their own Balance Sheet, it could not make contrary
submissions later on.

Moreover, assessees stand that testing equipments were developed in the factory to
avoid importing of such equipments with a view to save foreign exchange, confirmed that
such equipments were marketable. Hence, the duty is payable by Superb Electronics Ltd.
on such testing equipments as these are liable to excise duty.

Answer 5(b)

No, the demand made by the Department is not tenable in law. The facts of the
present case are similar to the case of CCEx. v. Lanco Kondapalli Power Pvt. Ltd.
(2011) 268 ELT 76(SC). The Apex Court held that the goods were irretrievably lost and
were not available for the purpose for which they were imported. Merely because the
goods were not destroyed in the presence of the customs officers, that would not disentitle
the goods from the project import rate of duty under Heading 9801 of the Customs Tariff.
Hence Sun Power Ltd. is entitled to pay duty at concessional rate under the Project
Import Regulations.

Answer 5(c)

Yes, the CESTAT’s order of rectification is bad in law. The facts of the instant case
are similar to the case of CCEx. v. RDC Concrete (India) Pvt. Ltd. (2011) 270 ELT 625
(SC). The Apex Court elucidated that re-appreciation of evidence on a debatable point
cannot be said to be rectification of mistake apparent on record.

It is well settled law that a mistake apparent on record must be an obvious and
patent mistake. The Apex Court held that CESTAT had reconsidered its legal view as it
concluded differently by accepting the arguments which it had rejected earlier. Hence
the Court held that CESTAT exceeded its powers under Section 35C(2) of the Act. It
cannot re-appreciate the evidence and reconsider its legal view taken earlier.
PP–ATLP–December 2012 26
Question 6
(a) From the following particulars, compute the assessable value for central excise
purposes. Out of 1,000 units manufactured, 800 units have been cleared to a
sister unit for further production of excisable goods on assessee's behalf, the
balance 200 units are lying in the stock :
`
Direct material consumed (inclusive of excise duty @10.3%) 2,20,600
Direct labour and direct expenses 1,60,000
Works overheads 40,000
Research and development costs 25,000
Administration overheads (75% related to production) 80,000
Inputs received free of cost from sister units 35,000
Abnormal losses (not included above) 24,000
Advertisement and selling costs 36,000
VRS compensation to employees (not included above) 1,20,000
Realisable value of scrap/wastage 20,000
(5 marks)
(b) Bhanu Enterprises is a manufacturing company. In the financial year 2011-12,
the details of its clearances of goods are as follows :
(` in lakhs)
(i) Total exports (including export to Bhutan `50 lakh) 300
(ii) Clearances of excisable goods without payment of
duty to a 100% EOU 100

(iii) Clearances of non-excisable goods 20

(iv) Job work under Notification No. 84/94-CE dated

11th April, 1994 175

(v) Clearances of packing materials which bear the

brand name of Ravi Ltd. and meant for packing
its products 40

Clearances of goods notified under section 4A of the Central Excise Act, 1944
(retail sale price of goods `100 lakh; abatement notified 40%; and transaction
value `80 lakh).

On the basis of above information, you are required to ascertain the eligibility of
Bhanu Enterprises for exemption based on the value of clearances in terms of
Notification No. 8/2003-CE dated 1st March, 2003 as amended for the financial
year 2012-13. Also give suitable notes. (5 marks)
 27 PP–ATLP–December 2012
(c) Bhaskar Ltd. has imported certain equipments from Japan at CIF value of
5,00,000 Yen. Other details are as under :
(i) Air freight 90,000 Yen
(ii) Insurance charges 10,000 Yen
(iii) Freight from airport to factory in India `20,000
(iv) Date of presentation of bill of entry 28th April, 2012
(Exchange rate notified by CBEC
1 Yen = `0.40)
(v) Date of arrival of goods in India 8th May, 2012
(Exchange rate notified by CBEC
1 Yen = `0.42)
(vi) Commission payable to the agent in India 10% of FOB cost
(Not included in CIF value of in Indian rupees
5,00,000 Yen)
Arrive at the assessable value for the purposes of customs duty providing brief
notes wherever required with appropriate assumptions. (5 marks)
Answer 6(a)
Computation of Assessable Value
`
(i) Direct material consumed (net of excise duty)
2,20,600 x 100
2,00,000
110.3
(ii) Direct Labour & Direct Expenses 1,60,000
(iii) Works overheads 40,000
(iv) Research & Development costs 25,000
(v) Administration Overheads (`80,000 x 75%) 60,000
(vi) Inputs received free of cost from sister unit
(forming part of cost as per CAS-4) 35,000
(vii) Abnormal losses (do not form part of cost) Nil
(viii) Advertisement & Selling costs (do not form part of cost) Nil
(ix) VRS Compensation to employees
(Non-recurring cost, not forming part of cost) Nil
Total 5,20,000
Less : Realisable value of Scrap/wastage 20,000
Total 5,00,000
Cost of Production of 1,000 units (as per CAS-4)
Cost per unit 500
Add : 10% notional profit margin as per Rule 8 50
Assessable Value under Rule 8 (per unit) 550
Assessable Value of 800 units cleared to sister unit 4,40,000
PP–ATLP–December 2012 28
Answer 6(b)
Computation of the value of eligibility limit clearances of ` 400 lakhs
` in lacs
Export to Bhutan (Note - i) 50
Clearances of goods notified under section 4A
(`100 lac – 40% abatement) 60
Clearances of packing material bearing brand name (Note-iii) 40
Total value of eligible clearances 150
Since, the aggregate value of eligible clearances in the previous Financial Year
2011-12 does not exceed `400 lakhs, Bhanu Enterprises is eligible to claim the benefit
of Notification No. 8/2003 in the Financial Year 2012-13.
Notes :
(i) Export turnover is required to be excluded while calculating clearance limit.
However, Export to Bhutan cannot be excluded as these are treated as
“clearances for home consumption”.
(ii) Following clearances are excluded :
(a) Clearances of excisable goods without payment of duty to a 100% EOU
(b) Clearances of non-excisable goods
(c) Job work under Notification No.84/94-CE.
(iii) Packing materials bearing brand name of other person and meant for packing
its product are included.
Answer 6(c)
Computation of Assessable Value
Computation of FOB Value
Yen
CIF Value as given 5,00,000
Less : Air Freight 90,000 yen
Insurance Charges 10,000 yen 1,00,000
FOB Value 4,00,000
FOB value as calculated above 4,00,000
Add : Air Freight restricted to 20% of FOB Value 80,000
Insurance charges (Actual) 10,000
Total 4,90,000
 29 PP–ATLP–December 2012
`
Total value in Indian currency @ 1 Yen = Re 0.40 1,96,000
Add : Agent’s commission in India
(4,00,000 yen x 10% `.0.40)
16,000
Total CIF Price 2,12,000
Add : Landing charges @ 1% of CIF Price 2,120

Assessable value 2,14,120

Notes

(i) As per Rule 10(2)(a)of the customs valuation (Determination of value of Imported
Goods) Rules, 2007. Cost of transport of the imported goods upto the place of
importation is only includible. Hence, freight from airport to factory is not includible.
(ii) Exchange rate as applicable on date of presentation of bill of entry is to be
considered.
(iii) Agent’s commission does not represent buying commission, hence, it is
includible.
(iv) Landing charges are considered as per clause (ii) of the proviso to Rule 10(2) of
the Customs Valuation Rules.

Question 7

(a) (i) Smart & Co. took CENVAT credit amounting to `2 lakh on inputs wrongly
included in their RG 23A Register in the month of February, 2012. During
audit, the internal audit party pointed out the mistake in August, 2012. Smart
& Co. immediately reversed the amount from balance of `15 lakh in their
CENVAT credit account lying since February, 2012.
Examine whether the company is liable to pay interest on the amount of
CENVAT credit taken wrongly. (3 marks)
(ii) Mention the 'relevant date' for the purpose of issuing show cause notice for
demanding customs duty under section 28 of the Customs Act, 1962 in the
following cases :
(a) Where duty has been erroneously refunded;
(b) Where duty is provisionally assessed; and
(c) Where duty is not levied at the time of importation of goods.
(3 marks)
(b) Mention the circumstances under which the penalty is imposable on any person
under Rule 26 of the Central Excise Rules, 2002. (6 marks)
(c) Briefly mention the provisions about temporary detention of baggage in the
Customs Act, 1962. (3 marks)
PP–ATLP–December 2012 30
Answer 7(a)(i)
No, Smart & Co. is not liable to pay interest on the amount of CENVAT Credit taken
wrongly in February, 2012. Provisions of Rule 14 of the CENVAT Credit Rules, 2004
have been amended with effect from 1.4.2012. Now the interest is payable only where
the CENVAT Credit has been taken and utilized wrongly. In the given problem, the
CENVAT Credit has not been utilized by MIS Smart & Company. Therefore, the company
is not liable to pay the interest.

Answer 7(a)(ii)

As per Explanation 1 to Section 28 of the Customs Act, the “relevant date” for
issuing show cause notice is as under:

(a) In a case where duty has been erroneously refunded - the date of refund.

(b) In a case where duty is provisionally assessed - the date of adjustment of duty
after the final assessment or re-assessment as the case may be.

(c) In a case where duty is not levied - the date on which the proper officer makes
an order for clearance of goods.

Answer 7(b)

In the following circumstances penalty can be imposed under Rule 26 of the Central
Excise Rules, 2002:

(i) Where any person acquires possession of, or is in any way concerned in
transporting, removing, depositing, concealing, selling or purchasing, or in any
other manner deals with, any excisable goods which he knows or has reason to
believe are liable to confiscation under the Act or these rules.

(ii) Where any person issues an excise duty invoice without delivery of the goods
specified therein or abets in making such invoice; or any other document or
abets in making such document, on the basis of which the user of said document
or invoice is likely to take or has taken any ineligible benefit like claiming of
CENVAT Credit or refund.

Answer 7(c)

As per Section 80 of the Customs Act, where:

(i) the baggage of a passenger contains any article which is dutiable or import of
which is prohibited; and

(ii) in respect of which a true declaration has been made under Section 77, the
proper officer may, at the request of the passenger detain such article for the
purpose of being returned to him on his leaving India and if for any reason, the
passenger is not able to collect the article at the time of leaving India, the
article may be returned to him through any other passenger authorized by him
leaving India. The Article may be sent as cargo consigned in the name of the
passenger.
 31 PP–ATLP–December 2012
PART C
Question 8
Attempt any five of the following :
(i) "The Finance Act, 2011 has expanded the scope of powers of the Transfer
Pricing Officer (TPO) under section 92CA." Discuss. (4 marks)
(ii) When can an advance ruling become void ? Explain. (4 marks)
(iii) What will be the tax treatment for dividend received by Indian companies from
specified foreign companies under section 115BBD ? Explain clearly with meaning
of specified foreign company and dividend. (4 marks)
(iv) A non-resident foreign company has a permanent establishment (PE) in India,
in respect of which royalty `101 lakh was earned from an Indian company in
pursuance of an agreement dated 10th June, 2009 (expenditure incurred on PE
in India `12,37,600).
Compute the gross tax liability of foreign company ignoring TDS/advance tax
for the assessment year 2012-13, assuming that there is no other income of the
company for the year. (4 marks)
(v) Distinguish between 'inbound transactions' and 'outbound transactions'.
(4 marks)
(vi) Write a note on unilateral relief under section 91. (4 marks)
Answer 8(i)
The Finance Act, 2011 has expanded the powers of the Transfer Pricing Officer
(TPO) under section 92CA to empower him to:
(i) Determine the arm’s length price (ALP) of other international transactions,
identified subsequently in course of proceedings before him, so far his powers
were restricted to determine the ALP of International transactions referred to
him by the Assessing Officer.
(ii) Conduct a survey by exercising the powers conferred upon an income-tax
authority under section 133A for the purpose of determining the ALP.
Answer 8(ii)
Advance ruling to be void in certain circumstances (Section 245T)
(1) Where the Authority finds, on a representation made to it by the Commissioner
or otherwise, that an advance ruling pronounced by it under sub-section (6) of
section 245R has been obtained by the applicant by fraud or misrepresentation
of facts, it may, by order, declare such ruling to be void ab initio and thereupon
all the provisions of this Act shall apply (after excluding the period beginning
with the date of such advance ruling and ending with the date of order under this
sub-section) to the applicant as if such advance ruling had never been made.
(2) A copy of the order made under sub-section (1) shall be sent to the applicant
and the Commissioner.
PP–ATLP–December 2012 32
Answer 8(iii)
The Finance Act, 2011 has inserted new Section 115BBD w.e.f. the Assessment
Year 2012-13 to provide that where total income of an Indian Company includes any
income by way of dividends declared, distributed or paid by a specified foreign company,
then such dividend shall be taxable at a concessional rate of 15% (+SC+EC+SHEC) on
the gross amount of dividend, in the sense that no expenditure shall be allowed in
respect of such dividend.
Specified foreign company has been defined to mean a foreign company in which
the Indian company holds 26% or more in nominal value of the equity share capital of
the company.
Dividend shall have the same meaning as is given to dividend in Section 2(22) but
shall not include sub-clause (e) thereof.
Answer 8(iv)
Computation of Tax Liability of Foreign Company
For the Assessment Year 2012-13
`

Royalty 1,01,00,000

Less : Expenditure incurred wholly for PE 12,37,600

Total Income 88,62,400

Tax payable @ 40% on 88,62,400 35,44,960

Add : EC & SHEC @ 3% on 35,44,960 1,06,349

Total tax payable 36,51,309

Note

1. As the foreign company has permanent establishment in India and it has earned
royalty attributable to such permanent establishment, such income shall be
taxable under section 44DA @ 40% instead of under section 115A, as the
agreement is made after 31.3.2003.
2. The deduction of expenditure will be allowed as they incurred wholly and
exclusively for permanent establishment.
Answer 8(v)
Inbound and outbound transactions are the broad categories of cross border
transaction. Inbound transactions refer to transactions through which a foreigner or foreign
entity earns income in India.
Outbound transactions refer to a transaction through which an Indian or Indian entity
earns income outside India. Cross-border tax issues related to inbound transactions and
outbound transactions are also different.
 33 PP–ATLP–December 2012
Answer 8(vi)
Unilateral Relief under Section 91
(1) In any previous year, a person resident in India, has paid tax in any country with
which India has no bilateral agreement under Section 90 for the relief or avoidance
of double taxation in respect of his income which accrued or arose during that
previous year under the law in force in that country, by deduction or otherwise,
he shall be entitled to the deduction from the Indian Income Tax payable by him
calculated on such doubly taxed income at this Indian Rate of Tax or the rate of
the said country whichever is lower or at Indian rate of tax, if both rates are
equal.
(2) In case of any person resident in India, earns income from agricultural operation
in Pakistan and paid tax thereof can seek relief at rate being lower of the following
alternatives namely :
(i) Tax actually paid in Pakistan
(ii) Amount computed under Indian Tax Rates.
(3) If any non-resident person is assessed on his share in the income of a registered
firm assessed as resident person in India in any previous year and such share
includes any income accruing or arising outside India during that previous year
(and which is not deemed to accrue or arise in India) in a country with which
there is no agreement under Section 90 for the relief or avoidance of double
taxation and he proves that he has paid income tax by deduction or otherwise
under the law in force in that country in respect of the income so included he
shall be entitled:
— to a deduction from the Indian income tax payable by him of a sum calculated
on such doubly taxed income so included
— at the Average Indian Income Tax Rate or
— the Average Foreign Tax Rate ,
Whichever is lower or at the Indian rate of tax if both the rates are equal.
GUIDELINE ANSWERS
PROFESSIONAL PROGRAMME

DECEMBER 2012

MODULE IV
GUIDELINE ANSWERS
PROFESSIONAL PROGRAMME

DECEMBER 2012

MODULE IV

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003
Phones : 41504444, 45341000; Fax : 011-24626727
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These answers have been written by competent persons
and the Institute hopes that the GUIDELINE ANSWERS will
assist the students in preparing for the Institute's
examinations. It is, however, to be noted that the answers
are to be treated as model answers and not as exhaustive
and the Institute is not in any way responsible for the
correctness or otherwise of the answers compiled and
published herein.

The Guideline Answers contain the information based on the

Laws/Rules applicable at the time of preparation. However,
students are expected to be well versed with the amendments
in the Laws/Rules made upto six months prior to the date of
examination.

C O N T E N T S
Page
MODULE IV

1. Due Diligence and Corporate Compliance Management 1

2. Governance, Business Ethics and Sustainability 21

© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

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 (i)

NOTE: Guideline Answers of the last Eight Sessions need to be updated in the light of
changes and references given below::

PROFESSIONAL PROGRAMME
UPDATING SLIP

DUE DILIGENCE AND CORPORATE COMPLIANCE

MODULE – IV – PAPER 1

Examination Question No. Updating required in the answer

Session
(1) (2) (3)

June 2009 to June 2012 — SEBI (SAST) Regulations 1997 has been
replaced by SEBI (SAST) Regulations,
2011. All answers pertaining to EBI (SAST)
Regulations 1997 may be updated in line
with the new regulations.
 1 PP–DDCCM–December 2012
PROFESSIONAL PROGRAMME EXAMINATION
DECEMBER 2012

DUE DILIGENCE AND CORPORATE

COMPLIANCE MANAGEMENT
Time allowed : 3 hours Maximum marks : 100
NOTE : Answer SIX questions including Question No. 1 which is COMPULSORY.

Question 1
(a) State, with reasons in brief, whether the following statements are true or false:
(i) As per annexure 1(d) of clause 49 of the listing agreement, every listed
company is mandatorily required to establish a whistle-blower policy.
(ii) An issuer may list its debt securities issued on private placement basis on
a recognised stock exchange.
(iii) As per SEBI (Issue of Capital and Disclosure Requirements) Regulations,
2009, there is a law of minimum subscription and it applies for public issues,
rights issues and debt instruments privately placed by listed companies.
(iv) The date-stamping requirement is applicable in relation to transfer deed
executed for transfer of any kind of securities in a company.
(v) Independent director cannot be an executive of the company in the
immediately preceding five financial years. (2 marks each)
(b) Examine and comment on the following :
(i) In the age of information technology and outsourcing where corporate
solutions are available at every step and in respect of every matter,
compliance solution providers adopt certain approaches for creating or
enhancing an ethics and compliance program for companies.
(ii) As per Regulation 7 of the Foreign Exchange Management (Transfer or
Issue of any Foreign Security) Regulations, 2000, Indian party seeking to
make investment in an entity engaged in the financial sector should fulfil
certain additional conditions. (5 marks each)
Answer 1(a)(i)
False
Establishment of whistle blower policy is recommendatory as per the Clause 49 of the
listing agreement and not mandatory.
Answer 1(a)(ii)
True
An issuer may list its debt securities issued on private placement basis on a

1
PP–DDCCM–December 2012 2
recognized stock exchange subject to the following conditions, as prescribed by SEBI
(Issue and Listing of Debt Securities) Regulations, 2008 :
(a) The issuer has issued such debt securities in compliance with the provisions of
the Companies Act, 1956, rules prescribed there under and other applicable
laws;
(b) Credit rating has been obtained in respect of such debt securities from at least
one credit rating agency registered with the Board;
(c) The debt securities proposed to be listed are in dematerialized form;
(d) The disclosures as provided in regulation 21 have been made.
The issuer shall comply with conditions of listing of such debt securities as specified
in the Listing Agreement with the stock exchange where such debt securities are sought
to be listed.
Answer 1(a)(iii)
False
As per SEBI (ICDR) Regulations, 2009 minimum subscription is applicable to public
and rights issue. As regards privately placed debt instruments by listed companies,
SEBI (Issue & Listing of Debt Securities) Regulations 2008 is applicable, under which
minimum subscription is at the discretion of the issuer.
Answer 1(a)(iv)
False
The date-stamping requirement is not applicable in relation to transfer deed executed
for transfer of debentures or other securities in a company. It is applicable only to the
shares of the company. The transfer deed so stamped is valid for lodgement in the case
of a listed company within 12 months of the date so stamped or first closure of the
register of members after it is so dated-stamped, whichever is later. In the case of an
unlisted company it is valid for lodgement within two months of the date so stamped.
Answer 1(a)(v)
False
As per clause 49 of the listing agreement, independent director is a non executive
director of the company, who has not been an executive of the company in the immediately
preceding three financial years.
Answer 1(b)(i)
Compliance solution providers adopts following approaches for creating or enhancing
an ethics and compliance program for companies—
Risk/Cultural Assessment : Through employee surveys, interviews, and document
reviews, a company’s culture of ethics and compliance at all levels of the organization
is validated. Our Reports and recommendations with detail observations identify gaps
between company’s current practices and benchmarks with international practices.
 3 PP–DDCCM–December 2012
Program Design/Update : In this phase, compliance solution providers help company
in creating guideline documents that outline the reporting structure, communications
methods, and other key components of the code of ethics and compliance program.
This encompasses all aspects of the program, from grass roots policies to structuring
board committees that oversee the program; from establishing the mandatory anonymous
complaint reporting mechanism—i.e., compliance and ethics help line or whistleblower
hot line—to spelling out the specifics of the code of ethics in a way that is easily
understood by everyone at all levels of organization.
Policies and Procedures : In this phase compliance solution providers help company
to develop or enhance the detailed policies of the program, including issues of financial
reporting, antitrust, conflicts of interest, gifts and entertainment, records accuracy and
retention, employment, the environment, global business, fraud, political activities,
securities, and sexual harassment, among others.
Communication, Training, and Implementation : Even the best policies and procedures
are useless if they are not institutionalized— they must become part of the fabric of the
organization. Compliance solution providers help company to clearly articulate,
communicate, and reinforce not only the specifics of the program, but also the philosophy
behind it, and the day-to-day realities of it. In this way, key stakeholders and other
personnel are more likely to embrace the program and incorporate it into their attitudes
and behaviours.
Ongoing self-Assessment, Monitoring, and Reporting: The true test of a company’s
ethics and compliance program comes over time. The cultural assessment, mechanisms,
and processes put in place including employee surveys, internal controls, and monitoring
and auditing programs, help organisations achieve sustained success.
Answer 1(b)(ii)
According to Regulation 7 of Foreign Exchange Management (Transfer or Issue of
any Foreign Security) Regulations, 2000, Indian party seeking to make investment in an
entity engaged in the financial sector should fulfill the following additional conditions:
(i) Be registered with the appropriate regulatory authority in India for conducting
the financial sector activities;
(ii) Have earned net profit during the preceding three financial years from the financial
services activities;
(iii) Have obtained approval for investment in financial sector activities abroad from
regulatory authorities concerned in India and abroad; and
(iv) Have fulfilled the prudential norms relating to capital adequacy as prescribed by
the regulatory authority concerned in India.
It may be noted that a step down subsidiary of JV / WOS investing in a financial
services sector is also required to comply with the above conditions.
Trading in Commodities Exchanges overseas and setting up JV / WOS for trading in
overseas exchanges will be reckoned as financial services activity and require clearance
from the Forward Markets Commission.
PP–DDCCM–December 2012 4
Question 2
(a) Write the most appropriate answer from the given options in respect of the
following :
(i) Which of the following type of companies are not required to file documents
and forms with the Registrar of Companies in e-forms No. 23AC-XBRL and
23ACA-XBRL —
(a) Listed with stock exchange
(b) Having paid-up capital of `5 crore or above
(c) Having turnover of `100 crore or above
(d) Having average profit of `5 crore or above in last three years.
(ii) Notice of consolidation, sub-division or increase in share capital or increase
in number of members is given to the Registrar of Companies in —
(a) E-form No.3
(b) E-form No.4
(c) E-form No.5
(d) E-form No.6.
(iii) SCORES, a web-based processing system commenced by SEBI relates
to—
(a) Online submission of share application forms by investors
(b) Online monitoring of complaints from investors
(c) Online approval system for public issues
(d) Online approval system for issuing Indian depository receipts (IDRs).
(iv) The stamp duty payable on transfer of debentures —
(a) Is nil, being exempt
(b) Is at uniform rate throughout the country
(c) Varies from State to State
(d) None of the above.
(v) Section 81 of the Companies Act, 1956 does not relate to —
(a) Issue of shares on rights basis
(b) Issue of bonus shares
(c) Further issue of shares to persons who may or may not be existing
members
(d) Conversion of loans into equity.
(vi) In case of revision in price band, the public issue must be kept open for the
following combination of minimum and maximum working days
respectively—
(a) 3 - 10
 5 PP–DDCCM–December 2012
(b) 5 - 15
(c) 1 - 10
(d) 3 - 30. (1 mark each)
(b) Distinguish between the following :
(i) 'Internal audit' and 'concurrent audit'.
(ii) 'Pre-issue advertisements for public issue of shares' and 'post-issue
advertisements for public issue of shares'. (5 marks each)
Answer 2(a)(i)
(d) Having average profit of Rs.5 crore or above in the last three years.
Answer 2(a)(ii)
(c) E Form 5
Answer 2(a)(iii)
(b) Online monitoring of complaints from investors.
Answer 2(a)(iv)
(c) Varies from state to state.
Answer 2(a)(v)
(d) Conversion of loans into equity.
Answer 2(a)(vi)
(a) 3-10
Answer 2(b)(i)
Internal Audit and Concurrent Audit
NSDL Stipulates depository Participants to carryout both Internal and Concurrent
Audit.
As per Bye Law 10.3, every Participant shall ensure that an internal audit in respect
of its depository operations is conducted at intervals of not more than six months by a
qualified Chartered Accountant or a Company Secretary holding a Certificate of Practice
and a copy of the internal audit report shall be furnished to the Depository.” The Chartered
Accountants, Company Secretaries or Cost and Management Accountants who are
engaged in Internal Audit or Inspection of the Participant in respect of its depository
operations, should not have any conflict of interest with the said Participant.
Activities related to account opening, control and verification of Delivery Instruction
Slips (DIS) are subject to concurrent audit which must be completed by the next working
day. If such audit cannot be completed by next working day due to large volume, it must
be completed within a week.
PP–DDCCM–December 2012 6
Answer 2(b)(ii)
Pre issue advertisement
The company, after registering the red herring prospectus (in case of a book built
issue) or prospectus (in case of fixed price issue) with the Registrar of Companies is
required to make a pre-issue advertisement format prescribed by SEBI (ICDR) Regulations
2009 and with required disclosures, in one English national daily newspaper with wide
circulation, Hindi national daily newspaper with wide circulation and one regional language
newspaper with wide circulation at the place where the registered office of the issuer is
situated.
Post issue advertisement
It should be ensured that advertisement giving details relating to oversubscription,
basis of allotment, number, value and percentage of all applications including ASBA,
number, value and percentage of successful allottees for all applications including ASBA,
date of completion of dispatch of refund orders or instructions to Self Certified Syndicate
Banks by the Registrar, date of dispatch of certificates and date of filing of listing
application, etc. is released within ten days from the date of completion of the various
activities in at least one English national daily newspaper with wide circulation, one
Hindi national daily newspaper with wide circulation and one regional language daily
newspaper with wide circulation at the place where registered office of the issuer is
situated.
Question 3
(a) Ramesh was the managing director of KMF Pvt. Ltd. He was also a substantial
shareholder and promoter of Hari group of companies. Ramesh was willing to
sell his total stake in Hari group of companies. Negotiations were going on for
acquisition of three listed companies of Hari group by KMF Pvt. Ltd. As the
managing director, he was involved in the negotiations on behalf of KMF Pvt.
Ltd. Memorandum of understanding had also been executed between the parties
for the deal.
Meanwhile, KMF Pvt. Ltd. purchased shares of the companies of Hari group
through a broker of recognised stock exchange. Order of purchase for the shares
was placed by Ramesh and contract note had been furnished to him by the
broker in the name of KMF Pvt. Ltd.
Before finally closing the deal for acquisition of companies by KMF Pvt. Ltd., the
matter has been placed before you to carry out due diligence particularly with
reference to SEBI (Prohibition of Insider Trading) Regulations, 1992.
Submit your views. (5 marks)
(b) NVN Holdings Pvt. Ltd. is an investment company. It has only two directors/
promoters/shareholders, Navin and Varun, both having 50% shareholding each.
These two directors of this private limited company, in their individual capacity,
were also promoters of Deepak Style Ltd., the target company. They together
held 33.38% of the voting rights/share capital in the target company. The remaining
15 promoters of the target company held 12.32% of the voting rights in that
company. Thus, the total holding of the promoter group in the target company
came to 45.70% including that of the two directors.
 7 PP–DDCCM–December 2012
Now, NVN Holdings Pvt. Ltd. acquired 6.17% of the total equity capital of the
target company without making public announcement.
You are required to —
(i) Explain the meaning of public announcement; and
(ii) State whether any default has been made by NVN Holdings Pvt. Ltd. with
reference to SEBI (Substantial Acquisi tion of Shares and Takeovers)
Regulations, 2011. (6 marks)
(c) You have been appointed as secretarial auditor by Jai Udyog Ltd. While checking
the records, you find that security deposits of the employees who had left the
company were still lying unpaid. On enquiry, it was revealed that the laptop
given to an employee, Rohit had not been returned to the company after his
retirement. Further, residential accommodation provided to another employee,
Gautam, was not vacated by him even after termination of his service with the
company. Notices were already given to them for handing over the assets to the
company. The directors of the company are not sure whether action under section
630 of the Companies Act, 1956 can be initiated against these ex-employees.
Advise the Board of directors of the company in the matter. (5 marks)
Answer 3(a)
Price sensitive information as defined in the SEBI (Prohibition of Insider Trading)
Regulations, 1992 means any information which relates directly or indirectly to a company
and which, if published, is likely to materially affect the price of securities of that company.
According to clause (ha) of Regulation 2, information regarding amalgamations, mergers
or takeovers is deemed to be price sensitive information.
In the given case, the information regarding the negotiation between KMF Pvt. Ltd.
and the Hari Group of companies was price sensitive as it was likely to affect the price
of the scripts of the company when published as it involves three listed companies of
Hari Group. Ramesh, on the one hand was negotiating with the company (Hari Group)
whose shares listed on Stock Exchange and on the other hand he, as a Managing
Director of the Private Ltd. Company (KMF Pvt. Ltd.), purchased shares in the name of
the KMF Ltd. Company. Thus, Ramesh purchased the shares of Hari Group when he
was in possession of the unpublished price sensitive information and thereby violated
Regulation 3 of the SEBI (Prohibition of Insider Trading) Regulation, 1992.
Answer 3(b)
Public Announcement
A public announcement is an announcement made by the acquirer through a merchant
banker, primarily disclosing his intention to acquire shares of the target company from
existing shareholders by means of an open offer. This is to ensure that the shareholders
of the target company are aware of an exit opportunity available to them.
The disclosures in the announcement include the identity of acquirer, purpose of
acquisition, offer price, number of shares to be acquired from the public, future plans of
acquirer regarding the target company, change in control over the target company, if
any, the procedure to be followed by acquirer in accepting the shares tendered by the
shareholders and the time slab for completing all the formalities.
PP–DDCCM–December 2012 8
Given situation : Where a company acquired shares of target company alongwith its
promoter directors, company should be presumed to have acted in concert with its
promoter directors in their individual capacity and their holdings have to be clubbed.
In the give situation, as NVN Holdings Pvt. Ltd. has acquired shares/voting rights in
the target company which entitled it to exercise more than 5% (6.17%) of the voting rights
therein, thereby triggering Regulation 3(2) of the SEBI (SAST) Regulations, 2011 as the
two directors/promoters of NVN holdings already hold 33.38%.
Thus, it can be concluded that since NVN Holdings Pvt. Ltd. did not come out with
a public announcement to acquire further shares of the target company, it has violated
the SEBI Regulations.
Answer 3(c)
Under Section 630 of the Companies Act, 1956, a complaint can be filed by the
company against any officer or employee of the company for withholding company’s
property wrongfully or illegally. The term “officer or employee” applies to existing as well
as past officers or employees and “property” includes all kinds of properties whether
immovable or movable.
Where the ex-employee, upon separation from the company, does not return the lap
top provided to him for discharging his official duty or continues to occupy the accommodation
and fails to handover the property to the employer, Section 630, could be invoked and
criminal complaint could be filed for recovery of such properties. (Gopica Chaddrabhushan
Saran vs. XLO India Ltd. (2009) 148 Com. Cases 130.
Question 4
(a) With reference to the relevant provisions of the Companies Act, 1956, advise
the company on the following matters :
(i) Company wants to keep its books of account at more than one place in
India other than its registered office in pursuance of the provisions of sub-
section (1) of section 209 of the Companies Act, 1956.
(ii) Company wants to give an advance salary of ` 80,000 to the daughter of
the managing director, who is employed in the company as Company
Secretary. (3 marks each)

(b) Kamal Consulting Ltd. seeks your advice in respect of the borrowing of ` 65
crore from a financial institution by the Board of directors for which it passed a
resolution at a meeting held on 10th May, 2012. Mohan, one of the directors,
opposed the said resolution, being not in the interest of the company and raised
an issue that the said borrowing is outside the powers of the Board of directors.
The following information is available with respect to the company :

(i) Share capital 30 crore

(ii) Reserves and surplus 30 crore
(iii) Secured loans 50 crore
(iv) Temporary loans repayable on demand 20 crore
 9 PP–DDCCM–December 2012
Advise the management of the company whether the power of borrowing of the
company is within the powers conferred under the Companies Act, 1956.
(5 marks)
(c) Raju is having securities in a depository account. He intends to create a pledge
on a security owned by him. He seeks your advice about the requirement of
Regulation 58 of the SEBI (Depositories and Participants) Regulations, 1996 for
creating of pledge on the security. (5 marks)
Answer 4(a)(i)
According to proviso to subsection 1 of section 209 of the Companies Act, all or any
of the books of account as specified in this section, may be kept at such other place in
India, other than its registered office, as the Board of directors may decide and when
the Board of directors so decides, the company shall, within seven days of the decision,
file with the Registrar a notice in e-form 23AA, in writing giving the full address of that
other place.
Answer 4(a)(ii)
In the given case,
1. The daughter of Managing director is employed in the company as company
secretary.
2. She wants to take salary advance in her capacity as company secretary and
not in her capacity as a daughter of managing director.
3. As company secretary she should be entitled to salary advance.
4. ` 80000 salary advance does not seem to be disproportionate to her salary.
Thus, she is entitled for salary advance in her capacity as company secretary and
Section 295 of the Companies Act may not be attracted in this case. This is similar to
the case M R Electronic Components v. AROC, held in Madras High Court, where the
wife of a Director availed salary advance as an employee of the company.
Answer 4(b)
According to Section 293(1(d) of the Companies Act, 1956, the Board of directors
of a public company, or of a private company which is a subsidiary of a public company,
shall not, except with the consent of such public company or subsidiary in general
meeting, borrow moneys, where the moneys to be borrowed, together with the moneys
already borrowed by the company (apart from temporary loans obtained from the company's
bankers in the ordinary course of business), will exceed the aggregate of the paid-up
capital of the company and its free reserves, that is to say, reserves not set apart for
any specific purpose.
In the given case, the company wants to borrow ` 65 crores and the amount already
borrowed is ` 50 crores in the form of secured loans. The agreegate of paid up capital
and reserves is ` 60 crores. As this transaction requires approval of shareholders,
Kamal Consulting Ltd is required to call general meeting and to obtain the approval of
shareholders to ratify the resolution passed by the Board of directors on May 10, 2012
and to make the resolution a valid one.
PP–DDCCM–December 2012 10
Answer 4(c)
Regulation 58 of SEBI (Depositors and Participants) Regulations, 1996 provides
that :
(1) If a beneficial owner intends to create a pledge on a security owned by him, he
shall make an application to the depository through the DP who has his account
in respect of such securities.
(2) The DP after satisfaction that the securities are available for pledge shall make
a note in its records of the notice of pledge and forward the application to the
depository.
(3) The depository after confirmation from the pledgee that the securities are available
for pledge with the pledger shall within fifteen days of the receipt of the application
create and record the pledge and send an intimation of the same to the DPs of
the pledger and the pledgee.
(4) On receipt of the intimation under sub-regulation (3) the DPs of both the pledgor
and the pledgee, shall inform the pledgor and the pledgee respectively of the
entry of creation of the pledge.
(5) If the depository does not create the pledge, it shall send along with the reasons
as intimation to the DPs of the pledger and the pledgee.
(6) The entry of pledge made under sub-regulation (3) may be cancelled by the
depository if pledger or the pledgee makes an application to the depository
through its DP:
Provided that no entry of pledge shall be cancelled by the depository without
prior concurrence of the pledgee.
(7) The depository on the cancellation of the entry of pledge shall inform the DP of
the pledger.
(8) Subject to the provisions of the pledge document, the pledgee may invoke the
pledge and on such invocation, the depository shall register the pledgee as
beneficial owner of such securities and amend its records accordingly.
(9) After amending its records under sub-regulation (8) the depository shall
immediately inform the DPs of the pledger and pledgee of the change who in
turn shall make the necessary changes in their records and inform the pledger
and pledgee, respectively.
(10) (a) If a beneficial owner intends to create a hypothecation on a security owned
by him he may do so in accordance with the provisions of sub-regulations
(1) to (9).
(b) The provisions of sub-regulations (1) to (9) shall mutatis mutandis apply in
such cases of:
Provided that the depository before registering the hypothecation as a
beneficial owner shall obtain the prior concurrence of the hypothecator.
 11 PP–DDCCM–December 2012
(11) No transfer of security in respect of which a notice or entry of pledge or
hypothecation is in force shall be effected by a DP without the concurrence of
the pledgee or the hypothecatee as the case may be.
Question 5
(a) State in the light of requirement of clause 49 of the listing agreement as to
whether the following persons can be appointed as independent directors on the
Board :
(i) Krishan, who is an executive of the company since its inception.
(ii) Soumitro, who holds 1.5% of the equity shares of the company having
voting rights.
(iii) Pradeep, who is already a director of 14 companies.
(iv) Shalini, who is appointed by a financial institution which has lent funds to
the company. (6 marks)
(b) The Board of directors of Radha Arts Pvt. Ltd. having paid-up capital of ` 4
crore consists of two directors. One of the directors is a member of the Institute
of Company Secretaries of India. The company intends to appoint him as
Company Secretary also. State the legal position as per the Companies Act,
1956. (4 marks)
(c) ATN Global Software Inc., a US company wants to raise the funds from Indian
capital market. The Board of directors of the company seeks your advice on the
following issues :
(i) Can a foreign company access Indian securities market for raising funds?
(ii) What parties would be involved in the issue of securities from Indian
securities market ?
(iii) Who is eligible to issue securities in Indian securities market ?
(iv) Who can purchase the securities and what would be the minimum application
amount for such issuance of securities ? (6 marks)
Answer 5(a)(i)
No, Mr Krishan who is an executive of a company, cannot be appointed as independent
director, as one of the conditions of Clause 49 of the listing agreement, with reference to
the definition of ‘independent Director’ stipulates that, ‘Independent director’ means a
non-executive director of the company who has not been an executive of the company
in the immediately preceding three financial years.
Answer 5(a)(ii)
Yes, Soumitro, who holds 1.5% of the equity shares of the company having voting
rights, can be appointed as independent director, as one of the conditions of Clause 49
of the listing agreement, with reference to the definition of ‘independent Director’ stipulates
that, independent director is not a substantial shareholder of the company i.e. owning
two percent or more of the block of voting shares.
PP–DDCCM–December 2012 12
Answer 5(a)(iii)
Yes, Mr pradeep can be appointed as an independent director in the company since
his total directorship is not more than 15 companies on the date of appointment, as
prescribed under Section 75 the Companies Act, 1956.
Answer 5(a)(iv)
Shalini, who is appointed by a financial institution, which has lent funds to the
company, can be appointed as independent director, as Nominee Directors appointed by
an institution which has invested in or lent to the company shall be deemed to be
independent directors under clause 49 of the listing agreement.
Answer 5(b)
As per sub-section (1) of section 383A of the Companies Act, 1956, every company
having such paid-up share capital as may be prescribed shall have a Whole-time secretary,
and where the Board of Directors of any such company comprises only two directors,
neither of them shall be the secretary of the company. As per Companies (Appointment
& Qualification of Secretary) Rules, every company having a paid up capital of not less
than Rs five crores, shall have a whole time secretary.
In the given case, the paid up capital being less than Rs.4 crore, is not required to
appoint a whole time secretary. Thus the director who is the member of ICSI can be
appointed as company secretary.
Answer 5(c)(i)
Yes, a foreign company can access Indian securities market for raising funds through
issue of Indian Depository Receipts (IDRs)
Answer 5(c)(ii)
The parties involved in the issue of Indian Depositary Receipts are:
(a) Issuing Company (Foreign Company)
(b) Overseas Custodian (custodian located at the same country where issuing company
is located).
(c) Domestic Depository (Depository located in India)
(d) Indian Investors who has invested in IDR issue
Answer 5(c)(iii)
— Pre-issue paid-up capital and free reserves of at least US$ 50 million and have
a minimum average market capitalization (during the last 3 years) in its parent
country of at least US$ 100 million;
— A continuous trading record or history on a stock exchange in its parent country
for at least three immediately preceding years;
— A track record of distributable profits for at least three out of immediately
preceding five years;
— Listed in its home country and not been prohibited to issue securities by any
 13 PP–DDCCM–December 2012
Regulatory Body and has a good track record with respect to compliance with
securities market regulations.
— The size of an IDR issue shall not be less than Rs.50 crores
Answer 5(a)(iv)
IDRs can be purchased by any person who is resident in India as defined under
FEMA Act, 1999. Minimum application amount in an IDR issue shall be Rs.20,000.
Question 6
(a) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) An issuer is required to allot the securities and refund the excess amounts
within ____________ from the closure of the offer.
(ii) The merger of a dairy farming business with a supplier of agricultural foodstuffs
is an example of ____________.
(iii) An Indian party is permitted to make investment in overseas joint ventures
(JV)/wholly owned subsidiaries (WOS), not exceeding ____________ of its
net worth.
(iv) Securities which have some of the attributes of both debt securities and
equity securities are known as ____________.
(v) New depository participants which are operational for less than ____________
in an audit period can submit audit report for that audit period with the audit
report for next audit period.
(vi) In the case of a public limited company, the director must obtain qualification
shares within ____________ from the date of appointment.
(1 mark each)
(b) Azad Ltd. is having paid-up share capital of ` 1 crore consisting of 7,00,000
equity shares of ` 10 each and 3,00,000 preference shares of ` 10 each, both
fully paid-up. Out of the paid-up capital, 3,00,000 equity shares are held in the
company by nationalised banks and Life Insurance Corporation (LIC). These
banks and LIC have further purchased 2,50,000 preference shares of the company.
Now, the company is not sure about its status whether it has turned as a
government company. It has approached you to clarify about its status so that
matter of appointment of auditors could also be decided. Advise the company
referring to relevant provisions. (5 marks)
(c) Swift Ltd. is seeking your advice as to how the registration of charges (created/
modified) with the Registrar of Companies as required under sections 124 to
145 of the Companies Act, 1956 will be made. Advise. (5 marks)
Answer 6(a)
(i) An issuer is required to allot the securities and refund the excess amounts
within 15 days from the closure of the offer.
(ii) The merger of a dairy farming business with a supplier of agricultural foodstuffs
is an example of Vertical Merger .
PP–DDCCM–December 2012 14
(iii) An Indian party is permitted to make investment in overseas joint ventures
(JV)/wholly owned subsidiaries (WOS), not exceeding 400% of its net worth.
(iv) Securities which have some of the attributes of both debt securities and equity
securities are known as Hybrid Securities .
(v) New depository participants which are operational for less than Three months
in an audit period can submit audit report for that audit period with the audit
report for next audit period.
(vi) In the case of a public limited company, the director must obtain qualification
shares within Two months from the date of appointment.
Answer 6(b)
According to Section 617, Government Company means any company in which not
less than 51% of the paid-up share capital is held by the Central Government or by any
State Government or Government(s) or partly by the Central Government and partly by
one or more State Governments and includes a company which is a subsidiary of a
government company as thus defined.
None of the shares of Azad Limited is held by Central or State Government(s). LIC and
nationalized banks do not come under “Central Government” or State Government as regards
Section 617 of the Companies Act. Hence, Azad Limited is not a government company
within the meaning of Section 617 of the Companies Act, 1956.
However, the provisions of Section 619B are attracted in this case as corporations
owned or controlled by the Central Government hold among themselves more than 51%
of the paid-up share capital of Azad Limited (Section 619B(f). This has also been
clarified by circular issued by MCA dated 11/2/77 including LIC and nationalized banks
as corporations owned and controlled by Central Government, for the purpose of 619-B,
relating to the appointment of auditors of government companies. This has also been
clarified by circular issued by MCA dated 11/2/77 including LIC and nationalized
Thus the company will be deemed to be a government company for the purpose of
appointment of Auditors under Section 619B. The auditor in the given company is to be
appointed by the Comptroller and Auditor General of India.
Answer 6(c)
Sections 124 to 145 in Part V of the Companies Act, 1956 provide for the registration
of charges in so far as any security on the company's property or undertaking is conferred,
modified or satisfied thereby.
Prescribed particulars of the charge together with the instrument, if any, evidencing,
creating or modifying the charge (or a certified copy thereof) are required to be filed with
the Registrar of Companies within thirty days after the date of creation or modification of
the charges. In case of satisfaction of charge, the intimation is required to be given to
the Registrar within thirty days from the date of payment or satisfaction of the charge.
The Registrar has discretionary powers to condone the delays upto thirty days in case
of particulars relating to creation or modification of the charge. In the case of satisfaction
of charge, the delays can be condoned by Company Law Board Bench of the respective
regions upon a petition (application) filed by the company or interested person.
 15 PP–DDCCM–December 2012
The prescribed particulars in e-Form 8 or e-Form 10 together with copy of the
instrument creating or modifying the charge and those relating to satisfaction of charge
in e-Form 17 are required to be filed with the Registrar of Companies, and should be duly
signed on behalf of the concerned company as well as the respective charge holder.
Non-filing of particulars of a charge renders the charge void against the liquidator or
against any other creditor of the company. This implies that if particulars of a subsequent
charge created on the property are filed and the particulars of the earlier charge particulars
are not filed, then the subsequent charge-holder would enjoy precedence over the earlier
charge-holder, e.g., in selling the property in order to satisfy his debt. It should be noted
that the concerned company cannot, even in the event of non-filing of particulars of
charge, repudiate its contractual obligation vis-à-vis the creditor in whose favour charge
is created.
Question 7
Write notes on any four of the following :
(i) Role of information technology in compliance management systems
(ii) Secretarial audit
(iii) Remuneration committee
(iv) Documents to be checked in due diligence process
(v) Book building and reverse book building
(vi) Redemption and roll-over of debt securities. (4 marks each)
Answer 7(i)
A critical component of an effective compliance program is the ability to monitor
and audit compliance in a “real time manner.” Yet, as companies cross geographical
and industry boundaries, it is becoming harder to perform this role in the traditional
manner. As a result, companies are increasingly seeking technology solutions.
Information Technology can play an effective role in implementation of a Corporate
Compliance Management Programme across various departments of an organization in
terms of real-time compliance reminders, generation of reports, sending warning signals,
generation of compliance calendar etc.
Many companies are introducing comprehensive web-based compliance systems
that links various offices/units for better co-ordination and continued compliance.
Companies prefer to introduce full-fledged compliance management systems for smooth
compliance of multiple laws. Web-based compliance software are available industry-
wise and tailor made compliance software can also be made according to company
specifications which has to be updated on continuous basis.
Answer 7(ii)
Secretarial Audit is a process to check compliance with the provisions of various
laws and rules/regulations/procedures, maintenance of books, records etc., by an
independent professional to ensure that the company has complied with the legal and
procedural requirements and also followed the due process. It is essentially a mechanism
to monitor compliance with the requirements of stated laws. It is a compliance audit and
PP–DDCCM–December 2012 16
it is a part of total compliance management in an organisation. The Secretarial Audit is
an effective tool for corporate compliance management. It helps to detect non-compliance
and to take corrective measures.
Answer 7(iii)
Remuneration Committee is recommendatory as per clause 40 of the listing agreement.
Accordingly :
(a) The board may set up a remuneration committee to determine on their behalf
and on behalf of the shareholders with agreed terms of reference, the company’s
policy on specific remuneration packages for executive directors including pension
rights and any compensation payment.
(b) To avoid conflicts of interest, the remuneration committee, which would determine
the remuneration packages of the executive directors may comprise of at least
three directors, all of whom should be non-executive directors, the Chairman of
committee being an independent director.
(c) All the members of the remuneration committee could be present at the meeting.
(d) The Chairman of the remuneration committee could be present at the Annual
General Meeting, to answer the shareholder queries. However, it would be up to
the Chairman to decide who should answer the queries.
Answer 7(iv)
Documents to be Checked in Due Diligence Process
The following are the few types of information or documents to be checked, during
the process of due diligence :
1. Basic Information
2. Financial Data
3. Important Business Agreements
4. Litigation Aspects
5. IPR Details
6. Marketing information
7. Internal control system
8. Taxation aspects
9. Insurance coverage
10. Human resources aspects
11. Environmental impact
12. Cultural aspects
However, the list mentioned above is not an exhaustive. The purpose of providing
 17 PP–DDCCM–December 2012
this list is to provide a general idea of documents that are required to be checked in any
type of due diligence.
Answer 7(v)
Book Building
(i) It is a method of Initial Public Offer (IPO) to raise capital, whereby the company
offers its shares for subscription at an indicative price range.
(ii) The investors are to subscribe at a price within the range offered by the Company.
(iii) The price at which shares will finally be allotted will be based on the bidding
process, prescribed.
Reserve Book Building
(i) It is method of buy-back of securities. It is an efficient price discovery process
adopted when the company aims to buy the shares from the public and other
shareholders.
(ii) This is generally done when the company wishes to delist itself from the trading
exchanges.
Answer 7(vi)
As per SEBI (Issue and Listing of Debt Securities) Regulations, 2008, the company
has comply with the following while redemption and roll over of debt securities :
— To redeem the debt securities in terms of the offer document.
— Where it is desired to roll-over the debt securities issued, ensure to pass a
special resolution of holders of such securities and give twenty one days notice,
containing the disclosure with regard to credit rating, rationale for roll-over etc.
— The issuer shall, prior to sending the notice to holders of debt securities, file a
copy of the notice and proposed resolution with the stock exchanges where
such securities are listed, for dissemination of the same to public on its website.
— The debt securities issued can be rolled over subject to the following conditions:
(a) The roll-over is approved by a special resolution passed by the holders of
debt securities through postal ballot having the consent of not less than
75% of the holders by value of such debt securities;
(b) Atleast one rating is obtained from a credit rating agency within a period of
six months prior to the due date of redemption and is disclosed in the notice;
(c) Fresh trust deed shall be executed at the time of such roll–over or the
existing trust deed may be continued if the trust deed provides for such
continuation;
(d) Adequate security shall be created or maintained in respect of such debt
securities to be rolled-over.
— Ensure to redeem the debt securities of all the debt securities holders,
who have not given their positive consent to the roll-over.
PP–DDCCM–December 2012 18
Question 8
Critically examine and comment on any four of the following :
(i) The acquirer has to undertake a preliminary study of the target company before
initiating any action for its takeover.
(ii) Every listed company is required to comply with the requirements specified in
Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957
with respect to minimum public holdings.
(iii) Due diligence investigations are generally for corporate mergers and acquisitions.
(iv) The scope of a search report depends upon the requirement of the bank or
financial institution concerned.
(v) The securities market facilitates the internationalisation of an economy by linking
it with the rest of the world. (4 marks each)
Answer 8(i)
Preliminary Examination of a target company
The acquirer has to undertake a preliminary study on the target company, before
taking any action for taking over a company. He may consider the following points:
It may be noted that this list is not an exhaustive checklist and it varies depends on
size of the company nature of industry :
(a) Information has to be collected on Target Company and to be analysed on
financial and legal angle.

(b) Register of members to be examined to verify the profile of the shareholders.

(c) Title of the target company with respect to immovable properties may be verified.

(d) Financial statements of Target Company have to be examined.

(e) Examination of Articles and Memorandum of Association of the Company.

(f) Examination of charges created by the Company.

(g) Applicability of FEMA provisions if any relating to FDI has to be looked into.

(h) Import and Export of technology if any.

(i) Business prospects etc.

Answer 8(ii)
Clause 40A of Listing Agreement stipulates conditions as to Minimum level of public
shareholding. Accordingly, the company is required to comply with the requirements
specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules,
1957 dealing with minimum public holding and continuous listing agreement.
Where the issuer company is required to achieve the minimum level of public
shareholding specified in Rule 19(2)(b) and/or Rule 19A of the Securities Contracts
 19 PP–DDCCM–December 2012
(Regulation) Rules, 1957, it shall adopt any of the following methods to raise the public
shareholding to the required level :
(a) Issuance of shares to public through prospectus; or
(b) Offer for sale of shares held by promoters to public through prospectus; or
(c) sale of shares held by promoters through the secondary market. Such sale
requires prior approval of the Specified Stock Exchange.
(d) Institutional Placement Programme (IPP) in terms of Chapter VIIIA of SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended;
or
(e) Rights Issues to public shareholders, with promoter/promoter group shareholders
forgoing their entitlement to equity shares, whether present or future, that may
arise from such issue; or
(f) Bonus Issues to public shareholders, with promoter/promoter group shareholders
forgoing their entitlement to equity shares, whether present or future, that may
arise from such issue; or
(g) Any other method as may be approved by SEBI, on a case to case basis.
Answer 8(iii)
Due diligence investigations are generally for corporate acquisitions and mergers–
i.e., investigation of the company being acquired or merged. These are also generally
the most thorough types of due diligence investigations. The buyer or transferee company
wants to make sure it knows what it is buying. Partnerships are another time when
parties investigate each other in conjunction with negotiations. Some other transactions
where due diligence is appropriate could be:
(a) Strategic Alliances and Joint Ventures
(b) Strategic Partnerships
(c) Partnering Agreements
(d) Business Coalitions
(e) Outsourcing Arrangements
(f) Technology and Product Licensing
(g) Technology Sharing and Cross Licensing Agreements
(h) Distribution Relationships, etc.
Answer 8(iv)
The scope of a Search report depends upon the requirements of the Bank or Financial
Institution concerned. A Search report prepared by the Company Secretary in Practice
enables the Bank/Financial Institution to evaluate the extent upto which the company
has already borrowed moneys and created charges on the security of its movable and/
or immovable properties. This information is very vital for considering the company's
request for grant of loans and other credit facilities. The Bank/Financial Institution, while
assessing the company's needs for funds, can take a conscious decision regarding the
PP–DDCCM–December 2012 20
quantum of loan/credit facility to be sanctioned, sufficiency of security required and its
nature, as also other terms and conditions to be stipulated. The Search report, thus,
acts as an important source of information enabling the lending Bank/Institution to take
an informed and speedy decision, and also assures it about the credit-worthiness or
otherwise of the borrowing company.
Answer 8(v)
The securities market facilitates the internationalization of an economy by linking it
with the rest of the world. This linkage assists through the inflow of capital in the form of
portfolio investment. Moreover, a strong domestic stock market performance forms the
basis for well performing domestic corporate to raise capital in the international market.
This implies that the domestic economy is opened up to international competitive
pressures, which help to raise efficiency. It is also very likely that existence of a domestic
securities market will deter capital outflow by providing attractive investment opportunities
within domestic economy.
 21 PP–GBES–December 2012
GOVERNANCE, BUSINESS ETHICS AND SUSTAINABILITY
Time allowed : 3 hours Maximum marks : 100

PART A
(Answer Question No. 1 which is compulsory
and any two of the rest from this part)

Question 1
(a) "Kautilya's Arthashastra maintains that 'for good governance, all administrators,
including the king were considered servants of the people. Good governance
and stability were completely linked'. If the king is substituted with the Board of
directors, the same principle can be applied with Corporate Governance."
In the light of the above statement, discuss the fourfold duties of the Board of
directors with regard to Corporate Governance as enunciated by Kautilya and
explain the six enemies of governance, which should be overcome by the Board
of directors for ensuring good Corporate Governance. (10 marks)
(b) State, with reasons in brief, whether the following statements are true or false :
(i) Developing a valid strategy is only the first step in creating an effective
organisation.
(ii) Insider trading is always illegal.
(iii) As per clause 49 of the listing agreement, only the Chairman of the company
can be the Chairman of the Audit Committee.
(iv) Mutual funds are institutional investors.
(v) According to California Public Employees' Retirement System (CalPERS),
lead independent director is appointed by independent directors.
(2 marks each)
Answer 1(a)
“Kautilya’s Arthashastra maintains that for good governance, all administrators,
including the king were considered servants of the people. Good governance and stability
were completely linked.”
If the king is substituted with the Board of Directors and the subjects with the
shareholders, the concept of good governance prevails. This is because the concept of
corporate governance believes that public good should be ahead of private good and
that the corporation's resources cannot be used for personal benefit. The four fold duties
of a king as mentioned in Arthashastra are as follows:
— Raksha – literally means protection, in the corporate scenario it can be equated
with the risk management aspect.
— Vriddhi – literally means growth, in the present day context it can be equated to
stakeholder value enhancement.
21
PP–GBES–December 2012 22
— Palana – literally means maintenance/compliance, in the present day context it
can be equated to compliance to the law in letter and spirit.
— Yogakshema – literally means well being and in Kautilya’s Arthashastra it is
used in context of a social security system. In the present day context it can be
equated to corporate social responsibility.
Arthashastra mentions self-discipline for a king and the six enemies which a king
should overcome – lust, anger, greed, conceit, arrogance and foolhardiness. In the
present day context, this addresses the ethics aspect of businesses and the personal
ethics of the corporate leaders.
Answer 1(b)
(i) True. Developing a valid strategy is only the first step in creating an effective
organization. The board plays a crucial role in advising, evaluating and monitoring
strategy implementation. Boards can best monitor strategy implementation by
setting benchmarks to measure progress and by drawing on objective sources
of information.
(ii) False. Insider trading isn't always illegal. Trading by a company insider in its
shares is not violation per se and is legal. What is illegal is the trading by an
insider on the basis of unpublished price-sensitive information.
(iii) False. As per clause 49 of the listing agreement the Chairman of the Audit
Committee shall be an independent director.
(iv) True. Institutional Investors are organizations which pool large sums of money
and invest those sums in companies. Mutual Funds are institutional investors
as they raise and invest on behalf of everyone participating in the scheme for
the common good.
(v) False. According to CalPERS where the Chairman of the board is not an
independent director, and the role of Chairman and CEO is not separate, the
board should name a director as lead independent director.
Question 2
(a) "The independence of independent directors is one of the most debated aspects
in Corporate Governance. Are they liable and can they be punished ?" Discuss
this statement in the light of available case studies. (6 marks)
(b) Write short notes on any three of the following :
(i) Mandatory committees under the listing agreement
(ii) Diligence report in banks
(iii) Fraud risk management
(iv) ISO 26000. (3 marks each)
Answer 2(a)
Independent directors are invited to sit on the board purely on account of their
special skills and expertise in particular fields and they represent the conscience of the
 23 PP–GBES–December 2012
investing public and also take care of public interest. Independent directors bear a
fiduciary responsibility towards shareholders and the creditors. Yet, the
independence of independent directors is one of the most debated aspects in
corporate governance.
Securities Exchange Commission, U.S in a recent case has begun a new era of
scrutinizing liability of independent directors by bringing an action against independent
director. In SEC v. Raval, Civil Action No. 8:10-cv-00101 (D.Neb. filed Mar.15,2010) it
was alleged that Vasant Raval, former Chairman of the Audit Committee of InfoGroup,
Inc.(now InfoUSA, Inc.) had failed to sufficiently investigate certain “red flags” surrounding
the company’s former CEO and Chairman of the Board, Vinod Gupta.
The SEC charged Raval for failing in his ‘affirmative responsibilities’ and thus
violating the anti-fraud, proxy, and reporting provisions of the US Exchange Act. To
settle his case, Raval consented to the entry of a permanent injunction prohibiting future
violations of the related provisions of the federal securities laws, a $50,000 civil penalty,
and a five-year ban from serving as an officer or director of a company.
Similarly in India, in Bhopal Gas Tragedy verdict, the court has held Keshub Mahindra
reputed industrialist, the then non executive chairman of Union Carbide India
limited(UCIL), guilty and sentenced him to two years of imprisonment alongwith seven
other accused. He attended only a few meetings in a year and took only macro view of
the company’s developments. A non-vigilant act of non-executive chairman, accounted
for death of thousands. “Ignorance” of the system by the director of the company is
unacceptable. Role of non executive director in this case is questionable. Later he was
granted bail.

Answer 2(b)(i)

Mandatory Committees under the Listing Agreement

According to listing agreement there are two mandatory committees to be set up

viz. Audit Committee and Shareholder Grievance Committee.

Audit Committee : The purpose of constitution of this committee is to make it

responsible for the oversight of the quality and integrity of the company’s accounting
and reporting practices; controls and financial statements; legal and regulatory compliance;
the auditors’s qualifications and independence; and the performance of company’s internal
function. The committee functions as liaison between the board of directors and the
auditors- external & internal.
The audit committee shall have minimum three directors as members. Two-thirds of
the members of audit committee shall be independent directors. All members of audit
committee shall be financially literate and at least one member shall have accounting or
related financial management expertise. The Chairman of the Audit Committee shall be
an independent director.
Shareholder Grievance Committee : This committee is constituted under the
chairmanship of a non-executive director to specifically look into the redressal of
shareholder and investors complaints like transfer of shares, non-receipt of balance
sheet, non-receipt of declared dividends etc.
PP–GBES–December 2012 24
Answer 2(b)(ii)
Diligence Report in Banks
The Reserve Bank of India advised all the scheduled commercial Banks to obtain
regular certification (Diligence Report) by a professional, preferably a Company Secretary,
regarding compliance of various statutory prescriptions that are in vogue. The Diligence
Report will not only act as an effective mechanism to ensure that the legal and procedural
requirements under the respective legislations are duly complied with but also instill
professional discipline in the working of the companies that have taken loan, besides
building up the necessary confidence in the state of affairs of the companies.
Answer 2(b)(iii)
Fraud Risk Management

The term 'fraud' is generally defined in the law as an intentional misrepresentation of

material existing fact made by one person to another with knowledge of its falsity and for
the purpose of inducing the other person to act, and upon which the other person relies
with resulting injury or damage.

For the corporates it becomes more important to proactively incorporate Fraud

Management policy or a plan aligned to its internal control and risk management plan.
Such policy/plan protects the company from any kind of uncertain happening which
leads the company to a huge loss or damage (brand reputation, financial loss, assets).

The Fraud Risk Management Policy will help to strengthen the existing anti-fraud
controls by raising the awareness across the Company and:

— Promote an open and transparent communication culture

— Promote zero tolerance to fraud / misconduct

— Encourage employees to report suspicious cases of fraud / misconduct

— Spread awareness amongst employees and educate them on risks faced by the
company.

Answer 2(b)(iv)
ISO 26000

ISO 26000 is the international standard giving guidance on social responsibility and
is intended for use by organizations of all types both public and private sectors, in
developed and developing countries. It provides guidance on principles of social
responsibility, the core subjects and issues pertaining to social responsibility and on
ways to integrate socially responsible behaviour into existing organizational strategies,
systems, practices and processes.
This International Standard is not a management system standard. It is not intended
or appropriate for certification purposes or regulatory or contractual use. Its intent is to
provide organizations with guidance concerning social responsibility and can be used as
part of public policy activities.
 25 PP–GBES–December 2012
Question 3
(a) "A corporate blog is published and used by an organisation to reach its
organisational goals.'' Comment, highlighting the benefits of corporate blogging.
(5 marks)
(b) Discuss briefly the disclosure norms under the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011. (5 marks)
(c) Discuss the barriers to visionary leadership. (5 marks)

Answer 3(a)

A corporate weblog is published and used by an organization to reach its organizational

goals. The advantage of blogs is that posts and comments are easy to reach and follow
due to centralized hosting and generally structured conversation threads. Although there
are many different types of corporate blogs, most can be categorized as either external
or internal.

Internal blogs may be used in lieu of meetings and e-mail discussions, and can be
especially useful when the people involved are in different locations, or have conflicting
schedules. The informal nature of blogs may encourage: employee participation, free
discussion of issues, collective intelligence, direct communication between various layers
of an organization, a sense of community.

An external blog is a publicly available weblog where company employees, teams,

or spokespersons share their views. It is often used to announce new products and
services (or the end of old products), to explain and clarify policies, or to react on public
criticism on certain issues. It also allows a window to the company culture and is often
treated more informally than traditional press releases.

The Advantages of Corporate Blogging

(a) Achieve customer intimacy

Initiate a communication with the customer. Speak directly to consumers and

have them come right back with suggestions or complaints—or kudos.

(b) Influence the public “conversation” and “control” it

Make it easy for journalists to find the latest, most accurate information about
new products or ventures. In the case of a crisis, a corporate blog allows to
shape the conversation about it. The control part is a huge advantage.

(c) Enhance brand visibility and credibility

Appear higher in search engine rankings, establish expertise in industry or subject

area, and personalize one’s company by giving it a human voice.

(d) Leadership

According to CNN “A blog is the perfect platform for a thought leader.”

PP–GBES–December 2012 26
Answer 3(b)

SEBI (Substantial Acquisition of shares and takeover) Regulations, 2011

Disclosures related provisions

It may be noted that the word “shares” for disclosure purposes include convertible
securities also.

Event based Disclosures (Regulation 29)

(a) Any person, who along with Persons Acting in Concert (PACs) crosses the
threshold limit of 5% of shares or voting rights, has to disclose his aggregate
shareholding and voting rights to the Target Company at its registered office
and to every Stock Exchange where the shares of the Target Company are
listed within 2 working days of acquisition as per the format specified by SEBI.

(b) Any person who holds 5% or more of shares or voting rights of the target company
and who acquires or sells shares representing 2% or more of the voting rights,
shall disclose details of such acquisitions/sales to the Target company at its
registered office and to every Stock Exchanges where the shares of the Target
Company are listed within 2 working days of such transaction, as per the format
specified by SEBI.

Shares taken by way of encumbrance shall be treated as an acquisition and on

release of such encumbrances it is a disposal.

Continual Disclosures (Regulation 30)

Continual disclosures of aggregate shareholding shall be made within 7 days of

financial year ending on March 31 to the target company at its registered office and
every stock exchange where the shares of the Target Company are listed by:

(a) Shareholders (along with PACs, if any) holding shares or voting rights entitling
them to exercise 25% or more of the voting rights in the target company.

(b) Promoter (along with PACs, if any) of the target company irrespective of their
percentage of holding.

Disclosures of encumbered shares

The promoter (along with PACs) of the target company shall disclose details of
shares encumbered by them or any invocation or release of encumbrance of shares held
by them to the target company at its registered office and every stock exchange where
shares of the target company are listed, within 7 working days of such event.

As per Regulation 28(3), the term “encumbrance” shall include a pledge, lien or any
such transaction, by whatever name called.” The promoters have to understand the
nature of encumbrance and those encumbrances which entail a risk of the shares held
by promoters being appropriated or sold by a third party, directly or indirectly, are required
to be disclosed to the stock exchanges in terms of the Takeover Regulations, 2011.
 27 PP–GBES–December 2012
Answer 3(c)
Barriers to Visionary Leadership
Barriers to great leadership can be set up by others or self-imposed. Either way
these barriers create a hurdle that has to be overcome in order to deliver good
communication, knowledge and ideas. Many aspiring leaders stumble because they fail
to recognise the barriers they are creating through lack of attention to detail. Frank
Martinelli enlisted barriers to leadership with a view to help companies identify and
remove them thereby facilitating visionary board leadership:
— Time Management : Lack of time to attend meetings, read materials and maintain
contact with each other in between meetings. The board members need to
organize themselves for maximum effectiveness and avoid wasting time on
trivial matters.
— Resistance to risk taking : In order to be innovative and creative in its decision-
making, boards must be willing to take chances, to try new things, to take risks.
Success in new venture is never granted. Boards need to acknowledge the
tension point and discuss it with funders and other key supporters. Board
leadership must strike a balance between taking chances and maintaining the
traditional stewardship role.
— Strategic Planning : Strategic planning offers boards an opportunity to think
about changes and trends that will have significant impact and develop strategies
to respond to challenges. Some boards are not involved in strategic planning at
all; others are involved in a superficial way. Therefore, the boards lose an
important opportunity to hone/exercise visionary leadership skills.
— Complexity : Board members frequently lack a deep understanding of critical
changes, trends and developments that challenge fundamental assumptions
about how it defines its work and what success looks like. This lack of knowledge
results in a lack of confidence on the part of the board to act decisively and
authoritatively.
— Micro Management : It is necessary that the board focuses its attention on
items of critical importance to the organization. If the board is tempted to micro
manage or to meddle in lesser matters, an opportunity to provide visionary
leadership is lost.
— Clinging to Tradition : Boards often resist change in order to preserve tradition.
However, changing environment requires the Boards to be open to change.
Maira and Scott - Morgan in “The Accelerating Organisation” point out that
continuous shedding of operating rules is necessary because of changing
environmental conditions. But shedding becomes more complicated in systems
involving human beings, because their sense of self-worth is attached to many
old rules. This human tendency to hold on to the known prevents boards from
considering and pursuing new opportunities which conflict with the old rules.
— Confused Roles : Some boards assume that it is the job of the executive director
to do the visionary thinking and that the board will sit and wait for direction and
inspiration. This lack of clarity can result in boards that do not exercise visionary
leadership because they do not think it is their job.
PP–GBES–December 2012 28
— Past Habit : Time was when clients, members and consumers would just walk
in the door on their own. Viewing things in this way, boards did not consider
market place pressures, or for that matter a competitive marketplace. All that
has changed. Yet for many boards their leadership style has not kept pace with
this new awareness.
Question 4
(a) "Much of the development of insider trading law has resulted from court
decisions.'' Elucidate. (6 marks)
(b) Discuss briefly any three of the following :
(i) Directors development programme
(ii) Related party transactions
(iii) Corporate citizenship
(iv) Corporate Governance in Australia. (3 marks each)
Answer 4(a)
Much of the development of insider trading law has resulted from court decisions.
In United States of America it was decided in SEC v. Texas Gulf Sulphur Co.
(1966), where federal circuit court stated that anyone in possession of inside information
must either disclose the information or refrain from trading. In 1984, the Supreme Court
of the United States ruled in the case of Dirks v. SEC that tippees (receivers of second-
hand information) are liable if they had reason to believe that the tipper had breached a
fiduciary duty in disclosing confidential information and the tipper received any personal
benefit from the disclosure. (Since Dirks disclosed the information in order to expose a
fraud, rather than for personal gain, nobody was liable for insider trading violations in his
case.)
The Dirks case also defined the concept of "constructive insiders," who are lawyers,
investment bankers and others who receive confidential information from a corporation
while providing services to the corporation. Constructive insiders are also liable for
insider trading violations if the corporation expects the information to remain confidential,
since they acquire the fiduciary duties of the true insider.
In United States v. Carpenter (1986) the U.S. Supreme Court ruled that "It is well
established, as a general proposition, that a person who acquires special knowledge or
information by virtue of a confidential or fiduciary relationship with another is not free to
exploit that knowledge or information for his own personal benefit but must account to
his principle for any profits derived there from."
Similarly in India, in 1992 Market regulator SEBI introduced Securities and Exchange
Board of India (Prohibition of Insider Trading) Regulations, 1992, providing that "Insider"
is any person, who is or was connected with the company, and who is reasonably
expected to have access to unpublished price-sensitive information about the stock of
that particular company, or who has access to such unpublished price sensitive
information. Various prosecutions under these regulations have been introduced and
finalised.
 29 PP–GBES–December 2012
In the case of M/s. Tata Finance Limited (TFL), 2008 SEBI has passed an order
restraining Shri D.S. Pendse Managing Director of the company, and associates from
accessing the securities market and prohibiting them from buying, selling or otherwise
dealing or associating with the securities market in any manner whatsoever, for a period
of five years.

Answer 4(b)(i)

Directors Development Programme

Directors Development should not be treated as merely another training schedule

rather it should be structured so as to sharpen the existing skills and knowledge of
directors. It is a good practice for boards to arrange for an ongoing updation of their
members with changes in governance, technologies, markets, products, and so on
through:

• Ongoing education

• Site visits

• Seminars; and

• Various short term and long term Courses

Answer 4(b)(ii)

Related Party Transactions

Related party transaction refers to Business deal or arrangement between two parties
who are joined by a special relationship prior to the deal. For example, a business
transaction between a major shareholder and the corporation, such as a contract for the
shareholder's company to perform renovations to the corporation's offices, would be
deemed a related-party transaction

In terms of Section 297 of the Companies Act 1956, the transactions of a company
with the following persons can be inferred/ interpreted as related party transactions.

• a director of the company

• relative of the director
• a firm in which such a director or relative is a partner
• any other partner in such a firm
• a private company of which the director is a member or director

The section prohibits them from entering into any contract/ related part transaction
with the company –

(a) for the sale, purchase or supply of any goods, materials or services; or

(b) for underwriting the subscription of any shares in or debentures of, the company.
PP–GBES–December 2012 30
Such a transaction shall requires the consent of Board for entering into such contracts.
Section 299 imposes duty on directors to disclose their interest in other concerns to the
Board of Directors before entering into any contract with the related parties.
Accounting Standard 18 issued by the Institute of Chartered Accountants of India
relate to ‘Related Party Disclosures’ makes it mandatory for companies to disclose
related party transactions in the financial statements. As per Accounting Standard 18-
‘Related Party Disclosures’, it is defined thus “Parties are considered to be related if at
any time during the reporting period one party has the ability to control the other party or
exercise significant influence over the other party in making financial and/or operating
decisions” and Related Party transaction means “a transfer of resources or obligations
between related parties, regardless of whether or not a price is charged.
Answer 4(b)(iii)
Corporate Citizenship
Business can not exist in isolation; business cannot be oblivious to societal
development.
Corporate citizenship is a commitment to improve community well-being through
voluntary business practices and contribution of corporate resources leading to sustainable
growth. The term corporate citizenship implies the behaviour, which would maximize a
company’s positive impact and minimize the negative impact on its social and physical
environment. It means moving from supply driven to more demand led strategies; keeping
in mind the welfare of all stakeholders; more participatory approaches to working with
communities; balancing the economic cost and benefits with the social; and finally
dealing with processes rather than struc¬tures. The ultimate goal is to establish dynamic
relationship between the community, business and philanthropic activities so as to
complement and supplement each other.
Answer 4(b)(iv)

Corporate Governance in Australia

Australia's corporate governance framework contains a range of measures that

promote accountability of management and transparency of financial and other
information. On the regulatory framework of corporate governance, the Australian
government has undertaken a set of reforms to improve disclosure norms of financial
information and to update accounting rules.

The Australian Stock Exchange through its listing rules, regulates the behaviour of
ASX listed companies. In addition to the listing rules, which are mandatory, the ASX
has a set of guidance notes to assist listed companies to comply with both the spirit and
letter of the rules.
The ASX Corporate Governance Council issued Corporate Governance Principles
in 2003. These were revised in 2007 and came into effect from January 1, 2008. This
was further revised in the year 2010. The approach is similar to the UK combined code–
i.e. ‘Comply or explain’. In Australia it is called “if not, why not approach”. If a company
considers that a recommendation is inappropriate to a particular circumstance, it has
the flexibility not to adopt it and explain why it has not adopted.
 31 PP–GBES–December 2012
PART B
(Answer ANY TWO questions from this part.)
Question 5
(a) "The integrity pact (IP) is a tool aimed at preventing corruption in public
contracting.'' Discuss. (6 marks)
(b) Discuss briefly any three of the following :
(i) Stakeholder engagement
(ii) Social and ethical accounting
(iii) Credo
(iv) Ethics in compliance. (3 marks each)
Answer 5(a)
Developed by Transparency International (TI), the Integrity Pact (IP) is a tool aimed
at preventing corruption in public contracting. It consists of a process that includes an
agreement between a government or a government department and all bidders for a
public contract. It contains rights and obligations to the effect that neither side will: pay,
offer, demand or accept bribes; collude with competitors to obtain the contract; or engage
in such abuses while carrying out the contract. The IP also introduces a monitoring
system that provides for independent oversight and accountability.
What is an integrity pact ?
It is a written agreement between the government/government department and all
bidders to refrain from bribery and collusion.
Bidders are required to disclose all commissions and similar expenses paid by them
to anyone in connection with the contract. If the written agreement is violated then the
pact describes the sanctions that shall apply. These may include:
• Loss or denial of contract;
• Forfeiture of the bid or performance bond and liability for damages;
• Exclusion from bidding on future contracts (debarment); and
• Criminal or disciplinary action against employees of the government.
It is a monitoring system that provides for independent oversight and increased
government accountability of the public contracting process.
In most cases, monitors are members of civil society or experts appointed by (and
reporting to) the TI Chapter and its civil society partners. The independent monitoring
system aims to ensure that the pact is implemented and the obligations of the parties
are fulfilled. The monitor performs functions such as:
• Overseeing corruption risks in the contracting process and the execution of
work;
• Offering guidance on possible preventive measures;
PP–GBES–December 2012 32
• Responding to the concerns and/or complaints of bidders or interested external
stakeholders;
• Informing the public about the contracting process’s transparency and integrity
(or lack thereof).
Why use an integrity pact?
— Companies can abstain from bribing safe in the knowledge that
• (A) their competitors have provided assurances to do the same, and
• (B) government procurement, privatisation or licensing agencies will follow
transparent procedures and undertake to prevent corruption, including
extortion, by their officials.
— Governments can reduce the high cost and distorting impact of corruption on
public procurement, privatisation or licensing in their programmes, which will
have a more hospitable investment climate and public support.
— Citizens can more easily monitor public decision-making and their government’s
activities.
Answer 5(b)(i)
Stakeholder Engagement
Stakeholder engagement is an alliance-building tool. Corporations practice
stakeholder engagement in an effort to understand the needs of their stake-holders,
create partnerships and promote dialogue. Stakeholder engagement identifies
stakeholders, assesses stakeholder needs, develops stakeholder relations plans and
forms alliances with stakeholders.
Stakeholder engagement leads to increased transparency, responsiveness, compliance,
organizational learning, quality management, accountability and sustainability. Stakeholder
engagement is a central feature of sustainability performance.
Answer 5(b)(ii)

Social and Ethical Accounting

Social and ethical accounting is a process that helps a company to address issues
of accountability to stakeholders, and to improve performance of all aspects i.e. social,
environmental and economic. The process normally links a company’s values to the
development of policies and performance targets and to the assessment and
communication of performance.

Social and ethical accounting has no standardized model. There is no standardized

balance sheet or unit of currency. The issues are defined by the company’s values and
aims, interests and expectations of its stakeholders, and by societal norms and
regulations. With the focus on the concerns of society, the social and ethical accounting
framework implicitly concerns itself with issues such as economic performance, working
conditions, environmental and animal protection, human rights, fair trade and ethical
trade, human resource management and community development, and hence with the
sustainability of a company’s activities.
 33 PP–GBES–December 2012
Answer 5(b)(iii)
CREDO

Credo is a statement of common values that allows employees to understand the

importance of the stakeholders and services provided. It is the force which makes them
work together to achieve a consistent high standard. A good credo gives the company a
reason to exist; it develops the spirit of employees motivating them at all times.

For instance

Steel Authority of India Limited

Credo of SAIL talks about stakeholder respect, and ethical practices to be followed
in the company :

— We build lasting relationships with customers based on trust and mutual benefit.
We uphold highest ethical standards in conduct of our business.

— We create and nurture a culture that supports flexibility, learning and is proactive
to change.

— We chart a challenging career for employees with opportunities for advancement

and rewards.

— We value the opportunity and responsibility to make a meaningful difference in

people's lives.
Answer 5(b)(iv)
Ethics in Compliance
Compliance is about obeying and adhering to rules and authority. The motivation for
being compliant could be to do the right thing out of the fear of being caught rather than
a desire to be abiding by the law. An ethical climate in an organisation ensures that
compliance with law is fuelled by a desire to abide by the laws. Organizations that value
high ethics comply with the laws not only in letter but also abide by the intent or the spirit
of the law with which the same was enacted or laid down and even go beyond. For eg.,
the main object of the Factories Act, 1948 is to ensure adequate safety measures and
to promote the health and welfare of the workers employed in factories. Organizations
that value high ethics not only comply with the Factories Act, but go beyond in giving
facilities for its workers.
Question 6
(a) "A code of ethics should reflect upon top management's desire for compliance
with the values, rules and policies that support an ethical climate.'' Elucidate.
(5 marks)
(b) You are the Company Secretary of Innovative Products Ltd. The Board of
directors desires to know the advantages of business ethics. Draft a note for
consideration of the Board of directors. (5 marks)
(c) "Corporate Governance Voluntary Guidelines, 2009 suggests for institution of
PP–GBES–December 2012 34
mechanism for whistle-blowing.'' Discuss the mechanism as enunciated in the
guidelines. (5 marks)
Answer 6(a)
Code of Ethics
The board of directors hold the ultimate responsibility for their firm’s success or
failure, as well as for ethics of their actions. The ethical tone of an organization is set at
the top, the actions and attitudes of the board greatly influence the ethical climate of an
organization.
A Report by the Conference Board Commission on Public Trust and Private Enterprise
suggested the following areas of oversight by a Board:
— Designation of a Board committee to oversee ethics issues;
— Designation of an officer to oversee ethics and compliance with the code of
ethics;
— Inclusion of ethics-related criteria in employees' annual performance reviews
and in the evaluation and compensation of management;
— Representation by senior management that all known ethics breaches have
been reported, investigated, and resolved; and
— Disclosure of practices and processes the company has adopted to promote
ethical behavior.
A code of ethics should reflect upper managers’ desire for compliance with the
values, rules, and policies that support an ethical climate. The development of a code of
ethics should involve the president, board of directors, and chief executive officers who
will be implementing the code. Legal staff should also be called on to ensure that the
code has correctly assessed key areas of risk and that it provides buffers for potential
legal problems.
In the United States of America, Section 406 of the Sarbanes Oxley Act, 2002
requires public companies to disclose whether they have codes of ethics and also to
disclose any waivers of those codes for certain members of senior management.
Section 406(a) of Regulation S-K requires companies to disclose:
— whether they have a written code of ethics that applies to their principal executive
officer, principal financial officer, principal accounting officer or controller, or
persons performing similar functions;
— any waivers of the code of ethics for these individuals; and
— any changes to the code of ethics.
If companies do not have a code of ethics, they must explain why they have not
adopted one. A company may either file its code as an exhibit to the annual report, post
the code on the company's Web site, or agree to provide a copy of the code upon
request and without charge.
 35 PP–GBES–December 2012
Corporate codes of ethics often contain about six core values or principles in addition
to more detailed descriptions and examples of appropriate conduct. The six values that
are desirable for codes of ethics include: (1) trustworthiness, (2) respect, (3) responsibility,
(4) fairness, (5) caring, and (6) citizenship.
In India, Clause 49 of the Listing Agreement requires that
(i) The Board shall lay down a code of conduct for all Board members and senior
management of the company. The code of conduct shall be posted on the
website of the company.
(ii) All Board members and senior management personnel shall affirm compliance
with the code on an annual basis. The Annual Report of the company shall
contain a declaration to this effect signed by the CEO.
Answer 6(b)
To,
Board of Directors,
Innovative Products Ltd.
Sub. : Advantages of business ethics
Business ethics comprises the principles and standards that guide behaviour in the
conduct of business. Businesses must balance their desire to maximize profits against
the needs of the stakeholders. Companies displaying a "clear commitment to ethical
conduct" consistently outperform companies that do not display ethical conduct.
1. Attracting and retaining talent
People aspire to join organizations that have high ethical values. Companies
are able to attract the best talent and an ethical company that is dedicated to
taking care of its employees will be rewarded with employees being equally
dedicated in taking care of the organization. Ethical organizations create an
environment that is trustworthy, making employees willing to rely, take decisions
and act on the decisions and actions of the co-employees. It cultivates strong
teamwork and productivity and support employee growth. Talented people will
invest their energy and talent only in organizations with values and beliefs that
match their own. In order to achieve this match, managers need to build cultures,
compensation and benefits packages, and career paths that reflect and foster
certain shared values and beliefs.
2. Investor Loyalty
Investors are concerned about ethics, social responsibility and reputation of the
company in which they invest. Investors are becoming more and more aware
that an ethical climate provides a foundation for efficiency, productivity and
profits.
3. Customer satisfaction
Customer satisfaction is a vital factor in successful business strategy. Repeat
purchases/orders and enduring relationship of mutual respect is essential for the
success of the company. The name of a company should evoke trust and respect
PP–GBES–December 2012 36
among customers for enduring success. Ethical conduct towards customers builds
a strong competitive position. It promotes a strong public image.
4. Regulators
Regulators eye companies functioning ethically as responsible citizens. The
regulator need not always monitor the functioning of the ethically sound company.
The company earns profits and reputational gains if it acts within the confines of
business ethics.
To summarise, companies adhering to good ethical conduct have following
advantages:
— Shareholders invest their money into a company and expect a certain level of
return from that money in the form of dividends and/or capital growth.
— Customers pay for goods, give their loyalty and enhance a company’s reputation
in return for goods or services that meet their needs.
— Employees provide their time, skills and energy in return for salary, bonus,
career progression, learning.

Sd/-
Company Secretary

Answer 6(c)

A whistleblower is a person who publicly complains concealed misconduct on the

part of an organization or body of people, usually from within that same organisation.

Whistle Blower Policy

The company may establish a mechanism for employees to report to the management
concerns about unethical behaviour, actual or suspected fraud or violation of the
company’s code of conduct or ethics policy. This mechanism could also provide for
adequate safeguards against victimization of employees who avail of the mechanism
and also provide for direct access to the Chairman of the Audit committee in exceptional
cases. Once established, the existence of the mechanism may be appropriately
communicated within the organization.

This is a non-mandatory requirement. In case the whistle Blower mechanism is

existing, the audit committee is responsible to review the functioning of the Whistle
Blower mechanism and it is suggested that a disclosure be made in the Annual Report
about the Whistle Blower policy and affirmation that no personnel has been denied
access to the audit committee.

Corporate Governance Voluntary Guidelines, 2009 suggest for Institution of

Mechanism for Whistle Blowing

I. The companies should ensure the institution of a mechanism for employees to

report concerns about unethical behaviour, actual or suspected fraud, or violation
of the company's code of conduct or ethics policy.
 37 PP–GBES–December 2012
II. The companies should also provide for adequate safeguards against victimization
of employees who avail of the mechanism, and also allow direct access to the
Chairperson of the Audit Committee in exceptional cases.

ICSI Recommendations to strengthen Corporate Governance recommends--adoption

of Whistle Blower Policy should be made mandatory, to begin with, for listed companies.
A model policy in this regard may be specified covering important clauses that protect
employees' interests.
Question 7
(a) Write a qualitative note on 'ethics philosophies'. (5 marks)
(b) Explain the features of a good ethics programme. (5 marks)
(c) Discuss the Clarkson Principles of Stakeholder Management. (5 marks)

Answer 7(a)

Ethics Philosopies

Deontological ethics, emphasises on the relationship between duty and the morality
of human actions. Deontology (Greek deon, “duty,” and logos, “science”) is therefore
science of duty. In deontological ethics an action is considered morally good because of
some characteristic of the action itself, not because the consequence of the action is
good.

Teleological Ethics, (derived from the Greek word ‘telos’ meaning end, purpose) is
an ethical theory that holds that the ends or consequences of an act determine whether
an act is good or evil. Rightness of actions is determined solely by the good
consequences. It is also known as consequential ethics.

Egoism, (from Latin ego, “I”), in philosophy, an ethical theory holding that the good
is based on the pursuit of self-interest. This model takes into account harms, benefits
and rights for a person’s own welfare. Under this model an action is morally correct if it
increases benefits for the individual in a way that does not intentionally hurt others, and
if these benefits are believed to counterbalance any unintentional harms that ensue.

Utilitarianism is an ethic of welfare. It is an idea that the moral worth of an action is

solely determined by its contribution to overall utility, that is, its contribution to happiness
or pleasure as summed among all persons.

Relativism is the idea that some elements or aspects of experience or culture are
relative to, i.e., dependent on, other elements or aspects. The term often refers to truth
relativism, which is the doctrine that there are no absolute truths, i.e., that truth is
always relative to some particular frame of reference, such as a language or a culture.

Virtue Ethics theory is a branch of moral philosophy that emphasizes character,

rather than rules or consequences, as the key element of ethical thinking.

Justice is the concept of moral rightness in action or attitude; it is closely linked to

fairness. A conception of justice is one of the key features of society.
PP–GBES–December 2012 38
Answer 7(b)
Features of Good Ethics Programme
The following factors indicate the success of an ethics programme :
— Leadership : that executives and supervisors care about ethics and values as
much as they do about the bottom line.
— Consistency between words and actions : that top management “practises what
it preaches”. This is more important than formal mechanisms such as hotlines
for people to report wrongdoing.
— Fairness : that it operates fairly. To most employees, the most important ethical
issue is how the organization treats them and their co-workers.
— Openness : that people talk openly about ethics and values, and that ethics and
values are integrated into business decision-making.
— Just rewards : that ethical behaviour is rewarded. This has greater influence on
the effectiveness of an ethics programme that the perception that unethical
behaviour is punished.
— Value-driven : that an ethics and compliance programme is values-driven. This
had the most positive effect on ethics and compliance programme and resulted
in:
— lower observed unethical conduct;
— stronger employee commitment;
— a stronger belief that it is acceptable to deliver bad news to management.
Answer 7(c)
The Clarkson Principle of Stakeholder Management
Max Clarkson (1922-1998) founded the Centre for Corporate Social Performance
and Ethics in the Faculty of Management, now the Clarkson Centre for Business Ethics
& Board Effectiveness. The Clarkson Principles emerged from a project undertaken by
the Centre for Corporate Social Performance and Ethics:
Principle 1 : Managers should acknowledge and actively monitor the concerns of
all legitimate stakeholders, and should take their interests appropriately into account
in decision-making and operations.
Principle 2 : Managers should listen to and openly communicate with stakeholders
about their respective concerns and contributions, and about the risks that they
assume because of their involvement with the corporation.
Principle 3 : Managers should adopt processes and modes of behavior that are
sensitive to the concerns and capabilities of each stakeholder constituency.
Principle 4 : Managers should recognize the interdependence of efforts and rewards
among stakeholders, and should attempt to achieve a fair distribution of the benefits
and burdens of corporate activity among them, taking into account their respective
risks and vulnerabilities.
Principle 5 : Managers should work cooperatively with other entities, both public
 39 PP–GBES–December 2012
and private, to insure that risks and harms arising from corporate activities are
minimized and, where they cannot be avoided, appropriately compensated.
Principle 6 : Managers should avoid altogether activities that might jeopardize
inalienable human rights (e.g., the right to life) or give rise to risks which, if clearly
understood, would be patently unacceptable to relevant stakeholders.
Principle 7 : Managers should acknowledge the potential conflicts between (a) their
own role as corporate stakeholders, and (b) their legal and moral responsibilities for
the interests of all stakeholders, and should address such conflicts through open
communication, appropriate reporting and incentive systems and, where necessary,
third party review.
Corporate Boards and leadership must display an outstanding understanding of
practical business ethics. They need not only do but also appear to do justice to diverse
pulls and pressures from a complex array of stakeholders.
PART C
Question 8
Attempt any four of the following :
(i) "The Kanpur Tanneries or Ganga pollution case is one amongst the most
significant water pollution cases.'' Discuss.
(ii) Distinguish between 'corporate sustainability' and 'corporate social responsibility'.
(iii) Discuss the standard disclosures under the G3 Guidelines of the global reporting
initiative (GRI) sustainability reporting framework.
(iv) "Sustainable development is a broad concept that balances the need for economic
growth with environmental protection and social equity.'' Elucidate this statement.
(v) Discuss the rule of strict liability as stated in Rylands vs. Fletcher and its
applicability in India. (5 marks each)
Answer 8(i)
The M.C. Mehta v. Union of India [AIR 1988 SC 1037] also known as the Kanpur
Tanneries or Ganga Pollution case is among the most significant water pollution case.
Detailed scientific investigations and the reports were produced before the Court as
evidence.
In the case, following the alarming details given by M.C. Mehta about the extent of
pollution in the river Ganga due to the inflow of sewage from Kanpur only, the Apex
Court came down heavily on the Nagar Mahapalika (Municipality) and emphasised that
it is the Nagar Mahapalika of Kanpur that has to bear the major responsibility for the
pollution of the river near Kanpur city. The Supreme Court held:
“Where in public interest litigation owners of some of the tanneries discharging effluents
from their factories in Ganga and not setting up a primary treatment plant in spite of
being asked to do so for several years did not care, in spite of notice to them, even to
enter appearances in the Supreme Court to express their willingness to take appropriate
steps to establish the pre-treatment plants it was held that so far as they were concerned
on order directing them to stop working their tanneries should be passed. It was observed
PP–GBES–December 2012 40
that the effluent discharged from a tannery is ten times noxious when compared with the
domestic sewage water which flows into the river from any urban area on its bank. It was
further observed that the financial capacity of the tanneries should be considered as
irrelevant while requiring them to establish primary treatment plants. Just like an industry
which cannot pay minimum wages to it worker cannot be allowed to exist, a tannery
which cannot set up a primary treatment plant cannot be permitted to continue to be in
existence for the adverse effect on the public at large which is likely to ensure by the
discharging of the trade effluents from the tannery to the river Ganga would be immense
and it will outweigh any inconvenience that may be caused to the management and the
labour employed by it on account of its closure”.
Answer 8(ii)
Although scholars and practitioners often interpret Corporate Sustainability and
Corporate Social Responsibility as being nearly synonymous, pointing to similarities
and the common domain. The two concepts have different backgrounds and different
theoretical paths. According to management science, the notion of corporate sustainability
can be defined first as the capacity of a firm to create value through the product and
services it produces and to continue operating over the years.
The evolutionary path of the concept of Corporate Social Responsibility is different
from that of Corporate Sustainability. The first recognized contribution in the literature
dates back to Bowen, who stressed the responsibilities of businesses and wrote that
social responsibility refers to the obligations of businessmen to pursue those policies,
to make those decisions, or to follow those lines of action which are desirable in terms
of the objectives and values of our society.
Although Corporate Sustainability and Corporate Social Responsibility have different
roots and have developed along diverse theoretical paths, they ultimately converged.
This is evident in some recent definitions of Corporate Social Responsibility provided by
international organizations like the prince of Wales International Business Leaders Forum:
Corporate Social Responsibility means open and transparent business practices that
are based on ethical values and respect for employees, communities and the environment.
It is designed to deliver sustainable value to society at large, as well as to shareholders.
Sustainable business success and shareholder value cannot be achieved solely
through maximising short-term profits, but instead through market-oriented yet responsible
behaviour.
The concept of sustainable development has been transposed from the macro to
the corporate dimension. According to management theory, the attempt to include
sustainability issues in the managerial framework can be divided into two separate issues:
Corporate Sustainability and Corporate Social Responsibility.
Answer 8(iii)
Standard Disclosures
In G3 Reporting guidelines there are three different types of disclosures contained,
which are as under :
• Strategy and Profile : Disclosures that set the overall context for understanding
organizational performance such as its strategy, profile, and governance.
 41 PP–GBES–December 2012
• Management Approach : Disclosures that cover how an organization addresses
a given set of topics in order to provide context for understanding performance
in a specific area.
• Performance Indicators : Indicators that elicit comparable information on the
economic, environmental, and social performance of the organization.
Answer 8(iv)
Sustainable development is a broad, concept that balances the need for economic
growth with environmental protection and social equity. It is a process of change in
which the exploitation of resources, the direction of investments, the orientation of
technological development, and institutional change are all in harmony and enhance
both current and future potential to meet human needs and aspirations. Sustainable
development is a broad concept and it combines economics, social justice, environmental
science and management, business management, politics and law.
The U.S. Environmental Protection Agency defined, "Sustainable development
marries two important themes: that environmental protection does not preclude economic
development and that economic development must be ecologically viable now and in
the long run." Hence sustainability encompasses ideas and values that inspire people to
become custodian of the environment without compromising economic growth.
It indicates development that meets the needs of the present generation without
compromising the ability of the future generations to meet their needs. The principle
behind it is to foster such development through technological and social activities which
meets the needs of the current generations but at the same time ensures that needs of
the future generation are not impaired.
World Commission on Environment and Development of United Nations (WCED)
recognized that the achievement of sustainable development could not be simply left to
government regulators and policy makers. It recognized that industry has a significant
role to play. While corporates are the drivers for economic development, they are required
to be more proactive in balancing this with social equity and environmental protection.
Four acceptable fundamental Principle of Sustainable Development are:
1. Principle of Intergenerational equity : need to preserve natural resources for
future generation.
2. Principle of sustainable use : use of natural resources in a prudent manner
without or with minimum tolerable impact on nature.
3. Principle of equitable use or intergenerational equity : Use of natural resources
by any state / country must take into account its impact on other states.
4. Principle of integration : Environmental aspects and impacts of socio-economic
activities should be integrated so that prudent use of natural resources is ensured.
Answer 8(v)
Rule in Rylands v. Fletcher
In the past all actions for environmental torts against companies and industries were
PP–GBES–December 2012 42
governed by the principle of strict liability. Strict liability means liability without fault i.e.,
without intention or negligence. In other words, the defendant is held liable without fault.
Absolute liability for the escape of impounded waters was first established in England
during the mid-nineteenth century in the case of Rylands v. Fletcher, (1868) LR 3 330. The
rule was first stated by Blackburn, J. (Court of Exchequer) in the following words:
“We think that that the rule of law is, that the person who for his own purposes brings
on his lands and collects and keeps there anything likely to do mischief if it escapes,
must keep it at his peril, and, if he does not do so, is prima facie answerable for all the
damage which is the natural consequence of its escape……”
The liability under this rule is strict and it is no defence to say that the thing escaped
without that person’s willful act, default or neglect or even that he had no knowledge of
its existence. The House of Lords, however, added a rider to the above statement
stating that – this rule applies only to non-natural user of the land and it does not apply
to things naturally established on the land or where the thing escaped due to an act of
God or an act of stranger or the default of the person injured or where the thing which
escapes is present by the consent of the person injured or in certain cases where there
is statutory authority.
Departure from Rylands v. Fletcher in India
In India, in M.C. Mehta v. Union of India, AIR 1987 SC 1086, the Supreme Court
sought to make a departure from the accepted legal position in Rylands v. Fletcher
stating that “an enterprise which is engaged in a hazardous or inherently dangerous
activity that poses a potential threat to the health and safety of persons and owes an
absolute and non-delegable duty to the community to ensure that no harm results to
anyone. The principle of absolute liability is operative without any exceptions. It does
not admit of the defences of reasonable and due care, unlike strict liability. Thus, when
an enterprise is engaged in hazardous activity and harm result, it is absolutely liable,
effectively tightening up the law.